Clare House Bungalow Homes, LLC, (“Clare House”) owns and operates a senior living facility. Residents must be 55 years old or older to occupy the individual units. The individual units are “bungalows” clustered with similar units. The terms of occupancy are contained in a Resident Agreement between each resident and Clare House. The residents pay a substantial up-front sum for the right to occupy the premises and use the common areas until death or until physically unable to care for themselves. At that time, the bungalow is marketed to someone else and some percentage of the lump sum paid by the prior resident, typically eighty percent (80%), is returned to that resident’s estate. In this case, two of the Resident Agreements were actually recorded prior to the giving of the mortgages (technically “deeds of trust”).
Clare House Bungalow Homes Residents Association is an association composed of 24 residents of the 28 bungalows owned and managed by Clare House. The Deeds of Trust at issue burden the large parcel of real property upon which is located all of the bungalows as well as a pool, community center and other common amenities.
The lenders argued that for those units for which the Resident Agreements were never recorded, the rights of the residents to occupy the property were void and not enforceable against the lenders.
The Court felt that a diligent investigation of the business records of Clare House would have put the lenders on notice of the presence of residents in the units. In addition, one of the lenders had a title report that disclosed the recorded Rental Agreements, and the others had received information from a representative of Clare House that individual units were occupied. The Court found these facts sufficient to impose a duty of inquiry upon the lenders.
The Court makes the curious statement that “the occupancy of the real property by a person not the owner is currently not sufficient to impose a duty to inquire as to the title to the real property….” But that “it is sufficient, however, to impose a duty to inquire as to the right to occupy….”
“The court finds that the holders of the Resident Agreements have a right to occupy, which is superior to the rights of the lienholders. The lienholders have all remedies available under state law regarding the enforcement of the Deeds of Trust, but cannot enforce them in such a way as to interfere with the residents’ superior right of occupancy. Due to the failure to make reasonable inquiry as to the rights of those occupying the property, the rights of the lienholders are subject to the right of occupancy granted by the Resident Agreements.”
You might be wondering what happened to the payments the residents were supposed to receive following termination of the occupancy? They had previously been found to be unsecured contract claims, “not an interest in real property.” They could be enforced only against Clare House, not against the lenders! Query: why were the two residents who had recorded their agreements not given secured priority over the lenders? The earlier decision doesn’t address this point.