Business Law Journal

When does a recorded agreement survive foreclosure? In Rodriguez v. City of Los Angeles, the California Court of Appeal recently addressed this question with important implications for buyers, title professionals, lenders, and municipalities implementing affordable housing programs. The court held that an agreement memorializing density bonus requirements constitutes the equivalent of a permit condition and therefore survives foreclosure, even when recorded after the foreclosing lender’s deed of trust.

Factual Background

In 2005, Jose Benavidez borrowed $244,000 from Accredited Home Lenders, secured by a deed of trust on property located on 49th Street in Los Angeles. Accredited recorded its deed of trust on February 28, 2005. The deed of trust required Benavidez to discharge any lien with priority over Accredited’s interest and to defend title against all claims, subject to encumbrances of record. Notably, the deed of trust did not prohibit property improvements or obtaining necessary permits, and it expressly contemplated future development, stating: “ ‘Borrower irrevocably grants and conveys … the … property … together with all the improvements now or hereafter erected on the property.’ ”

Also in 2005, Benavidez applied for a building permit under California’s density bonus law, which rewards developers who agree to provide affordable housing by allowing them to build more units than local zoning otherwise permits. The City approved a 35 percent density bonus, authorizing Benavidez to develop three units instead of two. In exchange, Benavidez agreed to rent one unit exclusively to low-income households for at least 30 years.

On June 16, 2005, Benavidez and the City executed a formal agreement titled “City of Los Angeles Agreement Number 108560 of City Contracts Relating to a Rental Covenant and Agreement.” The agreement stated its “purpose” was to ensure compliance with the Affordable Housing Incentives Program. Critically, the agreement provided that if the property transferred through foreclosure, the transferee would remain subject to all conditions, limitations, and restrictions. The agreement declared itself an “equitable servitude and covenant running with the land,” binding on successors and assigns for at least 30 years from the certificate of occupancy date. The City recorded this agreement on January 18, 2006—approximately 11 months after Accredited recorded its deed of trust.

Benavidez defaulted in 2013, and HSBC Bank (which had become the beneficiary of Accredited’s deed of trust) foreclosed. The property eventually transferred to the Rodriguezes in 2019. They claimed they were unaware of the 2006 agreement, despite its recordation. When the City demanded compliance in 2023, the Rodriguezes filed suit for quiet title and declaratory relief, arguing the agreement was a junior encumbrance extinguished by the foreclosure.

Legal Analysis

The Rodriguezes argued the case presented a straightforward priority dispute: because the City recorded the 2006 agreement after the lender recorded its deed of trust, and because the agreement stated it was a covenant or equitable servitude, the agreement constituted a junior encumbrance extinguished by foreclosure. The trial court rejected this theory and sustained the City’s demurrer without leave to amend.

The Court of Appeal affirmed, but on grounds that addressed a novel legal question. Rather than analyzing whether covenants running with the land survive foreclosure—an issue with conflicting authority that the City itself acknowledged—the court focused on whether the 2006 agreement was equivalent to a “condition attached to a permit” under Government Code section 65009. The court held it was such a condition.

The court explained that permit condition burdens run with the land once benefits are accepted. Section 65009 provides that challenges to permit conditions must be brought within 90 days of issuance, after which no challenge may be maintained by any person. This short limitations period prevents the chilling effect that uncertainty would have on property owners and local governments proceeding with projects. Importantly, permit conditions remain enforceable against successor owners who obtained property through foreclosure.

The court found City of Berkeley v. 1080 Delaware, LLC instructive. There, a developer obtained a permit requiring compliance with an inclusionary housing ordinance. Years later, after foreclosure, the successor owner argued it was not bound by the permit condition. The appellate court disagreed, holding that permit conditions survive foreclosure and bind successor owners, even those who were not parties to the original permit. The court found the case controlling. Moreover, it was important to the court that Benavidez had accepted the benefits of the permit, including the density bonus, and never challenged the conditions. 

The Rodriguezes attempted to distinguish their case, arguing they challenged only an equitable servitude, not a permit condition. While this seemed like a good argument (especially given the express language of the agreement), the court rejected this distinction as a strategic framing choice. The court concluded 2006 agreement incorporated the permit by number and existed solely to implement the permit’s requirements. Recital B stated that permit issuance required the owner and City to enter an agreement regarding operation, maintenance, and rental of restricted units. The parties executed the 2006 agreement “therefore” to fulfill permit requirements. The agreement was thus equivalent to a permit condition.

The court emphasized that the permit itself was absent from the record only because of the Rodriguezes’ strategic choices in framing their complaint, presumably aimed at avoiding authorities holding that permit conditions survive foreclosure. The court found no support for ignoring the permit when its existence and conditions were referenced in the recorded agreement attached to the complaint.

The court also distinguished the regulatory agreement in 1080 Delaware, which allegedly contained a provision stating it would extinguish upon foreclosure—a provision facially at odds with treating it as a permit condition. In contrast, the 2006 agreement expressly provided its terms survive foreclosure, supporting treatment as a permit condition equivalent.

This represents a novel application of permit condition law. The court did not decide whether the agreement was a covenant running with the land (where conflicting authority exists on survival after foreclosure), but rather held the agreement implementing permit requirements constituted the functional equivalent of the permit condition itself.

Practical Implications

Title professionals conducting searches should recognize that recorded agreements implementing affordable housing or density bonus requirements may survive foreclosure as permit conditions, regardless of recording priority. The critical inquiry is whether the agreement implements permit requirements rather than whether it constitutes a covenant or equitable servitude. Buyers and lenders should obtain copies of underlying permits when agreements reference permit numbers, as permit conditions bind successor owners even when such parties had no notice. Properties acquired through foreclosure remain subject to affordable housing restrictions when those restrictions implement permit conditions, creating potential liability for buyers who fail to comply. The 90-day limitations period under Government Code section 65009 could well bar challenges to permit conditions, even when raised through quiet title actions with their own unique accrual rules.

Key Takeaways

First, recorded agreements implementing density bonus or affordable housing requirements survive foreclosure when they constitute the equivalent of permit conditions. Second, recording priority between a lender’s deed of trust and a municipal agreement does not determine enforceability when the agreement implements permit requirements. Third, permit conditions run with the land and bind successor owners, including those acquiring property through foreclosure, regardless of whether they had actual notice. Fourth, the 90-day statute of limitations under Government Code section 65009 applies to challenges of permit conditions and cannot be circumvented by styling the action as quiet title.

AALRR has a dedicated group of attorneys who focus on real property and title disputes. If you encounter any issues relating to title of real property, please contact the author of this article.  Mr. Squire is also the editor of the Title Insurance Law Journal.

This article is a slightly edited version of an article that originally appeared in the American Land Title Association’s TILJ: The Authoritative Source of Land Title Litigation News Since 1992. Subscribe here! https://www.alta.org/news-and-publications/legal-and-regulatory-publications/title-insurance-law-journal/

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