A subordination agreement that is not carefully drafted can end up acting as a conveyance of an owner’s fee title interest in property, as occurred in the recent case of Earle Investments, LLC v. Southern Desert Medical Center Partners, 762 Ariz. Adv. Rep. 12 (2017). This case illustrates the detrimental impact that unclear language in a contract may have, which effectively converted a subordination agreement into a deed of trust.
The owner/lessor of the property argued that it had simply agreed to subordinate its leasehold interest to the lender, as in a standard subordination agreement. However, the court found that by joining in the deeds of trust and granting, transferring, and assigning all its rights in trust as security for the debt, the owner had actually transferred its fee interest in the property. The subordination agreement also sufficiently described the property to be considered a valid deed of trust.
When the lender foreclosed on the property, it acquired an undivided fractional fee-simple interest in the property. The lender owned the relevant units and an undivided fractional interest in leasehold, along with the common areas and facilities. The lender was not responsible for paying any rent or any other obligations under the lease.
In other words, the owner had only intended to give the lender priority to receive the rents from the lessee if the owner defaulted on the loan, but the owner had actually pledged its entire fee-simple interest in the land as security. The lender therefore had the right to foreclose on the entire fee-simple interest, and eliminated the owner’s interest in the property.
The fact that the lender’s successor had made rent payments after acquiring the property did not operate to ratify the lease. The lease was void at that point, and a lease obligation could not be created by payments denominated as rent.
Before signing a subordination agreement, consult with an experienced real estate attorney. A failure to carefully draft and evaluate legal documents could mean that a court ends up interpreting your agreement in a way that was never intended, including the possible loss of your property interest.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us to discuss your case with an experienced real estate attorney.