Legal Memorandum: Mortgage Foreclosure in MN

Issue: Will a mortgage foreclosure extinguish a leasehold interest under Minnesota Law?

Minnesota law is in accord with the Restatement (Third) of Property: Mortgages § 7.1 with regard to when certain interests are extinguished by mortgage foreclosure.  See In re Crablex, Inc., 762 N.W.2d 247, 253 (Minn. Ct. App. 2009).  As stated in § 7.1 the Restatement and approved in Crablex:

A valid foreclosure of a mortgage terminates all interests in the foreclosed real estate that are junior to the mortgage being foreclosed and whose holders are properly joined or notified under applicable law.  Foreclosure does not terminate interests in the foreclosed real estate that are senior to the mortgage being foreclosed.

(Emphasis added).

R-Ranch Markets #2 v. Old Stone Bank, 16 Cal. App. 4th 1323 (1993) (“Where a trust deed to secure a loan is taken without notice of a lease of the premises, . . . the lessee’s interest under such lease is foreclosed by the foreclosure of the deed of trust.”).  See Republic Nat’l Life Ins. Co. v. Marquette Bank & Trust Co., 312 Minn. 162, 164-65, 251 N.W.2d 120 (Minn. 1977); see also Restatement (Third) of Property: Mortgages § 7.1, cmt. a (“Generally, the priority of mortgages and other interests in real estate is determined by the chronological order of their creation. However, this principle is subject to a multitude of limitations.  Foremost of these are the recording acts, which in every state allow qualifying subsequent takers of real estate interests to prevail over those holding prior unrecorded interests.”).

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