## Facts

- Fiber Form Products, Inc. entered a five-year commercial lease with Old Town Properties, Inc. in 1985.
- The lease contained a subordination clause making it subordinate to any deed of trust or mortgage unless the beneficiary elected to make the lease superior.
- After the lease, Old Town encumbered the property with a deed of trust to a lender; Old Town later defaulted.
- A trustee’s sale occurred on December 3, 1986; Dover Mobile Estates purchased the property and recorded a trustee’s deed shortly thereafter.
- Dover knew of Fiber Form’s lease before purchasing the property and directed Fiber Form to send future rent to Dover’s agent; no new lease agreement was executed.
- Fiber Form remained in possession and continued paying rent while the parties discussed a possible rent reduction and lease-related terms; no modification was finalized.
- On June 1, 1987, Fiber Form gave written 30-day notice of intent to vacate, then vacated and stopped paying rent.
- Dover sued for unpaid rent (and conversion). After a court trial, judgment was entered for Fiber Form on the rent claim, and Fiber Form was awarded costs including attorney’s fees.

## Issues

1. Whether foreclosure under a senior deed of trust extinguishes a lease that is expressly subordinate to deeds of trust.
2. Whether the tenant’s post-foreclosure occupancy and rent payments revived or continued the original fixed-term lease, or instead created only a periodic tenancy.
3. Whether the tenant breached the implied covenant of good faith and fair dealing by asserting that the lease was extinguished and vacating after giving notice.
4. Whether the prevailing tenant could recover attorney’s fees and costs under the lease’s fee provision despite foreclosure terminating the leasehold.

## Decision

- The court affirmed the judgment for Fiber Form.
- The trustee’s sale extinguished Fiber Form’s lease because the lease was contractually subordinate and no lender election preserved or elevated it.
- After foreclosure, Fiber Form’s continued possession and rent payments created only a tenancy at will or month-to-month tenancy, not a reinstatement of the five-year term.
- Fiber Form properly terminated the post-foreclosure periodic tenancy by giving 30 days’ written notice and was not liable for future rent under the extinguished lease term.
- Fiber Form did not breach the implied covenant of good faith and fair dealing by asserting the legal consequences of foreclosure and terminating its periodic tenancy.
- The trial court properly awarded Fiber Form costs and attorney’s fees as the prevailing party, and properly denied Dover’s motion to tax costs.

## Legal Principles

- Foreclosure under a senior deed of trust terminates junior interests, including a lease made subordinate by contract, absent an effective agreement or election preserving the lease.
- A purchaser at a trustee’s sale is not bound by an extinguished subordinate lease merely because it knew of the lease or accepted rent after the sale.
- Post-foreclosure occupancy with rent acceptance generally creates a new periodic tenancy rather than reviving the prior fixed-term lease.
- The implied covenant of good faith and fair dealing cannot be used to impose obligations inconsistent with the contract’s express subordination terms or the legal effect of foreclosure.
- Contractual attorney-fee provisions may support a fee award to the prevailing party in litigation on the contract, even if the leasehold estate has been terminated by foreclosure.

## Conclusion

The court held that foreclosure of a senior deed of trust extinguished a commercial lease made subordinate by its terms, leaving the tenant only a month-to-month tenancy that could be ended with proper notice; the tenant owed no rent for the remainder of the former term and could recover contractual attorney’s fees and costs as the prevailing party.


Dover Mobile Estates v. Fiber Form Prods., Inc., 220 Cal. App. 3d 1494 (Ct. App. 1990)