Does an UD Action Support a Prejudgment Right to Attach Order?

In the recent decision in Rreef America Reit II Corp YYYY v. Samsara Inc., Defendant Samsara Inc. (Samsara) appealed from a prejudgment right to attach order and order for issuance of writ of attachment in favor of plaintiff Rreef America Reit II Corp, YYYY (Rreef) in Rreef’s unlawful detainer action against Samsara.

The writ secured $1,969,477.56 for daily rent and charges and attorneys’ fees and costs.

On appeal, Samsara asserted several challenges to the attachment order.

First, Samsara argued that Rreef did not satisfy the requirement under Code of Civil Procedure section 484.090 that the amount to be secured is greater than zero, because the amount that Rreef sought to attach must be reduced under section 483.015(b)(4) by the amount remaining on the letter of credit serving as collateral for Samsara’s performance of its obligations under the parties’ lease agreement, and the amount remaining on the letter of credit is greater than the amount Rreef sought to attach.

Second, Samsara argued that the trial court erroneously refused to consider Samsara’s affirmative defenses of waiver, estoppel, and retaliatory eviction, which are relevant to the requirement in section 484.090(a) that Rreef establish the “probably validity” of its claim.

Third, Samsara argued there was insufficient evidence to support findings that those defenses did not bar Rreef’s unlawful detainer action.

Finally, Samsara argued that the trial court erroneously declined to consider whether Rreef sought attachment for an improper purpose.

The appellate court concluded that Rreef’s interest in the letter of credit did not fall within the scope of section 483.015(b)(4), and thus Samsara had not shown that the amount to be secured by the attachment is not greater than zero.

It further concluded that the trial court implicitly found that Samsara’s waiver and estoppel defenses did not bar Rreef from proceeding with its unlawful detainer action, and that substantial evidence supports those findings.

However, the record showed that the trial court declined to consider Samsara’s retaliatory eviction defense, and the issue of whether Rreef sought attachment for an improper purpose, believing it should not be expected to determine whether Rreef was acting in “good faith” at that stage of the proceedings.

Therefore, the order was reversed, and the matter was remanded to the trial court for further proceedings.

In March 2019, Samsara entered a lease agreement with Rreef to rent office space in San Francisco. The lease provided for a ten-year term, commencing on “the date on which Landlord tenders possession . . . in a condition sufficient to allow Tenant to commence performing the Initial Alterations . . .”

Samsara agreed to pay rent in monthly installments beginning at $843,341.67 and increasing annually.

The lease further provided that if Rreef did not deliver the premises in “delivery condition” on or before November 1, 2019, Samsara had the option of terminating the lease by providing written notice to Rreef. Samsara would also be entitled to a rent abatement of $56,222.78 per day until the delivery date occurred.

The lease required Samsara to provide Rreef with a letter of credit in the amount of $11,384,368.00.

The letter of credit was to serve as “collateral for the full performance by Tenant of all of its obligations under this Lease and for all losses and damages Landlord may suffer as a result of Tenant’s failure to comply with one or more provisions of this Lease.”

Samsara’s bank issued the letter of credit the following month.

Over two years later, in September 2021, Samsara filed a complaint against Rreef asserting claims for violation of Health and Safety Code section 25359.7, subdivision (a); breach of contract; declaratory relief; and violation of Business and Professions Code section 17200 et seq. (the environmental action).

Samsara alleged that in July 2019, after Rreef had certified that the premises were in “delivery condition,” Samsara discovered that the premises were contaminated with lead and asbestos.

Testing allegedly showed that most of the paint was lead-based paint containing lead in amounts 24 times the EPA limit, and lead wipe samples demonstrated concentrations up to 35 times the legal limit.

The premises also allegedly contained at least 80,000 square feet of asbestos-containing flooring and roofing material.

The complaint further alleged that after Samsara conducted the testing, Rreef accused Samsara of breaching the lease and cut off its access to the premises, displacing Samsara from the premises for months. Rreef eventually hired its own environmental contractor, but it shared limited information with Samsara regarding its testing of the premises, and it allegedly failed to test for the presence of lead.

The day after Samsara initiated its environmental action, Rreef served it with a 5-day notice to pay rent or quit based on Samsara’s alleged failure to pay rent for the months of August 2021 and September 2021, in the total amount of $1,826,697.95.

Approximately two weeks later, Rreef filed an unlawful detainer complaint, alleging that Samsara failed to pay the amount due as stated in the 5-day notice.

The complaint alleged that Samsara stopped paying rent in May 2021, and had created a pretext to avoid its lease obligations because the report of the environmental consultant Samsara had hired in early 2021 showed that despite de minimis contamination of lead, the premises were safe to use under applicable standards, and Samsara continued to use the premises.

 The complaint sought possession of the premises, recovery of all unpaid rent for the months of August and September 2021, and damages for each day Samsara continued in possession from October 1, 2021 through the date of judgment.

In its verified answer, Samsara asserted several affirmative defenses, including retaliatory eviction, equitable estoppel, and waiver.

In October 2021, Rreef filed an application for right to attach order and order for issuance of a writ of attachment in the unlawful detainer action.

In its application, Rreef argued that it had met the statutory requirements for a right to attach order.

First, it contended that its claim was one upon which an attachment may be issued because its unlawful detainer claim was an unsecured, commercial claim for money due under a contract for a readily ascertainable amount.

Second, it had established the probable validity of its claim because Samsara failed to pay rent as required under the parties’ lease agreement, Rreef had served a 5-day notice on Samsara, Samsara failed to cure or quit within five days after receiving the notice, and Samsara had no viable defenses.

Third, Rreef was seeking attachment for a proper purpose because it sought attachment for no purpose other than to recover rent and charges due and owing under the lease.

Finally, Rreef asserted that the amount to be attached should be $3,796,175.51, consisting of the amount demanded in the 5-day notice ($1,826,697.5) and $1,784,477.53 for the reasonable rental value per day from October 1 through November 30.

Attachment is an ancillary or provisional remedy to aid in the collection of a money demand by seizure of property in advance of trial and judgment.

The amount to be secured by an attachment” is the amount of the defendant’s indebtedness claimed by the plaintiff.

Before an attachment order is issued, the court must find all of the following:

(1) the claim upon which the attachment is based is one upon which an attachment may be issued;

(2) the applicant has established “the probable validity” of the claim upon which the attachment is based;

(3) the attachment is not sought for a purpose other than the recovery upon which the request for attachment is based; and

(4) the amount to be secured by the attachment is greater than zero.

The plaintiff has the burden of establishing the probable validity of the claim upon which the attachment is based.

Letters of credit are governed by the Commercial Code, and it defines a letter of credit as “a definite undertaking . . . by an issuer to a beneficiary at the request or for the account of an applicant . . . to honor a documentary presentation by payment or delivery of an item of value.”

There are essentially three relationships that exist in a letter of credit transaction:

that of the bank to its customer who purchases the letter of credit;

that of the bank to the beneficiary to whom it makes a promise to pay; and

that between the customer and the beneficiary.

The parties did not present any case law, nor did the appellate court find any, establishing that a beneficiary’s interest in a letter of credit constitutes a security interest under the Commercial Code, and if it is a security interest, that it is a security interest in the customer’s property.

The appellate court concluded that because the parties agreed to use a letter of credit as collateral for Samsara’s performance under the parties’ lease agreement, Samsara’s performance is secured by its bank’s obligation to pay on the letter of credit, and not by Samsara’s property.

In reaching that conclusion, the appellate court did not decide whether a beneficiary’s interest in a letter of credit constitutes a “security interest” within the meaning of the Commercial Code.

It held only that Reef’s interest in the letter of credit is not a security interest in the property of Samsara, and thus section 483.015(b)(4) did not apply to reduce the amount to be secured by attachment.

Therefore, Samsara had not shown that the trial court erred in concluding that the amount to be secured by attachment is greater than zero.

Before issuing a right to attach order, the trial court must find that the plaintiff’s claim has “ ‘probable validity,’ ” meaning that “it is more likely than not” that the plaintiff will obtain a judgment against the defendant on that claim.

To determine whether a party has demonstrated the probable validity of its claim under attachment law, the court must “consider the relative merits of the positions of the respective parties and make a determination of the probable outcome of the litigation.

In the trial court, Samsara asserted waiver and estoppel defenses as support for its position that Rreef could not establish the probable validity of its claim.

Samsara argued on appeal that the trial court failed to consider those defenses based on a comment the court made at the hearing on Rreef’s attachment application that those defenses were “neither here nor there.” According to Samsara, the trial court erred as a matter of law in granting the application without considering the merits of those defenses.

Samsara argued that the undisputed evidence shows that Rreef waived its right to proceed with the unlawful detainer action when it accepted rent from Samsara after initiating its unlawful detainer action.

A waiver is an intentional relinquishment of a known right.

Waiver is a question of fact for the trial court.

Conduct manifesting an intention to waive, such as acceptance of benefits under a lease, can support a finding of implied waiver.

The burden is on the party claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to speculation; doubtful cases will be decided against a waiver. 

A nonwaiver clause in the parties’ lease agreement militates against a finding of waiver.

A landlord’s acceptance of rent with knowledge of a preceding breach does not always constitute a waiver of the right to assert a forfeiture based on that breach; waiver is ultimately a matter of intent.

In this case, the evidence presented by the parties show that Samsara ceased paying the monthly rent required by the parties’ lease agreement in May 2021, and Rreef immediately served Samsara with a notice of default, which Samsara did not cure.

After the parties were unable to resolve the rent dispute, Rreef drew on the letter of credit in August 2021 to cover the delinquent rent. Rreef then demanded that Samsara replenish the letter of credit, as required by their lease agreement.

When Samsara failed to do so and again failed to pay rent in September 2021, Rreef sent the 5-day notice demanding payment of rent for August and September, and then filed this action a couple of weeks later. Samsara wired payment for the August and September rent to Rreef after Rreef filed the attachment application.

Samsara argued that Rreef is estopped from proceeding with its unlawful detainer action based on Rreef’s opposition to Samsara’s ex parte application to consolidate the unlawful detainer and environmental actions, where Rreef stated that “Samsara has a clear path to eliminating the Unlawful Detainer Action: it can either pay the unpaid rent, under protest, or it can surrender the Premises and return the keys.”

According to Samsara, Rreef is judicially and equitably estopped from asserting its unlawful detainer claim because the trial court denied Samsara’s ex parte application, and Samsara relied on the statement in Rreef’s opposition when it paid the rent demanded in the 5- day notice.

Judicial estoppel prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or some earlier proceeding.

The doctrine serves a clear purpose: to protect the integrity of the judicial process.

Judicial estoppel is an “equitable doctrine,” so its application is “discretionary,” even where all elements of the doctrine are met.

The doctrine must be “applied with caution” and is “limited to egregious circumstances.”

It is an “extraordinary" remedy to be invoked when a party’s inconsistent behavior will otherwise result in a miscarriage of justice.

The doctrine applies when: (1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.

Absent success in a prior proceeding, a party’s later inconsistent position introduces no risk of inconsistent court determinations, and thus poses little threat to judicial integrity.

Finally, Samsara argued that certain comments the trial court made at the hearing on Rreef’s attachment application shows that the court failed to consider Samsara’s retaliatory eviction defense and the issue of whether Rreef was seeking attachment for a proper purpose.

Rreef argued that we should presume the trial court considered those issues, and even if the court failed to consider those issues, Samsara’s retaliatory eviction defense fails as a matter of law.

The appellate court concluded that Samsara’s retaliatory eviction defense did not fail as a matter of law, and that remand was required for the trial court to consider Samsara’s retaliatory eviction defense and the issue whether Rreef sought attachment for a proper purpose.

LESSONS:

1.         Before an attachment order is issued, the court must find all of the following:

            (1) the claim upon which the attachment is based is one upon which an attachment may be issued;

            (2) the applicant has established “the probable validity” of the claim upon which the attachment is based;

            (3) the attachment is not sought for a purpose other than the recovery upon which the request for attachment is based; and

            (4) the amount to be secured by the attachment is greater than zero.

2.         The plaintiff has the burden of establishing the probable validity of the claim upon which the attachment is based.

What is a Force Majeure Provision in a California Lease?

In the recent decision in West Pueblo Partners, LLC v. Stone Brewing Co., LLC, the appellate court reviewed the force majeure provision in the commercial lease between them.

After the commercial tenant, Stone Brewing Co., LLC (Stone), did not pay rent for several months during the pandemic, the landlord, West Pueblo Partners, LLC (West Pueblo), sued for unlawful detainer.

Stone argued it was excused from paying rent because COVID-19 regulations and business interruptions triggered a force majeure provision found in its lease.

The trial court disagreed and granted West Pueblo’s motion for summary judgment.

The trial court found that the force majeure provision only excused performance if the claiming party was unable to meet its obligations due to factors outside its control; but, because the tenant admitted during discovery it had the financial resources to pay rent during the period of the COVID-19 regulations but simply refused to do so, it could not invoke the force majeure provision.

The appellate court affirmed the judgment. The trial court correctly interpreted the force majeure provision not to apply where the tenant had the ability to meet its contractual obligations but chose not to perform due to financial constraints.

The landlord, West Pueblo, is a four- member limited liability company that holds a single asset: the Borreo building (the building), located in downtown Napa.

The tenant, Stone, is a large beer brewing and retail corporation that, among other things, operates restaurants known as “brewpubs.”

Beginning in 2015, Stone began negotiating a lease (the lease) with West Pueblo to use the building for one of its new brewpubs. The lease was executed in May 2016, and provided that West Pueblo would deliver the building with certain improvements and that Stone would pay a base rent of $38,000 that would increase over the lease’s 20-year term.

The lease further provided that, absent special permission, “the Premises shall be used for a full service restaurant and brewery to include the sale of malt beverages for both on and off premise consumption events as well as the sale of [Stone’s] merchandise . . . .”

Among the provisions the parties negotiated in the lease was a force majeure provision.

That provision states as follows: “FORCE MAJEURE. If either Party is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act, labor dispute, unavailability of materials or any cause outside the reasonable control of that Party, then the time for performance of the affected obligations of the Party shall be extended for a period equivalent to the period of such delay, interruption or prevention.”

Stone took possession of the building in January 2018.

When COVID- 19 emerged in early 2020, California and local governments imposed severe restrictions on Napa restaurants and businesses. From March 20, 2020, to May 18, 2020, Stone could not offer any on-premises dining. From July 8, 2020, to September 2, 2020, it could not offer indoor dining.

From September 3, 2020, to October 19, 2020, it was required to limit indoor dining to 25 percent capacity. That limitation was loosened to 50 percent from October 20, 2020, to November 15, 2020, but regulations were again tightened to prohibit indoor dining from November 17, 2020, to December 15, 2020.

From December 16, 2020, to January 24, 2021, Stone was banned from offering on- premises dining yet again. Those restrictions were then loosened to prohibit only indoor dining from January 25, 2021, to March 2, 2021.

According to Stone, these restrictions were “devastat[ing]” to its operating profits, and as a result of the forced closure, it was faced with the business decision to lay off the vast majority of its team members in order to minimize the financial losses it started to experience on day 1 of the imposed closure.

With no known endpoint, it made the decision to continue to operate the business with a skeleton crew, not only as a service to the Napa community by offering donations to first responders and hospitals, but also with the hope that it could retain a certain number of the management team through the uncertain times.

During the first year of the pandemic in 2020, Stone argued that its monthly rent payments became unsustainable based on the negative impact COVID-19 regulations had upon its business generally.

Stone initially asked West Pueblo for rent relief, and later withheld rent for June and July 2020, contending it was entitled to do so under the lease’s force majeure provision.

Stone paid full rent through November 2020, but again withheld rent for the months of December 2020, January 2021, February 2021, and March 2021 based on the force majeure provision.

Stone’s failure to pay rent for these four months—December 2020 through March 2021—gave rise to this litigation. West Pueblo ultimately issued a “Five-Day Notice to Pay Rent or Surrender Possession” on March 23, 2021.

Stone did not pay, and West Pueblo filed an unlawful detainer action against Stone on April 6, 2021.

The parties filed competing motions for summary judgment.

West Pueblo’s motion argued that Stone’s force majeure defense fails as a matter of law because the undisputed facts showed that the COVID-19 government restrictions did not delay, interrupt, or prevent Stone from paying its rent.

To the contrary, Stone conceded during litigation that it had the ability to pay rent for the building, and West Pueblo argued that a mere increase in expense or difficulty does not excuse a party’s obligation to perform under the force majeure provision.

In granting West Pueblo’s motion, the trial court held that the force majeure provision was unambiguous: “In line with [West Pueblo’s] position in the case, the court finds this plain language unambiguously means exactly what it says—that . . . the [force majeure] provision would apply to excuse Stone’s obligation only if the pandemic delayed, interrupted or prevented Stone’s payment of rent.”

Applying that interpretation of the lease, the court held that the force majeure provision did not apply because Stone always maintained the ready ability to make the rental payments and simply made a financial decision not to pay rent. 

On appeal, Stone argued the trial court erred in concluding it did not create a triable issue of material fact as to whether it was excused from performing its obligation to pay rent for the December 2020 through March 2021 period at issue due an erroneous interpretation of the force majeure provision.

In Stone’s view, the COVID-19 pandemic and its associated government closures were force majeure events that excused or deferred its obligation to pay rent.

As the trial court noted, there was no dispute that the COVID-19 pandemic qualified as a force majeure event potentially implicating the force majeure provision of the lease.

 The only question then, is whether Stone’s performance of its obligation to pay rent was “delayed, interrupted, or prevented” by the COVID-19 pandemic and the related closure orders.

During discovery, Stone admitted in responses to requests for admission that even though the brewpub operated at a loss, it was able to and had the financial resources to pay rent to West Pueblo for the months it withheld rent under the force majeure provision. Further, although the brewpub operated at a loss, Stone’s requests for admission responses admitted that it generated an overall profit in January and February 2021.

The California Supreme Court has held, where a contract contains a force majeure provision, the mere increase in expense does not excuse the performance unless there exists "extreme and unreasonable difficulty, expense, injury, or loss involved."

This standard derives from the doctrines of impossibility and impracticability, which are common law defenses to contract performance.

Although a force majeure provision is often included in a contract to specify which qualifying events will trigger its application, the qualifying event must have still caused a party’s timely performance under the contract to “become impossible or unreasonably expensive."

As applied here, Stone’s ability to pay rent must have been “delayed, interrupted, or prevented” by COVID-19 because timely performance would have either been impossible or was made impracticable due to extreme and unreasonable difficulty.

There is no triable issue of fact as to this issue because Stone admitted that it had the financial resources to pay rent to West Pueblo for the subject months, even though the brewpub (a small component of Stone’s overall business) was operating at a loss.

The mere fact that Stone was generating less revenue during this time period did not render its performance impossible or impracticable, and the force majeure event therefore did not impair Stone’s ability to pay its rent. Stone merely argued that the force majeure event made it more costly to do so.

Based on the plain meaning of the force majeure provision and the undisputed material facts in this case, the COVID-19 and the related closure orders did not delay, interrupt, or prevent Stone’s timely performance under the lease.

LESSONS:

1.         A  force majeure provision may read:  If either Party is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act, labor dispute, unavailability of materials or any cause outside the reasonable control of that Party, then the time for performance of the affected obligations of the Party shall be extended for a period equivalent to the period of such delay, interruption or prevention.”

2.         Although a force majeure provision is often included in a contract to specify which qualifying events will trigger its application, the qualifying event must have still caused a party’s timely performance under the contract to “become impossible or unreasonably expensive.”

Beware of Exculpatory Clauses in Commercial Leases

Commercial leases often contain exculpatory clauses, and a recent California court of appeal decision clarifies the circumstances under which such clauses are enforced.

In Garci v. D/AQ Corporation, Plaintiff was the lessee under a lease for commercial premises that contained an exculpatory clause providing that the lessor “shall not be liable for injury . . . to the person . . . of Lessee” and others, whether resulting from conditions arising on the premises or from other sources.

In April 2016, plaintiff fell down a staircase after hitting his head on a beam in the doorway at the top of the staircase. He sued defendants, alleging causes of action for premises liability and negligence. He alleged his fall was caused by the inherently dangerous condition of the staircase due to numerous building code violations.

Defendants moved for summary judgment and the trial court granted the motion, based on the exculpatory clause in the lease.

The appellate court affirmed the judgment.

Plaintiff inspected the premises twice before signing the lease, and the stairway was never changed or modified between that time and the date of the accident. He used the stairs and the doorway to the upstairs room a couple of times a month throughout his tenancy.

When the ownership changed, plaintiff met with Doran Tajkef, who worked for D/AQ. and there was no discussion of the staircase or the doorway at the top, and Tajkef did not go upstairs.

Plaintiff did not communicate any concerns about the stairway or the doorway to defendants before the accident.

The accident occurred at the top of the staircase, at the doorway to an upstairs office room then being used for storage. Plaintiff intended to go into the office room. When he got to the top stair, he reached for the door handle. It didn’t open because it "kind of sticks". He pushed harder on the door, which gave way suddenly. He didn’t bend down far enough and hit the crown of his head on the beam at the top of the door frame, which knocked him backwards.

Plaintiff had used both the doorway and the staircase as part of his business at various times before his injury.  He had seen another person hit his head on the low doorway at least once before his injury.

Defendants sought summary judgment on two grounds. First, Plaintiff could not establish the element of duty, defendants asserted, because a landlord out of possession is not liable for dangerous conditions of property of which it has no actual knowledge.

They further contended that, even if a duty could be established, the clause in the lease exempting the lessor from liability for injury to plaintiff was enforceable.

Plaintiff’s opposition argued defendants did not relinquish control of the premises to plaintiff, and owed him a duty to maintain the premises in safe condition. He contended his fall was a direct result of the staircase’s inherently dangerous condition due to extensive building code violations that were never inspected or remedied by defendants.

The exculpatory clause was not enforceable, plaintiff asserted, because it did not release defendants from their duty to reasonably inspect the premises. Plaintiff presented a declaration from an expert in construction and building codes, who concluded the staircase violated nine sections of the building code, including a requirement for a conforming landing at the top of the stairway.

The trial court granted defendants’ summary judgment motion on the ground the lease exempted defendants from liability, and it did not address the issue of duty.

The principles governing exemptions from liability in a commercial lease are described in Frittelli, Inc. v. 350 North Canon Drive, LP (2011) 202 Cal.App.4th 35, 43-44 (Frittelli).  As pertinent in the Garcia case, Frittelli observed: Courts have affirmed lease terms that exempted the landlord from liability arising from conduct by the landlord.

To the extent the exemption purports to shield the lessor and its agents from liability for negligence, the exemption is subject to the public policy disfavoring attempts by contract to limit liability for future torts.

The court explained this policy finds expression in California Civil Code section 1668 that provides that all contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.

Frittelli explained that Civil Code section 1668 ordinarily invalidates contracts that purport to exempt an individual or entity from liability for future intentional wrongs and gross negligence. And it prohibits contractual releases of future liability for ordinary negligence when the “public interest” is involved or a statute expressly forbids it.

However, an exemption from liability located within a commercial lease between business entities does not implicate the public interest, although such a clause is strictly construed against the person relying upon it.

An exculpatory clause that does not specifically mention negligence would ordinarily be construed as shielding the lessor from liability only for passive negligence, not for active negligence.

Passive negligence is found in mere nonfeasance, such as the failure to discover a dangerous condition or to perform a duty imposed by law.

The question whether an exculpatory clause covers a given case turns primarily on contractual interpretation, and it is the intent of the parties as expressed in the agreement that should control.  When the parties knowingly bargain for the protection at issue, the protection should be afforded.  This requires an inquiry into the circumstances of the damage or injury and the language of the contract; of necessity, each case will turn on its own facts.

Where, as in the Garcia case, no extrinsic evidence was submitted concerning the meaning of the exculpatory clause, the court determined the parties’ intentions as disclosed by the lease itself, looking at the plain language of the clause, viewed within the lease as a whole, and examined whether the clause clearly disclosed an intent to exempt the lessor from liability for ordinary negligence.

The clause entitled “Exemption of Lessor from Liability,” provided in pertinent part: Lessor shall not be liable for injury to the person of Lessee or any other person in or about the Premises whether the said injury results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places.

The clause expresses a clear intent to exempt defendants from liability for injury to plaintiff. There is no evidence the parties intended anything other than what the clause says. This is so under any construction, strict or otherwise. The public interest is not involved.

Plaintiff did not allege or present evidence of an intentional wrong, gross negligence, or active negligence. At most, plaintiff’s evidence showed defendants did not inspect the property for building code violations—establishing at most mere nonfeasance, such as the failure to discover a dangerous condition or to perform a duty imposed by law.

Plaintiff cited no authorities that supported a contrary conclusion.

Plaintiff cited Civil Code section 1953 (preventing modification or waiver of a landlord’s duty of care to prevent personal injury), but that only applies to residential leases, not commercial leases.

None of the cases plaintiff cited involves claims of passive negligence in maintaining a commercial property:

- Tunkl v. Regents of University of California involved an exculpatory clause in the conditions for admission to a charitable research hospital—not a commercial lease.

- Butt v. Bertola involved misconduct by a commercial lessor that was at the very least, active or affirmative negligence, not mere ordinary negligence.  Misconduct in knowingly maintaining defective sewerage facilities and in taking patently inadequate measures for the repair of those facilities, with knowledge of the injuries to plaintiff’s property which would ensue involved a complaint that the lessor was actively negligent in refusing to remediate the problems caused by the excessive moisture and mold infestation on the premises, and the court could not say as a matter of law that the exculpatory clause shield the lessor from liability.

- Henrioulle v. Marin Ventures, Inc. involved an exculpatory clause in a residential lease, not a commercial lease.

- Srithong v. Total Investment Co. included discussion of the principle that a lessor with a duty to maintain and repair the roof of its premises could not escape liability for injuries to a tenant by delegating its duty to repair water leaks to an independent contractor—not whether the two parties to a commercial lease can contract for a release of the lessor’s liability.

Plaintiff insisted the exculpatory clause did not release defendants from their duty to reasonably inspect the premises, including their failure to look for and/or remedy the violations of the Building Code Sections which created the dangerous condition causing plaintiff’s injuries and had existed throughout plaintiff’s tenancy, of which he had no knowledge.

While plaintiff did not know the staircase violated the building code, he certainly knew about the low beam at the top of the door frame that knocked him backward, and he had seen another person hit his head on the same low doorway. More to the point, as the trial court observed, failure to discover a dangerous condition is what the exculpatory provision purports to specifically cover.

In sum, plaintiff in the Garcia case alleged ordinary, passive negligence—the failure to discover a dangerous condition or to perform a duty imposed by law.

The exculpatory clause shielded the lessor from liability for ordinary negligence. Its language was clear, stating the lessor shall not be liable for injury to the person of Lessee.

These circumstances made this a case where, when the parties knowingly bargain for the protection at issue, the protection should be afforded.

LESSONS:

1.         It is always a good practice to read, carefully, any lease entered into, and commercial leases should be reviewed to detect any exculpatory clauses.

2.         Any defective conditions should be brought to the lessor's attention, and should be avoided by the tenant.

3.         California Civil Code section 1668 provides that all contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.

4          An exculpatory clause that shields the lessor from liability for ordinary negligence, where its language is clear, stating the lessor shall not be liable for injury to the person of Lessee, and the parties knowingly bargain for the protection at issue, the clause will be enforced against the tenant.

Can a Tenant be Evicted if Noncompliance with California Civil Code § 1962?

In a recent appeal in the matter of Group XIII Properties LP v. Stockman, landlord attorney Dennis P. Block & Associates litigated with tenant attorney BASTA in a case where the tenant failed to pay rent, and the Court reviewed the application of Civil Code section 1962 to the facts of the case.

Civil Code section 1962 requires owners of rental property to make certain written disclosures to their tenants including, but not limited to, the name, phone number, and usual street address at which personal service may be effectuated for all people who are managers of the premises, owners, or persons authorized to act on behalf of the owner for the purpose of service.

An owner, or the owner’s authorized representative, is required to make the disclosure within 15 days of executing the lease or, if the lease is orally made, within 15 days of the agreement.

The information to be disclosed must be kept current such that the required disclosure extends to any successor owner or manager; the successor must comply with the disclosure requirements within 15 days of succeeding the previous owner or manager.

A successor owner or manager is precluded from evicting a tenant for failure to pay rent if the tenant’s default occurs during a period of noncompliance with section 1962.

Plaintiff Group XIII Properties LP prevailed on an unlawful detainer action against defendant Michelle Stockman after defendant failed to pay rent.

Defendant raised, as an affirmative defense, plaintiff’s failure to comply with the disclosure requirements of section 1962.

Defendant argued the affirmative defense on two occasions—by moving for nonsuit (before the jury was given the case) and a directed verdict (after the jury was instructed).

The trial court ruled plaintiff “substantially complied” with section 1962 and denied defendant’s motions.

Defendant contended the trial court should have granted her motions, and the appellate court reversed the judgment because the successor owner/manager must strictly comply with section 1962; and substantial compliance with its provisions is inadequate.

Defendant moved into the property located on Challenger Way in the City of Lancaster pursuant to an oral agreement with the owner, Infinity Challenger, LLC (Infinity).

The property was subsequently sold by Infinity to plaintiff on June 28, 2019, at which time it was managed by Pama Management, Inc. (Pama).

Pama served defendant a notice of change of management (July notice), advising that IE Rental Homes (IE) was the new management company.

The July notice indicated rent was payable to IE by cashier’s check or money order only, and that payment could be remitted to an office address in Palmdale; office hours were specified at the bottom of the notice, which was signed by “agent” Michael Garcia.

Defendant was served another change of management notice (December notice), this one identifying Bridge Management Inc. (Bridge) as the new management company.

Similar to the July notice, the December notice indicated rent was to be paid to Bridge by cashier’s check or money order only, and that payment could be remitted to the same Palmdale office as the July notice; it did not, however, specify the times the office was open, and it did not identify any person as an owner, manager, or agent.

After failing to pay rent for January and February 2020, defendant was served a three- day notice to pay rent in the amount of $2,224.92, or vacate the premises. A payment ledger admitted into evidence showed defendant was current on her rent through the end of December 2019 and that no rent was paid thereafter.

There was nothing in the record suggesting defendant was served with a notice of change in ownership.

Defendant was not home when Madrigal attempted service of the July notice, so she posted it on defendant’s gate, then returned to the office and mailed a copy to her.

Defendant was home at the time Madrigal attempted service of the December notice but she refused to accept it; Madrigal posted this notice as well on defendant’s gate and then mailed her a copy. Madrigal handwrote her name and telephone number on both the July and December notices prior to serving them.

Defendant denied ever receiving or being served the July and December notices, either posted on her gate or in her mailbox. She also denied being served the three-day notice to pay rent or quit.

Defendant filed a motion for nonsuit arguing plaintiff was not in compliance with section 1962 when the defaulted rent was due because the December notice did not identify Bridge’s agent for service of process or provide the agent’s name, telephone number and “usual street address.”

Plaintiff maintained that, other than the change in management companies, the information on the July and December notices was essentially the same.

Plaintiff’s counsel pointed out the July notice identified the agent and that Madrigal testified she handwrote her name and telephone number on the December notice.

The court gave the impression the issue turned on whether the jury believed Madrigal’s testimony that she wrote information on the notice before serving it. In any case, the motion was denied.

On the following day, defense counsel renewed the motion for nonsuit, arguing that, per DLI Properties, LLC v. Hill, strict compliance with the mandatory notice provisions of section 1962 was required.

The court, apparently reading from section 1962, stated: “Disclosed therein the name, telephone number, and usual street address at which personal service may be effected of each person who is . . . ,” then asked, “Where does it say it actually has to say this is the address at which personal service may be effected?”

Concluding DLI Properties did not hold strict compliance with section 1962 was required—it just mentioned it in passing—the court ruled: The totality of the circumstances between what defendant herself knew and the circumstances involved in all of this if the jury believes that there was information written on top of the notice. There was substantial compliance, and the court denied the motion on that ground.

Shortly after the jury was given the case, Gharagozli moved for a directed verdict on the same ground as the nonsuit motion; the court denied the motion for the same reasons.

Defendant contendsed the court should have granted her motion and renewed motion for nonsuit or issued a directed verdict in her favor.

While made at different times, motions for nonsuit, directed verdict, and judgment notwithstanding the verdict (JNOV)] are analytically the same and governed by the same rules. The function of these motions is to prevent the moving defendant from the necessity of undergoing any further exposure to legal liability when there is insufficient evidence for an adverse verdict. Put another way, the purpose of motions for nonsuit, directed verdict and JNOV is to allow a party to prevail as a matter of law where the relevant evidence is already in.

A defendant is entitled to a nonsuit if the trial court determines that, as a matter of law, the evidence presented by plaintiff is insufficient to permit a jury to find in his favor.

In determining whether plaintiff’s evidence is sufficient, the court may not weigh the evidence or consider the credibility of witnesses. Instead, the evidence most favorable to plaintiff must be accepted as true and conflicting evidence must be disregarded. The court must give to the plaintiff’s evidence all the value to which it is legally entitled, indulging every legitimate inference which may be drawn from the evidence in plaintiff’s favor.

The trial court is governed by the same standard in ruling on a motion for directed verdict.

Any owner of a dwelling structure specified in Section 1961 or a party signing a rental agreement or lease on behalf of the owner shall do all of the following: Disclose therein the name, telephone number, and usual street address at which personal service may be effected of each person who is: Authorized to manage the premises. An owner of the premises or a person who is authorized to act for and on behalf of the owner for the purpose of service of process and for the purpose of receiving and receipting for all notices and demands.

In the case of an oral rental agreement, the owner, or a person acting on behalf of the owner for the receipt of rent or otherwise, shall furnish the tenant, within 15 days of the agreement, with a written statement containing the information required.

The information required shall be kept current and this section shall extend to and be enforceable against any successor owner or manager, who shall comply with this section within 15 days of succeeding the previous owner or manager.

A successor owner or manager shall not serve a notice pursuant to paragraph (2) of Section 1161 of the Code of Civil Procedure or otherwise evict a tenant for nonpayment of rent that accrued during the period of noncompliance by a successor owner or manager with this subdivision.

The plain terms of section 1962 required that the December notice advising defendant of the change in management from IE to Bridge disclose, in writing, the name, telephone number, and usual street address at which personal service may be effected of each person authorized to manage the premises and each person who is an owner of the premises or a person authorized to act on the owner’s behalf for the purpose of service of process and for the purpose of receiving all notices and demands.

In other words, at a minimum, this mandates the notice: identify each person authorized to manage the premises could only be considered if it is clear that the defect is one which could not have been remedied had it been called to the attention of plaintiff by the motion.

In other words, affirmance of an order granting nonsuit on a ground not argued to the trial court is prohibited unless the record establishes the flaw was not correctable by further proof. Respondent’s alleged defect did not pass this test and was therefore not considered by the Supreme Court.

For written leases, the requirements that the disclosures be made in the lease, and that copies be provided to the tenant when the lease is executed and on a yearly basis thereafter upon request of the tenant, indicate the disclosures are to be made in writing.

As for oral leases, the requirements that tenants be furnished a written statement containing the disclosures when the agreement is made and on a yearly basis thereafter upon request of the tenant impose a similar requirement.

With regard to keeping tenants apprised of any changes in the information to be disclosed, the requirement that any successor owner or manager shall comply with this section within 15 days of succeeding the previous owner or manager mandates that notice of the changes be made within 15 days and, in compliance with the section,” that it be made in writing.

Even crediting Madrigal’s testimony that she handwrote her name and telephone number on the December notice prior to serving it, there is nothing on the notice that explains her connection to the property, e.g., someone authorized to manage the premises, or a person authorized to act on the owner’s behalf.

Nor was there any written link between Madrigal and the street address of the Bridge office in Palmdale for the purpose of service of process (or of notices and demands) on Madrigal and/or service of process on behalf of plaintiff. In fact, the Palmdale address is preceded by the language you can remit payment to: suggesting that the sole purpose of the address is limited to receiving rental payments.

Plaintiff’s response was to follow the trial court’s reasoning and argue substantial compliance.

Plaintiff maintained the contents of the December notice (which identified Bridge as the new management company and specified the street address of its office in Palmdale), combined with Madrigal’s testimony that she handwrote her name and telephone number on the face of the notice, constituted proof that the notice substantially complied with the requirements of section 1962.

Substantial compliance means actual compliance in respect to the substance essential to every reasonable objective of the statute.

Where there is compliance as to all matters of substance, technical deviations are not to be given the stature of noncompliance.

Substance prevails over form. When the plaintiff embarks on a course of substantial compliance, every reasonable objective of the statute at issue has been satisfied.

Thus, the doctrine gives effect to our preference for substance over form, but it does not allow for an excuse to literal noncompliance in every situation.

Plaintiff argues substantial compliance buttressed by totality of the circumstances, including those beyond the four corners of the notice.

In this respect, plaintiff points not only to the contents of the notice and Madrigal’s testimony that she wrote her name and number on the notice, but to her testimony that her position as property manager had not changed with plaintiff’s purchase of the property, and that defendant had been paying rent directly to Madrigal who lived across from defendant.

Presumably the disclosures required under section 1962 may be lessened to some degree for tenants who already know the identity of the property manager and where he or she resides.

But it is difficult to excuse as “technical deviation” the failure of a successor owner or manager to make mandated disclosures where the finding of substantial compliance relies on the presumption that the information to be disclosed was already known to the person to be informed. Plaintiff has provided no legal authority to support such an understanding of substantial compliance.

Furthermore, the doctrine of substantial compliance does not apply at all when a statute’s requirements are mandatory, instead of merely directory.

A mandatory statute is one that is essential to the promotion of the overall statutory design and thus does not permit substantial compliance.

As this court wrote in DLI Properties, specifically with regard to section 1962 and the disclosures required of successor owners or managers before they can serve a three-day notice for nonpayment of rent or pursue eviction under Code of Civil Procedure section 1161(2), the legislative history makes clear the primary purpose for adding subdivision (c) to section 1962 was to ensure successor owners and/or their managers would notify their tenants where they were to send rent payments so as to avoid evictions based on nonpayment of rent.

In short, the legislative history of section 1962, specifically of subdivision (c), confirms that the provision is one that is essential to the promotion of the overall statutory design and thus does not permit substantial compliance.

Because compliance with section 1962 is effectively a jurisdictional prerequisite to an unlawful detainer action, strict compliance with its provisions is required. (See, e.g., landlord must strictly comply with the jurisdictional prerequisite of a valid three-day notice.)

The undisputed evidence demonstrates that plaintiff was a successor owner or landlord. Plaintiff purchased the property from the prior owner, Infinity, at which time defendant’s tenancy was governed by an oral agreement with Infinity.

Neither plaintiff nor defendant offered any evidence that a new and separate lease was executed or entered into by the parties subsequent to plaintiff’s purchase of the property.

The evidence further showed that Bridge succeeded IE as the property management company, as set forth in the December notice, purportedly served on defendant.

Under section 1962, plaintiff as a successor owner, and Bridge as a successor manager, were required to comply with section 1962 within 15 days of succeeding the previous owner or manager.

Where, as here, the lease agreement was an oral agreement, compliance with this section consisted of serving the tenant a written statement containing the information required.

As detailed above, however, the December notice advising defendant of the change of management from IE to Bridge did not provide the required information in strict compliance with section 1962(a)(1).

As a result, plaintiff, as a successor owner, was precluded from serving a three-day notice to pay rent or quit or otherwise evicting a tenant for nonpayment of rent that accrued during the period of noncompliance by a successor owner or manager with this subdivision.

This means plaintiff was barred from doing exactly what it did here—i.e., file a complaint in unlawful detainer premised on a three-day notice to pay rent or quit, seeking the payment of back rent that accrued during the period of noncompliance.

The court was found to have erred in denying defendant’s motions for nonsuit and a directed verdict, and the judgment was reversed.

LESSONS:

1.         Civil Code section 1962 requires owners of rental property to make certain written disclosures to their tenants.

2.         The information to be disclosed must be kept current such that the required disclosure extends to any successor owner or manager.

3.         The doctrine of substantial compliance does not apply at all when a statute’s requirements are mandatory, instead of merely directory.

4.         A mandatory statute is one that is essential to the promotion of the overall statutory design and thus does not permit substantial compliance.

5.         A successor owner was precluded from serving a three-day notice to pay rent or quit or otherwise evicting a tenant for nonpayment of rent that accrued during the period of noncompliance by a successor owner or manager with this subdivision.

Is Commercial Rent Excused Due to Covid-19 and Governmental Orders?

In the recent decision in SVAP III Poway Crossing, LLC v. Fitness International, LLC, the appellate court consideredDefendant Fitness International, LLC's (Fitness) appeal from a judgment entered in favor of plaintiff SVAP III Poway Crossings, LLC (SVAP) on SVAP’s breach of contract claim for Fitness’s non-payment of rent under the parties’ lease.

Fitness contended that the trial court erred in granting summary judgment because its obligation to pay rent was excused due to the COVID-19 pandemic and resulting government orders prohibiting it from operating its fitness facility for several months.

Specifically, Fitness contended that the court should have found that the obligation to pay rent was excused based on:

(1) SVAP’s own material breach of the lease;

(2) the force majeure provision in the lease;

(3) Civil Code section 1511;

(4) the doctrines of impossibility and impracticability; and

(5) the doctrine of frustration of purpose.

The appellate court concluded that these contentions lack merit and it affirmed the judgment in favor of SVAP.

SVAP is the owner and landlord of the building commonly known as the Poway Shopping Center.

Fitness is a California limited liability company renting certain space in the shopping center pursuant to a retail lease between the parties.

The lease provides Fitness the right to occupy the premises for a period of fifteen years, subject to three five-year renewals. The parties later extended the initial term of the lease to October 31, 2025.

In March 2020, California Governor Gavin Newsom proclaimed a State of Emergency in California due to the threat of COVID-19.

Soon after, he issued an executive order placing limitations on residential and commercial evictions for non-payment of rent. The order also stated, however, that it did not relieve a tenant of the obligation to pay rent, nor restrict a landlord’s ability to recover rent due.

Governor Newsom also issued an executive order directing all California residents to follow the State public health directive to stay home or at their place of residence, with certain exceptions, and directing all non-essential businesses to immediately cease operating to prevent further spread of COVID-19.

Gyms and fitness centers were included in the category of non-essential businesses.

Because the government orders made it temporarily illegal for Fitness to operate its health club and fitness center at the premises, it ceased doing so in March 2020.

Fitness was intermittently unable to operate its health club and fitness facility for certain periods from March 2020 through March 2021 due to government closure orders.

In May 2020, SVAP sued Fitness for breach of contract based on defendant’s non-payment of rent.

The complaint alleged that Fitness had defaulted on its obligations pursuant to the lease by failing to pay rent for April and May 2020, Fitness remained in occupancy of the premises, and SVAP had not terminated the lease.

SVAP further alleged that it had performed or was excused from performing all its obligations under the lease.

The complaint sought damages from Fitness for the outstanding rent payments, late payment service charges, interest, and attorneys’ fees and costs. SVAP attached the parties’ lease and its three amendments to the complaint.

Fitness alleged that the essential purpose of the lease was for Fitness to operate a full-service health club and fitness facility in the premises, but it was impossible for Fitness to do so for several months because of the COVID-19 pandemic and resulting closure of the premises in response to government orders.

According to the cross-complaint, Fitness’s inability to use the premises as a full-service health club and fitness facility meant it was not required to pay rent during the closure periods.

Fitness also alleged that SVAP breached the contract by failing to provide Fitness a credit for rent paid, failing to comply with the lease’s provisions regarding rent abatement, and violating various other representations, warranties, and covenants by SVAP to Fitness in the lease.

The cross-complaint further alleged that SVAP acted in bad faith by demanding payment under the lease and filing its lawsuit against Fitness. Fitness sought a judgment declaring, among other things, that it was not required to pay rent for the closure periods.

It also sought specific performance of the lease’s rent abatement provisions and the enforcement of certain promises alleged to have been made by SVAP filed a motion for summary judgment seeking judgment in its favor on its breach of contract claim and dismissing Fitness’s cross-complaint.

SVAP contended that it was undisputed that the parties had entered into the retail lease, Fitness had withheld more than eight months’ worth of rent, and its failure to pay was not due to lack of funds.

SVAP argued that this failure to pay constituted a breach of the lease, the lease (including its force majeure provision) allocated the risk associated with the pandemic to Fitness and precluded Fitness’s asserted defenses, and none of the other statutes or doctrines invoked by Fitness excused the breach.

Fitness opposed summary judgment, arguing that because its business operations were restricted intermittently during the pandemic, its obligation to pay rent was temporarily excused under Section 1511, the force majeure provision of the lease, and the equitable doctrines of impossibility, impracticability, and frustration of purpose.

Fitness further argued that SVAP had materially breached the lease because during the closure periods: (1) Fitness did not have the right to use the premises as a health club or to quietly enjoy the premises without interruption and disturbance as warranted by SVAP; and (2) SVAP failed to abate rent as required.

The trial court disagreed with Fitness and granted SVAP’s summary judgment motion.

There is no dispute SVAP has established the following elements for its breach of contract claim based on Fitness’s non-payment of rent: (1) the existence of a valid and binding contract between the parties for the lease of retail premises; (2) SVAP permitted Fitness to occupy the premises for the term of the lease; (3) beginning in April 2020, after the start of the pandemic and resulting closure orders, Fitness intermittently failed to pay rent to SVAP for several months; and (4) as of October 2021, Fitness owed $520,361.29 to SVAP in unpaid rent.

The crux of the parties’ dispute on appeal is whether Fitness’s obligation to pay rent during the closure periods was excused.

Section 1.9, of the Lease, on which Fitness relied, is titled “Initial Uses” and provides that the initial uses of the premises “shall be for the operation of a health club and fitness facility.”

Section 1.9 also provides that Fitness “shall have the right throughout the Term and all Option Terms to operate for uses permitted under this Lease.” Fitness repeatedly asserts that this means SVAP “guaranteed” it the right to operate, free from government interference, a fitness facility at the premises throughout the term of the lease.

The parties’ inclusion of Section 2.2—which required SVAP to guarantee that, “as of the Effective Date, Tenant’s Initial Uses of the Premises will not violate any applicable rule, regulation, requirement or other law of any governmental agency, body or subdivision thereof applicable as of the date hereof”—would be rendered meaningless if Section 1.9 were read to require SVAP to make that guarantee throughout the term of the lease.

Instead, the reasonable interpretation of Section 1.9 is that SVAP merely agreed not to restrict Fitness from using the premises in any way permitted under the lease.

Section 8.2 supports this interpretation, as it specifically allows Fitness to “change the use of the Premises to any alternate lawful retail use” not otherwise prohibited by the lease or certain other restrictions.

This language further underscores that SVAP’s obligation under the contract was not to ensure Fitness’s ability to operate a health club and fitness facility for the entire duration of the lease term, but rather to provide Fitness with possession of the premises in exchange for its payment of rent to SVAP.

Fitness did not dispute that SVAP has provided possession of the premises throughout the lease term, nor does Fitness argue that SVAP—as opposed to the government—has restricted its use of the premises in any way. Therefore SVAP fulfilled its obligations and did not breach the lease.

Fitness contended that its performance is excused because the government closure orders resulting from the COVID-19 pandemic constitute a force majeure event under the lease.

The closure orders were “restrictive laws,” but the laws did not delayed, hindered, or prevented Fitness from performing under the contract. First, the lease does not require SVAP to guarantee Fitness the unlimited right to use the premises as a health club and fitness facility even when prohibited by law. Rather, the obligation owed by SVAP was the delivery of the premises to Fitness. SVAP fulfilled that obligation.

Second, the trial court properly concluded that the obligation owed by Fitness was the payment of rent. There is no evidence or argument before us that the pandemic and resulting government orders hindered Fitness’s ability to pay rent. Even if they had, the lease explicitly excludes from the definition of force majeure event any “failures to perform resulting from lack of funds or which can be cured by the payment of money.”

Fitness’s claims of impossibility and impracticability were similarly unpersuasive. Impossibility is defined as not only strict impossibility but also impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.

A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost. The defense of impossibility may apply where, as here, a government order makes it unlawful for a party to perform its contractual obligations.

Fitness contended that the defense of impossibility applied here because the government closure orders made it illegal for it to operate its fitness facility.

But, Fitness’s obligation under the lease was to pay rent, not to operate a fitness facility. The government closure orders did not make it illegal for Fitness to pay rent. In fact, one of the orders explicitly stated that it did not relieve a tenant of the obligation to pay rent.

Fitness also contended that Civil Code sections 1511(1) and 1511(2) excuse its obligation to pay rent during the closure periods.

Section 1511(1) provides that a party’s performance of its contractual obligation is excused where the operation of law prevents or delays the performance. Section 1511(1) does not excuse Fitness’s performance because the pandemic and resulting government orders did not prevent Fitness from performing its contractual obligation to pay rent.

Indeed, one of the orders explicitly stated that commercial tenants (such as Fitness) remained obligated to pay their rent despite a moratorium on commercial tenant evictions. Section 1511(1) therefore does not excuse Fitness’s payment of rent.

Section 1511(2) similarly was no support to Fitness. It excuses performance only where prevented or delayed by an “irresistible, superhuman cause” and the parties have not “expressly agreed to the contrary.”

The irresistible, superhuman cause identified by Fitness here is the COVID-19 pandemic. Again, however, the pandemic did not prevent Fitness from performing its contractual obligation to pay rent.

Moreover, the parties had “expressly agreed to the contrary” by including a force majeure provision in their contract stating that any failure to perform that could be cured by the payment of money would not constitute a force majeure event.

Finally, Fitness contended that its obligation to pay rent was excused under the doctrine of temporary frustration of purpose because the value of the lease was destroyed by the government orders during the closure periods.

The doctrine of frustration excuses contractual obligations where performance remains entirely possible, but the whole value of the performance to one of the parties at least, and the basic reason recognized as such by both parties, for entering into the contract has been destroyed by a supervening and unforeseen event.

A party seeking to escape the obligations of its lease under the doctrine of frustration must show: (1) the purpose of the contract that has been frustrated was contemplated by both parties in entering the contract; (2) the risk of the event was not reasonably foreseeable and the party claiming frustration did not assume the risk under the contract; and (3) the value of counter-performance is totally or nearly totally destroyed.

Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.

The lease only required Fitness to operate a fitness facility for one day and permitted other uses thereafter.

It is also clear from the parties’ actions and argument that neither considered the contract to terminate as a result of the orders. On the contrary, Fitness continued to occupy the premises throughout the closure periods and did not attempt to rescind the lease. It therefore remains obligated to pay rent while in possession of the premises.

Liability under the lease continues as long as the lessee continues in possession.

LESSONS:

1.         Impossibility is defined as not only strict impossibility but also impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.

2.         A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.

3.         Civil Code section 1511(1) provides that a party’s performance of its contractual obligation is excused where the operation of law prevents or delays the performance. Section 1511(1) does not excuse Fitness’s performance because the pandemic and resulting government orders did not prevent Fitness from performing its contractual obligation to pay rent.

4.         The doctrine of frustration excuses contractual obligations where performance remains entirely possible, but the whole value of the performance to one of the parties at least, and the basic reason recognized as such by both parties, for entering into the contract has been destroyed by a supervening and unforeseen event.

5.         Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.

Can Tenants be Evicted so Landlord can Withdraw Property from Rental Market?

In the recent case of 640 Octavia, LLC v. Pieper, the trial court granted plaintiff landlord 640 Octavia, LLC’s (640 Octavia) summary judgment motion in an unlawful retainer action under the Ellis Act (Gov. Code, § 7060 et seq.).

Tenants Karl Pieper and Jose Montoya argued that the trial court (1) improperly sustained 640 Octavia’s objections to evidence relating to the landlord’s lack of intent to withdraw its property from the residential rental market, and (2) “improperly discounted” other evidence it did consider, relating to the landlord’s failure to strictly comply with the Ellis Act.

The Court of Appeal disagreed and affirmed the trial court's judgment.

640 Octavia is a Wyoming limited liability company, managed by Edward Kountze, that owns the real property at 640 Octavia Street in San Francisco, which has four residential units.

Kountze lived in a unit in the building with his partner. When 640 Octavia became the owner of the property in 2017, Pieper and Montoya (tenants) lived in unit 3.

In January 2020, 640 Octavia served tenants with a “Notice of Termination of Tenancy” (NOT). The NOT stated that the landlord was terminating tenancy and 640 Octavia was withdrawing the property “from the residential rental market” pursuant to the Ellis Act and section 37.9A of the San Francisco Residential Rent Stabilization and Arbitration Ordinance (S.F. Admin. Code, ch. 37) (Rent Ordinance).

The NOT continued: “This notice (the ‘Notice’) is what is commonly referred to as an ‘eviction notice’.”

The landlord also executed and filed with the San Francisco Residential Rent Stabilization and Arbitration Board (Rent Board) a “Notice of Intent to Withdraw Residential Units from the Rental Market” (NOITW).

640 Octavia recorded the NOITW with the county recorder.

The Ellis Act provides, with certain exceptions not relevant here, that no statute, ordinance, regulation, or administrative action shall “compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease.” (Gov. Code, § 7060, subd. (a).)

“A landlord who complies with the Ellis Act may therefore go out of the residential rental business by withdrawing the rental property from the market.” (Drouet v. Superior Court (2003) 31 Cal.4th 583, 587 (Drouet).)

Section 37.9A, subdivision (e) of the Rent Ordinance requires the landlord make relocation payments to tenants who lose their residence when it is removed from the rental market. The Rent Board publishes updates of the relocation amount due per tenant. The landlord must pay half of the relocation payment when it serves the NOT and pay the other half when the tenant vacates the unit. When 640 Octavia served the NOT, it owed the tenants relocation payments of $6,985.23.

Counsel for the landlord testified by declaration that she sent the NOT to the tenants’ address and enclosed checks for $3,492.62 for each of them.

She explained the postal service “returned to sender” the NOT and checks due to the overflow of mail in the tenants’ mailbox.

The landlord and tenants had been engaged in protracted litigation, including in a case brought by the landlord in federal court based on diversity jurisdiction, and so on March 11, 2020, counsel for 640 Octavia sent the NOT and checks to tenants’ counsel.

Counsel explained the NOT and checks had been returned by the postal service. On March 20, the tenants’ counsel responded that he had been “recently retained” in connection with the correspondence from 640 Octavia, notwithstanding his representation of them in ongoing litigation against the landlord, but was “not authorized to accept or receive” the relocation payments and therefore they were “rejected.” He also stated that his clients were exercising their right to extend occupancy of the rental unit until at least February 3, 2021, based on the tenants’ disabilities.

640 Octavia filed the unlawful detainer action on February 11, 2021.

It alleged that 640 Octavia had withdrawn the property from the rental market under the Ellis Act and complied with all applicable provisions of the Rent Ordinance, but the tenants had failed to vacate and continued in possession of the premises.

The tenants demurred, and the trial court overruled the demurrer. The tenants then answered the complaint, asserting various affirmative defenses, including that 640 Octavia had bad faith, ulterior, and improper reasons for seeking to recover possession of the premises.

640 Octavia moved for summary judgment. It submitted, among other things, the NOT, NOITW, and memorandum of the NOITW.

Kountze declared that, since at least January 2019, he had a “bona fide intent to withdraw the Property from the residential rental market.” He stated that when he purchased the property in 2016, he had “intended to use it for my family—one unit for myself, one unit for my partner, and one unit for my adult daughter, with a shared family office,” and now “would like to provide her a place to call home in the Bay Area where she can focus on her [graduate] studies.”

In November 2019, 640 Octavia signed license agreements for non-exclusive occupancy and use of unit 1 (with Daniel Amarel) and unit 2 (with Kountze and his partner). Unit 4 was vacant. Kountze declared that, other than the tenants in unit 3, none of the other units were occupied.

The tenants opposed summary judgment. They submitted, among other things, notices to quit or cure sent by 640 Octavia to them in 2017 and 2018, reports of private investigations conducted on the property in 2017, police reports from 2017 to 2019, screenshots from surveillance video in 2018 purporting to show Kountze making a neck “slashing” motion into the camera, text messages between Kountze and Amarel from 2018 and 2019, and documents from the unsuccessful federal action initiated by 640 Octavia against them. 640 Octavia objected to this evidence on various grounds, including relevance.

The trial court granted summary judgment for 640 Octavia and against the tenants. It sustained 640 Octavia’s relevance objections to the evidence summarized above.

The court concluded that 640 Octavia “has proven its compliance with all applicable state and local requirements, and has established its bona fide intent to withdraw the subject property from rent or lease.”

Specifically, it determined that 640 Octavia had the right to seek possession of the premises because it complied with the Ellis Act and applicable provisions of the Rent Ordinance in terminating the tenancies. It also determined that 640 Octavia’s “dominant motive in terminating this tenancy” was to “comply with the Ellis Act and withdraw the Property and the Premises from the residential rental market.”

The trial court concluded that 640 Octavia “established all elements of an Ellis Act unlawful detainer,” and the tenants had “failed to create a triable issue as to any material fact regarding elements of the cause of action or to any affirmative defense.”

The court explained that the tenants’ affirmative defenses could not overcome 640 Octavia’s prima facie case, were not defenses as a matter of law, or lacked sufficient admissible evidence to create a triable issue of fact. The court entered judgment in favor of 640 Octavia for restitution of possession of unit 3. The tenants appealed.

The tenants contended the trial court erred in concluding that 640 Octavia: (1) had a bona fide intent to exit the rental market; (2) served the NOT on all known tenants at the property; and (3) complied with the Ellis Act and Rent Ordinance in its service of the relocation payment checks.

The tenants argue that the trial court incorrectly concluded that 640 Octavia had a bona fide intent to remove the property from the rental market.

The tenants’ argument fails here as a result of the law reconciling a retaliatory eviction defense with an unlawful detainer claim in the context of the Ellis Act.

The defense of retaliatory eviction is codified at Civil Code section 1942.5.

This defense bars a landlord from recovering possession in an unlawful detainer action in retaliation against a tenant because of his or her exercise of rights or complaints made regarding tenantability.

Here, the tenants alleged that 640 Octavia sought to evict them in retaliation for the ongoing conflicts between Kountze, Pieper, and Montoya. The Ellis Act allows a landlord to respond to a retaliatory eviction defense by proving the landlord had a bona fide intent to exit the rental market.

The California Supreme Court explained in Drouet: “where a landlord has complied with the Ellis Act and has instituted an action for unlawful detainer, and the tenant has asserted the statutory defense of retaliatory eviction, the landlord may overcome the defense by demonstrating a bona fide intent to withdraw the property from the market. If the tenant controverts the landlord’s bona fide intent to withdraw the property, the landlord has the burden to establish its truth at the hearing by a preponderance of the evidence."

The trial court sustained 640 Octavia’s objections to three categories of evidence as irrelevant. The tenants contend that these evidentiary rulings were an abuse of discretion or otherwise reversable error, because the evidence relates to 640 Octavia’s lack of intent to take its property off the rental market.

The appellate court agreed with the trial court.

There was no dispute that the parties in the case have been engaged in ongoing conflict for many years. The trial court appropriately excluded evidence reflective of that longstanding conflict as irrelevant. At most, the evidence showed that 640 Octavia’s desire to exit the rental business was impacted by its protracted fights with the tenants.

The tenants argued that they have shown a triable issue of material fact as to whether 640 Octavia served “all tenants” with the NOT. The tenant- defendants received the NOT.

According to the tenants, however, the evidence excluded by the trial court suggests that Amarel, Kountze, and his partner—not defendants nor subject to any other eviction proceedings—were also tenants in the building.

The tenants thus argued that 640 Octavia needed to present evidence that it also served these three individuals with the NOT.

640 Octavia responded that the written license agreements it submitted on summary judgment showed Amarel, Kountze, and his partner were “licensees” rather than tenants, and that there was no need to serve any of them with the NOT.

The appellate court agreed with this argument and found in favor of the landlord and affirmed the judgment.

LESSONS:

1.         The Ellis Act provides, with certain exceptions not relevant here, that no statute, ordinance, regulation, or administrative action shall “compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease.” (Gov. Code, § 7060, subd. (a).)

2.         A landlord who complies with the Ellis Act may therefore go out of the residential rental business by withdrawing the rental property from the market.

3.         Where a landlord has complied with the Ellis Act and has instituted an action for unlawful detainer, and the tenant has asserted the statutory defense of retaliatory eviction, the landlord may overcome the defense by demonstrating a bona fide intent to withdraw the property from the market.

4.         If the tenant controverts the landlord’s bona fide intent to withdraw the property, the landlord has the burden to establish its truth at the hearing by a preponderance of the evidence.

What is the Presumed Term for an Oral Lease Agreement in California?

In the recent decision in 65283 Two Bunch Palms Building LLC v. Coastal Harvest II, LLC, Plaintiff Two Bunch orally leased an industrial building in Desert Hot Springs to Coastal Harvest for the indoor cultivation of cannabis.

When, after two years of negotiations, the parties were unable to agree to a written lease and a master service agreement, Two Bunch served Coastal Harvest with a 30-day notice to quit.

Coastal Harvest refused to vacate the property, so Two Bunch instituted an unlawful detainer action.

After a one-day trial, the trial court entered a judgment of possession for Two Bunch and awarded it $180,000.13 in holdover damages.

In the trial court, Coastal Harvest unsuccessfully argued it operated a licensed cannabis operation on the property and, therefore, it could not be evicted because it was entitled to the presumption under Civil Code section 1943 of a one-year tenancy for “agricultural" purposes, and the presumption of a one-year holdover tenancy for use of “agricultural lands” under Code of Civil Procedure section 1161, subdivision 2.

Assuming without deciding that Coastal Harvest’s cannabis operation constituted agriculture, Two Bunch rebutted the presumption under Civil Code section 1943 with evidence that the parties agreed that, unless they signed a written lease, the term of the oral lease was month-to-month.

And because the unlawful detainer action was not filed for failure to pay rent, Code of Civil Procedure section 1161, subdivision 2, and its holdover presumption for “agricultural” tenants simply did not apply.

In its unlawful detainer complaint, Two Bunch alleged it leased the property to Coastal Harvest under an oral lease agreement, and that at all times the lease was month- to-month and capable of being terminated at any time by either party.

Two Bunch alleged that on October 1, 2020, it served Coastal Harvest with a 30-day notice to quit the property by November 2, but Coastal Harvest refused to vacate the property and remained in its possession.

In its answer, Coastal Harvest alleged it could not be evicted because it was in lawful possession of the property under the presumption of a one-year tenancy for “agricultural" purposes under Civil Code section 1943 and/or under a presumption of a one-year holdover tenancy for use of “agricultural lands” pursuant to Code of Civil Procedure section 1161, subdivision 2.

At trial, Two Bunch introduced evidence that for more than two years the parties negotiated a written lease of the property and a master service agreement (MSA) “to enable [Coastal Harvest] to operate a California licensed cannabis cultivation facility at [Two Bunch’s] premises for the purposes of growing cannabis to be sold to other California licensed cannabis businesses.”

Pursuant to an oral lease, Coastal Harvest took possession of the property in October 2018, began operating its cannabis cultivation, and timely paid monthly rent.

The property was a large industrial building with wooden floors surrounded by an asphalt parking lot, and Coastal Harvest grew cannabis inside “potting cubes” that could be moved around the building, not in the ground.

While the negotiations for the written lease and MSA were ongoing, the tenancy was to be month-to-month. The written lease and MSA were never signed.

An attorney for Two Bunch testified that, during the negotiations, he informed Coastal Harvest that the oral lease was month-to-month and that, unless the parties could agree and sign a written lease and MSA, the oral lease would be terminated.

Coastal Harvest introduced evidence that the written lease being negotiated by the parties contemplated a minimum three-year term, that Two Bunch orally represented that Harvest could use the property for at least three years, but that the written lease was never signed.

Coastal Harvest moved for a defense judgment, arguing it was entitled to continue possessing the property pursuant to the rebuttable presumptions of one-year tenancies under Civil Code section 1943 and Code Civil Procedure section 1161, subdivision 2.

The trial court denied the motion.

The trial court found Coastal Harvest had failed to rebut the general presumption under Civil Code section 1943 that an oral lease is month- to-month.

In addition, the trial court found that Coastal Harvest’s cannabis operation was not an “agricultural use of land” because it did not grow the cannabis in the ground, and, therefore, the presumptions for agricultural tenants under Civil Code section 1943 and Code of Civil Procedure section 1161, subdivision 2, did not apply.

The trial court entered a judgment of possession for Two Bunch, and awarded it $182,000.13 in damages. Coastal Harvest timely appealed.

The Unlawful Detainer Act governs the procedure for landlords and tenants to resolve disputes about who has the right to possess real property.

An action for unlawful detainer is a summary proceeding.

The statutory scheme is intended and designed to provide an expeditious remedy for the recovery of possession of real property.

Unlawful detainer actions are, accordingly, of limited scope, generally dealing only with the issue of right to possession and not other claims between the parties, even if related to the property.

A plaintiff may file an unlawful detainer complaint under certain circumstances detailed in section 1161, and it specifies a tenant of real property is guilty of unlawful detainer only in specific circumstances, where the tenant:

fails to vacate after their termination as an employee, agent, or licensee;

is in default for nonpayment of rent;

breaches a material term of the lease;

commits waste, allows a nuisance on the premises, or uses the premises for an unlawful purpose; or fails to deliver possession to the landlord after having given written notice of their intention to terminate.

For a complaint to sound in unlawful detainer, it must allege the tenant is guilty of unlawful detainer under section 1161.

Coastal Harvest argued its licensed cannabis operation constituted agriculture and, therefore, the trial court erred by not applying the presumption of a one-year term under Civil Code section 1943 and/or the presumption of a one-year holdover term under Code of Civil Procedure section 1161, subdivision 2.

The appellate court was not persuaded by that argument.

Civil Code section 1943 provides: “A hiring of real property, other than lodgings and dwelling-houses, in places where there is no custom or usage on the subject, is presumed to be a month to month tenancy unless otherwise designated in writing; except that, in the case of real property used for agricultural or grazing purposes a hiring is presumed to be for one year from its commencement unless otherwise expressed in the hiring.

The trial court ruled that Coastal Harvest failed to rebut the general presumption under Civil Code section 1943 that the oral lease was month-to-month.

The trial court ruled that growing cannabis in moveable pots within a wooden floor warehouse was not “agricultural use” because Coastal Harvest was not “cultivating the ground.”

Therefore, the court found the presumptions for “agriculture” use and lands in Civil Code section 1943 and Code of Civil Procedure section 1161, subdivision 2, did not apply. 

For purposes of Civil Code section 1943, the intention of the parties is the controlling factor, and evidence the parties agreed to a longer term will rebut the general presumption of a month-to-month term for an oral lease.

Likewise, evidence the parties agreed orally to a term of less than one year may rebut the presumption of a one-year lease for agricultural land.

The record contains substantial evidence that, while the negotiations for a written lease were ongoing, the parties mutually understood the oral lease was for a month-to-month term and that it would be terminated unless the written lease was eventually signed.

Therefore, the trial court correctly ruled that Coastal Harvest did not rebut the general presumption of a month-to-month lease under Civil Code section 1943.

And, assuming, without deciding, that Coastal Harvest’s cannabis operation was an “agricultural” use of the property, which triggered the presumption of a one-year tenancy under section 1943, the same evidence demonstrated Two Bunch rebutted the presumption.

LESSONS:

1.         The general presumption under Civil Code section 1943 is an oral lease is month-to-month.

2.         For purposes of section 1943, the intention of the parties is the controlling factor, and evidence the parties agreed to a longer term will rebut the general presumption of a month-to-month term for an oral lease.

3.         The Unlawful Detainer Act governs the procedure for landlords and tenants to resolve disputes about who has the right to possess real property, it is a summary proceeding, and it is intended and designed to provide an expeditious remedy for the recovery of possession of real property.

4.         Unlawful detainer actions are of limited scope, generally dealing only with the issue of right to possession, and not other claims between the parties, even if related to the property.

Is a California Landlord Liable for Tenant's Dogs with Dangerous Propensities?

In the recent California decision in Fraser v. Farvid, the appellate court affirmed the trial court's decision in the case where Plaintiff Joni Fraser was attacked by two pit bulls who escaped from a single-family residence their owner, Hebe Crocker (Crocker or tenant), leased from Ali Farvid and Lilyana Amezcua (defendants or landlords).

Plaintiff sued Crocker and defendants. Plaintiff settled with Crocker.

The case against the landlords proceeded to trial, and a jury found plaintiff proved that defendants had actual knowledge of the dangerous propensity of Crocker’s dogs and could have prevented foreseeable harm to plaintiff. The jury found plaintiff suffered damages of more than $600,000.

The trial court granted defendants’ motion for judgment notwithstanding the verdict (JNOV), finding no substantial evidence was produced at trial demonstrating defendants’ knowledge of the dogs’ dangerous propensities.

Under California law, a landlord who does not have actual knowledge of a tenant’s dog’s vicious nature cannot be held liable when the dog attacks a third person.

Without knowledge of a dog’s propensities a landlord will not be able to foresee the animal poses a danger and thus will not have a duty to take measures to prevent the attack.

This “actual knowledge rule” can be satisfied by circumstantial evidence the landlord must have known about the dog’s dangerousness as well as direct evidence he actually knew.

The appellate court agreed with plaintiff that there was evidence from which the jury could have disbelieved defendants’ testimony that they did not know there were any dogs on the property.

But the only other evidence plaintiff relies on to establish defendants actually knew the dogs were dangerous—other than challenges to defendants’ credibility—was an e-mail from a next-door neighbor about the state of the property.

This e-mail was neither direct nor circumstantial evidence that defendants knew or must have known the tenant’s dogs were vicious.

The e-mail in question, sent on May 29, 2017, about 15 months before plaintiff was attacked read: “Hi Lilyana and Ali – I hope that you are getting a nice mini break with the holiday. Lorne and I wanted to let you know of your house. We aren’t sure how much you know. There is a new person living there. It is the same woman but it seems she may be either subletting or have an extended guest. . . . On the good end, they are no longer burning left over marijuana plants and they are so quiet. Even the 2 guard dogs in the back are quiet. Hopefully, it’s just the outside and inside is in good repair. We are not sure if you have a property manager who can check things out. We do miss having neighbors that we can talk to. Leigh.”

Plaintiff contended this e-mail “itself constitutes ‘substantial evidence’ of defendants’ knowledge that the dogs were dangerous.”

Plaintiff argued the e-mail’s reference to two “guard dogs,” plus defendants’ “false exculpatory statements” that they did not know the tenant kept any dogs on the property, constitutes affirmative evidence of actual knowledge that the dogs were vicious.

Defendants, on the other hand, contended none of this constituted evidence from which a reasonable juror could infer they knew or must have known of the dogs’ vicious nature.

In 2018, while she was walking her dog in the neighborhood, plaintiff was attacked by Crocker’s two pit bulls. The dogs had escaped from Crocker’s back patio after someone left the gate unlatched.

The facts about the attack and the severity of plaintiff’s injuries were not disputed.

Defendants, a married couple, have owned the subject property since 2005.

In December 2015, defendants leased the property to Crocker for a one-year term, and after that Crocker continued to rent the premises on a month-to-month basis.

The lease prohibited subletting without permission and prohibited dogs without permission.

About a year after she moved in, Crocker acquired the dogs, and after rehabilitating them on a friend’s ranch for six months, she brought the dogs to the property.

She testified they were her emotional support dogs.  She did not ask the defendants’ permission; and she never explicitly told them about the dogs.

Defendants did not produce the May 2017 e-mail in discovery.

At her deposition in April 2019, defendant Amezcua testified she had no communications from anyone about dogs on the premises.

In May 2019, Ramos-Platt forwarded the May 2017 e- mail to counsel for plaintiff, in response to a subpoena, saying it was the only e-mail she had regarding communication with the landlords.

Amezcua authenticated the e-mail at trial.

Defendant Farvid testified that prior to the attack, he had no idea the dogs were there, and no one ever told him there were guard dogs on the property. He testified that if he had seen any dogs being kept on the property, he would have brought that up with Crocker, especially if they were these dogs, because that would have been a breach of the lease.

When he was shown the May 2017 e-mail at trial, he said he did not recall seeing the e-mail before.

Defendant Amezcua also answered, “Not that I recall,” to the question whether, prior to the attack, she knew there were any dogs on the premises.

There was testimony from Susan Murray that in June 2017, the dogs attacked her 20-pound dog while she and her husband were walking their dogs. Murray had a puncture wound on her index and middle fingers inflicted by one of the pit bulls while she was trying to separate the dogs.

However, Murray did not report the attack to animal control authorities. She did not want the dogs to be put down, and she believed Crocker would always leash her dogs in the future and that it wouldn’t happen again. She also testified she never had any communication with either of defendants.

At trial, the jury found (9 to 3) both defendants had actual knowledge of the dangerous propensity of the dogs and had the ability to prevent foreseeable harm to plaintiff.

The jury found Crocker 60 percent responsible, and each of defendants 20 percent responsible. Plaintiff’s damages amounted to $604,977.10.

In its ruling on defendants’ JNOV motion, the trial court found there was an absence of any evidence that Defendants Farvid and Amezcua had actual knowledge that Crocker’s dogs were dangerous and vicious prior to the incident involving Plaintiff.

Regarding the May 2017 e-mail from Ramos-Platt mentioning “the 2 guard dogs,” the court stated: “In fact, the ‘guard dog’ comment says nothing to warn anyone about these dogs’ dangerous propensities but has been used by Plaintiff’s counsel to suggest that this comment, not remembered by Amezcua, is compelling proof that both Farvid and Amezcua had knowledge of the dangerous and vicious propensities of the two dogs.”

The court found the comment lacked “sufficient substantiality” to support a finding that defendants knew the dogs had dangerous propensities.

A motion for judgment notwithstanding the verdict may be granted only if it appears from the evidence, viewed in the light most favorable to the party securing the verdict, that there is no substantial evidence in support.

The standard of review on appeal is the same: whether any substantial evidence—contradicted or uncontradicted—supports the jury’s conclusion.

As already mentioned, to establish a landlord’s liability, the plaintiff must present either direct evidence the landlord actually knew about the dog’s dangerousness or circumstantial evidence that the landlord must have known.

Actual knowledge can be inferred from the circumstances only if, in the light of the evidence, such inference is not based on speculation or conjecture. Only where the circumstances are such that the defendant ‘must have known’ and not ‘should have known’ will an inference of actual knowledge be permitted.

The appellate court agreed with the trial court that there is neither direct nor circumstantial evidence that defendants knew or must have known Crocker’s dogs were dangerous.

Plaintiff contended the May 2017 e-mail alone constitutes substantial evidence defendants were told the dogs were dangerous, because calling the pit bulls ‘guard dogs’ was the same thing as calling them ‘vicious’ or ‘dangerous. Plaintiff argued guard dogs are presumed vicious.

The appellate court disagreed, finding there is no reasonable basis for drawing an inference from the May 2017 e-mail that defendants knew or must have known the dogs were dangerous.

Plaintiff contended that defendants’ "false exculpatory statements” that they were unaware of any dogs being kept on the property “constitutes evidence that they knew the dogs were dangerous.

In this case, there is no evidence at all of defendants’ knowledge of the dogs’ vicious propensities. No one other than Crocker and Murray (the person who was bitten in the June 2017 incident) had any knowledge the dogs were dangerous before the August 2018 attack, and they told no one.

Under the circumstances, the inconsistencies in defendants’ testimony about their knowledge of any dogs on the property could not, standing alone, justify an inference they knew or must have known the dogs were vicious.

Nor was there any merit to plaintiff’s claim that defendants ratified Crocker’s conduct by allowing her to keep her dogs after the attack.

The trial court correctly concluded there was no evidence of ratification, and the jury was not instructed on and made no finding on ratification.

LESSONS:

1.         A landlord should remain aware of the presence of dogs and their character in rental units, and should determine if any have a vicious nature.

2.         The “actual knowledge rule” can be satisfied by circumstantial evidence the landlord must have known about the dog’s dangerousness as well as direct evidence he actually knew.

3.         Under California law, a landlord who does not have actual knowledge of a tenant’s dog’s vicious nature cannot be held liable when the dog attacks a third person.

4.         A landlord should have a written lease that limits the number and nature of dogs by tenants, and such lease provisions should be enforced.

What are the New Eviction Requirements for Landlords in California?

Effective January 1, 2024, but not operative until April 1, 2024, new requirements for evictions of dwelling units in Civil Code §§ 1946.2 and 1947.12 tighten up the requirements for a landlord to terminate a tenancy under the Tenant Protection Act (i.e., California statewide rent cap and just cause eviction law) for no-fault evictions based upon owner move-in or substantial remodeling.

Additionally, an owner who violates the TPA by improperly terminating a tenancy or by raising rent beyond the maximum amount is liable for actual damages, reasonable attorney’s fees and costs (at the discretion of the judge), up to three times actual damages for willful violations and punitive damages.

The Tenant Protection Act of 2019 is a statewide rent cap and just cause eviction law. Under the TPA, there are only four permissible reasons on which a landlord may base a no-fault termination of tenancy.

The new law seeks to close perceived loopholes in two of them: terminations based on owner-move and those based on demolishing or substantial remodeling. The new law also seeks to address the question of remedies for a violation of the TPA. Currently, the TPA does not specify damages or enforcement mechanisms. 

Termination of tenancy based on owner move-in.

In order to lawfully evict a tenant for just cause on the basis of an owner move-in:

1.         The owner must identify in the written eviction notice the name and relationship to the owner of the intended occupant and include notification that the tenant may request proof that the intended occupant is actually an owner or related to the owner.

2.         The owner or their family member would have to move in within 90 days after the tenant vacates and then occupy the unit for at least one year

3.         The owner or their family member could not already occupy a unit and there could not be another vacant unit at the property.

4.         If the intended occupant does not actually move in within 90 days or use the unit as their primary residence for at least a year, the owner must offer the unit back to the tenant who was evicted at the same rent and lease terms in effect at the time they vacated and reimburse the tenant for reasonable moving expenses incurred in excess of the required relocation assistance payment that may have been made in connection with the eviction.

5.         If the former tenant does not move back in, and the owner subsequently identifies a new tenant still within the yearlong period after the eviction, the unit must continue to be offered at the lawful rent in effect at the time the eviction occurred and 

6.         The owner has to be a natural person holding at least a 25% ownership interest in the property (in order to prevent someone who holds a very small share of the property from evicting a tenant), a natural person who co-owns the property entirely with family members either outright or via a family trust, or a natural person who meets the 25% ownership threshold and whose recorded interest in the property is owned through an LLC or partnership.

Termination based on intent to demolish or to substantially remodel the residential real property. 

1.         Remodeling must require the tenant to vacate for 30 Consecutive Days. The remodel must not be able to be reasonably accomplished in a safe manner that allows the tenant to remain living in the place and must require the tenant to vacate the property for at least 30 consecutive days.

a.         However, the tenant is not required to vacate the property on any days where a tenant could continue living in the property without violating health, safety, and habitability codes and laws.

2.         Written Notice. A written notice terminating a tenancy must include all of the following:

            a.         A statement informing tenants of the intent to demolish or substantially remodel the unit,

            b.         The following statement verbatim: "If the substantial remodel of your unit or demolition of the property as described in this notice of termination is not commenced or completed, the owner must offer you the opportunity to re-rent your unit with a rental agreement containing the same terms as your most recent rental agreement with the owner at the rental rate that was in effect at the time you vacated. You must notify the owner within 30 days of receipt of the offer to re-rent of your acceptance or rejection of the offer, and, if accepted, you must reoccupy the unit within 30 days of notifying the owner of your acceptance of the offer”, 

            c.         A description of the substantial remodel to be completed, the approximate expected duration of the substantial remodel, or, if the property is to be demolished, the expected date by which the property will be demolished, 

            d.         A copy of the permit or permits required to undertake the substantial remodel. However, if the renovation is to abate hazardous materials then no permit need be given unless legally required. 

            e.         A notification that if the tenant is interested in reoccupying the rental unit following the substantial remodel, the tenant must inform the owner of their interest and provide to the owner their address, telephone number, and email address.

Any termination notice that does not comply with any provision of the just cause rules is void. 

Damages and enforcement mechanisms: Recovery of possession.

An owner who attempts to recover possession of a rental unit in material violation of the just cause provisions will be liable for: 

            a.         Actual damages.

            b.         In the court’s discretion, reasonable attorney’s fees and costs.

            c.         Upon a showing that the owner has acted willfully or with oppression, fraud, or malice, up to three times the actual damages. An award may also be entered for punitive damages for the benefit of the tenant against the owner.

Damages and enforcement mechanisms: Collecting or demanding rent beyond the maximum.

An owner who demands, accepts, receives, or retains any payment of rent in excess of the maximum rent shall be liable in a civil action for all of the following:

            a.         Injunctive relief.

            b.         Damages in the amount by which any payment demanded, accepted, received, or retained exceeds the maximum allowable rent.

            c.         In the court’s discretion, reasonable attorney’s fees and costs.

            d.         Upon a showing that the owner has acted willfully or with oppression, fraud, or malice, damages up to three times the amount by which any payment demanded, accepted, received, or retained exceeds the maximum allowable rent.

Note on “actual damages” for material violation in termination of tenancy rules:

A tenant who has been wrongfully evicted is now authorized to recover actual damages. How might one calculate actual damages? The case of DeLisi v Lam (2019) 39 Cal.App.5th 663, which involved the San Francisco rent control ordinance, is illustrative of how open ended the calculation can be. In the DeLisi case, the judge permitted the jury to weigh two competing (and mutually exclusive) methods of determining actual damages, as set forth by the expert witnesses for each side. 

First, according to the expert for the tenant, actual damages are the difference between the rent being paid by the tenant and the market rate rent, multiplied by the tenant’s intended length of occupancy. The tenant testified that she intended to stay five or ten years. Under the San Francisco ordinance, a triple damage penalty is automatically applied. Taking into account the present value of a ten-year tenancy, the expert arrived at a figure of $287,180. That figure multiplied by three would allow for total damages of approximately $860,000. 

The expert for the landlord took a different view. In his view, the value of the rent-controlled tenancy was not an asset the tenant could monetize. Instead, damages would be the amount the tenant was out-of-pocket beyond what she would have been if she had stayed in the rent-controlled apartment. This included moving expenses, the difference between her monthly rent at the rent-controlled property and her monthly rent at her new apartment, and any differences in expenses for items such as commuting to work. All in all, “actual damages” would be $23,139 for a five-year period and $48,183 for a 10-year period. Multiplied by three these dollar figures are still considerable, but a far cry from amount calculated by the tenant’s expert. 

The jury returned a verdict for $120,000 which multiplied by three equals $360,000. Which theory of “actual damages” did the jury base their decision on? No one knows for sure. Juries are not required to report the basis of their decisions. (They can be asked to answer specified questions. But even there, they are not reporting the reasoning behind their decision). 

In many legal cases the attorney fees are staggering, often in excess of the actual damages awarded. Attorney fees may be awarded to the tenant at the discretion of the judge.

LESSONS:

1.         Landlords should carefully review Civil Code §§ 1946.2 and 1947.12 to determine the requirements for evicting tenants of dwelling units.

2.         Landlords should also carefully review any applicable city and county eviction requirements.

3.         The new law seeks to close perceived loopholes in two of them: terminations based on owner-move and those based on demolishing or substantial remodeling.

4.         The new law also seeks to address the question of remedies for a violation of the TPA because currently, the TPA does not specify damages or enforcement mechanisms. 

What is a Tenancy at Will in California?

In the recent case of Borden v. Stiles, the California appellate court explored the issues involving the tenancy at will in that case.

Defendant Loretta Stiles lived in a Laguna Woods residential unit (the property) that was owned by Dan Blechman. Stiles was permitted to live at the property by Blechman without provision for the payment of rent or the duration of her stay.

Stiles had worked for Blechman for many years and, instead of being paid a salary, he allowed her to live at the property beginning in 2011 and also paid her expenses.

After Blechman passed away, the administrator of his estate, plaintiff Alex R. Borden, served Stiles with a 30-day notice to quit the property.

After Stiles refused to leave the property, he filed an unlawful detainer action.

Borden filed a motion for summary judgment against Stiles. Stiles in turn filed a motion for summary judgment against Borden, arguing Borden’s notice to quit failed to state just cause for terminating her tenancy, as required by the California Tenant Protection Act of 2019 at Civil Code section 1946.2.

The parties agreed in their respective motions that Stiles had a tenancy at will.

The trial court concluded section 1946.2 applied to Stiles’s tenancy and consequently granted Stiles’s motion and denied Borden’s motion on the ground Borden’s 30-day notice failed to state just cause for terminating the tenancy as defined in the statute.

The Appellate Division of the Orange County Superior Court reversed the decision, and published its decision because its analysis involves the interplay of statutes enacted almost 150 years ago regarding the hiring of real property with the relatively recently enacted section 1946.2.

Evidence suggested the tenancy at issue was created by a hiring under section 1925, because it showed Blechman permitted Stiles to live at the property in exchange for work she had performed for him at unspecified times.

Such a tenancy that is “terminable at the pleasure of one of the parties,” however, would have terminated under section 1934 when Stiles was notified of Blechman’s death.

At that point, Stiles would have become a holdover tenant, and no longer in lawful occupation of the property.

Because section 1946.2, subdivision (i)(3) defines “‘[t]enancy’” to be “the lawful occupation of a residential real property”, section 1946.2 would not apply to such an unauthorized occupancy.

The record, however, is silent on the specifics regarding the timeframe in which Stiles performed work for Blechman in exchange for her tenancy, when Blechman passed away, when Stiles was notified of his death, and whether thereafter Borden had potentially entered into a tenant relationship with Stiles.

Because triable issues of material fact existed as to whether Stiles was in lawful occupation of the property within the meaning of section 1946.2, subdivision (i)(3), summary judgment should not have been entered in either party’s favor.

The relevant evidence offered by the parties in support of and in opposition to the motions was undisputed and very limited in scope, confirming the following facts:

(1) Blechman orally agreed to allow Stiles to take possession of the property without any specified term or reservation of rent;

(2) Stiles took possession of the property, had continuously occupied the property for more than 12 months, and had never paid money for her occupancy;

(3) Borden was made administrator of the estate of Dan Blechman;

(4) Borden served a 30-day notice to quit which did not state a just cause reason under section 1946.2; and

(5) after the notice period expired and Stiles continued to occupy the property, Borden initiated the unlawful detainer action.

The parties stipulated if section 1946.2 were to apply, none of the exemptions specified in that section would apply.

Unlawful detainer actions are authorized and governed by state statute. The statutory scheme is intended and designed to provide an expeditious remedy for the recovery of possession of real property.

The remedy is available in only three situations: to a lessor against a lessee for unlawfully holding over or for breach of a lease; to an owner against an employee, agent, or licensee whose relationship has terminated; and to a purchaser at an execution sale, a sale by foreclosure, or a sale under a power of sale in a mortgage or deed of trust against the former owner and possessor.

Section 1946.2, subdivision (a) provides in relevant part: “Notwithstanding any other law, after a tenant has continuously and lawfully occupied a residential real property for 12 months, the owner of the residential real property shall not terminate the tenancy without just cause, which shall be stated in the written notice to terminate tenancy.”

Subdivision (b) of section 1946.2 sets forth two types of just cause—at-fault just cause and no-fault just cause—necessary to terminate a tenancy. The following circumstances establish at-fault just cause: default in the payment of rent; a breach of a material term of the lease; maintaining, committing, or permitting the maintenance or commission of a nuisance; committing “waste”; the circumstance where the tenant had a written lease that terminated on or after January 1, 2020, and the tenant refused to execute a written extension or renewal of a lease with similar terms; certain criminal activity by the tenant; assigning or subletting the premises in violation of the lease; the tenant’s refusal to allow the owner to enter the property; using the premises for an unlawful purpose; an employee, agent, or licensee’s failure to vacate after their termination as an employee, agent, or licensee; and when the tenant fails to deliver possession of the residential property after providing the owner written notice of intent to terminate the hiring of the real property.

Section 1946.2 no-fault just cause includes the circumstances when the owner, or the owner’s spouse, domestic partner, children, grandchildren, parents or grandparents intend to occupy the residential real property; the withdrawal of the residential property from the rental market; an order for the owner to comply with certain orders by a governmental agency or local ordinances that necessitate vacating the property; and the owner’s intent to demolish or to substantially remodel the residential real property.

Section 1946.2 also requires an owner, under specified circumstances, to provide relocation assistance, waive rent for the final month of tenancy, and comply with notice requirements. 

Significantly, section 1946.2, subdivision (i)(3) provides, for the purposes of that statute, the term tenancy means the lawful occupation of a residential real property and includes a lease or sublease.

After noting it was undisputed Stiles was a tenant at will, the trial court granted Stiles’s motion for summary judgment on the ground section 1946.2 applies to tenancies at will.

The Appellate Division affirmed the judgment after concluding section 1946.2 applies to tenancies at will if the tenant has continuously and lawfully occupied the subject residential real property for 12 months.

A tenancy at will is an estate which simply confers a right to the possession of premises leased for such indefinite period as both parties shall determine such possession shall continue.

The tenant at will is in possession by right with the consent of the landlord either express or implied, and he does not begin to hold unlawfully until the termination of his tenancy. His estate is a leasehold and he holds in subordination to the title of the landlord.

A permissive occupation of real estate, where no rent is reserved or paid and no time agreed on to limit the occupation, is a tenancy at will.

Here, Stiles’s tenancy may very well have been properly characterized as a tenancy at will in light of the undisputed evidence Blechman had provided Stiles a tenancy of indefinite duration that did not involve the payment of rent.

But the proper characterization of Stiles’s tenancy was not dispositive in the resolution of this appeal because evidence in the record, which showed Stiles might have hired the property from the now deceased Blechman, creates triable issues of material fact whether a condition precedent to section 1946.2’s application was satisfied—whether Stiles was in lawful occupation of the property within the meaning of section 1946.2(i)(3).

Upon Stiles receiving notice of Blechman’s death, if her tenancy was based on a hiring, it would have automatically terminated by operation of law.

Absent subsequent events that might have created a new tenancy (e.g., Borden and Stiles entering an agreement, Borden granting Stiles permission to continue occupancy, or Borden accepting rent from Stiles), Stiles’s status in continuing to occupy the property following receipt of notice of Blechman’s death would be that of a holdover tenant.

Such an occupancy would be unlawful, rendering section 1946.2 inapplicable to the eviction proceedings initiated by Borden, because tenancy is lawful occupation of residential real property.

The record, however, was silent regarding when Blechman passed away, when Stiles was notified of his death, and whether thereafter Borden had potentially entered into a new tenant relationship with Stiles.

While a tenancy at will is, by definition, an agreement whereby a tenant is granted permission to occupy real property without provision for the payment of rent, it would appear that definition does not preclude a landowner from giving possession and use of real property for a reward other than rent within the meaning of section 1925.

For example, an agreement whereby landowner son permitted father to remain on the land coupled with the father’s agreement to take care of the land could be deemed to establish a tenancy at will.

In any event, the evidence shows Stiles’s tenancy might have arisen out of a hiring, and if so, regardless of whether it was tenancy at will or some other form of tenancy, it would have terminated upon her receipt of notice of Blechman’s death, by operation of section 1934.

As triable issues of material fact therefore exist regarding the threshold issue whether Stiles was in lawful occupation of the property within the meaning of section 1946.2, subdivision (i)(3), summary judgment should not have been granted in favor of either party.

LESSONS:

1.         While a tenancy at will is, by definition, an agreement whereby a tenant is granted permission to occupy real property without provision for the payment of rent, it would appear that definition does not preclude a landowner from giving possession and use of real property for a reward other than rent within the meaning of Civil Code section 1925.

2.         If the tenancy at issue was created by a hiring under Civil Code section 1925, such a tenancy that is “terminable at the pleasure of one of the parties,” would have terminated under Civil Code section 1934 when notified of ther landlord's death. At that point, the tenant becomes a holdover tenant, and no longer in lawful occupation of the premises.

Does the Voluntary Dismissal of an Unlawful Detainer Action Bar Recovery of Attorney's Fees?

The recent decision in Riverside Mining Limited v. Quality Aggregates, considered parties who entered into a lease agreement allowing defendant and appellant Quality Aggregates (Quality) to mine on a property owned by plaintiff and respondent Riverside Mining Limited (Riverside Mining).

The business relationship soured, and litigation began.

The appeal contested two orders issued after Riverside Mining voluntarily dismissed the unlawful detainer action.

One is an order denying Quality’s motion for attorney fees under Code of Civil Procedure section 998, and the other an order granting Riverside Mining’s motion to disburse to it certain payments Quality had deposited with the court.

The appellate court affirmed both orders.

Riverside Mining owns a property of more than 150 acres in Jurupa Valley. In 2017, Quality leased about 73 acres that the parties call the Pyrite Quarry.

The lease agreement includes a provision shifting attorney fees to the prevailing party in any action, either at law or in equity, to enforce or interpret the terms of the agreement.

According to Quality, by 2020, Riverside Mining began infringing on its leasehold in various ways.

In 2021, Quality sued Riverside Mining, alleging breach of contract, trespass, and quiet title claims.

In August 2022, Riverside Mining filed an unlawful detainer action, seeking to evict Quality from the Pyrite Quarry for various alleged breaches of the lease agreement. The appeal concerned the unlawful detainer lawsuit.

Near the outset of the unlawful detainer lawsuit, the parties filed a stipulation that could help preserve the funds at issue during the litigation. They stipulated under that Quality would deposit with the court amounts “otherwise payable to” Riverside Mining “as monthly rental payments” under the lease agreement.

The stipulation explained Riverside Mining’s position that Quality’s breach of the lease agreement “constitutes forfeiture” of the lease agreement, while Quality’s position was it “has not breached nor forfeited the lease agreement” and intended to “continue paying rent.”

As requested, the court ordered Quality to deposit with the Clerk of the Court those funds otherwise payable to Riverside Mining as monthly rent for the pendency of the above-captioned action.

In 2022, Quality offered to compromise under Code of Civil Procedure section 998, proposing settlement of the unlawful detainer action “by entry of a dismissal with prejudice” of the action, “each party to bear their own attorneys’ fees and costs.”

Riverside Mining did not accept the offer.

In 2023, after substantial discovery but before trial, Riverside Mining requested the unlawful detainer action be dismissed without prejudice. The trial court entered the dismissal.

Later, Quality filed a memorandum of costs, claiming $118,372.65, a sum that included no attorney fees, but did include costs and the costs of the services of expert witnesses. Riverside Mining did not object to these costs, paying them in full in May 2023.

Meanwhile, Riverside Mining filed a motion requesting disbursement to it of the payments Quality had deposited with the court per the September 2022 stipulation.

According to the motion, the amount deposited totaled $228,000. Quality opposed the disbursement motion.

Quality also filed a motion for attorney fees under section 998. Quality requested an award of $199,514.38, based on a 1.25 multiplier. Riverside Mining opposed the fee motion.

The trial court granted Riverside Mining’s disbursement motion and denied Quality’s motion for attorney fees.

Quality argued it was entitled to recover attorney fees incurred after its section 998 offer because the lease agreement has a prevailing party attorney fee clause and Riverside Mining failed to obtain a result more favorable than Quality’s offer to compromise. The trial court disagreed, applying Ford Motor Credit Company v. Hunsberger.

Generally, except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.

Prevailing party includes a defendant in whose favor a dismissal is entered.

Consequently, after Riverside Mining voluntarily dismissed this lawsuit, it properly paid Quality’s costs.

Attorney fees are not normally recoverable costs. Rather, under what is known as the "American rule," each party to a lawsuit must ordinarily pay his or her own attorney fees.

Nevertheless, recoverable litigation costs include attorney fees when the party entitled to costs has a legal basis, independent of the costs statutes and grounded in an agreement, statute, or other law, upon which to claim recovery of attorney fees.

Civil Code section 1717 governs the award of attorney’s fees as costs in contract actions where the contract has an attorney fee provision.

If an unlawful detainer action is based on an alleged breach of the lease during an unexpired term (e.g., nonpayment of rent, improper use of the premises), then it is an action sounding in contract.

The statute requires any prevailing party attorney fee provision be treated as mutual, regardless of its wording, to avoid the perceived unfairness of one- sided attorney fee provisions.

Also, the statute defines “prevailing party” as “the party who recovered a greater relief in the action on the contract.”

There may be one prevailing party, or no party prevailing on the contract.

Sometimes, the trial court has discretion to determine who prevailed: If neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees.

Other times, however, the trial court has only one option. For example, if a party achieves a “‘simple, unqualified win’” on a contract claim, the trial court must find that party prevailed.

Importantly here, Civil Code section 1717(b)(2), specifies that “[w]here an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.”

This means that if, as here, a case is dismissed voluntarily, a prevailing party attorney fee clause does not alone permit recovery of attorney fees.

Although Quality made a valid section 998 offer to compromise this case, section 998 does not, expressly authorize an award of attorney fees. Attorney fees are recoverable as costs only if there is some other statutory or contractual right to such fees.

In Ford, the court of appeal applied these principles to facts like this case. The plaintiff sued alleging breach of a contract involving a lease agreement that included a unilateral attorney fee clause, made bilateral by Civil Code section 1717(a). The court noted no appellate authority had held Civil Code section 1717(b)(2) trumps section 998, but found a plain reading of the relevant statutes leads to this result.

The distinction between a voluntary dismissal (which is a result in a defendant’s favor) and a trial (which could result in a judgment in either side’s favor) is one of policy.

Civil Code section 1717, subdivision (b)(2), reflects a determination that the American rule that parties bear their own attorney fees should not change where a defendant in a contract action prevails by voluntary dismissal.

In the decade and a half since Ford, no appellate authority has parted ways with it and interpreted the statutes as Quality proposed. Additionally, section 998 has been amended since Ford, and the Legislature did not abrogate it.

When a statute has been construed by the courts, and the Legislature thereafter reenacts that statute without changing the interpretation put on that statute by the courts, the Legislature is presumed to have been aware of, and acquiesced in, the courts’ construction of that statute.

LESSONS:

1.         Generally, except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.

2.         Attorney fees are not normally recoverable costs. Rather, under what is known as the "American rule," each party to a lawsuit must ordinarily pay his or her own attorney fees.

3.         Sometimes, the trial court has discretion to determine who prevailed: If neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees.

4.         Although Quality made a valid section 998 offer to compromise this case, section 998 does not, expressly authorize an award of attorney fees. Attorney fees are recoverable as costs only if there is some other statutory or contractual right to such fees.

What is a Cotenancy Provision in Commercial Retail Leases in California?

In the unanimous decision in JJD-HOV Elk Grove, LLC v Jo-Ann Stores, the California Supreme Court reviewed the nature of a cotenancy provision in commercial retail leases.

A cotenancy provision is a feature found in some commercial retail leases.

These provisions typically allow retailers to pay reduced rent or terminate the lease when the number of anchor tenants (large retailers that are attractive to a broad range of shoppers) or the overall occupancy level of retailers in a shopping center falls below a specific threshold.

Generally, courts endeavor to enforce contracts as the parties have written them.

California Civil Code section 1671, however, prohibits the enforcement of liquidated damages provisions when they operate as unreasonable penalties for contractual breach.

The issue in this case was whether a cotenancy provision that allows the tenant to pay a reduced rent when a shopping center’s number of anchor tenants or occupancy level of retailers falls below a specific threshold is valid as an alternative performance of the contract or whether it is a penalty subject to section 1671’s reasonability limitation.

For the reasons discussed below, the Supreme Court affirmed the judgment of the Court of Appeal and upheld the cotenancy provision in this case as reflecting the parties’ agreement regarding acceptable alternative performance of agreed upon contract obligations.

Cotenancy clauses condition a retail tenant’s opening or operating of its business on whether other tenant businesses in a specific shopping center are also open for business.

These clauses, which are typically only found in retail leases, provide the tenant with the option to pay reduced rent, or occasionally to terminate the lease, should the provision’s specified tenancy levels for the shopping center not be met.

Even if landlords do not usually control the events that lead to vacancies within shopping centers and therefore resist being bound by cotenancy requirements, a knowledgeable tenant may request that a landlord incorporate the clause into the lease to protect a tenant’s financial viability should the shopping center not be utilized to its full capacity.

Anchor tenants greatly impact the economic viability of other retail tenants in a shopping center by attracting customers.

Cotenancy provisions assure a retail tenant that other tenants and, in particular, anchor tenants, will be open for businesses.

These provisions are typically a result of extended negotiations between a landlord and tenant, who tend to be sophisticated and well-represented.

Cotenancy provisions generally include the following provisions: (1) specific named cotenants and occupancy levels, (2) any right the landlord has to cure a failure to satisfy a cotenancy provision, and (3) any remedies the tenant has should a cotenancy provision not be satisfied.

Historically, when interpreting cotenancy agreements, courts have applied the general contract principle that, absent unconscionability or significant public policy concerns, contracts should be enforced as written and agreed upon by the parties.

The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. (Civ. Code, § 1636.)

If contractual language is clear and explicit, it governs. (Id., § 1638.).

It is not the province of the Court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves, and, in the absence of any ground for denying enforcement, to enforcing or giving effect to the contract as made, that is, to enforce or give effect to the contract as made without regard to its wisdom or folly, or to the apparent unreasonableness of its terms.

Courts generally appear to enforce cotenancy provisions when called upon to do so.

Landlord JJD-HOV Elk Grove (JJD) owns a shopping center in Elk Grove, California. Jo-Ann Stores, LLC (Jo-Ann), a national fabric and craft chain store, leased approximately 35,000 square feet of retail space in JJD’s shopping center.

Jo- Ann’s lease was for 10 years, starting in September 2004 with four options to extend the lease for five years each.

The lease provided two different calculations of rent: “Fixed Minimum Rent,” which was initially $36,458 per month (with an increase every five years and totaling $42,292 at the commencement of the litigation), or “Substitute Rent” (totaling the greater of three and one-half percent of Jo-Ann’s gross sales of all goods and services minus pattern sales or $12,000 per month).

This case concerned the Substitute Rent clause of Jo-Ann’s lease, which is triggered when the lease’s cotenancy provision is not satisfied.

The cotenancy provision stated: “To induce Tenant to enter into this Lease . . . Landlord represents that it has entered into or shall enter into binding leases . . . for the use and occupancy of either: (x) [three so-called ‘anchor tenants’ or comparable substitutes] . . . or (y) sixty percent (60%) or more of the gross leasable area of the Shopping Center (excluding the Premises).”

The cotenancy provision can be satisfied only by anchor tenants that are open for business. If the cotenancy provision is not satisfied for a period of six months, Jo-Ann has the option either to “continue its tenancy . . . subject to the obligation to pay only Substitute Rent until the satisfaction of the co-tenancy requirement” or to terminate the lease.

The cotenancy agreement was the result of extended negotiations by the parties, both of whom were represented by counsel. Little evidence, however, was produced about the specific details of those negotiations.

Jo-Ann invoked the cotenancy provision twice prior to the dispute that commenced this litigation.

 Jo-Ann first paid Substitute Rent for several months in late 2004 and early 2005, before the anchor tenants opened for business.

In 2007, Jo-Ann again paid Substitute Rent after Sacramento Food Cooperative, an anchor tenant, was replaced by Grocery Outlet.

Jo-Ann’s 2007 invocation of Substitute Rent resulted in litigation over whether Grocery Outlet was a comparable substitute tenant within the meaning of the cotenancy provision.

That litigation did not involve a dispute over whether the Substitute Rent provision was enforceable. In the course of that litigation, JJD acknowledged that Jo-Ann may pay Substitute Rent when the cotenancy provision is not satisfied. The dispute over comparable substitute tenants was ultimately settled and neither party waived its respective contentions regarding how the cotenancy provision was defined or satisfied.

This case came to to the Supreme Court after Jo-Ann invoked the Substitute Rent Clause for a third time. In July 2018, Jo-Ann informed JJD it intended to pay Substitute Rent because two anchor tenants, Sports Chalet and Toys “R” Us, closed.

These closures reduced the shopping center’s retail occupancy below 60 percent, meaning that the cotenancy provision was no longer satisfied.

Jo-Ann continued to pay Substitute Rent for approximately 20 months until May 2020, when Scandinavian Designs opened in the former Toys “R” Us space, satisfying the cotenancy provision.

Following Jo-Ann’s 2018 decision to pay JJD Substitute Rent, JJD filed a complaint against Jo-Ann for declaratory relief and breach of contract, arguing that the parties’ cotenancy provision is an unenforceable penalty.

JJD requested a judicial declaration that the cotenancy provision is an unenforceable penalty and thus Jo- Ann has always been obligated to pay Fixed Minimum Rent. JJD contended that Jo-Ann owed it $638,293 — the difference between Substitute Rent and Fixed Minimum Rent for all three periods where Jo-Ann paid Substitute Rent — plus interest.

Jo- Ann filed a cross-complaint against JJD seeking a judicial declaration that the parties’ cotenancy provision is valid and enforceable.

The trial court ruled for Jo-Ann, finding that the cotenancy provision with JJD was an alternative rent structure, rather than a penalty.

The Court of Appeal for the Third Appellate District affirmed. (JJD-HOV Elk Grove,

The Supreme Court held that the JJD court properly analyzed the cotenancy provision as a form of alternative performance. The cotenancy provision allocates risks and benefits between the two parties and provides JJD a realistic choice between accepting lower rent or taking additional efforts to increase occupancy rates or secure replacement anchor tenants.

According to JJD, the cotenancy provision is not a method of alternative performance but rather a penalty.

In Jo-Ann’s view, and that of the Court of Appeal, the cotenancy provision is enforceable as written.

The Court of Appeal reasoned that the lease and cotenancy provision simply created a rent scheme in which there are two applicable rents

The court determined that the triggering of the cotenancy provision and Jo-Ann’s subsequent payment of Substitute Rent was an alternative form of compliance with the lease as explicitly spelled out in the lease terms, rather than a contractual breach (or its functional equivalent).

A contractual provision that merely provides an option of alternative performance of an obligation does not impose damages and is not subject to section 1671 limitations.

In contrast, if the provision provides for liquidated damages, courts apply section 1671. In this case, the Supreme Court reached only the first step of this inquiry. Since the cotenancy provision provides for alternative performance, section 1671 does not apply.

If JJD wishes to avoid receiving a lower level of rent, it can choose to make inducements to attract additional anchor tenants or raise the overall occupancy rate. These efforts may include offering favorable lease terms, providing additional amenities to tenants, or renegotiating important leases.

The totality of the relevant economic circumstances here belies JJD’s characterization of the clause as a penalty.

The cotenancy provision does not realistically contemplate no element of free rational choice on the part of the obligor insofar as his performance is concerned.

Rather, JJD has a credible choice between two alternative methods of contractual performance, which are clearly designated in the duly negotiated contract.

Moreover, cotenancy provisions are not negotiated in a vacuum. The parties — who are often sophisticated and well- represented — consider such provisions alongside other lease terms during an arms-length negotiation process.

The bargaining power of the parties, their ability to rigorously negotiate contract terms with the assistance of counsel, their understanding of the real estate market, familiarity with how cotenancy lease provisions work, and ability to walk away from the bargaining table should the contract negotiations not meet with their approval, all inform what it means for the parties to have made a “realistic and rational choice” in entering a lease agreement in light of economic realities.

While a cotenancy provision standing alone may seem disadvantageous to one party or the other, its inclusion in the lease may be the result of one party acquiescing to less-desirable terms elsewhere in the lease.

JJD ignored the possibility that cotenancy provisions may exist to entice retailers into rental agreements, giving them a level of ameliorative protection should the shopping center’s other retailers close, reducing foot traffic and sales.

Anchor tenants attract customers to the shopping center. No retail tenant wants to be stuck in a shopping center filled with vacant stores.

These considerations likewise bear on whether contractual parties had a “realistic and rational choice” in entering the lease agreement.

Contracts exist to allocate risk between parties.

Allowing parties to allocate risk for mutual benefit has advantages.  Cotenancy provisions benefit both parties; they allow the landlord to court tenants, and they protect tenants should the landlord provide a reduced level of service.

The commercially sophisticated parties here mutually negotiated a cotenancy provision that accounted for the risk of reduced occupancy levels, outlined specific measures for what would happen if that were to occur, and provided the landlord the choice of accepting lower rent in lieu of taking the steps necessary to retain or attract tenants.

In light of the parties’ compliance with the lease through alternative performance, the Court of Appeal below properly applied general contract interpretation norms to assess the validity of the cotenancy provision.

These norms favor leaving contracts intact and unamended by the courts.

As noted extensively throughout this litigation, JJD and Jo-Ann were sophisticated, represented parties who duly negotiated a lease, including a detailed cotenancy provision.

JJD knowingly agreed to these terms when it signed the lease with Jo-Ann. The parties should continue to be bound by those lease terms.

LESSONS:

1.         Generally, courts endeavor to enforce contracts as the parties have written them.

2.         California Civil Code section 1671, however, prohibits the enforcement of liquidated damages provisions when they operate as unreasonable penalties for contractual breach.

3.         Cotenancy clauses condition a retail tenant’s opening or operating of its business on whether other tenant businesses in a specific shopping center are also open for business.

4.         Cotenancy provisions generally include the following provisions: (1) specific named cotenants and occupancy levels, (2) any right the landlord has to cure a failure to satisfy a cotenancy provision, and (3) any remedies the tenant has should a cotenancy provision not be satisfied.

What is an Option Clause in a Lease in California?

As discussed in the recent California appellate decision of Coyote Aviation Corporation v. City of Redlands, on April 4, 2000, plaintiff and appellant Coyote Aviation Corporation (Coyote) entered into a 20-year lease (April Lease) with the City of Redlands (City) for property located at the Redlands Municipal Airport (Property). 

Coyote intended to build hangars on the Property and lease them to pilots in need of storage for their planes. The parties negotiated a 20-year term for the April Lease and agreed that Coyote, with proper notice, could twice exercise a 15-year option (Option) to extend the lease. 

The April Lease would terminate on April 4, 2020, unless Coyote exercised an Option.

The parties signed an amended lease on September 5, 2000, based on Coyote being unable to take possession of the Property until that date.

The Amended Lease had the original termination date of April 4, 2020. 

Several months after the Amended Lease was signed, Coyote raised the issue with a City official that the Amended Lease should terminate on September 5, 2020, in order to be a 20-year lease, but no written amendment to the Amended Lease was ever executed by the parties. 

In June 2020, Coyote attempted to exercise the Option to extend the Amended Lease by sending written notice to the City.

The City informed Coyote that it was too late and that the Amended Lease had terminated on April 4, 2020. The City considered Coyote a holdover month-to-month tenant under the terms of the Amended Lease. 

The City issued a 30-day notice to quit the Property to Coyote.

Coyote filed an action against the City for breach of contract, specific performance, breach of the implied covenant of good faith and fair dealing, declaratory relief and promissory estoppel/detrimental reliance.

The trial court sustained the City’s demurrer to the first amended complaint in the action and entered judgment against Coyote. 

When Coyote did not vacate the premises after the 30-day notice to quit, the City filed an unlawful detainer action against Coyote. 

The trial court granted summary judgment in favor of the City and ordered Coyote to vacate the Property.

In its appeal Coyote claimed, as to the demurrer, that the trial court erred by sustaining the City’s demurrer to the breach of contract claim based on the City breaching the Amended Lease by refusing to extend the lease term and rejecting Coyote’s exercise of the 15-year Option; the City is estopped from asserting that Coyote’s exercise of the 15-year Option was untimely as the City caused any failure by Coyote to timely exercise the option; and the City waived any objection to Coyote’s exercise of the 15-year Option. 

Coyote also contended the trial court erred by sustaining the demurrer on a reformation cause of action raised in the original complaint based on it pleading sufficient facts to state a claim for reformation of the Amended Lease, the statute of limitations was tolled by the statements and conduct of the City’s employees, and the City was estopped from raising the statute of limitations as a bar to Coyote’s reformation cause of action. 

Coyote further claimed, as to the demurrer, that the City breached the Amended Lease by preventing it from removing the improvements on the Property, and that it can allege facts to support a claim of unjust enrichment based on the City taking control of the tenant improvements made by Coyote on the Property. 

Those issues were not properly raised on appeal as they were not decided by the trial court and are part of another ongoing case.

With respect to the appeal of the grant of summary judgment for the unlawful detainer, Coyote contended there are triable issues of fact as to whether the City should be estopped from contending that Coyote’s exercise of the 15-year Option was untimely.

Coyote relied on the course of conduct and representations by the City that it would be able to exercise the 15-year Option. Coyote also argued that the City’s attempt to deprive Coyote of the 15-year Option is barred by promissory estoppel and that the City waived any objection to Coyote’s exercise of the 15-year Option. 

The trial court issued a tentative ruling on the demurrer, and reviewed the provisions in the April Lease. 

It then noted the language in the Amended Lease that the parties intended to rescind the April Lease and enter into a new lease in its place. It quoted the language in the Amended Lease as to the term, notices and the 15-year Options. 

The trial court noted that the two leases were “clearly different.” 

The Amended Lease was not ambiguous as to notice on the 15-year Option; City must be given 45 days prior to April 4, 2020. 

The trial court noted that Coyote’s argument for breach of contract was based on its allegation that it had fully performed its duties and obligations under the Amended Lease. 

However, Coyote’s own allegations and exhibits demonstrated that it failed to timely exercise the 15-year Option under the terms of the Amended Lease. 

Given the finding that there was no claim for breach of contract, the second cause of action on specific performance also failed.

The third cause of action, breach of implied covenant of good faith and fair dealing, required proof that the City unfairly interfered with Coyote’s right to receive the benefit of the contract. 

The Amended Lease provided a termination date and deadline by which Coyote had to deliver written notice of its intent to exercise the 15-year Option, which Coyote failed to timely deliver. 

Under the doctrine of implied covenant, the implied covenant could not contradict the express terms of the contract. 

Under the express terms of the Amended Lease, Coyote had to timely exercise the 15-year Option and failed to do so. The declaratory relief claim in the fourth cause of action was part of the substantive claim and would also be denied. 

Finally, the fifth cause of action for promissory estoppel, the trial court found the claim was that Coyote relied on the promise made on December 5, 2000, by a City official, that City acknowledged the termination date error and made a clear promise to honor the full 20-year term to September 5, 2020.

The trial court cited to cases holding that promissory estoppel could not be asserted against a public entity to bypass rules that required contracts to be in writing. 

Pursuant to Government Code section 40602, a mayor shall sign all written contracts. Redlands Municipal Code section 3.04.010 only authorized contracts approved by the City council and mayor. 

There was no promise that was reduced to writing, approved by the City council and signed by the City’s mayor. 

The City argued there was no amendment to the FAC that could be made based on the unambiguous language in the Amended Lease. 

The extrinsic evidence—including the April Lease—clearly showed that the intent of the parties was that the Amended Lease would be for a 20-year term. Moreover, City officials throughout the term of the Amended Lease stated that the actual termination date of the Amended Lease was September 5, 2020. 

The elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff. 

Coyote insists that it sufficiently pleaded that it had performed its obligations under the Amended Lease to exercise the 15-year Option and that the City breached its duty under the Amended Lease by refusing to honor the 15-year Option. 

Coyote relied on extrinsic evidence, which included the agreement by the parties that the lease term was 20 years, and that City officials promised that the Amended Lease expired on September 5, 2020.

The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.

Extrinsic evidence cannot be used to contradict the contract’s terms unless the language is reasonably susceptible to the proposed interpretation. Indeed, unless the language is reasonably susceptible to the proposed meaning, extrinsic evidence cannot even be considered to explain or otherwise shed light upon the parties’ intent.

Moreover, under the parol evidence rule, when a contract is integrated, extrinsic evidence cannot be used to vary or contradict the instrument’s express terms. 

Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.

Under the parol evidence rule, extrinsic evidence is not admissible to contradict express terms in a written contract or to explain what the agreement was. The agreement is the writing itself. 

Parol evidence cannot be admitted to show intention independent of an unambiguous written instrument. 

The appellate court found that there are no grounds for the consideration of extrinsic evidence in this case.

Coyote signed the Amended Lease. The Amended Lease provided for a termination date of April 4, 2020, and all notices must be in writing and sent to the City clerk 45 days prior to the termination of the Amended Lease. 

It provided that any amendment to the Amended Lease was to be in writing. It also included an integration clause, which provided that the Amended Lease superseded all prior written and oral agreements, and was the entire agreement between the parties. 

The termination date in the April Lease and the Amended Lease are the same date.

It is clear that Coyote never provided written notice to the City clerk 45 days prior to April 4, 2020. 

The City did not have to accept any other type of notice, including any email notices to Shaffer and/or Sullivan that were made in December 2019 and January 2020. 

The terms of the Amended Lease were clear that if Coyote was in good standing under the Amended Lease, it “may” exercise the 15-year Option. The Amended Lease simply cannot be interpreted that the term “may” referred to the ability to provide any type of notice. This would contradict the express provision in paragraph 25 that all notices must be in writing. 

Coyote simply cannot prove it performed its duty under the Amended Lease to provide proper written notice of its decision to exercise the 15-year Option. As such, the breach of contract and specific performance causes of action fail.

Extrinsic evidence is not admissible to vary, alter or add to the terms of an integrated written agreement. 

The parol evidence rule establishes that the terms contained in an integrated written agreement may not be contradicted by prior or contemporaneous agreements, the rule necessarily bars consideration of extrinsic evidence of prior or contemporaneous negotiations or agreements at variance with the written agreement.

There was no ambiguity that needed to be resolved by extrinsic evidence.

The Amended Lease specifically required all amendments to be in writing. There is no evidence that there was a written amendment to the Amended Lease. Coyote cannot raise a viable claim that the Amended Lease had been changed by oral agreement by City officials. 

Coyote further contends the City should be estopped from contending that Coyote did not timely exercise the 15-year Option and that the Amended Lease expired on April 4, 2020, as its actions showed that it believed it expired on September 5, 2020. 

The appellate court found there was no waiver of the termination date. As previously stated, the Amended Lease provided that all amendments had to be in writing. There is no evidence that the Amended Lease was ever amended to include the termination date of September 5, 2020.

There is no dispute that the 15-year Option had to be submitted in writing to the City clerk 45 days prior to the termination date of the Amended Lease. 

In order to extend the Amended Lease, the parties would have to reach a new agreement, which would have to be approved by the City council and mayor under Government Code section 40602 and Redlands Municipal Code section 3.04.010. 

LESSONS:

1.         Any amendments to a written contract such as a lease should be in a writing signed by the parties to the contract.

2.         Extrinsic evidence is not admissible to vary, alter or add to the terms of an integrated written agreement. 

3.         The parol evidence rule establishes that the terms contained in an integrated written agreement may not be contradicted by prior or contemporaneous agreements, the rule necessarily bars consideration of extrinsic evidence of prior or contemporaneous negotiations or agreements at variance with the written agreement.

4.         An integration clause, which provided that the Amended Lease superseded all prior written and oral agreements, and was the entire agreement between the parties.

Can a Lease Include a Provision forDefense and Indemnity?

In the recent California appellate decision in Gumarang v. Braemer on Raymond, LLC, the Plaintiff and cross-defendant Allan Gumarang appealed the trial court’s order granting in part and denying in part his special motion to strike.

In 2016, Lessor and Gumarang executed a “Standard Multi-Tenant Shopping Center Lease” (Lease) through which Lessor agreed to lease to Gumarang commercial property (Property) in Pasadena for seven years. 

Gumarang intended to use the Property to operate an ice cream parlor. Gumarang personally guaranteed the Lease. 

Several provisions of the Lease address the parties’ respective rights and obligations. Under Paragraph 7.2, Lessor must, among other things, “keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas . . . .” 

Paragraph 8.2 requires Gumarang to obtain general liability insurance with a minimum coverage limit of $1,000,000 to protect himself and Lessor against “claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance” of the property. 

Paragraph 8.7 of the Lease, entitled “Indemnity,” provides: “Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.” 

Paragraph 8.8, entitled “Exemption of Lessor and its Agents from Liability,” states that notwithstanding Lessor’s or its agents’ negligence or breach of the Lease, neither Lessor nor its agents could be held liable for any injury or loss arising on or from the property, including damage or injury caused by fire. 

Instead, Paragraph 8.8 provides, Gumarang’s “sole recourse in the event of such damages or injury [shall] be to file a claim on the insurance policy(ies) that [Gumarang] is required to maintain pursuant to the provisions of Paragraph 8.”

In February 2017, after spending approximately eight months renovating the Property, Gumarang opened his ice cream parlor. 

In October 2017, a fire destroyed the Property. 

The Pasadena Fire Department investigated the fire and later released an investigation report. 

According to the report, the fire originated in the Property’s rear storage room. There were no “fire stops” in the walls of that room, and the Property did not have functioning fire protection or alarm systems.

The report concluded that the fire was accidental and most likely caused by “a non-specific electrical failure within an interior wall of the structure.” 

In March 2020, Gumarang filed his lawsuit, and, he filed a second amended complaint against Lessor, Management, and others to recover damages stemming from the fire that destroyed the Property. 

Against Lessor and Management, Gumarang asserted causes of action for breach of contract, negligence, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, and violations of Business and Professions Code section 17200 et seq. 

Gumarang alleged that Lessor and Management failed to ensure the Property was equipped with, among other things, electrical and fire prevention systems that were in good working condition, which caused the fire that destroyed the Property. 

Gumarang also alleged that Management failed to notify him that the Property lacked adequate electrical wiring and fire prevention systems before he executed the Lease.

In February 2021, counsel for Lessor and Management sent Gumarang a letter demanding that he “defend and indemnify them and their agents . . . as required under the terms and conditions of the [Lease]” and to place his insurance “carrier on notice of this claim.” 

Gumarang’s counsel later denied Lessor and Management’s request, claiming, among other things, that the Lease’s indemnity clause applied only to claims brought by third parties. 

In August 2021, Lessor and Management filed a cross- complaint against Gumarang, as well as other individuals and entities not party to this appeal. 

Lessor and Management’s cross-claims for contractual indemnity, breach of contract, and declaratory relief all arise out of allegations that Gumarang agreed to defend and indemnify Lessor and its agents, including Management, against any claims arising out of his use or occupancy of the Property when he signed the Lease. 

In mid-September 2021, Gumarang’s insurance carrier notified counsel for Lessor and Management that it would defend Lessor, but not Management, against the claims raised in Gumarang’s lawsuit because only Lessor was named as an insured in Gumarang’s insurance policy. 

The parties do not dispute that Management’s cross-claims for contractual indemnity, breach of contract, and declaratory relief concerning Gumarang’s obligations under the Lease’s indemnity provision are all premised on common factual allegations. The parties disagree, however, on what those common allegations are. 

According to Gumarang, Management’s cross-claims arise out of his protected activity of suing Management to recover damages from the destruction of the Property. 

Management, on the other hand, asserts that the cross-claims arise out of Gumarang’s nonprotected activity of breaching the Lease’s indemnity provision by refusing to defend and indemnify Management against any claims, losses, or damages arising out of his use or occupancy of the Property, including the damages to the Property at issue in Gumarang’s lawsuit. 

A claim for contractual indemnity is akin to a claim for breach of contract. 

Thus, a claim for contractual indemnity and breach of contract based on a refusal to honor an indemnity provision consist of the same elements: (1) the existence of an agreement containing a contractual indemnity provision; (2) the indemnitee’s performance of the relevant provisions of the agreement; (3) a loss within the meaning of the indemnity agreement; and (4) damages sustained as a result of the breach of the indemnity agreement. 

Here, Gumarang’s breach of Paragraph 8.7 of the Lease, which Management claimed requires him to defend and indemnify Management against any losses or damages arising out of his use or occupancy of the Property, constituted the wrongful conduct alleged in the challenged cross-claims. 

Specifically, Management alleges that Gumarang agreed to be bound by Paragraph 8.7 when he signed the Lease. 

In this case, it was not Gumarang’s filing of the underlying lawsuit that forms the basis of Management’s cross- claims for contractual indemnity, breach of contract, and declaratory relief. 

Rather, it was Gumarang’s alleged breach of the Lease’s indemnity provision by refusing to defend and indemnify Management against claims arising out of Gumarang’s use or occupancy of the Property that gave rise to those claims. 

LESSONS:

1.         A lease should be carefully reviewed to determine if there are any indemnity provisions, what triggers the right to indemnity, and which party is entitled to indemnity.

2.         Coverage under an insurance policy requires that a party seeking policy benefits is an insured, and a lessor should require a lessee to name the lessor as an additional insured party under the lessee’s policy.

3.         A claim for contractual indemnity is akin to a claim for breach of contract. 

Can You Amend a UD Complaint in California to Correct a Name of a Legal Entity?

In the recent appellate decision in 1215 Fell SF Owner LLC  v. Fell St. Automotive Clinic, the three consolidated appeals arose from two related unlawful detainer proceedings filed by Fell Holdings LLC (Fell Holdings) and Stanyan Holdings LLC (Stanyan Holdings), and appellants Fell Street Automotive Clinic (Fell Street Clinic), Stanyan Street Automotive Clinic (Stanyan Street Clinic), and Laurence Nasey (Nasey) sought review of certain postjudgment orders. 

Fell Holdings and Stanyan Holdings misdescribed themselves as California limited liability companies rather than Delaware limited liability companies in their unlawful detainer complaints. 

Arguing that this pleading defect deprived the trial court of fundamental jurisdiction because a legally nonexistent entity has no capacity to sue, appellants argued that all judicial action taken in the cases was void ab initio. 

The appellate court rejected appellants’ argument. 

Even if it accepted the premise of appellants’ claim—that the pleading discrepancy at issue, minor or not, has jurisdictional implications—the issue is whether the discrepancy is curable by amendment, not whether all judicial action in the cases should be treated automatically as a nullity. 

The appellate court reversed and remanded so that respondents could pursue curative amendments under Code of Civil Procedure section 473, subdivision (a)(1).

All three appeals turned on a single issue arising out of the same set of background facts. In brief, those facts are as follows. For many years, Nasey owned two separate properties in San Francisco (the Properties), one on Fell Street, and one on Stanyan Street. At these locations Nasey operated a sole proprietorship under the dba’s, “Ted & Al’s Towing” and “Ted & Al’s Service.” 

He lost ownership of the Properties in a nonjudicial foreclosure during the pandemic, but managed to remain in business by agreeing to a leaseback arrangement with the new owners, Fell Holdings and Stanyan Holdings respectively. 

This leaseback arrangement was memorialized in a September 2020 settlement agreement (the Settlement Agreement).

Under the Settlement Agreement, Fell Street Clinic and Stanyan Street Clinic became tenants of Fell Holdings and Stanyan Holdings for a period of months, and during that time Nasey was given the opportunity to repurchase the Properties. 

For each of the Properties, the parties stipulated to entry of judgment against appellants if Nasey failed to close escrow on the contemplated repurchase (the Stipulations for Entry of Judgment). 

Shortly after entering the Settlement Agreement, Fell Holdings and Stanyan Holdings filed but did not serve two unlawful detainer proceedings, one naming Stanyan Street Clinic as the tenant defendant (the Stanyan Street case), and the other naming Fell Street Clinic as the tenant defendant (the Fell Street case).

Pursuant to the Stipulations for Entry of Judgment, on February 19, 2021, the trial court filed identical judgments in the Stanyan Street case and in the Fell Street case (the Eviction Judgments).

The Eviction Judgments were initially filed under seal and provided for a forbearance period during which appellants were obligated to pay certain rental arrearages and current monthly rent on a monthly schedule. 

In late 2022, however, after the deadline for Nasey’s repurchase of the Properties passed, respondents brought motions to unseal and to enforce the Eviction Judgments. 

On December 21, 2022, the court issued identical orders unsealing and granting enforcement of the Eviction Judgments (collectively the Enforcement Orders). 

In April 2023, appellants moved to vacate the Eviction Judgments and the Enforcement Orders, for the first time arguing a lack of fundamental jurisdiction on the ground that Fell Holdings and Stanyan Holdings are not California limited liability companies; that those alleged entities have no legal existence; and that, as a result, all judicial action in both cases, from the date they were filed, was null and void. 

The court rejected this argument, and on August 4, 2023 issued substantively identical orders denying the vacatur motions (the Denial of Vacatur Orders). 

At the heart of all three appeals is a single question arising from what respondents argue is, at worst, a minor pleading error in each of the unlawful detainer complaints. 

That question is: Because the respondents misdescribed themselves as California limited liability companies rather than Delaware limited liability companies, does the naming discrepancy require us to conclude that the Eviction Judgments are void in both cases, entitling appellants to restoration of possession of the Properties and return of the earnest money deposit? 

Reprising the argument they made in the trial court, appellants urged that the answer is yes.

Appellants argued that the named unlawful detainer plaintiffs, Fell Holdings and Stanyan Holdings, are not real entities and have no capacity to sue or enter into contracts. 

This is so, appellants contended, based on allegations Fell Holdings and Stanyan Holdings make in describing themselves.

Appellants contended it has been settled for over 100 years that if a party does not exist, it cannot enter into legal agreements, be represented by counsel, or prosecute or defend any legal action. 

Because no entity named Fell Holdings LLC, a California limited liability company or Stanyan Holdings LLC, a California limited liability company exists, appellants argued that the trial court lacked fundamental jurisdiction to enter judgment. 

Indeed, they go even further.  They contend that the jurisdictional defect at issue here, which is unwaivable and may be raised at any time, cannot be cured by amendment. 

Respondents, for their part, do not contest the principle that a court lacks fundamental jurisdiction to proceed in an action initiated by a nonexistent party or that jurisdictional defects may be raised at any time, including after entry of judgment, but claim instead that the incorrect description of the corporate plaintiffs in this case does not involve a problem of “nonexistence.” 

Rather, pointing to a cryptic passage in a century-old Court of Appeal opinion that has never been cited for the proposition respondents urge to be adopted, they say their misdescription of their own corporate identity should be ignored as a “trivial” scrivener’s error. 

Neither appellants’ position nor respondents’ position is correct. 

Putting to one side for a moment the legal consequence of the pleading discrepancy at issue here (i.e., whether it deprived the trial court of jurisdiction ab initio), there is a long line of cases, involving plaintiffs who mistakenly pleaded the identity of a business entity defendant by the wrong name and the error was discovered long after the filing of the complaint, often after a statute of limitations deadline ran against the correctly described defendant. 

In this situation, curative amendments were allowed under section 473 if it could be said that the error was nothing more than a “misnomer” correctible by a change in the description of the defendant, but not if the correction required the addition of a party against whom, in substance, the original complaint stated no viable cause of action. 

This analysis applies in “ ‘wrong defendant’ ” as well as “ ‘wrong plaintiff’ ” cases. 

In both scenarios, the allowance of amendment and relation back to avoid the statute of limitations does not depend on whether the parties are technically or substantially changed; rather the inquiry is as to whether the nature of the action is substantially changed. 

Appellants are mistaken in claiming the pleading discrepancy involved in this case is beyond repair. 

The twist in this case is that the pleading discrepancy at issue in this case was brought to the attention of the trial court after entry of judgment. 

The appellate court concluded that it makes no difference. 

Appellants conceded that amendments after judgment are allowed on an application for relief after the judgment has been vacated or reversed, but contend that a motion for relief under section 473, subdivision (b) must be filed within six months after judgment and therefore would be untimely in this case. 

Section 473, subdivision (b), which confers authority to grant parties or their legal representatives relief from any judgment, dismissal, order, or other proceeding taken against them based on mistake, inadvertence, surprise, or excusable neglect, is not the pertinent source of discretion. 

The pertinent source of discretionary authority is section 473, subdivision (a)(1), which authorizes pleading amendments in furtherance of justice, and on any terms as may be proper, subject to no specified time limit. 

Where a defendant raises an issue of fundamental jurisdiction by vacatur motion filed after entry of judgment on the ground that there is a previously undiscovered pleading defect in the plaintiff’s complaint—as appellants did here, when they pointed out the misdescription of respondents’ pleaded state of domicile for the first time more than two years after the Eviction Judgments were entered—the plaintiff is entitled to respond by seeking leave to cure the defect under section 473, subdivision (a)(1). 

Accordingly, the appellate court reversed the Denial of Vacatur Orders in both underlying unlawful detainer cases and remand with directions that the trial court (1) vacate the Eviction Judgments and the Enforcement Orders without prejudice to their possible reinstatement if respondents are able to cure the potential jurisdictional defects appellants have identified; and (2) entertain and decide any motion from respondents under section 473, subdivision (a)(1) seeking to amend the complaints in these actions. 

Only if the pleading defects appellants have identified are not correctible will there be any need to consider procedural consequences under the nullity doctrine. 

LESSONS:

1.         Carefully determine and plead the precise legal name of any parties in a complaint.

2,         Curative amendments are allowed under section 473 if it could be said that the error was nothing more than a “misnomer” correctible by a change in the description of the defendant, but not if the correction required the addition of a party against whom, in substance, the original complaint stated no viable cause of action. 

3.         Section 473, subdivision (b), which confers authority to grant parties or their legal representatives relief from any judgment, dismissal, order, or other proceeding taken against them based on mistake, inadvertence, surprise, or excusable neglect, is not the pertinent source of discretion in all cases. 

4.         The pertinent source of discretionary authority may be section 473, subdivision (a)(1), which authorizes pleading amendments in furtherance of justice, and on any terms as may be proper, subject to no specified time limit. 

Is an Unlawful Detainer Action Dependent Upon the Notice to Pay or Quit?

The importance of the notice that is the basis of an unlawful detainer action in California was the subject of the recent appellate decision in Heffesse v. Guevera.

Plaintiff and appellant Cyril Heffesse appealed the judgment entered in favor of defendants Karina Yamileth Portillo Guevara  following the trial court’s granting of a motion for judgment on the pleadings. 

Plaintiff contended the trial court erred in determining that the notice to pay rent or quit overstated the amount of rent due by including the Systematic Code Enforcement Program (SCEP) fees.

Plaintiff also contended the court erred in denying him leave to amend the complaint. 

The appellate court disagreed and affirmed the judgment.

On November 14, 2023, plaintiff filed an unlawful detainer complaint against defendants based on a three-day notice to pay or quit. 

Plaintiff alleged he rented to defendants the premises located at 9639 1/2 S. Hoover St., in Los Angeles, pursuant to a written lease agreement; defendants rented the premises at a rental rate of $1,550.00 per month payable on the first of the month; a copy of the notice was served on defendants on October 6, 2023; and defendants did not comply with the notice. 

Plaintiff sought $3,132.64 in past due rent, possession of the premises, damages in the amount of $51.66 per day, forfeiture of the agreement, and reasonable attorney fees and costs. 

On March 27, 2024, defendants filed a motion for summary judgment on the basis that the three-day notice was “fatally defective” arguing plaintiff’s notice overstated the rental amount due because it demanded $1,554.44 per month for September and October 2023 instead of $1,550 per month as noted in the complaint, and defendants had made payment for August 2023 which plaintiff did not account for in the notice.

On March 28, 2024, the matter was called for non-jury trial. Plaintiff’s counsel asserted that whether the notice overstated the amount due was an issue for a trier of fact to decide. 

Immediately thereafter, defense counsel orally moved for a judgment on the pleadings because “on the face of the complaint” plaintiff stated the rental amount per month was $1,550, yet the notice demanded payments in the amount of $1,554.44 per month. 

Plaintiff’s counsel stated that she had “the lease ... agreement in front of [her], it’s for $1,550 and $4 of SCEP fees. So we are demanding $1554.44 for the months of September and October.”

The court indicated that it was unsure whether landlords are allowed to include SCEP fees as rent in the three-day notice as opposed to a separate failure to comply with terms of the lease to pay those amounts.

Plaintiff’s counsel argued the SCEP fees were “always permitted” to be included as “part of the rent.” 

Defense counsel countered the SCEP fees are “additional fees, they are not rent fees but instead are the same as late charges or other fees and therefore they cannot be included in a notice.

The court took the matter under submission. 

The court issued its ruling later that day, concluding a SCEP fee is not “rent” under LAMC (Los Angeles Municipal Code) [section] 151.02 and cannot be demanded in a notice to pay rent or quit, absent a separate agreement between the parties to treat the fee as rent. 

Plaintiff did not assert the existence of or presented evidence of any such separate agreement here, and so the Court found that the Notice was overstated and thus invalid on its face. 

The court entered judgment in favor of defendants and filed a notice of entry of judgment on the same day. 

Plaintiff filed a timely appeal of the judgment. 

In his opening brief, plaintiff contends SCEP fees are a “rental surcharge” under section 151.05.1 and thus are “an additional amount that may be added to the rent.” 

The appellate court disagreed. 

Under the Los Angeles Rent Stabilization Ordinance (“LARSO”), “rent” is defined as “[t]he consideration, including any bonus, benefits or gratuity, demanded or received by a landlord for or in connection with the use or occupancy of a rental unit, including but not limited to monies demanded or paid for the following: meals where required by the landlord as a condition of the tenancy; parking; furnishings; other housing services of any kind; subletting; or security deposits.” (§ 151.02.) 

Courts have concluded that there is a differentiation between “‘rent’ in the form of regular periodic payment for the occupancy and other duties owed to the landlord. 

The appellate court concluded that that differentiation results in “rent” for purpose of the time limitation of Code of Civil Procedure section 1161, referring only to the periodic payment which the parties have themselves labeled as “rent” and not to other obligations, even though involving the payment of money.

Section 151.05 specifically governs rental unit registration renewal fees and related surcharges, and is aptly titled “REGISTRATION, NOTIFICATION OF TENANTS, POSTING OF NOTICE AND PAYMENT OF FEES.” There is no reference to or mention of SCEP fees in section 151.05. 

The rules governing the SCEP fees are provided in section 151.05.1, a completely different section of LAMC, which is titled “PASSTHROUGH OF SURCHARGE FOR THE SYSTEMATIC CODE ENFORCEMENT FEE.” 

The statutory language is clear. Under LARSO, a landlord may bring an eviction action against a tenant for the tenant’s failure to pay rent to which the landlord is entitled, which includes the rental unit registration renewal fees and related surcharges due under section 151.05, subsection (F). 

Not only is the SCEP fee not listed as an amount due under section 151.05, subsection (F), the legislative branch of the City of Los Angeles took care to address it in a separate and distinct section—section 151.05.1. 

When one part of a statute contains a term or provision, the omission of that term or provision from another part of the statute indicates the Legislature intended to convey a different meaning. 

A court may not rewrite a statute, either by inserting or omitting language, to make it conform to a presumed intent that is not expressed.

If there is no ambiguity, then the appellate court presumes the lawmakers meant what they said, and the plain meaning of the language governs.

It is a cardinal rule of statutory construction that in attempting to ascertain the legislative intention, effect should be given as often as possible to the statute as a whole and to every word and clause, thereby leaving no part of the provision useless or deprived of meaning. 

Plaintiff cited Bawa v. Terhune in support of his position that SCEP fees can be included with and considered rent. Plaintiff’s reliance was misplaced. 

As plaintiff noted in his opening brief, Bawa held that a trivial breach (i.e., de minimus underpayment of rent) is insufficient to support an unlawful detainer action. 

While the plaintiff in Bawa did include the SCEP fee in the “unpaid and delinquent rent” total included in the three-day notice, whether the SCEP fees could be categorized as rent pursuant to LARSO was not at issue before the Bawa court; nor did the court consider it. 

It is axiomatic that a decision does not stand for a proposition not considered by the court. 

The appellate court held that under the LARSO statute, the SCEP fee is not considered rent. 

Accordingly, a tenant’s failure to pay the SCEP fee does not constitute a ground upon which a landlord may initiate an unlawful detainer action. 

A three-day notice to pay rent or vacate the premises issued pursuant to Code of Civil Procedure section 1161, subdivision 2 must state the “exact sum due.”

A notice that seeks rent in excess of the amount due is invalid and will not support an unlawful detainer action.

A valid three-day pay rent or quit notice is a prerequisite to an unlawful detainer action. 

Because of the summary nature of an unlawful detainer action, a notice is valid only if the lessor strictly complies with the statutorily mandated notice requirements. 

A judgment must be reversed when it is based on a three-day notice which lacks the information required by Code of Civil Procedure, section 1161, subdivision 2.

Here, the record reflected that the rent amount was $1,550 per month. 

The complaint indicates that defendant agreed to pay monthly rent of $1,550. 

The only document that lists a different rent amount is the three-day notice, which reflects the amount due for each delinquent month as $1,554.44. 

Plaintiff did not dispute that the $1,554.44 figure included the SCEP fee. 

Given the analysis above, the SCEP fee is not rent, and given plaintiff’s acknowledgement that the amount sought on the three-day notice included the SCEP fee, the notice overstated the amount due and could not support an unlawful detainer action. 

Moreover, plaintiff’s demand of payment of two different delinquent amounts based on a monthly rent amount of $1,550 listed in the complaint and the amount of $1,554.44 listed in the three-day notice, created precisely the type of ambiguity that the legislature intended to avoid in amending the unlawful detainer statutes. 

Taken together, discrepancies result in the ambiguity and confusion that the amendment to Code of Civil Procedure, section 1161, subdivision] (2) endeavored to avoid. 

As a result, a notice that fails to strictly comply with section 1161(2) and cannot support an unlawful detainer action.

Because the three-day notice did not strictly comply with the notice requirements of the unlawful detainer statutes, which were intended to prevent tenant confusion by setting forth clear rules regarding payment of rent, the notice was fatally defective. 

Plaintiff’s contention that the trial court erred in denying leave to amend lacked merit. 

Under Code of Civil Procedure, section 472c, subdivision (a), the general rule is that when any court makes an order sustaining a demurrer without leave to amend the question as to whether or not such court abused its discretion in making such an order is open on appeal even though no request to amend such pleading was made.

Here, nothing in the record reflected that plaintiff was precluded from seeking leave to amend the complaint. The appellate court therefore concluded that plaintiff elected not to amend the complaint, and had forfeited his claim of error on that ground.

Moreover, even if the claim is not forfeited, there was no abuse of discretion. 

Plaintiff’s failure to strictly adhere to the statutorily-mandated notice requirements made the notice “invalid on its face” as it is well settled that a defective three-day notice cannot support an unlawful detainer action. 

Due to the summary nature of such an action, a three-day notice is valid only if the landlord strictly complies with the provisions of Code of Civil Procedure, section 1161, subdivision 2. 

LESSONS:

1.         A valid three-day pay rent or quit notice is a prerequisite to an unlawful detainer action.

2.         A three-day notice to pay rent or vacate the premises issued pursuant to Code of Civil Procedure section 1161, subdivision 2 must state the “exact sum due.”

3.         A notice that seeks rent in excess of the amount due is invalid, and will not support an unlawful detainer action.

4.         Failure to strictly adhere to the statutorily-mandated notice requirements makes the notice “invalid on its face” as it is well settled that a defective three-day notice cannot support an unlawful detainer action.

5.         The best practice in preparing a three-day notice to pay or quit is to only include the amount of the unpaid monthly rent, and avoid adding any other claims or fee.

Can Payment of Rent Create a Month-Month Lease in California under Civil Code § 1945?

In the California Court of Appeal decision in Baca v. Kuang, Defendant Yonghe Kuang appealed from the trial court’s judgment and award of attorney fees against him in an unlawful detainer action.

Plaintiff and respondent Laura Read Baca doing business as Baca Properties was Kuang’s commercial landlord and issued a 30-day notice to terminate his tenancy.

Several days after the notice expired, Kuang tendered a rent check to Baca, which she deposited that same day and never refunded.

The next day, Baca filed an unlawful detainer action against Kuang, arguing that he was unlawfully holding over.

While the action was pending, Kuang tendered payment of rent and common area maintenance (CAM) charges to Baca pursuant to invoices sent by her management company for three additional months, which she deposited and never refunded.

The trial court held that despite Baca’s acceptance of these payments, she did not consent to Kuang’s continued possession based on the terms of their lease.

In reaching this holding, the court concluded that Civil Code section 1945—which establishes a presumption of renewal whenever a landlord accepts rent from a tenant after the expiration of a lease—did not apply.

The appellate court found that section 1945 did apply because Baca accepted rent from Kuang multiple times after his lease had expired.

It further found that, in light of this presumption, Baca consented to a month-to-month tenancy based on the undisputed facts and the terms of the lease, and the trial court’s judgment was reversed.

In January 2014, Baca’s predecessor and Kuang entered into a one-year commercial lease agreement (lease or agreement) for premises located in Fremont, California (premises). Baca’s company prepared the agreement— which required that Kuang pay a monthly rent and a monthly CAM charge.

The agreement also contained several provisions addressing what could happen if Kuang remained in possession of the premises after the lease terminated.

The parties subsequently signed several amendments to the lease that extended its term and increased Kuang’s monthly rent. In January 2019, the parties agreed to convert the lease term to a month-to-month tenancy.

On December 28, 2022, Baca issued a 30-day notice to terminate Kuang’s tenancy. The notice stated that January 31, 2023 was the termination date.

As of January 31, 2023, Kuang did not owe Baca any back rent. Nor was there any evidence that Kuang had breached any lease provisions as of that date.

On February 6, 2023, Baca received and deposited a check from Kuang for the February 2023 rent and CAM charges. The next day, she filed an unlawful detainer action against Kuang.

While that action was pending, Baca continued to invoice Kuang for rent and CAM charges for the months of March, April, and May 2023.

Kuang paid the invoiced amount for each of these months. Baca deposited all of Kuang’s payments after January 31, 2023 and never returned them.

At the court trial, Baca testified that she did not personally issue the invoices but admitted that “Baca Properties” did, either through “her software system and/or someone else managing the software system.” She further testified that “it was her understanding of the law that she could accept rent payments after the expiration of [Kuang’s] 30[-]day notice and still evict [him].”

Kuang’s attorney argued that, by accepting Kuang’s multiple payments of rent and CAM charges after the 30-day notice had expired on February 1, 2023, Baca renewed the lease pursuant to section 1945 or paragraph 26 of the agreement (holdover).

Baca countered that section 1945 did not apply because it was superseded by the terms of the agreement.

Specifically, Baca relied on paragraphs 24 (no waiver) and 42.3 (obligations surviving after lease expiration) of the agreement and argued that she “expressly reserved her rights to enforce a 30-day notice regardless of her actions” like accepting rent.

As a threshold matter, Kuang contended that because Baca accepted rent after the lease terminated, there is a presumption that she consented to its renewal under section 1945.

Baca countered that substantial evidence supports the court’s implicit conclusion that section 1945 did not come into play here because she did not intend to renew the lease.

The appellate court agreed with Kuang.

Under section 1945, “If a lessee of real property remains in possession thereof after the expiration of the hiring, and the lessor accepts rent from him, the parties are presumed to have renewed the hiring on the same terms and for the same time, not exceeding one month when the rent is payable monthly, nor in any case one year.” This presumption is rebuttable.

Baca initially contended that section 1945 does not apply because she issued a 30-day notice to terminate Kuang’s tenancy.

Baca, however, cited no legal authority to support this contention and, as Kuang pointed out, her contention was rejected by Superior Strut & Hanger Co. v. Port of Oakland.

In that case, a commercial landlord issued a 30- day notice to terminate tenancy. Although the tenant did not vacate at the end of the notice period, the landlord “took no further action, except to urge that [the tenant] move at the earliest possible date.”

The tenant thereafter “executed a promissory note for $14,437.15 stated to be the damages suffered by [the landlord] as a result of [the tenant’s] delay in vacating the premises.”

On appeal, another division of the appellate court concluded that section 1945 applied after the 30-day notice expired.

Of significance, the division held that “[t]he only reasonable inference that can be drawn from the evidence presented is that [the landlord] acquiesced to continued occupancy by [the tenant] and that such occupancy was with [the landlord’s] consent. Furthermore, even had [the landlord] not consented to continuation of . . . tenancy, its mere 30-day notice of cancellation could not have rendered [the tenant’s] continued possession ‘unlawful.’ ”

Turning to the applicability of section 1945 under the undisputed facts in this case, the appellate court held that Baca “accept[ed]” rent from Kuang, giving rise to a statutory presumption that she renewed the lease. 

Baca received and deposited Kuang’s payment of rent and CAM charges for the month of February on February 6, 2023—without qualification or objection.

Although Baca did file the unlawful detainer action the next day, she continued to invoice Kuang for rent and CAM charges for three additional months. And when Kuang paid those invoices, Baca again deposited his payments without objection or qualification. More notably, Baca never returned or offered to return any of Kuang’s payments.

Under these undisputed facts, there is only one reasonable inference: that Baca accepted rent from Kuang for purposes of section 1945.

Baca’s argument that she did not intend to “consent to a holdover tenancy” by cashing Kuang’s checks does not help her here.

Under the plain language of section 1945, the issue is whether Baca “accept[ed]” Kuang’s payments as “rent”—and not whether she subjectively intended to create a holdover tenancy.

Based on the undisputed admissions, the payments made by Kuang could only be construed as rent for the premises, and Baca’s deposit and retention of those payments can only be construed as her acceptance of that rent for purposes of section 1945.

Although there is a presumption that Baca consented to the renewal of the lease on a month-to-month basis, that presumption is rebuttable.

Kuang contended that there are no facts here to rebut that presumption. He therefore argues that his lease was renewed under the holdover provision found in paragraph 26, which provides that, if Kuang, with Baca’s consent, remains in possession of the premises after the lease’s expiration, “such occupancy shall be a tenancy from month to month upon all the provisions of this Lease . . . .”

Baca countered that the lease’s no-waiver provision rebuts the presumption and precludes the application of the holdover provision. She further contended that the trial court correctly concluded that she accepted Kuang’s payments pursuant to paragraph 42.3 of the lease, rather than the holdover provision found in paragraph 26.

Finally, she contended that her filing of the unlawful detainer action and her subjective lack of intent to renew the lease are sufficient to rebut the presumption.

The appellate court disagreed.

First, Baca’s reliance on the no-waiver provision of the lease was unavailing because that provision states in pertinent part that “[t]he acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted . . . .”

Nowhere in her brief, however, did Baca specify what lease provision Kuang breached before she accepted his rent payments. By failing to do so, Baca arguably forfeited her argument that the no-waiver provision is applicable here.

Second, paragraph 42.3 did not help Baca.  According to Baca, she did not accept Kuang’s payments as “rent” pursuant to paragraph 26 of the lease agreement, the holdover provision, “but rather as a voluntary setoff to holdover damages under paragraph 42.3.”

Baca’s unlawful detainer complaint, however, requested holdover damages based on the fair rental value of the premises starting on February 1, 2023. And Baca did, in fact, ask for and recover holdover damages from that date. This means that she could not have intended to use any of Kuang’s payments after February 1, 2023 as a setoff for holdover damages.

LESSONS:

1.         Under Civil Code, section 1945, “If a lessee of real property remains in possession thereof after the expiration of the hiring, and the lessor accepts rent from him, the parties are presumed to have renewed the hiring on the same terms and for the same time, not exceeding one month when the rent is payable monthly, nor in any case one year.”

2.         Civil Code, section 1945 is a rebuttable presumption.

3.         Under the plain language of section 1945, the issue is whether a landlord accepted the tenant’s payments as “rent”—and not whether she subjectively intended to create a holdover tenancy.