Whether you are a secured lender, business owner, or an investor in distressed commercial real estate, a recent California Supreme Court decision presents a potentially costly and time-consuming trap for the unwary.

For years, purchasers and credit-bidders at foreclosure sales in California have safely operated under the “relation back doctrine” included in Civil Code section 2924h(c). This doctrine provides that the successful foreclosure purchaser’s title is “perfected” as of the date of sale so long as the trustee’s deed is recorded within 15 days of the sale. The California Supreme Court has seriously limited the effect of this long relied-upon doctrine in Dr. Leevil, LLC v. Westlake Healthcare Center.

The day after making a successful foreclosure credit bid, the creditor-plaintiff, Dr. Leevil, served the hold-over occupant (an entity owned by the principals of the previous owner) with a three-day notice to quit under Code of Civil Procedure section 1161a(b). Dr. Leevil served notice four days prior to the recording of the trustee’s deed. In the subsequent eviction case, the trial court and appellate court ruled in favor of the Leevil and against the holdover occupant relying on the well-established relation back doctrine.

On further appeal, however, the California Supreme Court held that actual perfection of title (i.e., recordation of the trustee’s deed) was required before a creditor could serve an enforceable three-day notice. In other words, the relation back doctrine does not permit a prematurely served notice to quit.

Setting aside the initial delays and attendant costs this decision will likely cause the unwary, it also may give rise to an increase in “gap bankruptcies” – a bankruptcy filed with an aim for delay and with the intent of generating leverage for the debtor in negotiations with its creditors. A gap bankruptcy filing typically leads to increased costs for unprepared creditors, including potentially costly litigation, and a delay in recovery of possession of the real property asset.