Foreclosure buyer not entitled to $450K tenant payment

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A company that purchased commercial property at a foreclosure sale wasn’t entitled to a $450,000 payment a tenant made to the prior owner’s agent to restore leased space to its original condition.

Judge David W. Lannetti of the Norfolk Circuit Court said an assignment of income and rights, which the defendant bank held as collateral for the defaulted loan, unambiguously contemplated assignment of the tenant payment in 5900 Lake Wright Drive v. U.S. Bank (VLW 022-8-076).

“The Court holds that Lake Wright had constructive notice of U.S. Bank’s right to all payments related to the real property at issue, and that U.S. Bank therefore is entitled to the $450,000 payment pursuant to the assignment of leases and rents,” he wrote, granting the bank’s motion for summary judgment.

Demolition payment

U.S. Bank made a loan to Silver Oak Associates, which was secured by property at 5900 Lake Wright Drive as well as an assignment of leases and rents from the property. The deed of trust and assignment were recorded in January 2007.

According to the assignment, U.S. Bank was entitled to “all of the right, title and interest … in and to … all deposits (whether for security or otherwise), rents, issues, profits, revenues, royalties, accounts, rights, benefits and income of every nature of and from the Property.”

When Silver Oak defaulted on the loan, U.S. Bank began foreclosure proceedings. The property was purchased at auction by 5900 Lake Wright Drive LLC in September 2021.

But before the default, Silver Lake had required one of its tenants to pay $450,000 as a “Demolition Payment” to restore or remove any improvements and fixtures made to the premises. U.S. Bank acquired that money.

Two tenants remained on the property after foreclosure, including the one with the demolition payment; both leases would expire at the end of 2021. U.S. Bank refused to turn over the demolition payment.

Lake Wright sued U.S. Bank for conversion and unjust enrichment. Both parties moved for summary judgment. Neither party submitted the lease as an exhibit.

‘Without limitation’

Lake Wright claimed the lease that described the demolition payment was assigned to the new owner after foreclosure. Since the payment was intended to be used after the lease ended, which happened after it took ownership, Lake Wright said it was entitled to use the money.

But U.S. Bank said Lake Wright bought the property in a “where-is” and “as-is” condition with constructive notice of the assignment. And even though the assignment didn’t mention the demolition payment, the bank pointed out that it was expressly “without limitation.”

Further, U.S. Bank maintained that the money ran with the land. Without the bank’s relationship as lessor under the assignment, the tenant never would have made the demolition payment.

Where Lake Wright wasn’t a party to the unrecorded lease that was subject to the assignment, U.S. Bank said it had a superior right to apply the demolition payment to the outstanding loan balance.

Lannetti agreed with U.S. Bank.

“Despite Lake Wright’s assertion that the Assignment does not cover the Demolition Payment, the contract’s plain language indicates otherwise,” he pointed out.

“The Court must give words ‘their usual, ordinary, and popular meaning’ and, as such, the Court holds that the Assignment contemplates U.S. Bank obtaining ‘all deposits[,] … benefits and income of every nature of and from the Property … without limitation.’”

Since the assignment contemplates inclusion of the demolition payment, the bank was entitled to apply it to the outstanding loan balance.

“Because the Assignment conveyed all interest in the leases to U.S. Bank, the Assignment was recorded, and there is no evidence suggesting that U.S. Bank ever assigned the Assignment to Lake Wright, U.S. Bank’s interest in the Demolition Payment clearly is superior to that of Lake Wright. As such, U.S. Bank had a legal right to apply the Demolition Payment toward the outstanding loan balance.”

— Norfolk Circuit Court Judge David W. Lannetti

Constructive notice

Lannetti, however, agreed with Lake Wright that U.S. Bank was bound by the terms of Silver’s unrecorded lease, which was subject to the assignment.

His analysis didn’t end there.

Here, Lake Wright had constructive notice of the assignment before it bought the property at foreclosure.

“Because the Assignment conveyed all interest in the leases to U.S. Bank, the Assignment was recorded, and there is no evidence suggesting that U.S. Bank ever assigned the Assignment to Lake Wright, U.S. Bank’s interest in the Demolition Payment clearly is superior to that of Lake Wright,” Lannetti wrote. “As such, U.S. Bank had a legal right to apply the Demolition Payment toward the outstanding loan balance.”

The judge also rejected Lake Wright’s argument that the assignment dictated that the money be used for restoration of the property.

“The Court notes that the Demolition Payment is unlike a security deposit, which U.S. Bank conceded would have to be turned over to Lake Wright, as mandated by the Code of Virginia,” he said. “The Court is unaware of any similar provision for other types of deposits in the Code.”

‘Half a loaf’

Gregory Giordano of Willcox & Savage in Norfolk, who represented Lake Wright, said it was a well-reasoned opinion.

“I disagree with the $450,000 judgment, but I can’t fault his logic,” Giordano told Virginia Lawyers Weekly.

However, his client was happy that Lannetti awarded them $316,097.15 in back rent and prejudgment interest.

“We got half a loaf,” he said, adding that U.S. Bank has already satisfied the judgment.

Meanwhile, Joel Nied, who has extensive experience handling corporate transactions with Price Benowitz in Norfolk, said “it’s possible there wasn’t enough due diligence, which can be hard in the foreclosure process.”

He found it unclear from the opinion if the buyer knew about the demolition payment at foreclosure.

“It may have been easy to overlook it as a security deposit if you were quickly reading through documents,” he pointed out.

Nied offered some words of caution.

“If there’s a bank involved, you have to look very closely to make sure that the bank is paid off and has relinquished all of its claims,” he said. “It’s the ounce of prevention.”

Editor’s note: A version of this story that appeared in the Jan. 23, 2023, print issue misidentified the case’s VLW No. as 022-8-073.