Tuesday, February 11, 2020
Court of Appeal:
Majority Reaffirms 1942 Decision Saying That a Provision Setting a Higher Rental Rate Upon Expiration of the Term of the Lease Is Permissible; Dissenter Says It’s Unenforceable
By a MetNews Staff Writer
The Court of Appeal for this district has declared that Los Angeles Superior Court Judge Stephen P. Pfahler erred in ruling that a holdover provision in a lease, boosting the monthly rate to 150 percent of that paid during the term of the lease, was an unenforceable penalty provision, with a dissenter insisting that the trial judge got it right.
Justice John Shepard Wiley Jr. wrote the majority opinion, filed Friday, in which Presiding Justice Tricia Bigelow joined. Justice Maria Stratton was the dissenter.
The lessor of a warehouse was Constellation-F, LLC and lessee was World Trading 23, Inc. Pfahler awarded a judgment in favor of the lessor based on the monthly rate that was paid before lease expired, $14,500.
“The lease clause in this case specified rent would increase after the lease expired. The case law refers to such a clause as a holdover rent provision or as ‘a graduated rental.’…Commercial provisions of this sort are enforceable even if the increased rent is much greater than the base rent.”
He pointed to the 1942 decision in Vucinich v. Gordon upholding a 500 percent rent boost for a holdover tenant.
“The Vucinich decision is controlling here,” Wiley said.
Civil Code §1671
The defendant in that case relied on Civil Code §1671, as did World Trading. The section says, with respect to contracts for the leasing of real property:
“[A] provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.”
In the 1942 case, Presiding Justice Minor Moore of this district’s Div. Two rejected the contention that a rent boost from $100 per month to $500 was an unenforceable penalty. He said that §1671 pertains to liquidated damages, observing:
“Neither the question of penalty nor of liquidated damages is involved in this action.”
‘Amount of Damage’
“The statute applied to an ‘amount of damage.’ By contrast, however, a holdover clause provides for ‘a graduated rental.’…Graduated rentals are not damages. A graduated rental is the rate for leasing property. By its terms, then, Civil Code section 1671 did not apply to a holdover rent provision, as Vucinich held.”
Despite having declared §1671 to be inapplicable, Wiley proceeded to apply the current version of it. He noted that until a 1977 revision created a presumption against enforceability of a liquidated damage clause, the presumption is now in favor of validity, and said that World Trading did not succeed in rebutting that presumption by showing that “it faced monopoly coercion from Constellation when the parties struck their bargain.”
Free to Leave
Wiley went on to say:
“Nor was World Trading subject to coercion after the lease amendment. World Trading was at complete liberty to avoid the higher rent. It had merely to leave.”
Pfahler had imposed a $1,000 discovery sanction on World Trading which it failed to pay. The judge declined to add that amount to the judgment.
Yesterday’s opinion orders that it be added. Wiley explained:
“Sanctions orders have the force and effect of a money judgment….In the context of this case’s process, it is proper and efficient to add this sanctions award directly into the judgment.”
The case was remanded to determine if two entities are jointly and separately liable either under a estoppel or agency theory.
Stratton’s dissent relied on two California Supreme Court cases—Garrett v. Coast & Southern Federal Savings & Loan Assn., decided in 1973, and Ridgley v. Topa Thrift & Loan Assn., handed down in 1998. Both dealt with penalties for late payments of rent.
Wiley said of them:
“Garrett and Ridgley concerned neither graduated rentals nor commercial holdovers. Neither cited Vucinich. Neither applies here.”
“My problem with the majority opinion is that it completely disregards the test set out in Ridgley and Garrett and instead superimposes a new test by which one may challenge a liquidated damages provision. Under the majority’s new test, contracting parties need not attempt to tether a liquidated damages provision to estimated anticipated losses; instead a challenger must analyze each contracting party’s respective market power and persuade a court that there was enough of an imbalance of market power between the parties to invalidate the damages provision. The majority establishes this new test by blithely confining Ridgely and Garrett to their specific facts, as if the decisions are outliers which we are free to ignore. I take issue with that approach.”
She remarked that she does “not consider Vucinich persuasive,” saying that “its throw-away discussion of holdover rent was dicta appearing gratuitously in the last paragraph of the decision” and the case is one that “precedes the amendments to section 1671 and so does not discuss the statute in its current form.”
Stratton said Pfahler “noted correctly that Vucinich has ‘not been followed by any subsequent case as to its treatment of holdover rent.’ ”
The case is Constellation-F, LLC v. World Trading 23, Inc. 2020 S.O.S. 540.
Shelly Jay Shafron, Kevin David Kammer, and Douglas G. Carroll of the Calabasas firm of Shafron & Kammer represented Constellation. There was no appearance for World Trading.
Copyright 2020, Metropolitan News Company