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Walk, don’t run: After foreclosing, lenders should pause before evicting tenants in California

Jeff Brown December 26, 2018

The California Supreme Court has held that a new owner of property obtained through non-judicial foreclosure must perfect title before serving a written notice to quit on the current tenants. 

In Dr. Leevil, LLC v. Westlake Health Care Center, Westlake Village Property, L.P. (“Westlake Village”) owned property in Thousand Oaks, California, that it leased to Westlake Health Care Center (“Westlake Health”). Westlake Village obtained a bank loan, secured by the real property. 

After Westlake Village defaulted on the bank loan, the bank sold the loan (promissory note and deed of trust) to Dr. Leevil, LLC (“Dr. Leevil”), which then began the non-judicial foreclosure process allowed under California law. Dr. Leevil bought the property at the trustee’s sale. The very next day, Dr. Leevil served a three-day notice to quit on the property’s tenant, Westlake Health, five days before Dr. Leevil recorded title to the property by way of a trustee’s deed. Under California’s summary unlawful detainer process, the first step is to serve a written notice to quit, after which the owner may file a lawsuit seeking eviction of the tenant. Here, Dr. Leevil filed the unlawful detainer eviction lawsuit 40 days after service of the notice to quit.

In ruling on the appeal, the California Supreme Court, the state’s highest appellate court, interpreted California Civil Code Section 1161a(b)(3), which provides that a landlord may use the unlawful detainer process to evict a tenant after the landlord obtains the property through non-judicial foreclosure:

(b) In any of the following cases, a person who holds over and continues in possession of a manufactured home, mobilehome, floating home, or real property after a three-day written notice to quit the property has been served upon the person, or if there is a subtenant in actual occupation of the premises, also upon such subtenant, as prescribed in Section 1162, may be removed therefrom as prescribed in this chapter: 

* * *

(3) Where the property has been sold in accordance with Section 2924 of the Civil Code, under a power of sale contained in a deed of trust executed by such person, or a person under whom such person claims, and the title under the sale has been duly perfected

The Court held that the Code requires that “perfection of title” was a prerequisite “to Dr. Leevil having any right to the remedy section 1161a(b) affords.” And, the Court held, perfection of title “requires that the instrument of conveyance (the trustee’s deed) be recorded. . . .” 

Because one of the conditions set forth in section 1161a(b)(3) is that “title under the sale has been duly perfected,” Dr. Leevil was not entitled to a section 1161a(b) remedy until it first perfected title, which required, among other things, that the instrument of sale (the trustee’s deed) be recorded. That being so, the most natural reading of the statute required Dr. Leevil to perfect title before invoking section 1161a(b) – but it is undisputed that Dr. Leevil served the three-day written notice to quit before it perfected title to the property. Dr. Leevil, therefore, took the first step in the removal process authorized by section 1161a(b) before satisfying all of the prerequisite conditions.

Therefore, a little patience is needed before a new owner of property, who obtained the property through non-judicial foreclosure, may start the eviction process against any tenant of the property. It isn’t enough to successfully bid at a foreclosure trustee’s sale; the new owner must “perfect” title, i.e., record the trustee’s deed before serving the notice to quit.

Jeff Brown is a partner in the Firm's litigation department and focuses on real estate, finance, and commercial litigation.