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Earle Investments, LLC v. Southern Desert Medical Center Partners

Court of Appeals of Arizona, First Division

April 13, 2017

EARLE INVESTMENTS, LLC, an Arizona limited liability, Plaintiff/Counterdefendant/Appellee,
SOUTHERN DESERT MEDICAL CENTER PARTNERS, an Arizona general partnership, Defendant/Counterclaimant/Appellant.

         Appeal from the Superior Court in Maricopa County No. CV2013-015653 The Honorable David O. Cunanan, Judge

          Combs 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 Defendant/Counterclaimant/Appellant

          Presiding Judge Diane M. Johnsen delivered the opinion of the Court, in which Judge Jon W. Thompson and Chief Judge Michael J. Brown joined.


          JOHNSEN, Judge.

         ¶1 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 conclusion.


         ¶2 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.").

         ¶3 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 owner]."

         ¶4 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 Areas.

         ¶5 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.

         ¶6 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."[1]

         ¶7 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.

         ¶8 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.

         ¶9 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").

         ¶10 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 ...

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