Buying the Right of Redemption: A Better Way to Acquire Property?

Following a judicial foreclosure in California, the judgment debtor or its successor in interest ("Redeemer") has a right of redemption, which allows it to redeem foreclosed real property from whomever purchased it at the foreclosure sale ("Purchaser"). The redemption price is determined by a statutory formula and may be considerably less than the property's fair market value or the pre-foreclosure debt on the property.

A lender has generally pursued a judicial foreclosure action to obtain a deficiency judgment against its borrower. Because the deficiency judgment will be equal to the difference between the outstanding debt and the foreclosure sale purchase price, the lender has a strong incentive to bid less than its debt at the foreclosure sale. As a result, the redemption price may be well below the property's fair market value and an astute purchaser can acquire the debtor's right of redemption at a bargain price. The redemption price will not necessarily bear any relation to the fair market value of the property or the outstanding debt on the property prior to the foreclosure sale. Instead, California Code of Civil Procedure Section 729.060 provides a specific formula for the calculation of the redemption price, which is based primarily on the purchase price at the foreclosure sale. In many instances a party interested in purchasing a property following a judicial foreclosure sale may be better off redeeming the property than purchasing the property on the open market.

The Redeemer may want or need to have a lender involved in the redemption. Because of the very short and strict time periods, it is advisable for the Redeemer to have the loan (or a commitment) in place before exercising the right of redemption. It is also advisable for the Redeemer to obtain a pro forma commitment from a title company and have all title issues resolved before exercising the right of redemption.

Prospective purchasers of foreclosed real property may purchase the right of redemption from the judgment debtor. The right must be exercised within one year of the foreclosure sale date if there has been a deficiency judgment. The right of redemption expires in only three months if the proceeds from the foreclosure sale satisfied the indebtedness. By exercising its right of redemption, the Redeemer can acquire the estate back from the Purchaser with the added benefit that liens extinguished by the foreclosure sale do not reattach.

The Redeemer can use the one-year redemption period to conduct its due diligence investigation of the property. Moreover, the Redeemer will have the opportunity to operate the property and possibly increase its value.

During the period of redemption, the judgment debtor or its assignee retains the right to possess the property. The Redeemer may either take possession itself or file an action for a court appointed receiver. Although there is no direct authority on who has the power to enter into new contracts, including tenant leases, during the redemption period, the party in possession probably has this power, so that contracts and leases entered into by the Purchaser probably would be unenforceable.

The status and enforceability of the leases will often be a central question for the Redeemer. Tenants with leases which were executed prior in time to the foreclosed deed of trust remain in possession according to their terms. In addition, leases junior in priority to the foreclosed deed of trust pursuant to which attornment and nondisturbance agreements were executed should also remain in effect. Leases which were executed after the time of the foreclosed deed of trust or which were subordinated to the deed of trust are potentially terminated by the foreclosure sale. Some authorities suggest that junior leases are not affected if the tenants are not named as parties in the judicial foreclosure action. Although there is no authority directly on point which relates to the termination of a junior lease by a judicial foreclosure sale, the tenants' right to possession probably is not affected during the redemption period. In addition, the Redeemer may want to obtain estoppel certificates from the tenants.

The Purchaser may attempt to prevent redemption of the property. If there is a dispute, the Redeemer should file a petition with the Superior Court in the county in which the property is located before the expiration of the redemption period. The proceedings are expedited, usually taking no longer than 20 days. As a precondition to judicial proceedings, the Redeemer must deposit the undisputed amount of the redemption price with the sheriff. If the Court decides that the amount previously deposited is insufficient, the Redeemer has 10 days from the date of the court's order to deposit any additional amounts.