Does Rent Payment Before Expiration of Lease Mean Parties Renewed Lease?

As discussed in the recent California appellate decision of Ashirwad, LLC v. Bradbury, Michael Bradbury and Jeannette Bradbury (the Bradburys) leased a commercial property for a salon from Ashirwad, LLC (Ashirwad).

As between the two, Jeannette assumed primary responsibility for operating the salon. Shortly before the lease was set to expire in March 2020, Jeannette decided to retire. At about the same time, the State of California issued a stay-at-home order due to COVID-19.

Jeannette tried to help Ashirwad find a replacement tenant to continue the salon business.

Although the Bradburys’ salon equipment remained on the property, Ashirwad repeatedly assured them not to worry about it.

One day before the lease formally expired, the Bradburys paid Ashirwad $4,179, the equivalent of one month’s rent.

Approximately three months later, they paid Ashirwad an additional $2,100, but they made no other payments. The parties never discussed whether the tenancy would continue on a month-to- month basis.

When the Bradburys returned the keys to the property months later, Ashirwad demanded unpaid rent, asserting that under Civil Code section 1945, their $4,179 payment in March 2020 created a month-to-month tenancy. 

After a bench trial, the court concluded the Bradburys had rebutted section 1945’s presumption that the parties agreed to continue the terms of their expired lease. 

As a result, the court found there was no contract between the parties after their lease expired, and judgment was entered in favor of the Bradburys.

Ashirwad appealed the judgment, contending the court incorrectly interpreted and applied section 1945. It argued the court relied improperly on evidence of subjective intent, erred by finding that the section 1945 presumption was rebutted without evidence of a new agreement, and erroneously placed the burden on it.

The appellate court concluded the trial court did not err as a matter of law in its application of section 1945, and it affirmed the judgment.

The Bradburys and Karinjit Sukhija, the sole owner and member of Ashirwad, had a good personal and business relationship. Jeannette retired in February 2020, a month before the lease agreement expired. But based on their good relationship, she tried to help secure another tenant to “slide in” and continue the salon business.

On March 19, 2020, prior to the expiration of the lease, people living in the State of California were ordered to stay at their place of residence, except as needed to continue the operation of essential services due to the COVID-19 pandemic.

The salon was not an essential service and had to be closed immediately. Ashirwad repeatedly assured the Bradburys not to worry about the salon equipment left behind at the premises due to the order to stay home.

On March 30, 2020, the Bradburys paid Ashirwad $4,179, the equivalent of one month’s rent.

With this payment, Jeannette included a handwritten note that read, “Thank you again for understanding. We are trying to resurrect the salon.”

She signed the note with a hand drawn heart, testifying that she made the payment as a gesture of friendship, intending it as a gift.

After the lease expired on March 31, 2020, neither party raised the question of whether the tenancy would continue on a month-to-month basis.

The Bradburys also paid Ashirwad $2,100 in June 2020. They made no other payments; neither did Ashirwad tell them that any rent was due.

When Michael sought to return the keys to the property in October 2020, Ashirwad notified him that it intended to collect “unpaid rent” for May through October 2020.

Ashirwad asserted that the Bradburys owed unpaid rent because their March 30 “rent” payment established a month-to-month tenancy under section 1945.

Following a bench trial, the court expressed that it found “all the witnesses credible,” but “[Jeannette] was more credible and persuasive.”

The trial court highlighted Jeannette’s February retirement, her attempt to help find a new tenant, and the repeated reassurances to not worry about the salon equipment left behind.

The court took note of the fact that Jeannette knew Sukhija was financially affected by the shut down and she paid him as a gesture of friendship to him and intended the payment as a gift.

The Bradburys’ payment is dated March 30, 2020, one day before the lease expired. 

Under the language of section 1945, a payment made and accepted before the expiration of a lease does not trigger the presumption that the parties renewed the lease on the same terms.

The trial court determined that no month-to-month tenancy existed between the parties and entered judgment for the Bradburys. It reasoned that a reasonable person would not find the existence of a contract between the parties; i.e., a month-to-month tenancy after the expiration of the lease, and therefore, there was “no contract between the parties after March 31, 2020.

As the court explained, the parties were rightfully concerned for each other’s health and well-being during a national health emergency.

However, it was incumbent upon Ashirwad to communicate clearly its intention to bind the Bradburys to a month-to-month tenancy if the salon equipment remained on the premises.

It detailed the absence of any communication from Ashirwad during the intervening months and commented that it was curious and detrimental to its position.

Ashirwad moved to vacate the judgment, contending the court erred in its application of section 1945.

The court denied the motion, expanding on its prior ruling to explain that section 1945 was rebutted given the testimony in this case and the credibility of the witnesses.

The judge reasoned: All parties knew the lease had expired. Ashirwad apparently reassured the Bradburys they could leave the equipment in place due to the COVID shut down. There had been a good personal and business relationship between the parties and the payments could easily be interpreted as a gift. Ashirwad never made any demands for the rent.

Ashirwad asserted the trial court erred as a matter of law when it found that the Bradburys’ “subjective” intent overcame section 1945’s presumption, stating this is the sole issue on appeal.

But in its argument, it also raised two additional alleged errors, contending that the court improperly (1) determined that the presumption was rebutted without finding a new or different agreement, and (2) placed the burden on Ashirwad to prove the existence of a contract.

The trial court had to determine whether a contract existed between the parties.

Generally, if there is no evidence establishing a manifestation of assent to the ‘same thing’ by both parties, then there is no mutual consent to contract and no contract formation.

The existence of mutual consent is determined by objective rather than subjective criteria, the test being what the outward manifestations of consent would lead a reasonable person to believe.

Accordingly, the primary focus in determining the existence of mutual consent is upon the acts of the parties involved.

The reasonable meaning of the parties’ words and acts, and not their unexpressed intentions or understandings determine mutual consent.

Section 1945 provides a presumption of mutual consent when: (1) a tenant remains in possession of a leased property, (2) the tenant pays rent after the expiration of the lease, and (3) the landlord accepts that payment.

Section 1945 presumes that through the outward expressions of paying and accepting “rent,” the parties have agreed to continue their lease on the same terms.

A defendant can overcome this presumption by demonstrating that despite the implication of agreement to continue on the same terms, the parties’ objective acts demonstrate they did not mutually agree to continue the lease.

Ashirwad argues the court erred as a matter of law because it purportedly based its finding that section 1945 was rebutted on the Bradburys’ subjective intent. It maintains that while the court’s findings state only that the Bradburys intended the post expiration payments as gifts, intended necessarily refers to subjective intent.

The record does not show that the trial court based its finding on the Bradburys’ subjective intent as opposed to the parties’ objective acts and words. The court stated the testimony and credibility of the witnesses rebutted the presumption and that it found Jeannette to be more credible.

But Jeannette’s testimony was not limited to her intent; she also testified regarding her retirement, relationship with Ashirwad’s owner, her effort to help him find a new tenant to continue the salon business, and his repeated assurances to not worry about the salon equipment left behind at the premises.

Furthermore, the court’s reasoning does not reflect that the court was relying on her subjective intent because it focused on an objective view of the facts, applying the correct test to determine if mutual consent existed— whether a reasonable person would believe there was a contract between the parties

All parties knew the lease had expired. Ashirwad apparently reassured Jeannette that she could leave the equipment in place due to the COVID shut down. There had been a good personal and business relationship between the parties and the payments could easily be interpreted as a gift.

Ashirwad never made any demands for the rent.

This reasoning focused on how the payments could be interpreted objectively—explaining the payments could easily be interpreted as a gift— not that they were a gift because that was Bradbury’s subjective intent.

So, while Ashirwad argued the trial court relied on the Bradburys’ subjective intent, the face of the record refutes this assertion.

The court found it was incumbent upon Ashirwad to communicate clearly his intention to bind the Bradburys to a month-to-month tenancy if the salon equipment remained on the premises because it found Jeannette to be more credible and she testified that Ashirwad repeatedly assured her not to worry about the salon equipment left behind at the premises due to the COVID shut down.

In the court’s view, the absence of any communication from Ashirwad during the intervening months was “curious” and “detrimental” to his position.

To the extent the court considered the parties’ words and acts (or lack thereof) that occurred after the Bradburys’ payment, those facts could be considered because the subsequent conduct of the parties is an objective manifestation of the parties’ intent, which can be used to determine the parties’ mutual intention.

Ashirwad asserted that the trial court had to find there was a new or different agreement between the parties in order to rebut the presumption that the parties agreed to continue the lease on the same terms after its expiration. It claimed that because the trial court found no contract after the parties’ lease expired, the Bradburys did not rebut the presumption.

Proof of a new or different agreement is one way that a defendant can rebut section 1945’s presumption despite the payment and acceptance of “rent.”

But a new or different agreement is not the only way to rebut the presumption; all that is needed to overcome it is an objective showing that the parties did not agree to continue the lease.

It follows that the court here did not have to find a new or different agreement in order to conclude that the statutory presumption was rebutted.

The trial court only needed to determine that the objective evidence demonstrated the parties did not agree to continue the expired lease on the same terms.

LESSONS:

1.         Goodwill and friendly gestures may be used against the party offering them when money is concerned.

2.         Credibility of parties and witnesses often determines the ruling by the court.

3.         Section 1945 provides a presumption of mutual consent when: (1) a tenant remains in possession of a leased property, (2) the tenant pays rent after the expiration of the lease, and (3) the landlord accepts that payment.

4.         Generally, if there is no evidence establishing a manifestation of assent to the ‘same thing’ by both parties, then there is no mutual consent to contract and no contract formation.

5.         The existence of mutual consent is determined by objective rather than subjective criteria, the test being what the outward manifestations of consent would lead a reasonable person to believe.