Recently in commercial lease Category

The Disappearing Sublease - What can happen if the Sublessor files Bankruptcy, and ways to protect the subtenant or assignee.

March 11, 2014

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.

sacramento landlord attorney 3.jpgThe court of appeal first noted that the rejection of the lease by the bankruptcy court extinguished the lease, and the debtor no longer had any interest in it- likewise, all subordinate interests were extinguished. The court then noted that, here, the secured party was not a tenant seeking to be restored to the leasehold, nor was this the required unlawful detainer proceeding, so section 1179 did not apply.

A subtenant in a similar situation may not actually have notice of the bankrupt cy filing, and be up to date with rent and all other requirements, but suddenly be out on the street. To have a chance of surviving, the subtenant should have a separate agreement with the property owner, either a non-disturbance agreement or an option to enter a new lease. Either of these would be a contract directly with the owner, not affected by intermediate bankrupt party. Thus, the bankruptcy would not impact the subtenant's right to possession. A non-disturbance agreement would provide that the owner would not terminate the subtenant's right to possession, on notice and curing of all defaults. It would also provide that the subtenant would be entitled to all the bankrupt parties rights under the lease.

Option Agreements with other lease or purchase conract attached - when the binding contract is formed.

January 21, 2014

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.

"Where the parties, however, have agreed in writing upon the essential terms of the lease, there is a binding lease, even though a formal instrument is to be prepared and signed later. The formal instrument may be more convenient for purposes of recordation and better designed to prevent misunderstanding than the other writings but it is not essential to the existence of the lease." Just because they expected to enter a written lease does not let them off the hook for a contract they already signed.

The decision had a caveat, though, to reign in its impact. "Since the execution of the formal contract would add nothing to what the parties had already agreed upon," there is no reason to say that the agreement they had made was not enforceable. The question raised is that, if the lease contract that was attached added any terms or conditions, would that make a difference? In this case, probably not. I think the court would have found an intent that the terms of the attached lease were incorporated into the option agreement. Thus, they were already agreed to.

But what if the lease agreement had not been attached, and the option indicated that it was subject to entering a formal lease agreement? This is the same language used at superior court settlement conferences in California, they are often "subject to entering a formal settlement agreement," or "formal documentation of releases," or something similar. The parties get the case 'settled,' so it is taken off the trial calendar, everybody sighs relief, and then the negotiating over the formal settlement agreement gets complicated, maybe even falling apart, and the parties go back to set a trial date.

Here are the Option terms:

-Rent was $1.00 per acre per year payable in advance.
-If drilling operations were not commenced within one year from the date of the lease, the lessee could extend the period of the lease for four years by paying $1.00 per acre for each year.
-Plaintiffs' royalty was to be one-eighth of all production.
-Surface rights were to be retained by plaintiffs for agricultural purposes.
The lessee was to pay for any injury to livestock, trees, crops and improvements
-On the exercise by defendant of the option and the payment in advance to plaintiffs of a rental of $1.00 per acre for one year, plaintiffs agreed to execute and deliver a completed oil and gas lease on the attached form.
-The money for the rental could be deposited in escrow with instructions that it be paid to the lessors upon receipt of the executed oil and gas lease.


Notice in a California Commercial Lease - The Lease Language Governs, Most of the Time

December 12, 2013

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."

The landlord wanted to inspect the property, as provided for in the Lease. The landlord's attorney wrote a letter to the tenant's attorney asking who to "contact regarding property inspections..." The letter implied that notice of the inspection should be given to the attorney or, in his absence, to whomever the attorney designated. The tenant's attorney did not respond to the letter. The Landlord's attorney then provided notice of inspection to the tenant's attorney, and made the inspection. All heck broke loose, and the tenant sued the landlord for conducting the inspection without giving notice.

The Court said that notice was proper. In isolation, the lease notice provision required notice to be mailed to the tenant at the premises. Interpretations of contracts must fair and reasonable, not leading to absurd conclusions. The court noted that It would be absurd if the law required (1) strict adherence to the letter of the contract and (2) disregard of counsel's direction not to contact the tenant directly. The landlord was lawfully permitted to mail the notice of inspection to the tenant's attorney.

If the tenant's attorney believed that the lease required notice to be given directly to appellant at the premises, he should have said so when the landlord wrote him and asked. Instead, he did not reply. The court also noted that the tenant was equitably estopped from alleging that the giving of notice to counsel violated the lease notice provision. "The object of equitable estoppel is to `prevent a person from asserting a right which has come into existence by contract, statute or other rule of law where, because of his conduct, silence or omission, it would be unconscionable to allow him to do so.

This wacky set of facts is probably all due to the parties not liking each other. The tenant did not want to receive any direct communications from the landlord. I believe the landlord's attorney was correct to act as they did. But is this situation, parties should consult their Sacramento real estate attorney for advice. A better choice may have been to have the landlord itself send the notice, both to the attorney and to the tenant according to the lease provision. Then the tenant's only complaint would be that they made direct contact, but that was what the lease provided.


California Commercial Lease Negotiations - The Landlord's CAM Estimates May Need To Be Accurate, And The Landlord Cannot Raise The Percentage

September 12, 2013

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!

Yolo commercial property.jpg
The Fraud Exception to the Parole Evidence Rule

Americana argued that the Lease has an integration clause, which it claimed barred evidence of the prior negotiations (called parole evidence). This is true, but an exception has arisen in fraud cases. It requires that evidence offered to prove fraud "must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing." Thus, here Thrifty can allege both intentional and negligent misrepresentations based upon Americana's grossly inaccurate estimates. In addition, the information Thrifty presented established that Americana knew or should have known the information was inaccurate--Americana told other prospective tenants that their pro rata shares would be substantially higher than the rates represented to Thrifty, and Americana cut a deal with a movie theater to charge it less than its pro rata share based on square footage.

Seems that Americana's conduct was not too trustworthy. It is rare that a commercial tenant gets this kind of evidence to fight the CAM charges, an expensive proposition.


Jurisdiction of California Courts After the Civil Suit Is Decided - Sometimes It Continues, but There Are Limits

California Courts sometimes reserve jurisdiction over parties or an action after the case has gone to final judgment, for various reasons. Jurisdiction is generally the power to hear and determine the claims of the parties. Some examples of court's holding on to jurisdiction are to to enforce settlement in an action at the request of parties; or to determine the distribution of a fund of money deposited in court; and to make such other and further orders and decrees as might be deemed proper to carry out the judgment. In fact, there is a specific procedure to have the court reserve jurisdiction to enforce a settlement agreement. Where parties reach a settlement agreement that requires one or both parties to perform some acts that will not be complete within 45 days, they can file a "Notice of Conditional Settlement" per Rules of Court Rule 3.1385. In the Notice, they give the Court a date certain that the suit will be dismissed. Until then, the case becomes inactive, and off the court calendar, but still the court has jurisdiction to enforce the terms of the settlement agreement until the dismissal date.

sacramento real estate attorney option.jpgHowever, there is a limit to how long the court may keep jurisdiction over the parties. In Stump's Market, Inc., v. Plaza De Santa Fe Limited, LLC, Stumps had rented space for a grocery store in a shopping center from Plaza. The relationship had lasted several years. They negotiated a modification granting Stump five additional five-year options. The rent included a calculation of the percentage of sales (percentage rent). There was some water damage in the parking garage below Stumps grocery store. Plaza said it was caused by condensation from Stump's freezer. Stump disagreed, claiming that it was due to a leak that Stump had informed Plaza about.

They did not agree on what caused the damage, but they agreed that Stump would go ahead and repair the damage. They apparently did not agree (at least in writing) if, and how, they would split the cost. They got into a dispute as to paying for the repairs, calculating percentage rent, and Stump's exercise of the next option. The lawsuit ensued.

At trial the jury did not believe Plaza's witnesses, and found for Stump. In addition, the court retained jurisdiction until the judge decided that Stumps no longer had a right to occupy the premises. The life of the lease- another 17 years.

The court of appeals said that's crazy. It first noted that jurisdiction over a cause or parties after a final judgment, order, or decree is exceptional and limited to special situations. The jurisdiction of a court of equity to enforce its decrees is coextensive with its jurisdiction to determine the rights of the parties. Jurisdiction of the cause continues for this purpose, or leave may be expressly reserved to reinstate the cause for the purpose of enforcing the decree, or to make such further orders as may be necessary.

Yolo real estate lease attorney .jpgBut here, the court retained jurisdiction to solve problems that did not yet exist, concerning an arms-length contract. Here, there is no future event that is certain to occur. Under California law, a case must present an actual controversy between parties before the court will consider it. Here, there was only a concern that there may be a controversy sometime in the next seventeen years.

Oh well, Stump almost hit the jackpot. To be able to waltz into court anytime you think the landlord is not playing fair, without the expense of filing a new lawsuit, would be sweet. Plaza realized what a precarious existence it would live for the next seventeen years, and wisely appealed the decision.


California Commercial landlords have two new disclosure requirements in 2013- Energy Use, and whether the property meets accessability standards

February 12, 2013

California landlords are faced with a myriad of regulatory requirements for disclosures as well as enforcement of their leases. Two new mandatory disclosures for commercial leases will be required in 2013- past energy use of the building, and whether the premises have been inspected by a "certified access specialist", and if it was inspected, whether or not it passed. Property owners with concerns about their leases and disclosures should consult with a Sacramento and El Dorado commercial lease attorney to have their questions answered.

Sacramento El Dorado commercial lease attorney energy use.jpgENERGY USE REPORTING

The new law was actually enacted in 2009, required the California Energy Commission to set a schedule for rolling out, over time, the disclosure requirements. The commission adopted regulations in July 2012 setting the schedule:

--Owners of buildings with a total floor area of more than 50,000 square feet must begin making the required disclosures on and after January 1, 2013.
--Owners of buildings with a total floor area of between 10,000 square feet and 50,000 square feet must make the disclosures on and after July 1, 2013.
--Owners of buildings with a total floor area of between 5,000 square feet and 10,000 square feet must make the disclosures on and after January 1, 2014.

Covered commercial landlords are required to do the following:

A. At least 30 days before entering a contract to sell, lease or borrow against the entire property, the owner must register with the EPA's Energy Star Portfolio Manager.

B. The owner must instruct their utility providers to upload their data on the building's energy use to the owner's account at the website.

C. The building owner must then use the Portfolio Manager account to generate a "Statement of Energy Performance" for the building, and a "California Energy Performance Report." This will provide the EPA's benchmarking data and ratings for the most recent 12-month period for the subject building.

Sacramento commercial lease attorney access inspection.jpgACCESSIBILITY INSPECTION

Effective July 1, 2013, California law will require every commercial property owner or lessor to state, in leases signed starting July 1, whether the property has been inspected by a "Certified Access Specialist" (CASp), and, if so, whether the
property has or has not been determined to meet all applicable
construction-related accessibility standards..." Civil Code section 1938.

A CASp is a person certified by the California State Architect to inspect commercial properties for compliance with accessibility laws. The advantage to landlords, and there is only one, is that if the landlord had the inspection, and the property was approved as accessible under the law, the landlord has some extra umph in defending a disability lawsuit - at which point they should contact a real estate attorney. Of course, if the landlord does not pass the exam, they then have an obligation to make the necessary changes to comply (or risk losing a valuable tenant who does not want a non-qualifying property). Given the frequency of change in the access rules, it is good that the statute does not require a new inspection before every new or renewed lease agreement.

California commercial lease provisions prevents claim for constructive eviction or breach of covenant of quiet enjoyment - the right language saves a landlord.

January 15, 2013

California real estate law, and often commercial rental agreements, provide the tenant with a right of quiet enjoyment. This means that the landlord promises that during the term of the tenancy no one will disturb the tenant in the tenant's use and enjoyment of the premises.

If the covenant of quiet enjoyment is breached, the tenant has a choice- he can stand on his lease and sue for damages, or vacate the premises and claim constructive eviction. A 1994 Third District decision found that the a Lease provision prohibited the lessee's claim for constructive eviction, restricting his rights to a claim for damages or injunctive relief. While this is bad for tenants, the law is clear, and Commercial landlords and tenants entering leases should consult with an experienced Sacramento real estate and leasing attorney to be fully advised as to the terms of their contracts.

constructive eviction.jpgIn Lee v. Placer Title Company Placer was the tenant in a shopping center. Their premises were next door to a dry cleaners. Placer claimed that cleaning fumes made the office unusable, stopped paying rent, and vacated the premises. Lee sued for the balance of the rent owed on the lease as damages. Placer raised, as a defense, constructive eviction.

The lease provision which covered landlord defaults stated:
"In no event shall Tenant have a right to terminate this Lease as a result of Landlord's default and Tenant's remedies shall be limited to damages and/or an injunction."

covenant of quiet enjoyment.jpgThe court first noted that the covenant of quiet enjoyment is codified in California at Civil Code section 1927. But this covenant may be waived by the parties; another code section (3268) provides that some statutes are subordinate to the intention of the parties. Here, the parties modified the covenant by limiting the tenant's remedies to damages or an injunction only- they cannot terminate the lease. Thus, the tenant could not vacate the premises and assert a constructive eviction defense.

This language is a boon for landlords, and a bust for tenants. If a tenant could prove interference with their use of the premises, the likely result would be reduction of rent for the duration of the interference. Meanwhile, the tenant is stuck with the premises though it may be difficult to do business. They may have to set up shop temporarily elsewhere, a digester for a retail location, and an additional expense (though the expense could be included in damages.)


California commercial landlord and mitigation of damages- rents from later tenants can offset rent owed before the first lease was terminated.

Generally with California commercial properties, when a tenant defaults there is an unlawful detainer, and the landlord is awarded as damages the rent due until the judgment. If the lease contract would have gone for a longer term, the landlord may later sue for the balance of the rent due for the remainder of the terminated lease. In a confusing decision from Southern California, the landlord collected more from the later tenants than the evicted tenant could ever owe.

california commercial lease.jpgKumar v Yu involved a shopping center lease that was not to end until July 2006. In November 2003 the first tenant was evicted, and the landlord got a default judgment for rent then due. (This default was set aside, but there is not further explanation in the decision). The landlord rented to a second tenant, who was evicted. The unlawful detailed included a judgment for over $21,000, which was paid. The landlord rented to a third tenant, who agreed to a much higher monthly rent. In 2007 the landlord sued the first tenant for the balance of the rent due under the original lease.

Generally, to recover damages from a tenant for the remainder of the term after a commercial lease has been terminated, the lease must provide that the...

"damages the landlord may recover include the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award, or for any shorter period of time specified in the lease, exceeds the amount of such rental loss for the same period that the lessee proves could be reasonably avoided." Civil 1951.2(c)(1)

The language "could reasonably be avoided" addresses mitigation of damages. If the landlord wants to collect, he must make a reasonable effort to relet the premises. If he does, then the rent received from the new tenant is subtracted from what the defaulting tenant may have owed. In our case, the landlord, in the good old days before 2008, was able to increase the rent, and get paid.

The landlord argued that the rent he received from tenants two and three can be applied in mitigation (or an offset) only against the damages the first tenant owed after he vacated the premises. But the court said no. Civil Code §1951.2(a)(4) provides:

"Any other amount necessary to compensate the lessor for all the detriment proximately caused by the lessee's failure to perform his obligations under the lease or which in the ordinary course of things would be likely to result therefrom."

The allowance for subsequent tenants' rents is not a setoff, but simply a method of determining actual damages to the lessor as a result of the breach of the lease. A party damaged by a simple breach of contract may not recover more on the breach than he would have received if the contract was fully performed.

This may be the first published opinion that allows mitigation against rent owed before an unlawful detainer, but it makes sense. It is really only a matter of contract damages. Parties in such situations are advised to consult an experienced Sacramento leasing attorney -post termination damages are complicated and involve a calculation of pre and post termination rents, subsequent tenants, and when to try and collect. I did say this decision was confusing. Mitigation of damages is standard practice. The landlord could have calculated that he was paid more then the first tenant owed after lease termination. Why did he bother with the lawsuit?

California Letters of Intent & Proposals - When a proposal was really a contract, and the $16 million dollar surprise

Recently a federal court in Northern California found that a document which one party claimed was a non-binding proposal was really a binding ground lease agreement with purchase options, which resulted in a 16 million dollar damage award. The proposal concerned development of the Santana Row project in San Jose. Generally, creating of a valid contract requires mutual assent. An "agreement to agree, " without more, does not create a contract. In this case the court found more.

Santana Row.jpgIn First National v. Federal Realty, First National controlled the property but did not want to sell it yet. Federal unsuccessfully offered to buy, and the parties entered negotiations for a ground lease that lasted several years. They exchanged several proposals, including a "counter proposal" and a "revised proposal." Finally the both signed a document titled "Final Proposal," a one page document. Earlier proposals stated that they were non-binding; the final did not include this language. It stated that it was "accepted by the parties subject only to approval of the terms and conditions of a formal agreement," and Federal was to prepare a formal legal agreement. And it provided that First National could require Federal to buy the property any time over a period of ten years; and that Federal could force First National to sell at the end of ten years (the "Put and Call"). Federal never prepared a formal agreement, and decided it did not want the lease.

The court First looked at the specific language of the Final Proposal. It did not include the standard non-binding clause, and said that its terms were "hereby accepted by the parties subject to" only a formal agreement. The court then looked at the surrounding circumstances. There was the passage from counter to revised to final proposal.

A lease agreement such as this is required to comply with the Statute of Frauds. This requires that there must be a signed written memorandum that states the essential contract terms with reasonable certainty.
Federal argued that the proposal fails this test because it is missing a term for the duration of the ground lease. But the court noted that the term does not have to be express in the contract, but could be explained by extrinsic evidence.

Extrinsic evidence is something beyond the written words which is used to explain terms that were understood by the parties but are unintelligible to everyone else. Here the ten year period of the "Put and Call" implies a ten year duration. Parties involved in extensive negotiations and are concerned about letters of intent should consult with an experienced Sacramento and El Dorado business and contracts attorney who can guide them in making sure the documents accomplish what they intend for them. The court here found all the essential terms to make a binding contract, which resulted in a 16 million dollar surprise for Federal.

California Lease with Option To Extend - Exercise By One Tenant May Not Bind Others, And The Lessor Can Waive Strict Requirements

March 11, 2012

California commercial leases and rental agreements often have an option which allows the tenant -lessee the right to extend the term of the lease. Generally, the option language provides a specific method to exercise the option, and if the lessee does not follow the procedure, courts find the option was not exercised. In a recent decision, a tenant did not follow the required procedure, but the landlord waived the procedure, extending the term. However, three other tenants did not request the extension, and were not liable for rent. To avoid these kinds of problems parties to a commercial lease with an option should consult with an experienced Sacramento and El Dorado real estate attorney.

In Kavin v. Frye property was leased to open a dress shop in southern California. Kavin was the lessor. There were four lessees who signed the lease, but only two, Andrea and Sessi, were active in the dress shop. The other tenants (Frye & Morgan) were required to sign on primarily as guarantors of the lease. The agreement contain an option to extend the term. The option had to be exercised in writing no later than six months before the end of the term of the lease; if not done, the option automatically terminated .

store_display_1.jpgThe option was not exercised within the time period (and was terminated according to the lease). Meanwhile Sessi had a baby and gave up the dress shop, leaving it all to Andrea. Two weeks after the time to exercise the option passed the land went to the sop and asked Andrea if she wanted to extend. She said yes, so he dictated to her the words she wrote and signed the paper exercising the option. Andrea never discussed exercising the option with any of the other three tenants. Eventually, Andrea could not pay the rent any more, and abandoned the place with over a year left on the extended term. Kavin sued all four lessees for the balance of the rent for the full extended term.

The court found that the other three tenants were not bound to the extended term, and did not owe any rent. The deadline to exercise the option had passed, and the option was automatically terminated. The landlord argued that he had waived the deadline requirement, and so it should be enforceable as to all four. However, the court saw that the deadline also benefitted Frye and Morgan (who essentially guaranteed the lease) because they had signed on for the original term, but would not necessarily want to be on the hook for rent any longer. As the deadline requirement benefitted the other parties, Kavin the lessor could not unilaterally waive it.

The court concluded that, when Kavin had Andrea write out & sign an exercise of option, the lessor was making a new deal with only Andrea. The rest of the tenants were not involved in the new agreement, the old rental agreement was concluded, and only Andrea had to pay rent. This case points out several things common about options- that tenants sometimes do not really read their lease or believe the formal requirements are necessary, landlords sometimes cut corners to keep a tenant in place, and co-tenants really need to pay attention to what is happening with their lease at all times.

California Commercial Leases & Covenant of Quiet Enjoyment- Tenant Can Waive the Covenant, So They Better Read The Lease.

February 17, 2012

Every California lease includes a covenant of quiet enjoyment. It protects the tenant from any act or omission which interferes with the tenant's right to use and enjoy the property for the purposes contemplated by the parties. The recent decision of Fritelli, Inc., v. 350 North Canyon involved a tenant who did not closely read the lease, and was surprised that they waived the covenant of quiet enjoyment. Unlike California residential rental agreements, commercial lessees can modify or waive the covenant of quiet enjoyment; most form leases have a waiver built in. Property owner / lessors and potential lessees concerned with the issue should consult with an experienced Sacramento, Yolo, or El Dorado real estate attorney to discuss the language in their agreements.


Fritelli entered a lease to operate a doughnut shop in a shopping center. The lease guaranteed the tenant "quiet enjoyment." However, other provisions provided:

a. The lessor was granted authority to renovate the center, limiting liability for damages, and providing reduced of rent to the extent the use of the premises was impaired;

b. That, notwithstanding the lessor's negligence or breach, lessor was exempt from any liability due to conditions of the premises;

c. Lessee was required to maintain insurance, and lessee's sole recourse in the event of damages or injury was to file a claim on their insurance policy.

The doughnut shop was in business, and renovations of the shopping center began. In the ensuing lawsuit the lessee complained that scaffolding preventing customers from seeing and entering the shop, and dust and dirt entered the store every day, and that the business declined.

The court first noted that, in a commercial context, the tenant may agree to limit the scope of the covenant of quiet enjoyment. This was titled a "net" lease, which usually means that "the parties intended to transfer from the lessor to the tenants the major burdens of ownership of real property over the life of the lease." It then reviewed the provisions of the lease, and found that the parties' intent was to exempt the lessor from liability for breach of the lease and ordinary negligence. Specifically, the provision which allows remodeling without claims for damages modified the covenant of quiet enjoyment.

Interestingly, the court pointed out that nothing in the lease language limits the exemption from damages to the limits or forms of coverage of insurance available. So, the tenant could have uninsured harm caused by the landlord, but be stuck with the loss. Lastly, the court found that, in this context, the limitations of liability did not need to be printed in bold or large type or distinct from other contract provisions, unlike releases contained in recreational activities. This is a case where the lessor had tough terms in the lease but did all they could - they had a cleaning company in daily to clean the doughnut shop during construction, and reduced the rent. The court was not sympathetic of the tenant who did not read their lease before signing.

California Commercial Leases And Subrogation Waivers- What You Need To Know About Their Meaning And Use

February 7, 2012

California commercial leases and rental agreements often contain a waiver of subrogation clause. While important, it is often misunderstood or overlooked, even though at its best it benefits both the landlord and the tenant. Parties negotiating leases will want to consult with an experienced Sacramento and El Dorado leasing attorney.

Generally speaking, one who makes payment on another's behalf payment becomes entitled to be subrogated to the other's rights. If I have agreed to insure your house, and I paid to repair fire damage to the house, I am subrogated to your rights to recover from anyone who was liable for the fire. That means I can sue them for damages. The waiver of subrogation prevents this. In commercial leases, the clause refers mostly to insurance.

How does it work?

In most leases, the lessor is required to maintain insurance for the building. The lessee contributes their share towards the premium payment as part of the rental agreement or common expenses. The lessee/tenant is required to have insurance for their personal property and leasehold improvements.

building construction.jpgExample 1: The tenant accidently causes a fire that burns the building down. The landlord makes a claim against their insurance policy, and is paid. Ordinarily, the insurance company now steps into the shoes of the landlord (is subrogated to the landlord's rights) and has the right to sue the tenant for damages cause by the tenant's negligence. A waiver of subrogation by the landlord prevents the insurance company from going after the tenant.

Example 2: The lessor accidently burns the building down. The lessee makes a claim to its insurance company for the lost personal property. The insurer pays off the lessee, and now has a right to go after the landlord. The tenant's waiver of subrogation prevents this.

A mutual waiver of subrogation clause takes care of these concerns.

Two Typical Provisions Limited to Insurance:

1. Landlord and Tenant agree to cause the insurance companies issuing their respective property (first party) insurance to waive any subrogation rights that those companies may have against Tenant or Landlord, respectively, as long as the insurance is not invalidated by the waiver.

2. The parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

Broader Provisions:

The parties may agree, and the lease provide, for even broader waivers of subrogation that goes into the parties claims against each other. In such a case, the landlord and tenant would be relying ONLY on the insurance coverage to make them whole in the event of loss, and waive direct claims they have against each other.

An example is:

"Landlord and Tenant each hereby waive any and all rights of recovery against the other or against the officers, employees, agents and representatives of the other, on account of loss or damage occasioned to such waiving party or its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of such loss or damage."

Waivers of subrogation may also be applied to liability insurance policies- I have only discussed property insurance above. The choice of breadth of the waiver is something the parties have to determine themselves, and negotiate for their best position. For absolute safety, each party should confirm, by reviewing the other's policy, that the waivers are included. All told, waiver of subrogation is an important and beneficial provision that is often overlooked.

California Commercial Building Owners and Landlords Soon To Be Required To Report And Disclose Energy Use During Lease, Lending and Sale Transactions

February 1, 2012

In 2009 the legislature enacted a law requiring that, during lease of the entire building, lending, or sale transactions for nonresidential buildings, owners must disclose "energy ratings' developed by the U.S. Environmental Protection Agency. A sliding schedule of compliance is required, with the largest buildings starting in July 2012. Beginning July 2013 all size buildings will be required to comply. Commercial property owners may want to consult with an experienced Sacramento or Yolo Real Estate attorney regarding these transactions.

Under the new law, beginning in 2009 utility companies have been required to keep energy consumption records in a format compatible with the EPA's Energy Star Portfolio Manager database. The law requires owners to use the data to benchmark the building's energy use using the U.S. EPA Portfolio Manager system in advance of certain financial transactions, and to disclose statements of the building's energy usage to potential buyers, lessees, and lenders.

factory_chimneys.jpgThe California Energy commission published proposed regulations last August which established the following schedule:

July 1, 2012: disclosure by owners of buildings larger than 50,000 square feet;

January 1, 2013: disclosure by owners of buildings larger than 10,000 square feet, but less than 50,000;

July 1, 2013: disclosure by owners of buildings less than 10,000 square feet.

The steps required by covered nonresidential property owners is as follows:

1. At least 30 days before entering a contract to sell, lease or borrow against the entire property, the owner must register with the EPA's Energy Star Portfolio Manager.

2. The owner must then instruct their utility providers to upload their data on the building's energy use to the owner's account at the website.

3. The building owner must then use the Portfolio Manager account to generate a "Statement of Energy Performance" for the building, and a "California Energy Performance Report." This will provide the EPA's benchmarking data and ratings for the most recent 12-month period for the subject building.

windmills_3.jpgIn addition to creating a database of commercial building energy use in California, this new law will provide buyers and renters (of whole buildings) with energy consumption statistics for comparison with competing properties. In the case of triple-net leased properties, this will require disclosure of information regarding tenants use of the property, which may face some resistance. While commercial leases generally require tenants to conform to all laws, landlords will want to consult their leasing attorney regarding including requirements of disclosure in the lease. Building owners may also want to more aggressively manage their building's energy use, as a better grade can argue for a better price in the commercial real estate market. While the regulations are currently in draft form, their ultimate adoption is inevitable and owners must take notice.

California Residential Landlord Liability For Injured Tenants - When Can They Get a Waiver In The Lease?

November 18, 2011

It has long been the rule in California, stated in Civil Code §1953, that a residential landlord cannot require a tenant to waive their right to have the landlord take care to prevent personal injury. A recent decision addressed whether this rule against waiver applies to health club or exercise facilities provided by the landlord. The court found the landlord could indeed require a waiver of injury in using the exercise equipment.

The no-waiver rule is derived from a series of Supreme Court decisions concerned about waiver, or 'exculpatory' clauses, that affects the public interest. In cases generally suitable for public regulation, where the party is performing a service of great importance to the public, which is often a matter of necessity for some members of the public. The party seeking the waiver has a decisive bargaining advantage against members of the public. This is the situation in rental housing, an area of extensive regulation by the legislature.

treadmill.jpgHere, in Lewis Operating Corp. V. Superior Court, the tenant was injured on a treadmill in the recreation facilities of the landlord. There was a waiver in the lease applying only to the recreation facilities. The court looked at the facilities as being "noncore functions" of the property. It noted that courts have consistently enforced exculpatory clauses , releases, and waivers in the recreational context. Skiing, parachute jumping, and attending football games are not essential services affecting the public for this purpose. California law is designed to protect a tenant's basic, essential need for shelter. This does not include exercise equipment, which is outside the basic requirement. The court found that there was no public policy violated by the waiver applying to the health facilities, and the waiver was valid.

How can the landlord protect themselves? Experienced Yolo and Sacramento County real estate attorneys will advise landlords to spell out in their lease waivers that the "noncore functions" of the property, such as swimming pool, exercise equipment, etc., are nonessential amenities. However, basic common areas, such as parking areas, lawns, and corridors, remain essential and are unlikely to be subject to a waiver of liability.

Commercial Leases - California Lessors & Landlords Have An Advantage

September 6, 2011

Recent news has shown that the State of California has not been a wise landlord, leaving millions in uncollected rent. This articles outlines some of the advantages of the commercial landlord over the residential landlord in California.

Historically parties negotiating a commercial tenancy are more likely to have equal bargaining power than residential parties, where landlords are in a stronger bargaining position. As a result, California courts often apply different standards to commercial vs. residential leases. While residential leases have an implied warranty of habitability as a dependent covenant in residential leases, commercial leases have no such warranty.

Residential tenants are prohibited from waiving statutory deposit refund rights in Civil Code section 1950.7. There is no comparable prohibition against a commercial tenant's waiver of security deposit refund rights.

storefront.jpgCivil Code section 1953 provides residential tenants a "nonwaivable" bundle of rights which is not extended to commercial property tenants. Waiver restrictions concerning statutory notices apply only to residential rental agreements. A commercial lease may waive or modify the tenant's right to statutory notice, providing for any substitute form of notice different from and superseding the notice provisions contained in CCP §§ 1161 and 1161.1. Commercial tenants may usually prefer a longer notice period for certain alleged defaults, a term which can be negotiated in commercial tenancies. In such event, the lease should clearly state that the specified notice is in lieu of, and not an alternative to, the statutory notice period.

Parties to a California commercial tenancy generally allocate maintenance and repair responsibilities in the lease; unlike the residential lease, these are typically made the tenant's obligations.

10650_office_space_for_rent.jpgIn a residential tenancy, if the landlord accepts partial rent after serving a three day notice, the notice is invalid and cannot support an eviction. In contrast, a commercial property landlord's acceptance of a partial rent payment after filing a UD complaint for nonpayment of rent does not waive the landlord's right to possession, as long as, before accepting the partial rent payment, the landlord gave the tenant actual notice that the acceptance would not waive any of the landlord's rights.

Commercial landlords may also rely on statutory authority to serve a three-day notice estimated rent demand: Pursuant to CCP § 1161.1, a three- day notice for nonpayment of rent on commercial property may state the amount due as an estimate ... so long as the amount is "reasonably estimated" and "clearly identified" by the notice as an estimate.

Given the balance of rights commercial landlords have in California, state government is failing to enforce its leases and appears to be losing millions. A tenant of the state should receive no better consideration then any other commercial tenant, or that tenant is being subsidized by the taxpayers.