Demolition of a Building, Which Impairs Security, May Constitute Waste

  The owner of a parcel of real property with a building on it demolishes the building to make way for new development.  Unfortunately, the owner is unable to complete the development and ends up defaulting on a purchase money promissory note secured by a deed of trust on the property.  The holder of the note and DOT exercises the power of sale under the DOT and buys the property back at a foreclosure sale for less than the amount due under the note.  The note holder then sues the former owner and others for waste and impairment of security based on their demolition of the building, seeking as damages the loss of value in the property that resulted from the destruction of the building.  Is such an action barred by the antideficiency statutes?

   The court answered the question “no” in Fait v. New Faze Development.  While the Supreme Court has limited actions for waste following a foreclosure sale under DOT securing a purchase money note to “bad faith” waste, the court defined bad faith waste as any waste that is not committed as a result of the economic pressures of a market downturn. It is no defense, therefore, to an action for waste based on the demolition of a building to simply claim that the demolition was part of a good faith attempt to improve the property. The impairment of security that results from the destruction of a building is actionable waste, notwithstanding the antideficiency statutes, unless the destruction itself was somehow caused by the economic pressures of a depressed market.

   Indeed, defendants may have had the best of intentions, but that fact alone does not entitle them to escape liability for waste. The pertinent question is whether the demolition of the building, which is what the defendants claim impaired the value of the property, was caused by the economic pressures of a market depression. Bad faith waste occurs whenever the owner’s impairment of the value of the security is not caused by the economic pressures of a market depression, whether the owner acts recklessly, intentionally, maliciously, or with some other mental state.