PERFORMANCE DEED OF TRUST

              So everyone knows that mortgages and deeds of trust are used to secure debt repayment. Right? Yes of course. But they can do more than that. 

            And when they do more they are called “Performance” documents. 

            The Colony at California Oaks is a property owner’s association, charged with the duty of governing open spaces in a community of 1,586 homes in Murrieta California. Within the community is an 18-hole golf course including landscape features that extend into open spaces. 

            The golf course was sold in 2007 to Majestic Asset Management. By the terms of the purchase and sale contract, Majestic assumed the obligations of the prior owners to use the property only as a golf course, and to maintain it in a condition to similar courses in the area. 

            The maintenance obligation includes the landscape extensions. 

            To secure its maintenance and use duties, Majestic executed a performance deed of trust for the benefit of the sellers. In 2012 the sellers transferred the PDOT to the Association. 

            After Majestic received title to the golf course, grass and trees died, a lake dried, landscaping deteriorated, and the golf course property was used for events inconsistent with a golf course. 

            When Majestic stopped paying for maintenance costs shared with the Association in 2013, litigation started. Although Majestic was the Plaintiff, the Association asserted claims against Majestic for foreclosure under the PDOT based on the failure of Majestic to continue golf course operations and maintenance of the landscape extensions. 

            The trial court found that Majestic was required to use the golf course only as such. And that Majestic must maintain it. And that Majestic must maintain the landscape. And that Majestic must maintain the extensions. 

            The court ruled that Majestic had breached its obligations. 

            The court rendered judgment for the Association in 2016. Also included in the judgment was an injunction directing Majestic to repair and restore the golf course. 

            In 2019 the Association petitioned the trial court to enter an order finding that Majestic breached the deed of trust and failed to discharge its injunction obligations. The Association also asked the trial court to appoint a receiver to take control of the golf course and bring it into compliance with the judgment. 

            First, the court appointed a receiver in 2020, holding the foreclosure issue for later. 

            Second, two years later after it became clear that the receiver could not rehabilitate the golf course, the court ordered foreclosure pursuant to the PDOT. 

            Third, the court convened a hearing and in 2023 entered a decree directing the clerk to issue a foreclosure writ of sale on the golf course. 

            Majestic appealed. 

            The Appellate Court reviewed the purpose of a deed of trust. The Court had no issue determining that a deed of trust can authorize foreclosure if the borrower fails to perform a required action. 

            Typically, the required action is payment. But the deed of trust can also secure nonmonetary obligations rather than loan repayment. 

            The Court then reviewed the valuation assigned to the performance deed of trust. Good stuff for those that work in this small space. But I won’t bore my loyal readers with it. The conclusion is that security documents can be breached in ways that cannot be compensated in dollars. Secured parties may then take the action allowed by the deed of trust or mortgage – foreclosure. 

            The Association wins and is allowed to foreclose; Majestic loses. See Majestic Asset Management v. The Colony At California Oaks; Case D082407 and D082907; California Court of Appeals, 4^th Appellate District, Division One; December 16, 2024: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2024/2024-Ohio-5432.pdf. 

            Questions / Issues: 

1.         PDOT. Why aren’t PDOTs used more? Institutional lenders commonly include ‘performance’ obligations in their loan docs – particularly regarding construction, use, leasing, transfers, subordinate debt, discharge of senior obligations, &tc. But ‘performance’ duties are not as common in non-institutional security documents. 

2.         Right to Redeem. Attorneys know from their law school property classes that borrowers have a right to “redeem” the mortgaged property by payment of the amounts owing. But this is difficult to quantify when the breach relates to use and maintenance and there is neither a loan nor a lender. What type of testimony is needed to establish and monetize a change in use or failure to maintain that causes permanent and extensive damages? How does the mortgagor / grantor obtain a release from a PDOT – ever – without consent of the secured party? What would motivate a secured party to consent in a situation involving a use obligation that could continue forever? 

3.         Foreclosure. What will happen at this foreclosure sale? Is the PDOT removed by operation of law at the moment of sale, or does it continue? If it continues, which buyers will be willing to purchase this property, knowing that it must be used only as a golf course and previous owners did not find it economically possible to do so? 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York