EARLE INVESTMENTS, LLC, an Arizona limited liability, Plaintiff/Counterdefendant/Appellee,
SOUTHERN DESERT MEDICAL CENTER PARTNERS, an Arizona general partnership, Defendant/Counterclaimant/Appellant.
from the Superior Court in Maricopa County No. CV2013-015653
The Honorable David O. Cunanan, Judge
Law Group, PC, Phoenix By Christopher A. Combs, Alexandra E.
Fugate Counsel for Plaintiff/Counterdefendant/Appellee
Dickinson Wright, PLLC, Phoenix By Michael R. Scheurich,
Maggie E. Wood Counsel for
Presiding Judge Diane M. Johnsen delivered the opinion of the
Court, in which Judge Jon W. Thompson and Chief Judge Michael
J. Brown joined.
We address in this case the effect of broadly written
subordination agreements a landowner executed in support of
deeds of trust that secured loans made to the owner of some
commercial condominium units situated on the owner's
land. We conclude the subordination agreements functioned as
conveyances of the landowner's interest in the encumbered
property, and vacate and remand the superior court's
judgment to the extent it is inconsistent with that
AND PROCEDURAL BACKGROUND
In January 1974, Duane P. Alleman, on behalf of Du Paul Ltd.
("Du Paul"), conveyed by warranty deed a fee-simple
interest in land located in Tempe to Arizona Title Insurance
and Trust Company ("Arizona Title"). In 1976,
Arizona Title then leased a portion of the land to Duane P.
Alleman, acting on behalf of Southern Desert Medical Center,
Inc., "Phase II" ("SDMC Inc.").
The 50-year lease stated that SDMC Inc. could use the land
"only for the purpose of operating and maintaining
offices for medical and dental and related services."
SDMC Inc. was to pay all taxes and assessments and rent of
$1, 250 per month. Additionally, the lease provided it was
"UNDERSTOOD AND AGREED that the lease-hold interest of
the Lessee may be enrolled in a Horizontal property
Regime" pursuant to Arizona Revised Statutes
("A.R.S.") section 33-551 (1976). The lease
specified that SDMC Inc. could convey "Units" of
its leasehold estate under such a horizontal property regime.
Each such conveyance would include a proportionate interest
in the "Common Areas" of the horizontal property
regime. The lease provided that Unit owners would be
responsible for their respective shares of rent, taxes and
assessments due under the lease. The lease further set out
remedies available to Arizona Title as lessor in the event of
a breach by a Unit owner. Among other things, Arizona Title
could "terminate this Lease as to that portion of the
premises on which the leasehold estate is owned by such [Unit
The lease also addressed respective rights and obligations
with respect to security interests. First, SDMC Inc. agreed
that its leasehold interest would be subordinate to any
mortgage or deed of trust placed on Arizona Title's
interest in the property, with the proviso that the lease
would remain in full force and effect notwithstanding any
default. The lease also addressed the possibility that an
owner of a Unit might want to post its interest as security
for a loan:
Lessor may, in its sole discretion, but it shall not be
obligated to, subordinate its interest in portions of the
real estate to the lien of a mortgage or Deed of Trust
granted of [sic] the grantee of the leasehold estate in one
or more Units under a Declaration of Horizontal Property
Regime. In such event, however, the subordination shall be
only as to the property upon which the leasehold estate is
owned by such grantee, and appurtenant interest in the Common
On the same day it entered into the lease with Arizona Title,
SDMC Inc. established a horizontal property regime on the
parcel. The Declaration that established the regime recited
that Arizona Title was the owner of fee-simple title to the
land and that, pursuant to its lease, SDMC Inc. was "the
owner of the leasehold estate in and to the aforedescribed
property, subject to the provisions of said Lease." The
Declaration further recited that SDMC Inc. was constructing
on the parcel a professional building project that was to be
known as Southern Desert Medical Center, Phase II, which
"shall be held, sold and conveyed" subject to the
Declaration. The regime was to last until the 50-year lease
from Arizona Title expired.
As provided in the Declaration, SDMC Inc. was to divide the
project into "Units and "Common Elements." The
Declaration defined "Unit" to mean "a separate
leasehold estate, consisting of the space bounded by and
contained within the perimeter walls, floors, ceilings and
windows of each Unit." The Declaration specified that
"Common Elements" and "Common Area" were
"synonymous, " and meant "each multi-office
structure, except for the Units, the earth upon which the
structure is located and the air space above, the interior
surface of the ceiling of the structure, " and, inter
alia, all bearing walls, roofs, ceilings, floors,
foundations, storage spaces, patios, lobbies, carports,
parking spaces, pipes, wires. Further, ownership of a
"condominium" within the meaning of the Declaration
would include "the leasehold interest in a Unit, "
along with an undivided interest in the Common Areas.
Finally, the Declaration specified that each condominium was
"a separate parcel of real property which may be
conveyed, transferred and encumbered in the same manner as
any other parcel of real property, independently of all other
parts of the property, subject only to the provisions of this
Declaration and the underlying Lease."
On June 28, 1977, Duane P. Alleman, acting on behalf of SDMC
Inc., conveyed to Duane P. Alleman, in his personal capacity,
two suites of condominiums under the regime, designated as
numbers 1 through 34 of Building "G" and numbers 40
through 59 of Building "I." The warranty deed
described the real property to be conveyed as the Units,
"TOGETHER with an undivided . . . interest in and to the
Leasehold Estate in and to the subject Real Property, and
TOGETHER with [an undivided] interest in the common areas,
" all as set forth in the Declaration. Two days later,
to secure financing for tenant improvements, Alleman granted
a lender a security interest in each of the two suites
through identical deeds of trust. The same day, Arizona
Title, as owner/lessor, and SDMC Inc., as lessee, executed
two identical Subordination Agreements. The particulars of
the Subordination Agreements are set out infra
¶¶ 15, 23, 25, 29.
Two years later, Arizona Title conveyed to Du Paul by special
warranty deed its fee-simple title in and to the land that
was subject to the lease between Arizona Title and SDMC Inc.
On the same day, Du Paul conveyed the same interest to
Southern Desert Medical Center Partners
("Partners") by warranty deed. At that point,
therefore, Partners became the owner/lessor of the parcel of
land, subject to whatever rights, benefits or obligations
were imposed or granted by the Subordination Agreements.
In July 1997, the lender foreclosed on the deeds of trust
securing construction of Alleman's two suites of Units.
The condominiums were sold at a trustee's sale, and later
conveyed to a second entity, which, on November 7, 2001,
conveyed the Units by warranty deed to appellee, Earle
Investments, LLC ("Earle").
Even though it was an owner of Units ostensibly subject to
the Lease, Earle paid no rent to Partners, the owner/lessor,
until 2012, when it agreed to pay six years' back rent of
$35, 481.07 for Units 1 through 34 of Building "G"
and $20, 871.21 for Units 40 through 59 of Building
"I." Thereafter, Earle made rent payments for
several months, then stopped, asserting that, under the
Subordination Agreements and as a result of the foreclosure
sales in July 1997, it held a fee simple interest in the land
occupied by the Units. It argued that ...