A California Appellate Court recently determined that a lender taking a security interest in both California real property and an easement benefiting such real property by recording a deed of trust does not lose its security interest in the easement because of the borrower’s subsequent acquisition of fee title to the property burdened by the easement. In other words, on foreclosure of the deed of trust security, the purchaser at the foreclosure sale will acquire both the real property security and the benefiting easement right.

The Appellate Court in Hamilton Court, LLC v. East Olympic, L. P. determined that in California the union of a lesser and greater estate in real property does not result in a merger of such estates where the result would be an injustice, injury or prejudice to a third person. The Appellate Court further stated that whether or not there has been a merger of real property estates depends on the actual or presumed intention of the parties. An agreement between the parties that there will not be a merger will usually be respected and enforced.

Lenders taking deed of trust security interests in California real property should make clear in the deed of trust and other loan documents the intent of the lender and borrower that any easement or other right benefiting the real property security will not be extinguished by the borrower subsequently acquiring title to the burdened property.

In Hamilton Court, a seller of real property took back a note for the purchase price that was secured by a deed of trust against the property and an easement benefiting the property. Subsequently, the purchaser of the property also acquired title to the property burdened by the easement. After the seller reacquired title to the property through foreclosure, the purchaser sued to quiet title to the property burdened by the easement that was still owned by the purchaser. In the note and deed of trust, the seller and purchaser had agreed, essentially, that the purchaser’s subsequent acquisition of the property burdened by the easement would be subject to the seller’s deed of trust and would not affect the priority of the deed of trust. The Appellate Court reasoned that, in the absence of a merger of the fee estate and easement in the purchaser’s ownership, the seller would have had a first priority security interest in the easement, but with such a merger the seller would have no interest in the easement, which would be inconsistent with the intent of the agreement between the seller and purchaser.

For further information on this decision or any other real estate matters, please contact Delmar Williams, another attorney in our Real Estate group, or your BB&K attorney.