Articles Posted in commercial lease

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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.’

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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.

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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.

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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.”

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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!

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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.

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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:

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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.

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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…

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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.