Opinion
No. 110690
Decided July 25, 1967.
Landlord and tenant — Lessee of mortgaged real estate — Rights not terminated by foreclosure of mortgage — Forcible entry and detainer against lessee — Not maintainable by purchaser, when.
1. The rights of a tenant under a lease of real estate previously mortgaged are not terminated by a foreclosure action upon the mortgage to which the tenant has not been made a party.
2. An action in forcible entry and detainer against the tenant of the mortgagor cannot be maintained by the mortgagee-purchaser of the property at a foreclosure sale who had never been in possession where the tenant was not a party to the foreclosure.
Mr. Arthur P. Underhill, for appellees.
Mr. Ralph W. Ross, for appellants.
This is an appeal from a judgment in forcible entry and detainer granted by the Massillon Municipal Court.
The defendants-appellant, who will be called the "lessees" for purposes of this opinion, hold a five-year lease, expiring in 1968, written and recorded, having been executed subsequent to a mortgage having been given by their landlord to a third person.
Thereafter the mortgage was foreclosed without making the lessees parties to the foreclosure action and the mortgagee purchased the land at the judicial sale upon foreclosure and thereafter obtained a judgment in forcible entry and detainer against the lessees in the Massillon Municipal Court.
Only the lessees have been in possession of the premises during the time subsequent to the execution and recording of the lease.
This court holds that the lease was subordinate to the mortgage but that the foreclosure action could not terminate the rights of the lessees of the mortgagor in default without making the lessees parties to the foreclosure suit.
The Ohio rule was stated by its Supreme Court in 1847 in the case of Henrietta Frische v. Henry Kramer's lessee, 16 Ohio 125.
"After condition broken, then the mortgagee has an interest in the land — as between the parties to the mortgage, he has the legal interest. Having this legal interest, he may file his bill in chancery for a foreclosure, or for a decree ordering a sale of the mortgaged premises. To this bill he must, or ought to make the mortgagor a party. And he ought further to make all persons parties who have acquired interests in the property, either anterior, or posterior to the date of his mortgage. * * * As to those not parties to the suit — not before the court, the decree does not affect them; their interests remain as they were."
The mortgagee who became the judicial sale purchaser, who is the appellee in this court, relies upon the case of New York Life Ins. Co. v. Simplex Products Corp., 135 Ohio St. 501, which holds that the purchaser at the foreclosure sale acquires no rights thereby from or against the mortgagor's lessee and hence could not hold the tenant to his obligation to pay rent under the lease.
This is quite a different case. In the case at bar, the tenant claims rights in the land and asserts he had a right to protect them by having his day in court. There the opposite question arose. The tenant owed the rentals first to his landlord. The landlord defaulted upon the prior mortgage and made the tenant's estate less secure. Under these facts the Ohio Supreme Court decided it would not be fair to require the tenant to live up to obligations owed a landlord who had defaulted upon his payments upon a mortgage executed prior to the lease.
It is for the purpose of releasing the tenant of his obligation to a defaulting landlord that the court laid down the rule that foreclosure of a prior mortgage terminates a tenant's obligation under a lease made by the mortgagor thereafter even though the tenant is not joined in a foreclosure action.
That rule is to protect tenants and hence to promote commerce by encouraging leases of mortgaged premises. Such a rule strengthens the general economic position of the mortgage lender also.
To be consistent, the reasoning behind the Simplex rule must require protection of the tenant's rights by requiring they cannot be terminated by a foreclosure in which he has not been joined.
It is one thing to release him of obligations because of a foreclosure action in which he has not been joined. This is nothing more than an application of the rule that a covenant to pay rent is dependent upon the landlord's covenant of quiet enjoyment. 33 Ohio Jurisprudence 2d 613, Landlord and Tenant Section 356. It is the opposite thing to argue he can lose valuable rights in land thereby.
The court, in deciding the case at bar, makes the observation that the contrary rule could permit landlords to break leases without giving lessees notice or a right to a day in court when the inflationary cycle warrants while being able to hedge against deflation by keeping the tenant bound by a long term lease.
All that would be required would be for the real owner to put the record title in the name of an agent and take back a mortgage.
This economic fact of life is recognized by the law in all heavily populated states such as New York, New Jersey, California and Florida, where the question has been litigated.
See the annotation in 109 A. L. R. 447, "Relation and rights inter se of purchaser under foreclosure of mortgage and tenant under lease subsequent to mortgage."
The rule is stated in 37 American Jurisprudence 50, Mortgages, Section 554:
"Ordinarily, however, the foreclosure of a mortgage affects the rights and interest of only such persons as are made parties; and one in possession of real estate under claim of right from a mortgagor is a necessary party to a foreclosure of the mortgage, and a decree of foreclosure is not effective as to him unless he is joined. Accordingly, whether a lease of real estate previously mortgaged is terminated by a foreclosure action and sale is held by the majority of the decisions to depend on the joinder of the lessee as a party to the foreclosure action; such a lease, by the weight of authority, is terminated in case, and only in case, the lessee is made a party to the foreclosure suit."
The Ohio Supreme Court stated the rule applicable in this case in 1895 in the case of Stewart, Admr., v. Wheeling Lake Erie Rd. Co., 53 Ohio St. 151, at page 167:
"It is the duty of a mortgagee to make all persons who appear of record to have a lien upon or interest in the mortgaged premises parties to his action of foreclosure, and if he does not, their lien or interest remains unaffected thereby; and any such encumbrancer, whether prior or subsequent to the mortgage, who has not been made a party, may maintain an action to enforce his lien, and have a resale of the property for that purpose; * * *."
The same rule is stated in Stewart v. Johnson (1876), 30 Ohio St. 24 at page 30, which cites on the same point two other Ohio Supreme Court cases: Frische v. Kramer's lessee, 16 Ohio 125, and Childs v. Childs, 10 Ohio St. 339.
The Ohio rule is stated in 37 Ohio Jurisprudence 2d 520, Mortgages, Section 330:
"Section 330. Generally; Joinder of and Bringing in Parties, Generally. — Ordinarily, all persons who are beneficially interested, either in the estate mortgaged or the obligation secured, are proper or necessary parties to a foreclosure action, for the judgment of foreclosure is not binding upon the rights, interest, or liens of those who are not parties to the foreclosure action, or are not in privity with the parties thereto, and their liens or interests remain unaffected by the sale, the same as if no sale had been made. As the Ohio courts have pointed out, a foreclosure action contemplates appraisal and sale of the entire land mortgaged, not merely the equity of redemption, and so as to convey title without cloud to the purchaser at the judicial sale. It is therefore the policy of the courts that all persons having claims against the property should be made parties to the foreclosure action, and this includes an outstanding claimant although he neither derives nor claims title from the defendant in possession or his immediate predecessor in title."
And further at page 528:
"This does not mean that these persons are all indispensably necessary in order that the foreclosure action may proceed, but merely that they must be made parties in order that their rights may be affected." (Emphasis added.)
And at page 588:
"The judgment of foreclosure is not binding upon the rights, interests, or liens of those who are not parties to the foreclosure action, * * *."
And at page 642:
"* * * Likewise, the purchaser takes the land subject to the rights of purchasers at prior tax sales unless such purchasers are made parties before the order of sale. Moreover, if an encumbrancer whose lien appears of record, whether prior or subsequent to the mortgage, is not made a party, he may maintain an action to enforce his lien and have a resale of the property for that purpose."
The lessees not having been joined in the foreclosure action, their lease is not terminated and is good as against a petition in forcible entry and detainer.
There is a second ground upon which this case must be reversed under the Ohio authorities.
A question of title of such a nature arises as to deprive the Municipal Court of jurisdiction.
The rule is set forth in 24 Ohio Jurisprudence 467, Forcible Entry and Detainer, Section 10, as follows:
"It is generally agreed that the mere fact that a purchaser at a judicial sale must produce either the order of the court confirming the same or his deed from the sheriff, to enable him to maintain forcible entry and detainer against the judgment debtor in possession, will not prevent him from bringing the action on the ground that the title to real estate is involved. But there is authority in Ohio to the effect that an action of forcible entry and detainer cannot be maintained if the title to the premises is drawn into question, and, pursuant to this view, it has been held that an action of forcible entry and detainer against the tenant of the mortgagor by the mortgagee-purchaser of the property at a foreclosure sale who had never been in possession involved the title of real estate so as to oust the justice of the peace of jurisdiction, since the plaintiff, in order to make out his case, had to prove title to the premises."
The judgment of the Municipal Court is reversed and final judgment entered for the defendants-appellant, at plaintiffs-appellee's costs.
Judgment reversed.