Earle Investments, LLC v. Southern Desert Medical Center Partners
242 Ariz. 252
| Ariz. Ct. App. | 2017Background
- In 1976 Arizona Title leased land to SDMC Inc. for 50 years; the lease allowed SDMC Inc. to create a Horizontal Property Regime (condominiums) and stated lessor could subordinate portions of its interest to unit-owner mortgages.
- SDMC Inc. created a condominium regime and conveyed specific units (with undivided interests in the leasehold and common areas) to Alleman, who granted deeds of trust to a lender to secure tenant-improvement loans.
- Arizona Title (then later Du Paul/Partners) executed two Subordination Agreements contemporaneous with the deeds of trust; those agreements described the property in Exhibit A as the units, an undivided fractional interest in the leasehold estate, and an undivided interest in common areas.
- Lender foreclosed in 1997; the trustee-sale purchaser later conveyed the units to Earle Investments, which asserted it held fee simple title to the land beneath the units and ceased paying rent to Partners.
- Superior Court granted summary judgment quieting title in Earle and ruling Earle was not subject to the lease; Partners appealed.
Issues
| Issue | Plaintiff's Argument (Earle) | Defendant's Argument (Partners) | Held |
|---|---|---|---|
| Whether the Subordination Agreements merely subordinated the lessor's leasehold interest or instead conveyed the lessor’s fee interest to the lender | The agreements effectively conveyed the lessor’s fee interest (they joined in the deed of trust and granted all right, title, interest) | The agreements only subordinated the leasehold; they did not convey fee title to the lender | Conveyance: the agreements operated as a deed of trust/mortgage — the lessor granted, transferred and assigned its right, title and interest in trust to the trustee |
| Scope of the property conveyed: did foreclosure transfer fee title to the land beneath specific units or only an undivided fractional interest in the entire leased parcel | Foreclosure gave fee simple title to the land under the specific units securing the loans | The conveyance was limited to the unit-level interests and did not transfer an entire undivided interest in the whole parcel | The lender acquired an undivided fractional fee-simple interest in the entire parcel described in the lease/Declaration, not a fee in specific portions beneath particular units |
| Adequacy of legal description in Subordination Agreements | Exhibit A adequately described the encumbered property by reference to the Declaration and recording information | The agreements lacked sufficient legal description to convey fee title | Held adequate: Exhibit A properly described the property by reference to the recorded Declaration |
| Whether Earle ratified the lease by paying rent after foreclosure | Partners: Earle’s rent payments constituted ratification of the lease, obligating it under the lease | Earle: payments do not create or revive lease obligations when foreclosure rendered the lease void as to lender/assignee | No ratification: payments did not create lease obligations; lender’s foreclosure had extinguished lessor’s leasehold interest as to the lender/assignee |
Key Cases Cited
- Old Stone Capital Corp. v. John Hoene Implement Corp., 647 F. Supp. 916 (D. Idaho 1986) (subordination cannot grant a fee where parties only intended to subordinate leasehold absent formal mortgage joinder)
- Republic Nat. Life Ins. Co. v. Lorraine Realty Corp., 279 N.W.2d 349 (Minn. 1979) (lessor’s fee retained unless lessor itself mortgages fee)
- Matthews v. Hinton, 234 Cal. App. 2d 736 (Cal. Ct. App. 1965) (lessor joining as trustor in deed of trust can expose fee interest to lender)
- Travelers Ins. Co. v. Holiday Village Shopping Ctr. Ltd. P'ship, 931 P.2d 1292 (Mont. 1996) (subordination vs. mortgage distinction can create ambiguity; joinder language matters)
- Makeever v. Lyle, 125 Ariz. 384 (Ariz. Ct. App. 1980) (definition of condominium ownership includes an undivided interest in common elements and land)