Articles Posted in commercial lease

Published on:

In California, every contract includes an implied obligation not to do anything that prevents the other party from benefiting from the contract, and to cooperate if necessary for the other party.  This is called the implied covenant of good faith and fair dealing.  It does not create a new obligation but applies to those obligations which have been agreed on.  The Restatement of Contracts comments provide that the bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.  Sacramento Real Estate attorneys see the argument come up often in real estate contracts which end up falling out of escrow, and occasionally commercial leases in which the parties fail to cooperate.  Courts generally allow parties to use unfettered discretion, without restriction of the covenant, if the contract provides for unfettered discretion, and there is adequate consideration (162 Cal App. 4th 1107, 1121).  In a decision involving an office lease at 595 Market Street in San Francisco the tenant wanted to sublease the premises, and thought that the landlord breached the implied covenant by terminating the lease.  But the lease provided that the landlord could do so, so the tenant had covenanted away its argument.

covenant of good faith attorneyIn Carma Developers (Cal) Inc. v. Marathon Development, Carma entered a lease of the 30th floor of the building for ten years.  Carma’s business changed, its headquarters moved to Houston, and Carma submitted a proposal to the lessor to sublease a portion of the premises.  The Lease had a provision (set out below) that in such a case the lessor had the right to terminate the lease.  The Court first noted that it has been suggested the covenant requires the party holding such power to exercise it “for any purpose within the reasonable contemplation of the parties at the time of formation-to capture opportunities that were preserved upon entering the contract, interpreted objectively.”  It repeated to principles that have emerged:

1, breach of a specific provision of the contract is not a necessary prerequisite, and

Published on:

In the past, when multiple parties were obligated under the same commercial lease, they were presumed to be jointly liable. They are each responsible for their share of the total. If the other side wanted to enforce the agreement, they had to name all the jointly liable parties in the same lawsuit (the compulsory joinder or all-or-none rule). If you filed suit but couldn’t locate one of the lessees, they were off the hook. But over time the Courts changed the rule by converting “joint” obligations into “joint and several” obligations. These are considered to be a contract that is made both separately with each promisor and jointly with all the promisors. Civil Code section 1659 provides “Where all the parties who unite in a promise receive some benefit from the consideration, whether past or present, their promise is presumed to be joint and several.”

Sacramento commercial lease lawyer.jpgParties who are jointly and severally liable may be sued together in one lawsuit, or names in separate lawsuits, brought at different times. Nothing short of satisfaction of the debt bars any further actions against other parties. But, what happens to the rule of res judicata, or claim preclusion? Judgments are generally conclusive. The doctrine of res judicata precludes parties from relitigating a cause of action that has been finally determined by a court of competent jurisdiction. Any issue necessarily decided in such litigation is conclusively determined as to the parties or their privies if the issue is involved in a subsequent lawsuit on a different cause of action. Sacramento real estate attorneys rarely see issues of claim preclusion raised in commercial lease practice. However, in a recent decision the commercial landlord scored a judgment of over $2 million against one of three co-signors on the lease. The landlord then sued the other two tenants, who argued res judicata – there was already a judgment on the lease, and further action was prohibited. Both the trial court and court of appeals agreed with the tenants forgetting a key element of the res judicata doctrine. It took the Supreme Court to straighten them out.

In DKN Holdings LLC v. Wade Faerber, Caputo, Faerber, and Neal leased from DKN a commercial space in a shopping center to operate a fitness center for ten years. The lease stated that the parties who signed the lease “shall have joint and several responsibility” to comply with the lease terms. Caputo alone sued DKN for fraud, and DKN counter-claimed for rent. DKN did not bring the other tenants into the lawsuit. After trial, all the tenant’s claims were rejected, but the landlord was awarded over $2.8 million.

Published on:

Last week I discussed a cotenancy provision in a California commercial lease, where the court found that the rent abatement aspect – if the specified cotenant was not operating, the tenant’s rent is reduced or eliminated – was found to be an unenforceable penalty. That court also looked at whether the provision was unconscionable, and thus unenforceable. Unconscionability (codified at Civil 1670.5) has no specific legal definition, but generally means extreme unfairness. Business and real estate attorneys often see a situation where one party gets a really bad deal, but that alone does not make it unenforceable. California courts have developed an analysis requiring two elements, “Procedural,” and “Substantive.” In the decision being addressed here, the court found that Procedural element was not fulfilled so the cotenancy provision was not unconscionable.

Sacramento commercial lease unconscionable attorney.jpgIn Grand Prospect Partners, LP, v Ross Dress for Less Inc., Ross entered a lease in a commercial center in Porterville, CA. The lease required that Mervyn’s be open when the Ross store opened, and Mervyn’s was to remain in operation for the term of the Ross lease. If Mervyn’s was not operating, Ross could cease paying rent, and also terminate the lease. Mervyn’s filed for bankruptcy before opening in this center, so the cotenancy requirement was unfulfilled, and Ross declined paying rent. In the ensuing lawsuit, the Landlord claimed that the cotenancy provision was unconscionable, and thus should not be enforced.

Procedural Unconscionability.

Published on:

Cotenancy provisions are often required by larger retail tenants in shopping centers of all sizes. They require other specified stores in the center to be open and operating, on the assumption that these other stores will draw the desired mix of potential customers. They come in two flavors; opening requirements, meaning that the requirement is fulfilled before the tenant is required to open; and Operating requirements, meaning that the tenant’s obligations continunue only so long as the named tenants remain in business. Parties to a commercial lease may need to consult with a Sacramento real estate attorney to clearly define the cotenancy requirements in their lease, so that they do not face any surprises, as one tenant faced in a recent decision when their cotenancy provision was found to be an unenforceable penalty because the tenant had never really considered what its harm would be if the named store did not open.

Sacramento commercial lease attorney.jpgIn Grand Prospect Partners, LP, v Ross Dress for Less Inc., Ross was negotiating with a shopping center owner Porterville, in Tulare County. Ross wanted a cotenancy provision that required a Mervyn’s to opening and running before Ross was required to open. If Mervyn’s did not open, or ceased operating, Ross would not owe rent, and did not have to open a store. (The terms of the lease are more fully set out below). Two months after the parties signed the lease; Mervyn’s filed bankruptcy, and never opened its store in the Portville center. Eventually Ross notified the landlord that it was going to terminate the lease under the cotenancy provision. This lawsuit ensued, with Grand Prospect, the landlord, claiming that the lease was unconscionable, and the cotenancy rent abatement provision was an unenforceable penalty.

Under California law, an unenforceable penalty lacks a proportional relationship between the forfeiture compelled and the damages or harm that might actually flow from the failure to perform a covenant or satisfy a condition. The test requires a comparison of

Published on:

Let’s get this out of the way – the only essential terms for a real estate sale contract are the identities of the buyer and seller, the property in question, and the purchase price. Essentially, that is the law in California. Of course, the courts have found ways around the rule, but the trend of the law favors carrying out the parties’ intent once the court has determined that the parties had intended to make a contract. The courts will hear evidence of the parties’ intent to explain essential terms. (Okun v. Morton, 203 Cal. App. 3d 805) Sacramento real estate attorneys are occasionally asked about contracts in which all the standard details are left out, and asked how to enforce, or deny, the contract. When there is no time for payment specified, I always advise the “a reasonable time” is inferred, whatever that means in the circumstances. Such a situation was addressed by the Supreme Court when a tenant wanted to enforce a purchase option that was included in the lease.

sacramento real estate purchase attorney.jpgIn Patel v. Liebermensch, the tenants leased a condo in San Diego. The lease included the following purchase and sale option:

“Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3% through the end of the year 2004 and cancels with expiration of your occupancy. Should this option to buy be exercised, $1,200.00 shall be refunded to you.”

Published on:


California commercial leases often include options for renewal of the lease beyond the initial term. Option terms can provide the duration of the renewal, and describe the future rent, or provide a mechanism for calculating the rent to be paid. But, frequently commercial lease attorneys encounter leases that are not so specific. They can describe the procedure for exercising the option, and the future term or terms, but only provide that the rent was to be as agreed upon. Lessors and landlords do this to provide some assurance to the potential tenant that they may be able to stay in the location for another tenant without committing themselves to rent terms, or even that this tenant. The tenant who has not consulted a real estate attorney enters the lease with the false comfort that they have the right to stay if they want. Such was the case in a Supreme Court decision where the tenant, who had made significant improvements to the property, learned that they did not have a right to stay.

ElDorado real estate and leasing attorney.jpgIn Ablett v. Clausen the Lease provided these option terms:

the lessees ‘shall have the first right and a prior option to secure a lease upon said premises before the same are offered to any other person, firm or corporation for lease or rental and that said option shall contemplate a lease for a period of five (5) years upon terms to be then agreed upon.’

Published on:

California commercial tenants sometimes need to sublease their premises, or assign the lease. Without fail, they remain liable to the property owner for the lease, in the event that the subtenant does not perform. Breach of the lease does not automatically terminate it – the owner must exercise its right to terminate the lease. But what happens if the sublessor files for bankruptcy protection? In bankruptcy the bankrupt sublessor has 60 days to “assume” the lease. (Bankruptcy Code section 365(d)(4). In the 9th circuit Federal Court (covering California), if the lease is not assumed, the bankrupt owner’s right to possession under the lease ends. (In re Lovett 757 F.2d 1035) The master lease no longer exists, extinguishing all subordinate rights, such as a Sublease. Suddenly, the sub-tenant no longer has a lease, and is out in the cold. The California Court of appeal decision discussed below adopts this rule. Parties considering a sublease may want to consult with a Sacramento real estate attorney. A solution to the disappearing sublease may be, at the time of entering the sublease, for the subtenant to enter a non-disturbance agreement or option to enter a new lease with the property owner.

sacramento sublease attorney.jpgIn 366-386 Street LP v. Superior Court (Monro), Paem was the assignee of the lease for Rosebud’s English Pub on Geary in San Francisco. In the assignment transaction, Paem gave to the assignor a note and deed of trust, secured by the business. Paem filed Chapter 11. The bankruptcy court rejected the lease, and thus the debtor (and trustee) no longer had any right, title, or interest in the lease. This extinguished the assignor’s security interest in the lease.

The Assignor then filed a state court action, seeking relief from forfeiture of its security interest under Code of Civil Procedure section 1179. This section provides that The court may relieve a tenant against a forfeiture of a lease whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174.

Published on:

Option agreements for sale or lease of property often have a form of lease or purchase agreement attached, to be entered on exercising the option. The expectation is that, if the option is exercised, the attached contract will be signed by the parties and govern the transaction. Occasionally the option will contain all the terms, and not attach a form contract, and may or may not refer to entering an agreement. Sacramento and ElDorado real estate attorneys advise clients to prepare the Agreement and attach it to the option, otherwise there could be a dispute when the option was exercised. In pone such case, after the option to lease property was exercised, the property owner backed out. His legal argument was that the option was only a contract to enter a contract, and did not affect title to his property. The court said no, in this case, the option was sufficient as a lease.

In John Gavina v. Lon Smith, Plaintiff Gavina granted Defendant an option for an oil and gas lease on Gavina’s property. The option stated all the details of the lease, (set out below), but also had an attached lease form that, on exercise of the option, was to be signed by the parties. Smith exercised the option and deposited the money in escrow. Gavina refused to accept the money from the escrow, did not sign the formal lease form, offered to give Smith the option fee back. Essentially, they told Smith to get lost. The lawsuit resulted.

sacramento lease attorney.jpgThe judge was not impressed by Gavina’s conduct. Because of the nature of the suit (quiet title), it first addressed the question of whether the option itself created a contract, or was merely an executable contract to make a lease. It found the intent of the parties, as expressed in the option agreement, to set forth in both the option and the attached form of lease all the terms and conditions on which Gavina’s offer to lease was made. By exercising the option, Smith accepted the offer and agreed to the lease on the those terms. The requirement of a written lease was satisfied. (Statute of Frauds) Nothing more was required to make a binding lease.

Published on:

In commercial leases the landlord and commercial tenant may agree to notice procedures that differ from those provided in the statutory provisions governing landlord – tenant relations. Residential leases are different, given the Legislature’s long standing concerning with protecting unwary residential tenants, and the swift process of unlawful detainer. The courts respect the terms of the commercial lease regarding notice. In one decision the Lease provided for notice to the tenant by mail or email “at” the specified address, and the tenant acknowledged receiving the email at a location other than the specified address. The court said it was not good enough, and even though it is naive to think of the location where an email is received, that’s what the Lease required. In recent decision out of San Luis Obispo, the court declined to follow the letter of the lease, because the tenant’s attorney instructed plaintiff’s attorney to contact the attorney only.

Sacramento landlord attorney 2.jpgIn Eucasia Worldwide School Inc. V. DW August Co. The Lease provision read: “The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice.”

The parties did not get along at all. Due to the strained relationship, the tenant’s attorney’s assistant, on attorney letterhead, directed landlord’s counsel to “have NO DIRECT CONTACT with” appellant without [the attorney’s] “express permission.”

Published on:

Commercial tenants entering lease in California are usually required to pay their proportionate share of “common area maintenance,”, or CAM charges. The CAM charges are always characterized as an estimate- at the end of the year the landlord determines the total costs incurred for the year, and then apportions them out to all the tenants. However, if it is a new development, sometimes not even built, the lessor must base the Common Area Maintenance charges on true estimates- what they predict will happen based on experience on other projects, or otherwise a best guess. At the end of the year, they figure out the real charges, and usually the tenant has to make up a big deficit. Sacramento and Placer real estate attorneys are frequently consulted regarding CAM charge disputes; often, there is a big jump in the charges, and the tenant can’t believe they are justified. In a recent decision, the parties entered a letter of intent regarding an unbuilt project. Even though the CAM charges which were described were clearly described as an estimate, the landlord was surprise when the court said the landlord may be liable for fraud and breach of the covenant of good faith and fair dealing.

Sacramento commercial lease CAM.jpgIn Thrifty Payless Inc. V. The Americana at Brand, LLC, Thrifty entered a letter of intent to enter a lease of property from Americana. The project had not been built yet, but Thrifty had experience with Americana on other leases, and the CAM charges were reasonably accurate. The Letter of Intent (“LOI”) Americana proposed stated three estimates- property taxes, insurance premium, and common are maintenance. The CAM estimate was $14.50. Thrifty crossed out $14.50 and wrote that a budget was to be presented to Thrifty. Americana responded with a budget, saying that Thrifty’s pro rata share would be 2.2% of the budget, or $14.50. The parties entered the lease agreement. Of course, American ended up charging Thrifty much more for the three line items, including CAM charges at 5.67% of the total instead.

In the lawsuit, Thrifty alleged that Americana knew the representations were not true at the time they were made, or were made with no reasonable basis to believe that they were true. Thrifty alleged that its reliance was reasonable because of their prior experience with Americana. Citing other decisions, Thrifty claimed that estimates that the party should have known were inaccurate were grounds for misrepresentation. Thrifty found out that Americana was telling other potential tenants that Thrifty was paying a higher percentage that 2.2%, and that Americana had cut a deal with a theater to charge it less that its pro rata square footage rate. Great evidence!