YARO ENTERPRISES, INC. v. FIRST FINANCIAL RESOURCES, INC.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
The plaintiff, Yaro Enterprises, Inc. (Yaro), appeals from a Superior Court judgment dismissing its first amended complaint (FAC) against the defendant, First Financial Resources, Inc. (FFR), for failure to state a claim upon which relief can be granted. The FAC asserted claims for breach of lease and for tenancy by estoppel. We vacate the dismissal of the breach of lease claim but affirm the dismissal of the estoppel claim.
1. Breach of lease. FFR executed a five-year lease with Direct Invest - 1 Clarks Hill, LLC (Direct Invest), the former owner of commercial property in Framingham. Direct Invest lost the property through foreclosure of a mortgage that predated the FFR lease; the property is now owned by Yaro. The parties appear to agree that unless Yaro's predecessor in interest had properly subordinated the mortgage to FFR's lease, the foreclosure of that mortgage extinguished the lease. See HRPT Advisors, Inc. v. MacDonald, Levine, Jenkins & Co., P.C., 43 Mass. App. Ct. 613, 625-626 (1997) (HRPT). The motion judge determined that a valid subordination of the lease could not occur without a recorded document. The judge concluded that because there was no recorded subordination,2 the lease was extinguished upon foreclosure of the preexisting mortgage, and could not support Yaro's claim for breach of lease.
Here, however, the lease (which was an exhibit to the FAC) allowed for subordination either by notice to the tenant or by recording an instrument of subordination. Specifically, paragraph 13.1(a) of the lease provided that a superior mortgagee 3 could elect to subordinate its mortgage to the lease, such election to “become effective upon either notice from such [s]uperior [m]ortgagee to [t]enant ․ or by the recording in the appropriate registry or recorder's office of an instrument by which the [s]uperior [m]ortgagee subordinates its rights under such [s]uperior [m]ortgage to this [l]ease” (emphasis added).4 RA62. Although in HRPT, 43 Mass. App. Ct. at 618, there is a single mention of the fact that the mortgagee there recorded an instrument of subordination prior to foreclosure, nothing in HRPT states that such recording was essential to the validity of the subordination insofar as the parties to the lease were concerned.
Nor do the parties point to anything in HRPT or elsewhere in statutory or decisional law suggesting that parties to a lease cannot, as between themselves, contract out of any recording requirement that might otherwise apply.5 Cf. Bank of America, N.A. v. Casey, 474 Mass. 556, 560 (2016), quoting McOuatt v. McOuatt, 320 Mass. 410, 413 (1946) (deed transferring title to real estate “is good against the grantor and his heirs and those having actual notice,” notwithstanding defects that bar recordation); id. at 560-561 (purpose of recording mortgage is “to provide effective notice to anyone beyond the parties to the mortgage transaction and those with actual notice of it”); Gomes v. Harrison, 97 Mass. App. Ct. 745, 751 (2020) (“deed is effective on delivery to the grantee and enforceable as between the parties to that instrument regardless of whether it has been recorded”). Accordingly, the dismissal of the breach of lease claim based on the failure to record a subordination instrument was, on this record, error.
It might be questioned whether the FAC sufficiently alleged that the mortgagee here had given FFR, as tenant, pre-foreclosure notice of subordination of the mortgage, as possibly distinct from pre-foreclosure notice of the mortgagee's intention to exercise its rights under an assignment of the lease to the mortgagee under paragraph 13.1(b) of the lease. But this was neither the basis of the judge's ruling nor the focus of the parties’ arguments on appeal, and the notice allegedly given is not in the record before us. We therefore decline to reach any issue as to the adequacy of such notice. The parties may, of course, address it in further proceedings in the trial court.
2. Tenancy by estoppel. Yaro's FAC further claimed that FFR, by continuing to pay rent for some period after the foreclosure, represented “to Yaro that it had attorned to and recognized Yaro as a [s]uccessor [l]andlord under the lease,” thus creating a tenancy by estoppel. Yaro's theory is that this estoppel bars FFR from asserting, as it now does, that the foreclosure terminated the leasehold tenancy and left FFR a tenant at will, free to vacate the premises and stop paying rent.
“To establish estoppel, a party must show ‘(1) a representation intended to induce reliance on the part of a person to whom the representation is made; (2) an act or omission by that person in reasonable reliance on the representation; and (3) detriment as a consequence of the act or omission.’ ” Reading Co-Op. Bank v. Suffolk Constr. Co., 464 Mass. 543, 556 (2013), quoting Bongaards v. Millen, 440 Mass. 10, 15 (2003).
The flaw in Yaro's theory is that FFR's bare payment of rent was just as consistent with FFR's claim of a post-lease tenancy at will as with Yaro's claim of a continued tenancy under the lease. See Staples v. Collins, 321 Mass. 449, 451 (1947) (payment and acceptance of rent after termination of lease was “prima facie proof of the creation of a tenancy at will”). Yaro failed to allege any representation or action by FFR that was consistent only with a continued leasehold tenancy and not with a tenancy at will. In reviewing a decision on a motion to dismiss for failure to state a claim, “we look beyond the conclusory allegations in the complaint and focus on whether the factual allegations plausibly suggest an entitlement to relief.” Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011), citing Iannacchino v. Ford Motor Co., 451 Mass. 623, 635-636 (2008). Here, where Yaro's theory is that it relied on FFR's payment of rent as a representation that a leasehold tenancy (as opposed to a tenancy at will) continued to exist, Yaro has failed to allege facts plausibly suggesting that any such reliance was reasonable. The estoppel claim, therefore, was correctly dismissed.
Conclusion. The judgment of dismissal is vacated as to count 1 (breach of lease) and affirmed as to count 2 (tenancy by estoppel).
vacated in part; affirmed in part.
2. Yaro does not challenge the propriety of the judge's conclusion, at the motion to dismiss stage, that there had been no recording.
3. There is no dispute that Yaro's predecessor in interest was a superior mortgagee within the meaning of the lease.
4. Paragraph 13.1(a) also stated, “This section shall be self-operative and no further instrument of subordination shall be required.” We need not rest our decision on this additional language.
5. We express no view on the effect, if any, of an unrecorded subordination on third parties without notice thereof. Cf. HRPT, 43 Mass. App. Ct. at 626-627.
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