Opinion
No. 78-1164
Decided August 17, 1979.
Mortgages — Foreclosure — Lessee's right to mortgaged premises — Subordination of mortgages to lease.
1. Ohio follows the minority rule pursuant to which foreclosure under a prior mortgage terminates a lease given by the mortgagor because there is a lack of privity between the lessee and the mortgagee.
2. A prior mortgagee may by its conduct or silent acquiescence subordinate its interests to those of a subsequent lessee of the mortgagor.
Mr. Harry G. Ebeling, Mr. J. Ralston Werum and Mr. Charles Cobbe, for plaintiff.
Mr. Joel Shapiro, for defendant.
Plaintiff, the Prudential Insurance Company of America, and former mortgagee of certain business property, maintains this action in forcible entry and detainer claiming right to possession to that property by title under a Sheriff's Deed acquired in foreclosure proceedings. The defendant, Bull Market, Inc., operates a restaurant and bar on a portion of the property, and maintains that it has a right to possession of that portion of the property by virtue of a term lease given by the former mortgagor prior to foreclosure. The case came to be heard on plaintiff's motion for partial summary judgment in its favor on the issue of the defendant's right to possession of the occupied portion of the property. Based on the appropriate law of this state and the issues raised by the submissions of the parties, this court concludes that there exists a genuine issue of material fact with respect to the defendant's right to possession of the property, and, accordingly, the plaintiff's motion is overruled.
It is the plaintiff's position that under Ohio law, in order for a mortgagee to prevail in a determination that a lessee's possessory right has been extinguished by foreclosure, the mortgagee need only show that the lessee's interest was created by lease from the mortgagor after the mortgage was recorded, and that the mortgagor-lessor's interests have been foreclosed. Because those facts are not in dispute in the present case, the plaintiff contends that it is entitled to a judgment in its favor, denying the defendant's right to possession, as a matter of law.
In New York Life Ins. Co. v. Simplex Products Corp. (1939), 135 Ohio St. 501, cited by the plaintiff herein in support of the motion, a mortgagee sought to obtain rents allegedly due from a lessee after foreclosure of a mortgagor-lessor's interests in a property. The mortgagee claimed that the rent was due for the balance of the lease term although the lessee had discontinued occupancy several months prior to expiration of the lease. As in the present case, the lease was entered into subsequent to the execution of the mortgage, and the lessee was not a party to the foreclosure proceedings. The Supreme Court of this state held that the mortgagee was not entitled to rent under the lease because the lease terminated with foreclosure of the mortgagor's interest, upon which the lease was dependent. Specifically, the mortgagee could not collect the rent because, "`[t]here is in such case no privity of either estate or contract between the mortgagee and the lessee of the mortgagor to bind either * * *.'" Id. at 504, quoting Western Union Tel. Co. v. Ann Arbor Rd. Co., (C.A.6, 1898), 90 F. 379.
However, in Davis v. Boyajian, Inc. (Stark Co. C.P. 1967), 11 Ohio Misc. 97, which is factually indistinguishable from the present case, the court reversed a judgment in forcible entry and detainer entered against lessees of a mortgagor, after the mortgagor's interest had been foreclosed. The court held that "the lease was subordinate to the mortgage but that the foreclosure action could not terminate the rights of the lessees of the mortgagor in default without making the lessees parties to the foreclosure suit." Id. at 98. In so deciding, the court relied on Frische v. Kramer's Lessee (1847), 16 Ohio 125, an action in ejectment against the grantee of a purchaser at foreclosure, wherein it was stated: "And [the mortgagee] ought further to make all persons parties, who have acquired interests in the property * * *. As to those not parties to the [foreclosure] suit, not before the court, the decree does not affect them; their interests remain as they were." Id. at 139.
The Davis court acknowledged the Simplex decision, but distinguished it on the nature of the action. In Simplex, the mortgagee sought to enforce the lease and the lessee's obligations, while in Davis (as in the present case) the mortgagee was seeking to have the lease declared invalid and terminate the lessee's right to possession. With recognition of this distinction, the holdings of both cases are reconcilable in that they each afforded a measure of protection to a lessee. Davis at 99.
The Davis distinction is justified, in part, as follows: A lessee's rent obligation should not continue where an express or implied covenant of quiet enjoyment in a lease is breached by foreclosure against the defaulting mortgagor-lessor; but the lessee's rights under the lease should not be summarily terminated under the same circumstances, unless the lessee chooses to act on the breach of convenant. Id.
Nonetheless, the case law in other jurisdictions does not reflect support for the fine distinction suggested in Davis. Instead, there exists a more basic split of authority concerning the effect of foreclosure on lessees of the mortgagor, irrespective of whether tenants' rights or obligations are being asserted. The majority position, in accord with the underlying concept of Frische v. Kramer's Lessee, supra, is that foreclosure has no effect on lessee rights if the lessee is not joined in the foreclosure proceeding. The minority position, in accord with the Simplex approach, is that the lease terminates with foreclosure of the mortgagor's interest, whether or not the lessee was joined in the foreclosure proceeding, because the lessee is not in privity with the final owner. See cases collected at Annotation 14 A.L.R. 664, 664-678.
Moreover, a further justification of the distinction in Davis, that protection of lessees "promote[s] commerce by encourging leases of mortgaged premises," Davis at 99, is subject to question. Favoring lessees under long term leases against foreclosing mortgagees may adversely affect commerce by reducing values at foreclosure sales, which in turn might conceivably reduce the availability of mortgage loans and thereby impair the free transferability of property.
The question is, therefore, whether the Simplex approach is necessarily limited to cases where lessee obligations are asserted, as the defendant herein contends, or is to be more broadly construed as a statement by the Supreme Court that this state follows the minority rule regardless of whether tenant rights or obligations are asserted.
Although the Simplex decision does not explicitly limit itself to actions in enforcement of lessee obligations, and, indeed, contains ample dicta to the contrary, such limitation was thought necessary by the Davis court for continued viability of the decisions, including Frische v. Kramer's Lessee, supra, which require joinder of a party in a foreclosure proceeding as a prerequisite to determination of that party's interest in the mortgaged property. Davis at 100-101. However, the joinder prerequisite is generally only applied in favor of parties whose interests are of a type that are properly determinable in foreclosure proceedings. See cases collected at 37 Ohio Jurisprudence 2d, Mortgages, Section 335, at pages 528-29. Hence, it has been stated that parties claiming title, liens, or similar interests in the mortgaged property are beneficiaries of the joinder rule; but that, because the interest in possession of the mortgagor, or of those holding under him (including lessees of the mortgagor), is not a proper subject for determination against the mortgagee in foreclosure proceedings after condition is broken by the mortgagor, such interests and the holders of same are not properly to be benefited by the joinder prerequisite. 37 Ohio Jurisprudence 2d, Mortgages, Section 337. Thus, the joinder requirement was properly applied in Frische in favor of a purchaser from the mortgagor where the purchaser claimed an equity of redemption which was determinable in the foreclosure proceeding. But, an extension of the Frische principle to a mere lessee of the mortgagor, as in Davis, is unwarranted because, as stated in Simplex, "`[t]he right of the tenant to such possession depends on that of the lessor, and goes with it.'" Simplex, at page 505, quoting McDermott v. Burke (1860), 16 Cal. 580.
Therefore, because limitation of the Simplex approach to cases where lessee obligations are asserted, as suggested by Davis, is not necessary to ensure consistency with the joinder requirement of Frische, this court concludes that the Supreme Court did in fact announce in Simplex that this state follows the minority rule to the effect that foreclosure terminates a lease of the mortgagor for lack of privity between the lessee and the mortgagee. The numerous citations in the Simplex opinion of case law from minority rule jurisdictions, and the apparent assumption in early cases in this jurisdiction that foreclosure terminates mortgagor leases, see, e.g., Cassilly v. Rhodes (1843), 12 Ohio 88, are consistent with this conclusion. This court would, therefore, decline to follow the Davis decision, in that, inter alia, this court finds the distinction drawn by Davis (lessee obligation versus lessee rights) to be non-workable. The Davis decision, being one of a court of common pleas, is entitled to the utmost respect but does not constitute a binding authority upon this trial court.
Although this court agrees in principle with the plaintiff's interpretation of the Simplex decision, there is a factual consideration in the present case which prevents the Simplex rule from being dispositive in the captioned cause.
The defendant maintains, by its amended answer and by affidavit of Paul H. Deneau, former partner in the mortgagor-lessor entity, that the plaintiff-mortgagee expressly or impliedly consented to subordination of the mortgage to subsequent leases, including the lease held by the defendant. The plaintiff, for its part, maintains by affidavit of Allen J. Green, plaintiff's custodian of books and records, that it has no record of consent to subordination of the mortgage to defendant's lease.
If the plaintiff consented to subordination of the mortgage to the lease held by the defendant, then the plaintiff cannot prevail on the motion. Foreclosure on a subordinated mortgage (subordinated to a lease) does not entitle the mortgagee to disturb senior interest holders without their consent. In effect, the subordinated mortgage is viewed as having been executed and recorded subsequent to the senior interest (the lease). In cases where a mortgagor gives a lease prior to a mortgage, the authorities are in unanimity that foreclosure against the mortgagor does not affect the lessee's interest. See cases collected at Annotation 14 A.L.R. 664, 678-80; cf. 37 Ohio Jurisprudence 2d, Mortgages, Section 405; id. at Section 132, citing Cassilly v. Rhodes, supra, and Simplex.
The defendant asserts that the plaintiff consented to subordination and waived priority of the mortgage by approval of the subordination provision in clause 19 of the form lease used by the mortgagor-lessor; or, alternatively, that the plaintiff should be estopped to deny its approval because it acquiesced in clause 19 after the plaintiff was fully aware that the clause was included in the mortgagor-lessor's form lease. It is noted that although the defendant does not explicitly assert that the plaintiff particularly consented to subordination of the mortgage to the lease entered into by the defendant, neither does the plaintiff deny that it overtly approved of clause 19 as included in the form lease, or that it failed to object if aware of the inclusion of clause 19 in the defendant's lease.
It is generally recognized that a mortgagee may be estopped to deny the subordination of a mortgage by his conduct with respect to subsequent interests in the mortgaged property, cf. West v. Klotz (1881), 37 Ohio St. 420; Tuscany v. Papp (Cuyahoga Co. 1928), 30 Ohio App. 49, including conduct of improper silence of acquiescence on creation of a stranger's interest. 55 American Jurisprudence 2d, Mortgages, Section 329; cf. Buckingham v. Smith (1840), 10 Ohio 288, 298-99. Thus, although the defendant has not made clear through its materials in opposition to the plaintiff's motion that the alleged express subordination by the plaintiff was of a type enforceable against a mortgagee, cf. R. C. 5301.25, the defendant has raised a genuine issue of fact concerning conduct by the plaintiff such that, if found in the defendant's favor, the plaintiff would be estopped to deny consent to subordination. The issue is, therefore, material, and plaintiff's motion for partial summary judgment denying the defendant's right to possession of the mortgaged premises is, based upon the foregoing reasoning, deemed to be not well taken and same is, therefore, overruled in its entirety.
Motion overruled.