Real Property Notes Blog

No Surplus Proceeds Unless Mortgage Paid in Full

In Trademark Properties v County of Macomb, an unpublished Michigan Court of Appeals Opinion, The mortgagee submitted an opening bid of $20,572.80 after publishing a foreclosure notice stating that the balance due on the mortgage was $55,030.58.  The successful bid was Trademark Properties, with a bid of $31,572.80.  Trademark also obtained an assignment of the mortgagor’s right to surplus proceeds and then made a claim to the Sheriff for the $11,000 difference between the mortgagee’s opening bid and the final sale price, arguing that the mortgagee’s opening bid extinguished the mortgage and difference between the opening bid and the final bid constituted surplus proceeds under hte foreclosure statute.  The trial court denied the claim.

On appeal, the Michigan Court of Appeals affirmed.  The court held that, under the plain and ordinary meaning of surplus, there is a surplus after a mortgage foreclosure sale only if the entire mortgage balance was satisfied.  Because both the opening bid and the final bid were for less than the balance undisputedly due under the mortgage, there were no surplus proceeds to which Trademark could lay claim.

Assignment of Rents is Not an Assignment of the Underlying Lease

In Sturgis Building LLC v Kirsch Industrial Park LLC, the mortgagor granted a mortgage and assignment of rents to the mortgagee.  The mortgagee exercised the assignment of rents and collected rents from the tenants during the foreclosure and the redemption period.  At the end of the redemption period, one of the tenants moved out, claiming that the lease had been terminated by the foreclosure. The trial court held that the lease, executed subsequent to the mortgage, was terminated by the mortgage foreclosure.  The mortgagee appealed.

The matter was affirmed on appeal.  The assignment of rents statute, MCLA 554.231, only provides for assignment of rents, not the leases themselves.  The mortgage also provided only for assignment of rents, not leases.  Under common law, foreclosure of a mortgage extinguishes junior encumbrances on the property, including leases.

If a tenant and a foreclosing lender wish to keep a lease in effect subsequent to foreclosure of a mortgage, they should enter into a separate agreement providing for attornment by the tenant after foreclosure.

© Steve Sowell 2018