## Facts

- Vallely Investments, L.P. owned land in Newport Beach, California and leased it under a long-term ground lease.
- The lease was amended and restated in 1986, extending the term to 2051 and permitting assignment if (1) the assignment was written with notice to the lessor and (2) the assignee expressly accepted and assumed all lease terms and covenants.
- The lease included a provision addressing leasehold mortgagees, stating that a mortgagee or foreclosure purchaser would not incur rent/covenant liability unless it became owner of the leasehold by foreclosure or assignment in lieu, and then liability would be limited to obligations arising by operation of law or privity of estate.
- The then-lessee, Balboa Landing, L.P., borrowed funds secured by a deed of trust on the leasehold and later defaulted.
- To address the default and related risks, the lender’s affiliate, BancAmerica Commercial Corporation (BACC), took a written, recorded assignment of the leasehold and expressly assumed all obligations under the lease; Vallely received notice.
- A foreclosure later terminated BACC’s leasehold estate.
- Vallely sought a declaration that BACC remained liable for rent and other obligations for the balance of the lease term based on BACC’s express assumption.

## Issues

1. Whether an assignee of a mortgaged ground lease who expressly assumes lease obligations remains contractually liable to the lessor after foreclosure terminates the assignee’s leasehold estate.
2. Whether a lease clause limiting a leasehold mortgagee’s liability to obligations arising by operation of law or privity of estate bars enforcement of the assignee’s express assumption agreement.

## Decision

- The Court of Appeal reversed summary judgment for BACC and directed entry of judgment for Vallely.
- The court held that BACC’s written, express assumption created privity of contract with Vallely, making BACC liable on the assumed obligations even after foreclosure ended its possessory interest.
- The mortgagee-liability clause was construed to limit liability imposed solely by mortgagee/foreclosure status, not liability voluntarily undertaken by an express assumption.

## Legal Principles

- Lease obligations may be enforced against an assignee based on privity of estate (tied to possession) and/or privity of contract (based on an express promise to perform).
- Termination of an assignee’s estate (including by foreclosure) ends privity-of-estate liability, but does not discharge contractual liability created by an express assumption absent a contract defense such as release or novation.
- A clause limiting a leasehold mortgagee’s liability to obligations arising by operation of law or privity of estate does not negate or supersede separate contractual duties the mortgagee (or its affiliate) affirmatively assumes as a tenant-assignee.

## Conclusion

An assignee that expressly assumes a ground lease’s covenants becomes contractually bound to the lessor, and that contractual liability survives foreclosure terminating the assignee’s leasehold estate; a mortgagee-liability limitation clause does not protect the assignee from obligations it voluntarily assumed.


Vallely Invs., L.P. v. BancAmerica Com. Corp., 106 Cal. Rptr. 2d 689 (Ct. App. 2001)