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A lease which is subordinate to a deed of trust is extinguished by a foreclosure sale. A foreclosure proceeding destroys a lease junior to the deed of trust, as well as the lessee's rights and obligations under the lease. If the sale of the landlord's interest is forced by one having a paramount title to that of the tenant, such as a mortgagee whose interest existed at the time the lease was made, the tenant's interest will be defeated by the sale.
Appellant Dover Mobile Estates filed suit to recover rent from respondent Fiber Form Products, Inc. In 1985, Fiber Form entered into a five-year lease with landlord Old Town Properties, Inc. The lease provided that it was subordinate to any deeds of trust or mortgages placed on the property unless the mortgagee or beneficiary elected to have the lease be superior. When Old Town defaulted, the mortgagee foreclosed and the property was sold in a trustee's sale. Fiber Form continued paying monthly rent for a period of time but, after giving 30 days' notice, vacated the premises. The trial court found that the foreclosure sale extinguished the lease, entered judgment in favor of Fiber Form, and awarded the tenant $ 7,255.95 in attorney fees. It denied Dover’s motion to tax costs. In its appeal, Dover argued that (1) a trustee's sale did not terminate Fiber Form's lease; (2) Fiber Form breached the covenant of good faith and fair dealing; and (3) the trial court erred in denying its motion to tax costs.
Did the foreclosure sale terminate the prior lease?
The Court affirmed, finding that the lease was subordinate to the deed of trust and was therefore extinguished by the foreclosure sale. Because the lease was extinguished, there was no lease for Fiber Form to avoid. The foreclosure sale terminated the prior lease, causing Fiber Form to be a month-to-month tenant. Fiber Form acted properly in terminating on 30 days' notice. The Court also held that the trial court's decision in awarding respondent costs for attorney's fees was within its discretion.