In larger commercial real estate leases, the tenant occasionally needs a loan to build the premises or finance major transactions. The tenant does not own the real property, but has the lease, which is both an interest in real property and a contract. This results in two sets of rights and obligations – those from the interest in the property (“privity of estate”), and those provided in the lease (“privity of contract”). If the tenant allows another party to take possession of the premises, that party has privity of estate with the landlord, but is not responsible for the obligations of the lease. This is why the lessor requires, in the lease, that any assignment be approved and the new tenant sign an acceptance of the assignment and the obligations of the lease contract. The Lessor will also require that any lender secured by the lease agrees to assume all the obligations of the Lease if it forecloses.
But what happens when the leasehold lender forecloses, but nobody makes sure that the Lender actually assumed all the lease obligations? That was the issue in a recent decision when the lender foreclosed on a lease in a shopping center
In BRE DDR BR Whittwood Ca LLC v. Farmers & Merchants Bank of Long Beach, a shopping center tenant needed a loan to finance construction. The lease allowed the Tenant to encumber its leasehold interest through a mortgage, but presumed that a mortgage lender who succeeded to Tenant’s interest assumed Tenant’s obligations. The lease stated: