## Facts

- Owners of downtown Little Rock “hotel lots” entered a net ground lease allowing a tenant to build a hotel; the tenant also owned adjacent lots used for parking.
- The ground lease included a “Mortgage of the Fee” clause stating the lease would be subordinate to a specified permanent financing mortgage and any renewal, extension, or refinancing, subject to stated limits.
- The original construction/permanent loan was made by Liberty National and secured by a mortgage on the hotel lots signed by both the fee owner and the tenant.
- The Balches later acquired the fee simple interest in the hotel lots; Crestwood became the ground-lease tenant and owner of the adjacent lots.
- After default on the Liberty National loan, Crestwood refinanced with Leader Federal; the new loan paid off Liberty National and the Liberty National mortgage was released.
- Crestwood alone signed the Leader Federal note and mortgage, which purported to encumber both the hotel lots and adjacent lots.
- Leader Federal did not obtain the Balches’ signatures on the Leader Federal mortgage; instead, the Balches signed an “Estoppel and Subordination Certificate” addressing the ground lease and stating their interest under the lease was subordinate to Leader Federal’s mortgage.
- Crestwood later defaulted; Leader Federal sued to foreclose and sought to reach the Balches’ fee simple interest in the hotel lots based on the Certificate.

## Issues

1. Whether the Balches’ execution of an estoppel and subordination certificate—without signing the mortgage—subordinated their fee simple title in the hotel lots to Leader Federal’s mortgage and subjected that fee interest to foreclosure.
2. Whether the ground lease’s subordination/mortgage clause, combined with the Certificate, was sufficient to create a lien on the lessors’ fee simple interest in favor of the refinancing lender.

## Decision

- The Arkansas Supreme Court reversed the foreclosure decree to the extent it subjected the Balches’ fee simple interest to Leader Federal’s mortgage.
- The court held the Certificate subordinated only the Balches’ interests as lessors under the ground lease, not their underlying fee simple title.
- The case was remanded for further proceedings consistent with limiting foreclosure to interests actually encumbered.

## Legal Principles

- Instruments asserted to encumber or subordinate a fee simple estate are strictly construed; fee title is not subordinated absent clear, unambiguous language showing that intent.
- Contract interpretation begins and ends with the written language when it is not ambiguous; extrinsic material cannot be used to create an encumbrance not expressed in the document.
- A subordination document directed to rights “under the lease” affects lease-related interests and priorities, and does not reach the landlord’s fee estate unless it expressly states that the fee is made subject to the mortgage.
- A lease provision authorizing subordination to specified financing does not, by itself, automatically place the fee under a later lender’s mortgage; the landowner’s consent to encumber the fee must be clearly manifested in the operative transaction documents.

## Conclusion

Because the refinancing mortgage was signed only by the tenant and the lessors’ certificate spoke in terms of subordination tied to the ground lease rather than an express encumbrance of fee title, the lender lacked a lien on the lessors’ fee simple interest and could not foreclose that fee based solely on the certificate.


Balch v. Leader Fed. Bank for Sav., 315 Ark. 444, 868 S.W.2d 47 (Ark. 1993)