One of the most overlooked clauses in commercial leases is the option to renew. Essentially, an option to renew is merely an offer by which the lessor binds himself in advance to make a contact if the lessee accepts on the terms and within the time designated (Cicinelli v. IwasakiI (1959) 170 Cal. App. 2d 58). Landlords have a tendency to use form or template language in their leases without paying too much attention to renewal clauses. Relying on boiler plate language and not negotiating lease terms can lead to a costly dispute at the expiration of the initial lease term. Tenants and landlords should fully apprise themselves of the terms and conditions of their renewal clause, if any, prior to executing the lease.

Many commercial leases with renewal clauses contain explicit terms for the tenant to comply with if they intend to exercise their option.  Notably, options to renew typically require the tenant to give the landlord notice in writing of their intent to renew, usually 6-12 months prior to termination of the lease. In Jeffrey Kavin, Inc. v. Frye, a 2012 California Court of Appeals case, the lease required tenants to deliver written notice to the landlord within six months before the end of the initial term; otherwise the option would automatically expire. The tenants in this case provided written notice of their intent to renew two weeks after termination of the initial term, and remained in the premises for a few months after the initial lease term ended.

Upon their move-out, landlord sued the tenants for breach of contract, claiming that they had validly exercised their option to renew. The court ruled otherwise, stating that since the tenants did not strictly comply with the terms of the option, the option to renew automatically expired. The court further stated that the landlord was not permitted to waive the renewal notice requirements, citing that a party cannot waive a contract provision when the provision benefits both parties (Jeffrey Kavin, Inc. v. Frye (2012) 204 CA4th 35).  Given that the renewal clause gives exclusive power to the commercial tenants to accept or reject, the landlord cannot waive the provisions surrounding that option.

In a surprisingly large amount of commercial leases, the lease provides the tenant with the option to renew, but fails to make any mention of what notice the tenant must give the landlord of their intent to renew. California courts have held that when the option to renew requires no particular form of notice, the tenant’s acts or course of conduct dictate whether or not the option has been validly exercised. In a California Court of Appeals case involving a commercial lease for a food market, the option to renew did not contain any notice requirements, but contained an increased rent amount for the renewal period. When the option to renew is not clear on its face, the court will consider evidence outside of the lease to determine whether the option was exercised. In the instant case, after the conclusion of the initial lease term, the tenant remained in possession of the premises and paid the increased rent amount, which the court ruled as being sufficient conduct constituting an exercise of the option (Cicinelli v. Iwasaki (1959) 170 Cal. App. 2d 58).

A lease containing a renewal option that is silent as to notice requirements can be detrimental to landlords. Without specific notice requirements, the landlord is left in the dark and unable to prepare for the tenant’s acceptance or rejection of the additional lease term(s). Absent the tenant voluntarily telling the landlord, the landlord will not know if the tenant plans to vacate or remain in possession of the premises until after expiration of the initial lease term. Landlords should implement a specific timeframe for the tenant to notify the landlord in writing of their intent to renew. This will provide sufficient notice to landlords to find a replacement tenant should their current tenant not wish to exercise their option to renew.

Alternatively, options to renew can be extremely beneficial to tenants, giving them security and peace of mind that they will not have to relocate their business every three to five years. The option to renew gives tenants exclusive power over the decision to continue the lease for additional term(s).  With that power, comes significant risk, especially when the option to renew lacks specific notice requirements. If the initial lease term ends and the lease lacks any notice requirements, the tenant’s continued possession of the premises and tender of rent payment could subject them to rent for the renewal period (Adv. Corp. v. Wikman (1986) 178 Cal. App. 3d 61). Given that most renewal periods range from three to five years, tenants should be mindful of termination dates to avoid any unwanted lease renewals.

There are several other potential issues that can arise from renewal options, and we will discuss those in our upcoming commercial leasing articles. As noted, options to renew in commercial leases are oftentimes bitter-sweet. Landlords and tenants should adequately address and negotiate renewal clauses at the inception of the lease agreement, clearing up any misunderstandings or missing terms. Additionally, seeking the advice of an experienced real estate attorney can make renewal options more predictable and useful.

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Buying Into an HOA, Part 3


Simon Offord

by Simon Offord on January 26, 2017

in HOA Litigation

Buying a new home can be an overwhelming process. The amount of paperwork is staggering. When buying property that is part of a homeowners’ association (HOA), the paper work is increased due to a statutorily-mandated set of additional disclosures regarding the HOA (Civil Code Sections 1365 – 1368 and 1375).  In this third installment in this blog series (part 1 and part 2), I will discuss some of the more important issues to look out for in the HOA disclosures.

One of the vital elements of the HOA disclosures is the Covenants, Conditions, and Restrictions, commonly known as CC&Rs. The CC&Rs contain the rules that govern the HOA, and some of the things you might find the in CC&Rs could impact your decision to buy the property.  Previous blogs discussed potential restrictions relating to improvements to your home or restrictions on use.  However there are several other potential pitfalls to look out for when reviewing CC&Rs and HOA disclosures.

Past Board/HOA Meeting Minutes

A well-run HOA should have regular meetings.  How regular is somewhat dependent on the size of the HOA, however in no case should the HOA not at least meet once annually.

Moreover, the HOA should maintain minutes of these meetings.  The minutes should include a description of what was discussed.  The minutes are an excellent resource to learn about what is going on in the HOA.  The minutes may mention common area projects that homeowners are considering, complaints owners may have about the HOA, potential upcoming special assessments, potential changes to the CC&Rs (some of which changes may have a significant impact on your intended use of the property, ie prohibiting short term rentals or restricting pets) etc.  It is possible the seller is not involved and does not attend these meetings, so the meeting minutes can be a useful resource.

Larger HOAs may also produce monthly or quarterly newsletters.  The newsletters are another resource for buyers to learn about issues that may have not been disclosed about the HOA.

The HOA’s Finances

HOA’s should maintain financial documents that include an operating budget, a summary of association reserves, a summary of any outstanding loans, and information on all association insurance policies, among other things.  Again, size of the HOA is a significant issue in determining whether the HOA is properly funded, but potential purchasers should make sure the HOA has funds in reserve to cover unexpected damage or issues, along with sufficient monthly income to cover all expenses in addition to building up the reserves.

Consider Your Own Research

If after a review of all the items discussed in this article and the prior two you still are not comfortable, keep researching!  Try and speak with the Board or Property Manager to get their honest opinion.  Walk the property and look at the condition of the railings, roof, siding and any other building components.  Have a property inspector inspect the common areas for potentially expensive upcoming issues.  Search the internet.  Talk to owners.  Make sure there are no past or active lawsuits involving the HOA or members.

Ultimately, the more information one gathers, the better.  Owning in an HOA has benefits including cost-sharing of maintenance, but there are also disadvantages.  Identifying these disadvantages prior to purchasing is critical, and we hope this series has been helpful.

Of course, the issues discussed above are among the concerns that clients have raised with us.  However, it is critical that a buyer carefully review the CC&Rs and disclosures for themselves.  What may seem insignificant to one buyer may be a deal-breaker for another.  Therefore, the above items are not intended to be an all-inclusive list, but instead a guide as to some of the more common issues that have caused concerns.

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A recent case confirmed our oft-repeated advice to get it in writing.  In Westside Estate Agency, Inc. v. James Randall, a broker learned this rule the hard way.

California’s statute of frauds declares invalid any “agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate” unless that agreement is in writing and signed by the broker’s client .  (Civ. Code, § 1624, subd. (a)(4).)   This rule has very limited exceptions, and the Westside case did not contain any such exceptions.

In Westside, the broker agreed to assist a “friend” in purchasing a $40+ million dollar home in Bel Air.  The broker did not get an agreement in writing.  The broker prepared two offers for the purchase which were rejected.  However, the sellers remained interested.  A couple months later, the client (“buyer”)  hired an attorney to prepare a new, slightly higher offer which was ultimately accepted.  The attorney then received the $925,000.00 commission (those pesky attorneys!).

The broker filed suit against the buyer, claiming that it was owed the commission under a breach of an implied contract theory.  The attorney was also sued for intentional interference with an implied contract (which cause of action was ultimately dismissed by the broker).  The buyer demurred to the Complaint (which is a motion that is filed at the outset of the case, arguing that even if everything in the Complaint is true, there is no legal recourse), arguing that without a written agreement, buyer owed no duty to broker.  The Trial Court agreed and dismissed the action against the buyer.

The broker appealed the Trial Court’s decision.  The  Appellate Court  affirmed the Trial Court’s decision, concluding that there was no viable cause of action to overcome the statute of frauds as the complaint failed to allege that there was a written agreement (let alone one that “unequivocally” shows on its face that the broker was employed and seeking to recover a commission, which is what the law requires).

The Appellate Court examined the facts further, and rebutted the broker’s argument that the prior offers he wrote constituted a writing sufficient to entitle him to a commission.   Specifically, the Court held that even though the two unsuccessful offers contained language that stated that the broker would collect a commission, since the broker was not the procuring cause of the eventual purchase, he had no right to a commission.  The Court affirmed century-plus old law that states that “merely putting a prospective purchase on the track of property which is on the market will not suffice to entitle the broker to the commission contracted for, and even though a broker opens negotiations for the sale of the property, he will not be entitled to a commission if he finally fails in his efforts.”

The obvious take away from this case is GET IT IN WRITING!  Even if you are working with a client that you consider a friend, do not make the mistake of assuming they will make good on their word.  We realize that buyer representation agreements are uncommon, but if you are in the midst of making multiple offers on a $40 million dollar plus property, you should do everything you can to get an agreement in writing, or you could miss out on the commission of a lifetime.

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5 Tips for Landlords This Winter


Ashlee Adkins

by Ashlee Adkins on December 21, 2016

in Landlord/Tenant Disputes

A landlord’s duty to maintain a habitable unit can morph as the winter months approach here in California. What makes a unit habitable in the summer months can change with the seasons and the drop in temperature. In our recent California Landlord Basics webinar on December 16 (view replay here), we discussed the statutory requirements for a residential unit to be considered habitable (See Cal. Civ. Code § 1941.1).

As discussed in our webinar, habitability is determined based on “reasonableness”. A landlord has a duty to repair defects that make a unit uninhabitable (See Green v. Superior Court (1974) 10 Cal. 3d 616). Typically, a landlord has 30 days to repair a defect that affects habitability, but this is not a set requirement. The court has discretion to determine if the landlord acted reasonably, despite the 30 day repair standard.

While issues with a unit’s water heater or furnace in July wouldn’t necessarily warrant an emergency fix, a lack of heat and hot water in the bitter cold temperatures of December might. A broken water heater and furnace at this time of year would certainly require a shorter time-frame for repair. Also, defects in the roofing and windows of a unit can be particularly uncomfortable for a tenant in the winter. These defects specifically related to the winter months not only affect the tenant’s comfort, but could also cause health concerns. Proactive landlords should consider these 5 tips during the winter months to prevent headaches, excessive repairs costs, and legal fees later on:

  1. Minimum Temperature

The California Department of Housing requires existing residential units to be capable of maintaining a minimum room temperature of 70° F at a point three feet above the floor in all habitable rooms ( See 25 CCR § 34). Check in with your tenant to make sure the heater is working adequately. http://www.hcd.ca.gov/codes/state-housing-law/shlstatutes.htm

  1. Water Heater Repair

A water heater check-up may be wise to avoid an emergency repair situation during the colder months. As mentioned in our webinar, the required repair time for a water heater is much shorter than the typical 30 day standard (more like 1-3 days).

  1. Roof inspection

Winter usually means more severe weather, including rain and snow, depending on where in California you are located. Civil Code § 1941.1 requires the unit to have a weather-protected roof. Ensuring that the roof of your rental unit is in good condition by having it inspected could save thousands in future emergency repair costs.

  1. Weather Stripping Unit

Keep your tenants happy by keeping their energy bills down. Inspect windows and doors to make sure they are not allowing cold air inside. Weather stripping the unit helps keep the tenants costs down, and also makes the unit more eco-friendly.

  1. Travel and Frozen Pipes

Advise tenants to keep the heater on, even minimally, if they are travelling for the holidays. When temperatures drop below 30° F, and the heater is left completely off, pipes have the potential to freeze. Keeping the heat on, even on a low setting, could help prevent freezing. The American Red Cross recommends setting the thermostat while you are travelling at no lower than 55° F. (See http://www.redcross.org/get-help/prepare-for-emergencies/types-of-emergencies/winter-storm/frozen-pipes)

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In the recent case of Mendez v. Rancho Valencia Resort Partners, LLC, the appellate court analyzed whether certain noise constituted a nuisance.

The Mendezes (“Neighbor”) filed suit, claiming Rancho Valencia’s (“the Resort”) outdoor festivities constituted a private nuisance.  The Trial Court ruled in favor of the Resort, determining the noise levels were not “substantial and unreasonable.”  The Trial Court made a point to highlight the fact that the Neighbor did not make substantial efforts to resolve the issue either directly with the Resort or through the County administrative procedures, putting the Trial Court in a position to “draw a line in the sand” which can oftentimes be a less desirable result.

The Appellate Court affirmed the Trial Court’s decision.  The Appellate Court emphasized that the harm suffered by the Neighbor needed to be “substantial” and “unreasonable…of such nature, duration or amount as to constitute unreasonable interference with the use and enjoyment of the land.”

Thus, whether something constitutes a nuisance is clearly a heavily fact-based inquiry.  The Appellate Court went into a detailed review of the local zoning ordinances, but ultimately, the Appellate Court seemed to defer to the Trial Court’s findings based on its review of the facts and testimony at trial.

Ultimately, this case does not give us any new, bright-line standards.  Instead, it confirms that determining whether something is a nuisance is a heavily fact-dependent analysis that is difficult to forecast.  One judge one day could deem something to be a substantial interference and another judge another day could disagree.  This emphasizes the importance of trying to resolve these type of disputes informally, as some sort of compromised position is much more manageable than losing in an all-or-nothing decision.

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This November, Californians will vote on Proposition 64, the “Adult Use of Marijuana Act” which will effectively legalize the recreational use of marijuana to people over age 21.

California’s Marijuana Legalization Initiative enumerates extensive modifications to the state’s Business and Professions Code regarding the registration and licensing of retail marijuana businesses.

It has been a decade since California passed Proposition 215, legalizing the use of medical marijuana at the state level.  Since then, property owners have faced a host of concerns in leasing to medical marijuana businesses.  Marijuana remains illegal under federal law, and the specter of federal seizure remains even in jurisdictions where it is legal at the state level.  Very reasonably so, landlords did not want to run the risk of forfeiture by being tied to drug trafficking.

Additionally, given the high level of risk, marijuana dispensaries paid well above market rates (already expensive in California) to have space.  These businesses are also cash businesses, which meant not only increased security concerns at the property, but also that the landlord and vendors and employees would likely need to be paid in cash.   Banks also then had to file suspicious activity reports for anyone depositing such large sums of cash, which could include the landlord.

To work around these obstacles, marijuana enterprises often needed to buy a building outright and as they were not eligible to borrow from federally insured banks, the businesses often seek private money sources to finance the building.

Most standard form leases are not sufficiently specific to deal with marijuana businesses as tenants.  For one thing, the lease provisions usually do not state the rent payments can be made in cash.  More importantly however, the leases all have a provision that requires the tenant to be in compliance with the law.  This covenant needs to be drafted in such a way to mandate compliance with state law and non-related marijuana federal law.

Will any of these issues change under the passage of Proposition 64? It’s unclear.  The text of the bill is extremely long (full text here: https://www.oag.ca.gov/system/files/initiatives/pdfs/15-0103%20(Marijuana)_1.pdf? )

If passed, most of the bill’s provisions will go into effect in 2018.  One of the key things to watch is legislation at the city level. Section 3(d) of the Adult Use of Marijuana Act allows local governments to ban businesses that deal in the recreational pot business.

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Over four years ago, I wrote about the unpublished case of Jacobsen v. Aurora Loan Services (2012).  Jacobsen was a foreclosure investor who had been negotiating with borrower O’Brien.  O’Brien had borrowed $1.24M secured by a deed of trust against the property.  O’Brien’s payments to the lender and loan servicer became sporadic and eventually, O’Brien was in default.  The day before the Trustee’s Sale, O’Brien deeded the property to Jacbosen.

Jacobsen showed up at the foreclosure sale and bid $500.  His bid was not the highest.  Here’s where it gets problematic: as is customary, the loan servicer Aurora likely gave instructions to the foreclosing trustee to credit bid.  Accordingly, Aurora had the “winning” bid at over $1.5M.  However, for some reason, the Trustee’s Deed to Aurora noted a “cash bid”.  That became a disputed fact in the subsequent litigation between Jacobsen and Aurora.

Jacobsen and O’Brien ultimately sued Aurora Loan Services and Cal-Western (the foreclosing trustee) on a variety of theories to try to challenge the sale.  They sued to quiet title, to invalidate the loan documents, and for wrongful foreclosure.  At the trial court level in San Francisco, both sides brought motions for summary judgment.  A motion for summary judgment is essentially a trial on the pleadings and requires that there be no disputed material facts.

At that time, the Federal district court granted the defendants’ motions for summary judgment and to dismiss the case.

Plaintiffs appealed to the Ninth Circuit.  The Ninth Circuit affirmed the lower court’s ruling on the causes of action for quiet title, the loan validity, and cancellation of loan instruments.  However, the Ninth Circuit reversed on the claim of wrongful foreclosure, citing the elements as articulated in the Sciaratta case.  On appeal, the Ninth Circuit concluded that there was sufficient evidence on the record of a material dispute regarding the credit bid and whether the credit bid was proper.  Further, the Plaintiffs needed to prove that they suffered damage from any wrongful foreclosure and the lower court had not addressed this element in its opinion.  On those two grounds, the case was remanded.   Now the parties can continue to litigate at the trial court level on the propriety of Aurora’s credit bid and whether the plaintiffs were actually damaged by Cal-Western and Aurora’s foreclosure sale.

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Court Allows Owner to Evict Tenant who has Filed Bankruptcy

by Henry Chuang September 29, 2016 Bankruptcy
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Sholem Perl (“Perl”) owned a duplex in Los Angeles. Perl defaulted on his loan and the property was foreclosed on in 2013. At the foreclosure sale, Eden Place, LLC (“Eden Place”) purchased the property but Perl remained in possession of the property. After buying the house, Eden began the unlawful detainer process and on June […]

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Commercial Landlords Subject to New Accessibility Disclosure Requirements

by Ashlee Adkins September 28, 2016 Commercial Real Estate
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Multiple attempts have been made by California legislators in the past several years to limit the growing number of predatory Americans with Disabilities Act (“ADA”) lawsuits in California, whereby landlords and business owners are being sued for ADA accessibility violations. According to U.S. Congressman Ken Calvert, California has 40 percent of the nation’s ADA lawsuits, […]

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The Basics of Homeowners Association Disputes Part 1 – Mediation

by Simon Offord September 16, 2016 HOA Litigation
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HOA disputes are something that we see on a regular basis. Although in a perfect world, none of us would get in disputes with our neighbors, the reality is that disputes between neighbors, or the association and an owner, are exceedingly common. However, most HOA CC&Rs have provisions to try and resolve these disputes without […]

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