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.