BRE DDR BR Whittwood CA, LLC v. Farmers and Merchants Bank of Long Beach

When a shopping center tenant defaulted on a secured

loan, the lender took possession of the premises through

foreclosure and transferred its interest to a third party.

Later, the third party surrendered the premises. The

landlord filed this action against the lender to enforce the

lease obligations, including payment of rent for the full lease

term. The trial court granted summary adjudication in favor

of the landlord because the foreclosure documents referred to

the lease, and the lease required transferees to assume the

lease obligations. On appeal, the lender contends that it was

obligated to pay rent only while it was in possession of the

premises, because it never expressly assumed the lease

obligations. We hold that the purchase of the leasehold

estate in this case—identified in the deed of trust by

reference to the lease—did not constitute an express

agreement to assume the obligations of the lease. The record

shows the lender did not expressly assume the lease. We

reverse the judgment, with directions.

FACTS

The Lease

On December 13, 2006, the original owner of a

shopping center entered into a 15-year lease with the

Breckenridge Group (Tenant) for restaurant space. The

3

shopping center was eventually sold to respondent BRE

DDR BR Whittwood CA LLC (Landlord).1

Section 8.1.1 of the lease required Landlord’s consent

to any transfer, sale, assignment, or other conveyance. The

section provided, “Any attempted or purported Transfer

without Landlord’s written consent shall, at Landlord’s

election, be void and shall confer no rights upon any third

Person.” Section 8.1.1 permitted 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: “Tenant shall have the right

. . . to encumber Tenant’s leasehold interest under this Lease

. . . through a Mortgage (‘Leasehold Mortgage’) with an

institutional lender . . . . Landlord agrees that in the event

the Leasehold Mortgagee succeeds to Tenant’s interest under

this Lease (in which event it shall assume all of Tenant’s

obligations under this Lease), Landlord shall, at the time of

such succession, recognize such mortgagee, trustee or lender

as the then Tenant under this Lease upon the same terms

and conditions contained in this Lease and for the then

unexpired portion of the Term.” The leasehold mortgagee

had the right under the lease to acquire and succeed to the

Tenant’s interest through a foreclosure sale.



1 The original owner, PPF RTL 15603 Whittwood Lane,

LP, sold the property to Cole MT Whittier CA, LP on August

27, 2010, who then sold the property to Landlord on October

17, 2014.

4

Section 8.1.2 of the lease applied to transfers other

than leasehold mortgages. These transfers required Tenant

to submit a transfer document providing for “the assumption

by the Transferee of all of the obligations and liabilities of

Tenant” under the lease.

On January 3, 2007, Tenant recorded a memorandum

of lease (memorandum) in the Los Angeles County

Recorder’s Office, signed by the original owner and Tenant.

It gave notice of the lease term of 15 years. The

memorandum notified successors of the transfer restrictions

set forth in the lease: “All of the rights and obligations of the

Parties under the Lease shall bind and inure to the benefit of

their respective heirs, successors and assigns; provided,

however, that nothing [i]n this Section 9 shall be construed

to limit or waive the provisions concerning restrictions on

Transfer set forth [i]n Article 8 of the lease.”

Construction Deed of Trust, Foreclosure, and Transfer

Appellant Farmers & Merchants Bank of Long Beach

(Farmers & Merchants) loaned funds to Tenant and recorded

a construction deed of trust securing the loan on January 16,

2007. The deed of trust identified the property as “[a]n

unrecorded leasehold estate established by a memorandum

of lease . . . recorded January 3, 2017.” Tenant assigned its

right, title, and interest in all present and future leases of

the premises to Farmers & Merchants.

5

Tenant defaulted on the loan. On February 12, 2009,

Farmers & Merchants recorded a notice of trustee’s sale of

the property. One month later, Farmers & Merchants

recorded a trustee’s deed upon sale identifying itself as the

successful bidder of the leasehold estate. Both documents

described the property in the same language as the

construction deed of trust.

On August 5, 2009, Farmers & Merchants recorded a

grant deed transferring the property to Whittier Carino’s,

LLC.2 Whittier Carino’s did not meet the requirements in

the lease for an appropriate transfer because it had a net

worth of less than $3 million and operated fewer than three

restaurants. Based on trademark concerns, Farmers &

Merchants recorded another grant deed on November 16,

2009, transferring the leasehold interest to Whittier JC, LLC

(Whittier). Whittier’s managing member is Farmer’s &

Merchants.

Landlord’s Notification of Inappropriate Transfer and

Surrender of Premises

The shopping center was sold to a second owner in

August 2010. On August 10, 2010, the general manager of



2 The property description on the grant deed identifies

“[a] leasehold as created by that certain lease dated

December 20, 2006, executed by PPF RTL 15603 Whittwood

Lane, LP . . . as Lessor, and Breckenridge Group, Inc. . . . as

Lessee, as reference in the document entitled ‘Memorandum

of Lease’ . . . .”

6

the shopping center sent a letter to Farmers & Merchants

stating that it was not notified of any transfer, which

rendered Farmers & Merchants in default under the lease.

Farmers & Merchants replied that its “interest in the subject

property continues to be held . . . via an LLC in which

[Farmers & Merchants] is the majority member.”

The general manager requested that Whittier execute

a tenant estoppel certificate. The chief executive officer of

Farmers & Merchants executed the certificate on behalf of

Whittier. The certificate lists Whittier as the successor in

interest of Tenant and states that the lease termination date

is March 31, 2023.

The second owner received rent payments from

Whittier through July 2014. After the second owner sold the

property to Landlord in October 2014, Whittier stopped

paying rent and surrendered possession of the premises on

December 22, 2014, with the intent to terminate the

leasehold estate.

PROCEDURAL HISTORY

Landlord filed an amended complaint against Farmers

& Merchants and Whittier on January 13, 2015, alleging

causes of action for breach of contract and damages under

Civil Code section 1951.2. Landlord filed a motion for

summary adjudication on the issue of whether Farmers &

Merchants had a contractual duty as successor to Tenant to

comply with the lease. In opposing the motion, defendants

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submitted a declaration by the vice president at Farmers &

Merchants that defendants neither “intended to, nor did

they assume the at issue Lease.”

In December 2015, the trial court granted plaintiff’s

motion for summary adjudication. The court found that the

construction deed of trust and notice of sale specifically

identified the lease, and the lease provided that Farmers &

Merchants was obligated by the lease terms upon

foreclosure. Farmers & Merchants elected to purchase the

leasehold estate and succeeded to Tenant’s rights and

obligations. “The language of the underlying documents

compels a finding that defendant owes contractual duties

under the subject lease.”

A bench trial was held on the issue of damages. The

vice president of Farmers & Merchants testified that neither

defendant executed a document expressly assuming the

obligations under the lease. Relying on the summary

adjudication ruling, the court found a breach of contract and

calculated damages. The trial court entered judgment

against Farmers & Merchants in favor of Landlord on March

3, 2016. Farmers & Merchants filed a timely notice of

appeal.3



3 In the parties’ briefs on appeal, they refer to

defendant Whittier as an appellant. The trial court did not

enter a judgment against Whittier. Only a party aggrieved

by the judgment has standing to appeal. (Code Civ. Proc.,

§ 902; County of Alameda v. Carleson (1971) 5 Cal.3d 730,

8

DISCUSSION

Standard of Review

“Motions for summary adjudication are procedurally

identical to motions for summary judgment ([Code Civ.

Proc.], § 437c, subd. (f)(2)), and our review of rulings on those

motions is de novo (Hartline v. Kaiser Foundation Hospitals

(2005) 132 Cal.App.4th 458, 464). Summary adjudication is

warranted only if the motion completely disposes of a cause

of action, an affirmative defense, a claim for damages, or an

issue of duty. (Code Civ. Proc., § 437c, subd. (f)(1).) The

motion shall be granted ‘if all the papers submitted show

that there is no triable issue as to any material fact and that

the moving party is entitled to a judgment as a matter of

law. In determining whether the papers show that there is

no triable issue as to any material fact the court shall

consider all of the evidence set forth in the papers, except

that to which objections have been made and sustained by

the court, and all inferences reasonably deducible from the

evidence . . . .’ (Id., subd. (c).)” (Dunn v. County of Santa

Barbara (2006) 135 Cal.App.4th 1281, 1290.) In reviewing

the summary adjudication ruling, we view the evidence

presented in the light most favorable to the party opposing



736-737.) Whittier did not file a notice of appeal and has no

standing to appeal because it is not an aggrieved party.

9

summary adjudication. (Seibold v. County of Los Angeles

(2015) 240 Cal.App.4th 674, 682.)

We apply a de novo standard of review to the

interpretation of a lease and subsequent documents. (ASP

Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th

1257, 1266.) “‘The precise meaning of any contract,

including a lease, depends upon the parties’ expressed

intent, using an objective standard. [Citations.] When there

is ambiguity in the contract language, extrinsic evidence

may be considered to ascertain a meaning to which the

instrument’s language is reasonably susceptible. [Citation.]

[¶] . . . We review the agreement and the extrinsic evidence

de novo, even if the evidence is susceptible to multiple

interpretations, unless the interpretation depends upon

credibility. [Citation.]’” (Id. at pp. 1266-1267.)

General Principles Governing Assumption of a Real

Property Lease

“A lease of real property is both a conveyance of an

estate in land (a leasehold) and a contract. It gives rise to

two sets of rights and obligations—those arising by virtue of

the transfer of an estate in land to the tenant (privity of

estate), and those existing by virtue of the parties’ express

agreements in the lease (privity of contract).” (Vallely

Investments v. BancAmerica Commercial Corp. (2001) 88

Cal.App.4th 816, 822 (Vallely).) A leasehold estate for years

is a sufficient interest in real property to be security for a

deed of trust that confers a power of sale affecting the

10

leasehold after breach of the obligation so secured. (Civ.

Code, § 2920.) “‘[W]here a trust deed to secure a loan is

taken . . . , the lessee’s interest under such lease is foreclosed

by the foreclosure of the deed of trust.’ [Citation.]” (RRanch

Markets #2, Inc. v. Old Stone Bank (1993) 16

Cal.App.4th 1323, 1327.) A mortgagee who takes lawful

possession of the premises from the lessee is considered an

assignee. (Schonfeld v. City of Vallejo (1975) 50 Cal.App.3d

401, 421, disapproved on other grounds in Morehart v.

County of Santa Barbara (1994) 7 Cal.4th 725; Johnson v.

Sherman (1860) 15 Cal. 287, 292-293 [“[h]e is therefore

substituted in the place of the mortgagor, who was lessee,

and therefore is assignee and liable as such”].)

“An assignee’s liability to the landlord turns on the

nature of the assignment. If the assignee takes possession of

the premises but no more, privity of estate exists and he is

bound by all lease covenants which run with the land. Upon

a subsequent assignment, privity of estate ends and, with it,

all obligation to the landlord. (Kelly v. Tri-Cities

Broadcasting, Inc. (1983) 147 Cal.App.3d 666, 678 [(TriCities)].)

If, however, the assignee expressly agrees with the

assignor to assume the obligations of the lease, far different

consequences attend. The assumption agreement creates a

new privity of contract between landlord and assignee,

enforceable by the landlord as a third party beneficiary,

regardless of whether the landlord was a party to the

assumption agreement. As a consequence, the assuming

assignee is required to perform all covenants of the lease for

11

the remainder of its term, absent a release by the landlord.

(Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d

232, 244–245; Rest.2d Property, Landlord and Tenant, § 16.1

(4), com. c, p. 121.)” (Vallely, supra, 88 Cal.App.3d at p. 822.)

In Enterprise Leasing Corp. v. Shugart Corp. (1991)

231 Cal.App.3d 737 (Enterprise), this court found that there

must be an express assumption of the contractual

obligations of a real property lease to hold an assignee liable

for the lease obligations. (Id. at p. 746.)4 Lease covenants

that run with the land bind and inure an assignee only as

long as it remains in possession of the premises. “‘“As long

as he remains in possession the nonassuming lessee is bound

to pay the rent, maintain the insurance, make repairs, and

pay taxes, if the lease so provides. However, these

obligations terminate when the assignee terminates his

possession.”’” (Id., supra, at pp. 745–746, quoting Tri–Cities,



4 The requirements for the assumption of a lease of real

property are different than for those of personal property.

(Miller & Starr, Cal. Real Estate (4th ed. 2016) § 34:131, pp.

34-427-34-428.) The assumption of a lease of personal

property can be shown through words or actions without any

formal assumption, and even “implied from the assignee’s

acceptance of the benefits under the contract or its

acquiescence in the terms of the contract. However, the

same rules do not apply to the assumption of a lease of real

property, which requires a formal written assumption. The

entry into possession and acceptance of the benefits of the

lease will not render the assignee liable on the contract as an

assuming party.” (Ibid., fn. omitted.)

12

supra, 147 Cal.App.3d at p. 677; accord, Melchor Investment

Co. v. Rolm Systems (1992) 3 Cal.App.4th 587, 593.)

Express Agreement

It is undisputed that the deed of trust and sale upon

deed created an assignment to Farmers & Merchants.

Landlord contends that Farmers & Merchants also assumed

the lease obligations for the full term, because the

foreclosure and purchase of the deed of trust that referenced

the lease constituted an express assumption of the lease

terms. We disagree.

An express assumption of a real property lease

requires specific affirmation by the assignee to bind itself to

the lease obligations. In Bank of America National Trust &

Savings Association v. Moore (1937) 18 Cal.App.2d 522

(Moore), the court found the defendant assumed the

obligations of a lease by stating so in a written assignment

agreement. The document was signed by the defendant, as

assignee, and the assignor. The document concluded, “‘It

being understood that said Assignee . . . is to accept, assume

and agree to perform all of the terms, conditions and

limitations contained in said lease.’ [¶] ‘The undersigned,

[defendant], hereby accepts, assumes and agrees to perform

all of the terms, conditions and limitations contained in the

aforementioned lease to be kept and performed by said

lessee.’” (Id. at p. 524.) This language established “privity of

contract.” (Id. at p. 525.) The court stated, “we have not a

13

naked assignment creating privity of estate only, ceasing

with cessation of possession, but one clothed with the

express assumption by the assignee of the obligations of the

lessee. . . . [T]he agreement of the defendant, in harmony

with the requirement of the lease, may be interpreted as a

contract directly with the lessor.” (Ibid.)

In Realty & Rebuilding Co. v. Rea (1920) 184 Cal. 565,

(Rea), the Supreme Court distinguished a “bare assignment”

from an “express agreement” to assume obligations in a

lease: “An occupant of real property who holds by virtue of a

bare assignment of the lease and without entering into any

contract, either with his assignor or the lessor, affirmatively

binding himself to fulfill the covenants of the lease, is subject

only to such obligations as he impliedly assumes by entry

and taking possession of the lease premises. [Citations.] . . .

Where, however, the assignee expressly agrees in writing to

be bound by the terms of the lease, there arises, as

distinguished from any obligation resulting from mere

occupancy, a new and different obligation . . . based upon

privity of contract.” (Id. at p. 569.)

Similarly, in First Nat. Bank v. Aldridge (1939) 33

Cal.App.2d 485 (Aldridge), the defendant sought to avoid

rent obligations by claiming that no privity of contract

existed with the plaintiff, who was an assignee under the

initial lease. (Id. at pp. 487, 490.) The court disagreed,

relying on the defendant’s signed agreement to “‘assume

future obligation of the original lessee and first party . . . in

payment of future rentals to the lessor . . . or other party

14

entitled thereto.’” (Id. at p. 487.) It noted that “[e]ven in the

absence of such an agreement, appellants would have been

liable for rent during the period of their occupancy” because

the covenant to pay rent ran with the land, “and the naked

assignment alone created a privity of estate . . . which placed

upon them the obligation to pay rent provided for while they

remained in possession of the premises.” (Id. at p. 490;

accord, Hartman Ranch Co. v. Associated Oil Co. (1937) 10

Cal.2d 232, 243 [sublease to defendant contained express

promise to assume parent lease]; Tyler v. Wilson (1943) 58

Cal.App.2d 583, 587 [partnership did not assume obligations

of lease, so monthly payments provided for in lease

continued “only so long as” the partnership remained in

possession.].)

Under the same legal principles, the Supreme Court

has declined to impose obligations on an assignee where the

assignee did not sign the lease or any document evidencing

an acceptance of the lease or its obligations. In Treff v.

Gulko (1932) 214 Cal. 591 (Treff), the court found that

although the assignee consented to an assignment and made

payments over time to the landlord, the assignee never

signed an “acceptance or agreement to take over the lease.”

(Id. at p. 596.) Finding the defendant “h[eld] under a mere

naked assignment of a lease,” the court upheld the obligation

to pay rent so long as the assignee remained in “occupancy of

the premises [which] terminates with his abandonment of

possession.” (Id. at p. 600). The court distinguished cases

that found “fresh contractual stipulation” to bind the

15

assignee under the lease. (See id. at pp. 594–595, citing

Bonetti v. Treat (1891) 91 Cal. 223 [assignee agreed in

writing “‘to pay all rent that may fall, due from time, to time

by virtue of the provisions of said lease’”]; Lopizich v. Salter

(1920) 45 Cal.App. 446 [assignee signed document “‘hereby

accept[ing] said assignment, and hereby obligat[ing] itself

upon said lease’”].) “‘In the absence of fresh contractual

stipulation, there is no privity of contract between the

assignee and the landlord. But the assignee may, by express

stipulation to be bound by the covenants of the lease, create

a privity of contract between himself and the landlord, which

will also endure till the term expires. . . . It seems, however,

that to establish privity of contract between landlord and

assignee, the necessary agreement must be made between

them themselves.’” (Treff, supra, at p. 600; accord, Ellingson

v. Walsh, O’Connor & Barneson (1940) 15 Cal.2d 673 [upon

admission of individual defendant as member of lessee

partnership, a new legal partnership was formed and

required express assumption of the lease to bind the

partnership to the lease’s contractual obligations].)

The facts in Tri-Cities are similar to the case before us.

There, a lease between the landowner and lessee required

any assignee to assume the lease obligations: “Lessee

hereby warrants and represents that in the event said

assignment shall ever take place, the assignee therein shall

assume all of the liabilities and obligations assumed by

Lessee in this Lease Agreement.” (Tri-Cities, supra, 147

Cal.App.3d at p. 671.) The lease further provided that the

16

“‘assigns and/or heirs of both parties shall carry out the

terms of this Lease Agreement.’” (Ibid.) The defendant

purchased the lessee’s business, including the lease. (Id. at

p. 670.) The purchase agreement “acknowledged the

[existence] of a land lease covering the real property,” and

attached an exhibit that states, “‘Land Lease covering real

property on which broadcasting transmitter is located.’” (Id.

at p. 671.) The bill of sale also lists the “Land Lease covering

real property on which broadcasting transmitter is located.”

(Ibid.) As part of plaintiffs’ petition to compel arbitration, it

argued that the purchase agreement, lease, and possession

of property by Tri-Cities was proof of an assumption of the

lease. (Id. at p. 672.) The trial court agreed, but the

appellate court did not.

The Tri-Cities court noted that “[i]n every case

examined where there has been an express assumption, the

assignee has stated specifically either orally or in writing

that he agrees to be bound by the terms of the lease.” (TriCities,

supra, 147 Cal.App.3d at p. 673.) After considering

the evidence at issue,5 the court concluded “as a matter of



5 First, the court noted that the purchase agreement’s

language (“‘[h]owever, the assignability of such lease will be

subject to its terms’”) “cannot be stretched into an express

assumption of all the terms in the lease.” (Tri-Cities, supra,

147 Cal.App.3d at pp. 674–675.) Instead, the court

construed this language to reference the uncertainty as to its

“assignability.” (Id. at p. 675.) Second, the lease provision

stating that “‘assignee therein shall assume all of the

liabilities and obligations assumed by the Lessee in this

17

law no evidence was presented to the trial court . . . to

substantiate the conclusion Tri-Cities had assumed the

lease.” (Id., at pp. 674–676.)

We adhere to the reasoning set forth in Tri-Cities and

conclude no express assumption can be found in this case.

Farmers & Merchants was not a signatory to the lease. The

contract between the original owner and Tenant

contemplates engaging a mortgage lender, but the provisions

cannot form a binding contract on a non-party to the lease.

The foreclosure documents do not contain an express

agreement to assume the lease. The deed of trust, notice of

trustee’s sale, and deed upon sale reference the

memorandum of lease, but do not provide any express terms

by which Farmers & Merchants agreed to uphold the lease

covenants or provisions in the memorandum of lease. We

agree with the rationale set forth in Tri-Cities that the

language of the documents served to acknowledge the lease

rather than assume its obligations.

Farmers & Merchants was not a signatory to the

tenant estoppel certificate. Whittier executed the tenant

estoppel certificate, but no fresh contract was entered into

with Whittier, because Landlord refused to consent to



Agreement’” imposed a duty on the “lessee, not the assignee.”

(Ibid.) Finally, the lease provision that “‘assigns and/or heirs

of both parties shall carry out the terms of this Lease

Agreement’” constituted an obligation of the lessor and

lessee to obtain assumption agreements necessary to

perform the terms of the lease—“[i]t create[d] no privity of

contract with Tri-Cities.” (Id. at pp. 675–676.)

18

Whittier as assignee. The evidence establishes nothing more

than a “naked assignment” to Farmers & Merchants.

Farmers & Merchants never assumed the lease obligations

and was required to pay rent only until it surrendered

possession of the premises. (Enterprise, supra, 231

Cal.App.3d at pp. 745-746.)

Landlord could have protected itself by requiring the

mortgage lender to sign the lease or a document assuming

the lease obligations. It did not do so. Landlord, as a

signatory to the initial lease, was in the best position to

protect itself by including provisions in the lease requiring

consent and assumption. (See Bennett v. Leatherby (1992) 3

Cal.App.4th 449, 452 [“lessor[] consented to the sublease and

required ‘the specific assumption of all of the obligations’”];

Moore, supra, 18 Cal.App.2d at p. 525 [“the lease itself

declares that an assignment shall be void unless the

assignee agrees, in writing, to carry its burdens, the

agreement of the defendant, in harmony with the

requirement of the lease, may be interpreted as a contract

directly with the lessor”].) In such scenario, the landlord

could treat the lease as voidable and seek legal recourse.

(Judicial Council of California v. Jacobs Facilities, Inc.

(2015) 239 Cal.App.4th 882, 911 [“the unconsented

assignment of a lease can be voided by the lessor’s

declaration of forfeiture”].) The lease did not direct Tenant

to obtain an assumption from the mortgage lender as it did

in the event of a transfer under the lease in Section 8.1.2.



We reverse the judgment and the order granting summary adjudication. We direct the trial court to deny Landlord’s motion for summary adjudication and we remand for further proceedings consistent with this opinion, which may include the filing of a dispositive motion by Farmers & Merchants on the issue of assumption of the lease. Farmers & Merchants has requested an award of attorney fees on appeal. The issue of its entitlement to attorney fees and the appropriate amount, if any, is best left to the determination of the trial court. (In re Marriage of Cheriton (2001) 92 Cal.App.4th 269, 320.)

The judgment and the order granting summary adjudication in favor of BRE DDR BR Whittwood CA LLC are reversed. The trial court is directed to enter a new and

different order denying the motion for summary adjudication. Appellant Farmers & Merchants Bank of Long Beach is awarded its costs on appeal.