Arizona Court of Appeals Division One holds that subordination agreements operate as deeds of trust conveying ownership interests in commercial condominium leases.

A title company conveyed a leasehold interest to a medical center.  The lease was eligible for a statutory “horizontal property regime,” under which a lease could be conveyed in each commercial unit with a proportionate interest in the common areas of the property and each unit’s lessee would be responsible for shares of rent, taxes, and assessments.  The medical center conveyed two units (the “Units”) to Duane Alleman (“Alleman”) subject to the horizontal regime, who then executed deeds of trust in the Units to finance tenant improvements.  At the same time, the title company and medical center executed Subordination Agreements, which provided that the related deed of trust would be superior to any interest of the property owner or lessee.  The medical center later obtained fee simple ownership of the entire property from the title company.  Alleman’s deeds of trust were foreclosed upon, and Earle Investments (“Earle”) acquired the Units.  Earle commenced proceedings against the medical center to quiet title in the Units, and the Superior Court granted summary judgment in Earle’s favor.

The Court of Appeals affirmed in part, vacated, and remanded.  Finding no guidance in Arizona case law, the Court surveyed other jurisdictions, concluding that Earle’s interest in the Units hinged on whether the Subordination Agreements operated as mortgages or deeds of trust conveying an interest in property.  The Court concluded that the Subordination Agreements conveyed all of the owner/lessor’s right, title, and interest in the property and adequately described the property conveyed.  Accordingly, Earle acquired the owner/lessor’s interest in the property.  Turning next to what interest was acquired, however, the Court concluded that Earle acquired only an ownership interest in the Units (which did not include the underlying land), an undivided fee-simple interest in the leasehold estate, and an undivided fee-simple interest in the common areas.  The Superior Court was thus affirmed only to the extent that it held Earle owned the Units and had undivided fee-simple interests in the leasehold and common areas.

Judge Johnsen authored the opinion; Judge Thompson and Chief Judge Brown concurred.