Does foreclosure extinguish a recorded density bonus agreement?
California’s density bonus law (Government Code sections 65915-65918) rewards a developer who agrees to build a certain percentage of low-income housing with the opportunity to build more residences than would otherwise be permitted by the governing local regulations.
How is an agreement under that law, recorded as a lien on the affected property junior to the lender’s mortgage, treated in a foreclosure sale? An opinion recently published by California’s Second Appellate District — Rodriguez v. City of Los Angeles — addresses the issue.
Facts: density bonus agreement recorded against property junior to lender’s mortgage; lender forecloses
In 2005, the City of Los Angeles through its Housing Department granted Jose Benavidez a 35% density bonus for the development of residential units on his property. The density bonus allowed Benavidez to develop one more unit than otherwise would be authorized, resulting in a three-unit project. In exchange, Benavidez agreed to rent one of the three units exclusively to low-income households for at least 30 years.
The density bonus was memorialized in a written agreement between the City and Benavidez, which the City recorded against the property in January 2006. The agreement stated that if the property was transferred in any manner or sold at a foreclosure sale, title would be taken subject to the limitations provided in the agreement and the new owner would be bound by the agreement.
Benavidez’s mortgage loan was recorded on the property in early 2005 — months before the density bonus agreement was recorded. The terms of the deed of trust appeared to contemplate the development of the property.
Benavidez later defaulted, and in 2013 the lender foreclosed. Several years later in 2019 Jose Luis Rodriguez and Guillermina Rodriguez purchased the property, allegedly unaware of the 2006 density bonus agreement.
In 2023, the City sent a notice to the Rodriguezes demanding compliance with the agreement, including submission of a land use compliance report for the property.
Trial court: City’s demurrer sustained; case dismissed
The Rodriguezes sued the City for quiet title and declaratory relief., claiming that because the density bonus agreement was recorded after the mortgage loan, the lender’s foreclosure extinguished the agreement.
The trial court sustained the City’s demurrer to the complaint with prejudice and dismissed the case.
The Rodriguezes appealed.
Court of Appeal: affirmed; the density bonus agreement was equivalent to a condition attached to a permit, and therefore survived the foreclosure
The Court of Appeal affirmed.
The court agreed with the City’s argument that the density bonus agreement was equivalent to a “condition attached to a permit” under Government Code section 65009(c)(1)(E), and therefore survived the foreclosure. The court cited authority holding “It is well settled that the burdens of permits run with the land once the benefits have been accepted.” Further, “the permit conditions remain enforceable against even successor property owners who were not parties to the original permit and who obtained the property following a foreclosure.”
The court concluded that the Rodriguezes’ lawsuit “effectively seeks to challenge a condition attached to a permit. Because the Rodriguezes’ sole theory is that foreclosure extinguished the challenged condition, and because we conclude such conditions survive foreclosure, the complaint fails to state a cause of action….”
Lesson
Under the Rodriguez opinion, a recorded density bonus agreement can be construed as a condition attached to a permit, and can survive the foreclosure sale even where the agreement is junior to the foreclosed deed of trust.