Vallely Investments, L.P. v. Bancamerica Commercial Corporation

106 Cal.Rptr.2d 689 (2001)

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Nature of the Case

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Facts

P entered into a long-term ground lease with a developer. Following a series of assignments, the lease ended up in the hands of Balboa. In 1986, P and Balboa amended and restated the lease, providing, among other things, that its term would expire in 2051. The lease permitted the lessee to transfer or assign its interest freely or to encumber it with a mortgage. Any assignment had to be in writing, with notice to P. The assignee was required to expressly accept and assume all of the terms and covenants of the lease, and any leasehold mortgage was subordinate to the lessor's rights. Article 13(e) stated no leasehold mortgagee or foreclosure sale purchaser would incur any liability for rent, or performance of leasehold covenants unless it became owner of the leasehold by foreclosure or assignment in lieu of foreclosure. Then its liability was limited to that arising by operation of law or privity of estate. Balboa borrowed $7 million from BA Mortgage to develop the property. It secured the loan with a deed of trust on the ground lease. Balboa defaulted in 1988 and filed for bankruptcy protection to stay the foreclosure. Balboa and D executed an instrument entitled assignment of leasehold interest. As part of the assignment, D agree with Balboa to faithfully observe, perform and fulfill all of the terms, covenants and conditions and obligations required to be observed, performed and fulfilled by Balboa as lessee under the Ground Lease. No one ever told P of what happened. D was the successful bidder at the foreclosure sale and managed the property until selling the lease to Edgewater. P gave Edgewater an extension of time to pay the 1996 rent, which was due in one lump sum in November 1995. P agreed to allow it to pay the 1996 rent in equal monthly installments. This was reflected in a lease amendment signed by the parties, which provided that all other rent obligations under the lease remained unchanged. Edgewater failed to pay the rent due and P sued. P learn of the 1989 assignment to D. Edgewater filed a chapter 11 bankruptcy petition. The bankruptcy court entered an order deeming the lease rejected. P retook possession of the property in August 1998. P sought a declaratory judgment that D was liable, as assignee, for the rent due for the balance of the lease term. The trial court denied P's motion and granted summary judgment on the ground that D's foreclosure of its senior deed of trust terminated D's junior interest in the lease, and along with it any obligations that entity had to P. P appealed.