Lenders who foreclose and take ownership of security property via credit bid at the foreclosure sale often confront a tenant whose lease has been extinguished, but who would rather not vacate the property.
Just how quickly can the lender serve a notice to quit and start the eviction ball rolling?
A recent decision from California’s Second Appellate District — Dr. Leevil, LLC v. Westlake Health Care Center — clarifies the timing requirements.
Facts: lender forecloses, serves notice to quit immediately, then later records Trustee’s Deed and sues for unlawful detainer
Westlake Village Property, L.P. owned property containing a skilled nursing facility. Westlake Village leased the facility to Westlake Health Care Center, an affiliated corporation.
The lease was for a 20-year term, and contained an automatic subordination clause, as many commercial leases do.
Six years into the lease, Westlake Village took out a loan from TomatoBank, secured by a deed of trust on the nursing facility property. Westlake Village defaulted on the loan and declared bankruptcy.
The bank sold the loan to Dr. Leevil, LLC. Leevil obtained relief from the bankruptcy stay, instituted a nonjudicial foreclosure sale (trustee’s sale), and purchased the nursing facility via credit bid.
The day after the trustee’s sale, Leevil served Westlake Health with a notice to quit. Leevil recorded the Trustee’s Deed five days later.
Westlake Health refused to vacate the property, and Leevil sued for unlawful detainer. Westlake Health claimed that its lease was senior to the deed of trust and that the notice to quit was invalid because it was served before the Trustee’s Deed was recorded.
Trial court’s judgment
The trial court ruled that the lease was subordinate to the deed of trust and was extinguished by the trustee’s sale.
The court also found that the notice to quit was valid, and ordered eviction.
Westlake Health appealed.
Court of Appeal’s opinion
The court of appeal affirmed the judgment in favor of Leevil.
If a lease executed before the recordation of a deed of trust does not contain a subordination clause, then the lease will survive a subsequent foreclosure — meaning the foreclosure purchaser takes the property “subject to” the lease.
But here, the court observed that the lease contained an automatic subordination clause. As such, Leevil’s foreclosure sale extinguished Westlake Health’s lease.
The court also held that the Code of Civil Procedure (section 1161a) “does not require that title be perfected (i.e., that the trustee’s deed be recorded) before service of the three-day notice. It requires that title be perfected before a tenant ‘may be removed’ from the property.”
In other words, a notice to quit (a prerequisite to an unlawful detainer lawsuit) is valid as long as the trustee’s deed is recorded before the owner files a lawsuit for unlawful detainer.
When a lease is extinguished by a foreclosure sale due to a subordination clause, the foreclosure sale purchaser may immediately serve a notice to quit. Under the Dr. Leevil decision, the notice to quit will be held valid as long as the trustee’s deed is recorded before the owner files a lawsuit for unlawful detainer.
** NOTE: This opinion was reversed by the California Supreme Court in December 2018. See Money and Dirt coverage here: Eviction After Foreclosure: California Supreme Court Weighs In.