Lease remains valid even if not recorded.

In November 1996, a foreclosure action was commenced by Hazel Greenberg, who held a note and mortgage covering 245 East 177th Street in Manhattan. A Judgement of Foreclosure was secured by Greenberg, and thereafter the Referee appointed by the Court conducted a foreclosure sale at which Greenberg was the successful bidder. The Referee executed a Memorandum of Sale setting forth the details of the foreclosure sale transaction. Thereafter Greenberg assigned her rights under the Memorandum of Sale to EDEA 117 Corp., and the Referee deeded the property to EDEA.

Subsequent to the Judgement of Foreclosure, EDEA was advised that the property owner, 245 East 117, Inc. leased a portion of the property to Davyon, Ltd. This lease was executed long before the foreclosure action and although it was a term of 15 years, it was not recorded. Davyon was not named as a defendant in the foreclosure action.

When EDEA learned of this lease, it commenced a re-foreclosure action which sought a judgement declaring that Davyon had no interest in the property and that Davyon was foreclosed from claiming any right to the property and that EDEA is the sole and lawful owner of the property involved. (EDEA 117 Corp. V. Davyon Ltd et al Index 108372/99, Supreme Court, New York County). EDEA moved for summary of judgement, claiming that there was no factual dispute and therefore no need for a trial.

Justice Louise Gruner Gas reviewed the facts involved in this case. She stated that EDEA's position is that Davyon's lease does not give Davyon a property right in the property since Davyon failed to record the lease. It appeared that EDEA's argument was that EDEA was a bona fide purchaser for value, who took the premises free of the unrecorded lease. Accordingly, EDEA claimed that it is entitled to judgement on its re-foreclosure action in order to terminate any leasehold interest which was not cut off in the original Foreclosure Action.

The judge stated that Davyon's position was that its leasehold interest in the property survives the Judgement of Foreclosure. Davyon pointed to a provision in the Judgement of Foreclosure which provided that the property had been sold subject to inter alia, the rights of tenants or persons in possession of the property, if any.

Davyon further claimed that EDEA is a corporation which is owned and controlled by Greenberg and is an alter ego of Greenberg; and that Davyon continually occupied the property since long before the foreclosure action pursuant to a valid lease, with the full knowledge of EDEA's principals, Mr. & Mrs. Greenberg.

The judge ruled in favor of Davyon. She stated that a foreclosing party must join all parties with subordinate interests as "necessary parties" to the foreclosure action, including every party having an estate or interest in the property as a tenant. Where the foreclosing mortgagee fails to name a necessary party, that party is unaffected by the Judgement of Foreclosure and retains its rights with respect to the foreclosed property.

It is an appropriate remedy for a purchaser at a foreclosure sale, (such as EDEA), in which a necessary party was not named in the foreclosure action, to seek to re-foreclose pursuant to statute (Real Property Action and Proceeding Law [ss] 1503). This re-foreclosure proceeding may be commenced by either the purchaser at the foreclosure sale or by an assignee of the purchaser (as in this case).

While EDEA properly commenced the instant re-foreclosure action, EDEA was wrong to argue that Davyon's failure to record its lease prevents it from claiming a leasehold interest in the property, which survives the Judgement of Foreclosure. Although the lease which might have been recorded, is not required to be recorded under the law. The purpose of recording a lease is to protect the rights of innocent purchasers who acquire an interest in the property without knowledge of prior encumbrances; and to establish a public record which will furnish potential purchasers with notice of previous conveyances and encumbrances that might effect their interests and uses. However, the failure to record a lease where there is actual notice that such a lease exists, loses all pertinence since the purpose of recording is to furnish constructive notice to those who have no notice.

Accordingly, Justice Gans ruled that EDEA cannot rely on Davyon's failure to record its lease as the basis to terminate Davyon's leasehold interest in the property.

The-Justice further ruled that based upon record, issues of fact existed regarding whether Greenberg actually knew that Davyon's lease was in existence at the time of the Foreclosure Action and, if so, whether Greenberg is the alter ego of EDEA so that Greenberg's actual knowledge should be imputed to IDEA.

As a result, the Court denied EDEA's otion 'for summary judgment and set this ase down for trial to determine the-issues f fact.

While it is certainly good practice to record a long-term lease, a mortgagee cannot ignore a known tenant, and fail to name the tenant in the foreclosure action, simply because the lease is unrecorded.