Articles Posted in commercial lease

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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.

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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.

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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.

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

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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?

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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:

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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.

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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.

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California Civil Code section 1950.7 controls the commercial Lessor / Landlord’s use of the deposit. A commercial landlord got a surprise in decision involving a San Francisco commercial lease. The tenant had already leased the premises for five years when PERS (Public Employee’s Retirement System, California’s state employee retirement program) bought the building. PERS terminated, or reduced, many of the services the prior lessor had provided the lessee. The lessee was infuriated, and stopped paying rent. Two months later he made a partial payment of back rent, and vacated the building. PERS v. Winston

The trial court found that the elimination of some and reduction of other services followed by the tenant vacating the premises was a “constructive eviction” (where the conditions are so reduced that the tenant is forced to vacate the premises). The court concluded that the tenant owed rent for the time up until he vacated the property, reduced by an amount to account for the reduced services. The court made no finding as to the deposit. On appeal, the tenant said that the landlord was entitled to offset the deposit by the rent due, but was then required to refund the balance of the deposit. As a result, the landlord owed him money.

The Appellate Court agreed. It reasoned that under subdivision c) of 1950.7, where the only default is failure to pay rent, the lessor is required to return the balance of the deposit to the tenant “no later than two weeks after the landlord receives possession of the premises…” Thus, the landlord owed the tenant a refund before the lawsuit was filed. The landlord cannot offset the deposit for future rent damages, interest, or attorney fees it may recover in a lawsuit. Important in this case is the timing of the offset. It was critical in determining who was entitled to a money judgment.

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When a lessee or tenant fails to pay rent, California Code of Civil Procedure section 1161 requires that the landlord must provide the tenant with a three-day notice to pay rent or quit before bring an unlawful detainer. Commercial leases sometime provide for a different number of days, but the “pay rent or quit” notice is routinely served. If the tenant does not pay by the end of the final day, the landlord may immediately file an unlawful detainer.

The three day notice does not have to served by a registered process server. These process servers are registered with the county clerk / recorder under Business & Professions section 22350. As of 2005, on registration process servers are required to be fingerprinted so that the county can run a background check.

A recent California unlawful detainer decision concerned a lease in Beverly Hills. The notice was served by a registered process server. The lessees, in their verified answer, denied they were served with the notice. At trial, the process server did not appear. The Lessor attempted to introduce into evidence the proof of service, but the trial court refused to allow it, ruling that it was hearsay. Apparently the lessees did not testify that they did not receive the notice; they relied on the lack of proof that it had been served at all.

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An illusory contract, or illusory promise, is one where the person making the promise has a free pass not to perform. For example, if the duty of a party to performed is subject to his own approval, without conditions, then there is no legal detriment, and no contract at all. If you promise to sell me your apples at 20 cents each, and I promise to buy as many as I decide to order, we do not have a contract. If my promised is conditioned on the apples not having worms, we have a deal.

In a recent California commercial lease decision, the tenant argued that the rental agreement was illusory. Thrifty-Payless Inc. leased space in an undeveloped shopping center to operate a drug store. The Landlord was to spend lots of money up-front to develop the site and obtain numerous government approvals first, and then Tenant’s obligations would began. The lease contained 2 relevant provisions- 1, that the Landlord could terminate if, acting with due diligence (a requirement- not illusory) it could not obtain the permits. And 2, Either the Landlord or Tenant could terminate if the property was not ready by a specified date.

1342027_cranes.jpgDuring the process the Landlord proposed what it refers to as a “lease amendment” and what Rite Aid refers to as a “campaign of deception and threats” to increase the rent. The Landlord said that construction costs had increased, and referred to a “2-way termination right” if the lease did not begin by the deadline. The tenant was not interested. From the tenant’s perspective the Landlord misrepresented that it could not currently complete construction by the deadline, including “alter[ing]” construction schedules. Meanwhile the landlord continued to represent to other potential tenants that the property would be open by the deadline. The Landlord terminated under provision 2. The lawsuit commenced.

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