Kulawitz v. Pacific Woodenware & Paper Co. ( 1944 )

SHENK, J.

This is an appeal by the defendant from a judgment in its favor on a cross-complaint in an action in which the plaintiff sought the rescission of a lease.

The defendant leased store premises in a building owned by it in Oakland, to the plaintiff for a term of four years from July 1,1938, at a minimum monthly rental of $350. The lease provided that the premises were to be used for the conduct of a general furniture business exclusively, and the lessee agreed not to allow any sale of property by auction on the premises except upon retiring from business. The defendant as lessor covenanted that during the term of the lease it would not let or permit occupation of any other space or storeroom in the same building “for the purpose of conducting therein a furniture store.” The lease also provided that should the lessee abandon or vacate the premises during the term of the lease the lessor might at his option without notice to the lessee relet the premises, and the lessee should satisfy any deficiency between the amount realized from the reletting and the amount of the rents reserved.

The lessee took possession and conducted a general furniture business until January, 1941, when, because of illness, he became unable to give his personal attention to the business. He held an auction sale and retired from the conduct of the furniture business on the leased premises. He turned over the keys to the defendant’s renting agent with instructions to find a tenant and if necessary at a rental of as much as $100 per month less than that provided in the lease. A tenant was not found. The plaintiff did not pay the rent for February, March or April, but prior to April 18, 194l, commenced to clean and restock the store in preparation for a reopening for business. While making these preparations he observed a sign on an adjoining store in the same building that it would open on May 1st for the sale of carpets, rugs and linoleum. On April 2d the defendant had let the adjoining store to one Smith on a month to month basis commencing May 1, 1941, for the specified purpose of conducting therein the “sale of linoleum and kindred products.” On April 21st the plaintiff gave the lessor a telephonic notice of the claimed breach of the restrictive covenant in the lease, and on April 24th he served written notice that competition in the same building in the important items of “carpets, rugs and linoleum” would constitute a difference between a net profit and a definite loss in his conduct of the furniture business in the same building; that the breach of the covenant went to the essence of the lease agreement; that he would no longer be bound by the provisions of the lease; and that since the telephonic communication of April 21st, he had removed his stock of furniture from and had given up the possession of the premises. On April 29th the lessor replied by letter stating that it denied any breach of the restrictive covenant; that the lessee had “retired” from the furniture business; that the claimed breach was a mere pretext, and that it would continue to hold the lessee to the performance of the lease provisions. The Smith tenancy for the sale of linoleum and kindred products continued and was in existence at the time of trial.

In October, 1941, the plaintiff filed his complaint for rescission. Various amended and supplemental cross-complaints were filed by the defendant by which it sought recovery of unpaid rentals for the full unexpired term. They will be referred to as the cross-complaint. By his answer to the cross-complaint the plaintiff admitted that rental was due to May 1, 1941, offered to pay the same, and alleged defensive matter to prevent the recovery of rentals for the remainder of the term by reason of his eviction from the leased premises by the defendant.

The trial court found the facts as above stated, and denied to the plaintiff any relief on his complaint. As to the issues raised by the cross-complaint and the plaintiff’s answer thereto, the court concluded that the defendant had violated the restrictive covenant in a substantial respect, that the lease had terminated as of May 1, 1941, and that the defendant was entitled to recover only the unpaid rentals due to that date. The defendant had judgment accordingly.

On the appeal the defendant contends that the plaintiff was not entitled to a declaration that the lease had terminated and to be relieved of his obligation to pay rentals for the full term when he was himself in default in the payment of prior rental under the lease; that the plaintiff’s “retirement” from the conduct of the furniture business on the leased premises in January, 1941, rendered the lessor’s restrictive covenant inoperative; that before the defendant could be placed in default of the restrictive covenant it was entitled to reasonable notice to afford an opportunity to remove the source of the objection; and that the evidence does not support the finding of a substantial breach of the restrictive covenant.

The plaintiff, being in default under the lease, was not entitled to rescind without curing his default by tendering the amount due to the time of the claimed breach by the lessor. Breach of the restrictive covenant would not entitle the plaintiff to escape his obligation to pay that portion of the rentals which had accrued to the date of the alleged breach and which he was bound to pay. His notice was not accompanied by payment of that portion of the obligation which was incontrovertibly due. He therefore had not effected rescission of the lease and the trial court correctly concluded that he was not entitled to prevail on his complaint. (Civ. Code, §1691; Crouch v. Wilson, 183 Cal. 576, 584 [191 P. 916]; Couts v. Cornell, 147 Cal. 560 [82 P. 194, 109 Am.St. Rep. 168].) The question of the correctness of the trial court’s findings and conclusions is therefore resolved by a consideration of the issues raised by the defendant’s cross-complaint and the plaintiff’s answer thereto.

A covenant not to let other premises in the lessor’s property or permit their use for certain purposes during the existence of the lease with the covenantee is binding and a breach thereof entitles the lessee to terminate the lease. (Medico-Denial Bldg. Co. v. Horton & Converse, 21 Cal.2d 411 [132 P.2d 457]; University Club v. Deakin, 265 Ill. 257 [106 N.E. 790, L.R.A. 1915C 854] ; Hiatt Inv. Co. v. Buehler, 225 Mo.App. 151 [16 S.W.2d 219].) The result in such cases is based on the rule that the condition broken by the covenantor excuses performance by the covenantee. That rule applies ordinarily without the express intention of the parties, in cases of agreed exchange, such as Cameron v. Burnham, 146 Cal. 580 [80 P. 929], and Rathbun v. Security Mfg. Co., 82 Cal.App. 793 [256 P. 296], (See Rest., Contracts, §§ 266, 397; Cal. Ann., pp. 143, 226.) For historical or other reasons it was not made applicable to leases, unless by the intention of the parties, expressed or necessarily implied, performance by one was conditioned upon performance by the other. (See Rest., Contracts, § 290; Cal. Ann., pp. 155-156.) Therefore breach or failure to perform by a party to a lease is not a defense unless the covenant broken was a condition precedent to performance by the party defending. (Alderson v. Houston, 154 Cal. 1 [96 P. 884] ; Civ. Code, § 1439; 6 Cal.Jur. 489.)

In this case performance of the restrictive covenant by the lessor was essential to the beneficial enjoyment of the property by the lessee for the purposes intended. It was therefore a condition precedent to the lessee’s performance, and breach thereof may be said to amount to a constructive eviction of the lessee and was found to be such by the trial court. Any interference by the landlord by which the tenant is deprived of the beneficial enjoyment of the premises amounts to a constructive eviction if the tenant so elects and surrenders possession, and the tenant will not be liable for rentals for the portion of the term following his eviction. (Veysey v. Moriyama, 184 Cal. 802, 805 [195 P. 662, 20 A.L.R. 1363]; Agar v. Winslow, 123 Cal. 587 [56 P. 422, 69 Am.St. Rep. 84]; McAlester v. Landers, 70 Cal. 79 [11 P. 505]; Giraud v. Milovich, 29 Cal.App.2d 543, 547 [85 P.2d 182].)

. Default by the lessee in the payment of rentals does not waive the lessor’s performance of the restrictive covenant unless the lease provides expressly or by necessary implication that performance thereof depends upon the payment of rentals. No such provision or intention appears from the agreement here involved. Under this lease the result flowing from the nonpayment of the rent gave to the lessor only the right to the rent or at his option to a termination of the lease. If he did not exercise the option the lease continued in existence. So long as the lease continued in existence the lessor was bound not to interfere with the beneficial enjoyment of the premises by the lessee for the purposes intended. Therefore upon the lessee’s default in the payment of rent the lessor could at its option have terminated the lease; but as it elected to consider the lease in force it was bound to an observance of its covenant. {Standard Livestock Co. v. Pentz, 204 Cal. 618 [269 P. 645, 62 A.L.R. 1239].)

The lessee’s “retirement” sale in January, 1941, did not release the lessor from that covenant. The lease term was an estate in lands vested in the lessee. His “retirement” sale did not constitute a surrender nor an offer to surrender the leasehold. In fact the conduct of the parties indisputably showed their intention to consider the lease as continuing. The lessee sought to sublet the premises through the lessor’s agent and to discharge his obligation for any deficiency in rentals. The lessor at all times unmistakably indicated its intention to treat the lease as in existence until the expiration of the stipulated term. There is no evidence of abandonment by the lessee by virtue of the “retirement” sale nor of acceptanee of any such abandonment by the lessor. The lessee’s title continued and he had a right to resume possession at any time until the expiration of the term, and the lessor had no right to interfere with his dominion and control. (Welcome v. Hess, 90 Cal. 507 [27 P. 369, 25 Am.St.Rep. 145].) The foregoing considerations render inapplicable cases such as M. M. Ullman & Co. v. Levy, 172 La. 79 [133 So. 369], where, on the lessor’s sale of the goodwill of a business, his agreement not to engage in the same business in the vicinity for a specified number of yéars was held ineffective after the termination of the lease period and the tenant’s retirement from business prior to the expiration of the agreed term of restraint.

The evidence in the present case is that the lessee surrendered possession of the premises when he gave to the lessor the notice dated April 24, 1941. Upon surrender of possession by the lessee before the expiration of the lease term, the lessor had three remedies: (1) To consider the lease as still in existence and sue for the unpaid rent as it became due for the unexpired portion of the term; (2) to treat the lease as terminated and retake possession for its own account; or (3) to retake possession for the lessee’s account and relet the premises, holding the lessee for the difference between the lease rentals and what it was able in good faith to .procure by re-letting. (Treff v. Gulko, 214 Cal. 591, 598 [7 P.2d 697]; Siller v. Dunn, 103 Cal.App. 154, 158 [284 P. 232].) The defendant followed the first course. It filed a cross-complaint by which it sought to recover rentals unpaid to the expiration of the lease term. It successfully resisted the plaintiff’s claim of rescission inasmuch as the defendant’s breach did not excuse the plaintiff’s liability for rentals due prior thereto (Civ. Code, §1511, subd. 3), and the plaintiff had failed to discharge his liability. But the defendant’s breach placed it in a position of being unable to resist successfully defensive matter interposed to its own action. It could not compel a performance which depended upon performance of its own broken covenant. When, upon the constructive eviction by the lessor, the lessee exercised his right to terminate the lease and surrender possession of the premises, the result was a constructive reentry by the landlord. All issues between the parties were thus set at rest with the exception of the single issue of the liability of the lessee for unpaid rentals to the date of reentry. (State Guaranty Corp. v. Richardson, 9 Cal.App.2d 287, 289 [49 P.2d 606], citing Welcome v. Hess, supra.)

But, complains the defendant, the plaintiff has in effect received the relief sought by his complaint. This as a legal proposition is not so. In such a ease the lessee has a choice of several .remedies: he may rescind and become absolved from further payment of rentals; he may continue under the lease and sue for loss of profits; or he may treat the violation as putting an end to the lease for the purposes of performance and sue for damages. (Medico-Dental Bldg. Co. v. Horton & Converse, supra, at p. 434; Hiatt Inv. Co. v. Buehler, supra, 16 S.W.2d at p. 226. Here the plaintiff ineffectually sought the first named remedy. The fact that he failed to establish his right to rescission did not preclude him from any other relief that might be open to him. The rule that a party is not to be denied relief because he has mistaken his remedy is applicable in such a case. (Agar v. Winslow, supra, at p. 591.) The plaintiff may not be denied a lawful defense against an unjust claim for rentals because he misconceived his right to rescission. Here the court has merely given effect to the plaintiff’s treatment of the lessor’s violation of the restrictive covenant as putting an end to the lease for purposes of performance.

The defendant relies on Medico-Dental Bldg. Co. v. Horton & Converse, supra, and Strong v. Morrison, 87 Cal. App. 169 [261 P. 1051], as support for its contention that in any event the plaintiff was not entitled to terminate the lease without affording the defendant reasonable opportunity to remove the source of the objection. Neither of the cases relied on is controlling in favor of the defendant on the facts presented by this record. The defendant had notice from the plaintiff of the latter’s intended action on account of the former’s breach. That notice was given a sufficiently reasonable time in advance of the date of the commencement of the Smith tenancy to afford the defendant an opportunity to cancel that tenancy if it chose to do so, and thus place itself in a position to hold the plaintiff to his rental obligations. It did not follow that course, but preferred to deny the commission by it of any breach and to continue in force and collect the rentals under the month to month tenancy to Smith for purposes in violation of its lease with the plaintiff, and at the same time hold the plaintiff bound to his lease. This it could not do. In neither of the cases relied upon did the landlord enter into a rental agreement with the prospective tenant which expressly provided for the competing use. In those cases the violation was not direct, but indirect by reason of the conduct of the competing tenant. The landlord in each of those cases was entitled to reasonable notice and time sufficient to enable it to acquire knowledge of the facts, to ascertain whether the condition could be corrected, and if possible to prevent a continued breach. In cases of direct breach, such as the present, the contention that notice and reasonable opportunity to comply with the terms of the covenant are necessary to put the lessor in default, has been rejected. (Hiatt Inv. Co. v. Buehler, supra, 16 S.W.2d at p. 227, and cases cited.) Moreover, the finality of the defendant’s reply to the plaintiff’s notice indicated that further, opportunity would have availed nothing.

In its answer to the plaintiff’s complaint the defendant affirmatively admitted that its covenant not to let any space in the same building for use as a furniture store was a material and essential part of the agreement and of the inducement and consideration therefore, without which the plaintiff would not have entered into the lease. Its contention, however, that the breach of the covenant was in an immaterial respect and that the plaintiff was not entitled to abandon the lease for such a trivial cause is not supported by the record. A breach of a covenant not to permit a similar sales business to be conducted occurs if but one of several classes of articles is permitted to be sold by the competitor.' (Medico-Dental Bldg. Co. v. Horton & Converse, supra; Pappadatos v. Market Street Building Corp., 130 Cal.App. 62 [19 P.2d 517]; Parker v. Levin, 285 Mass. 125 [188 N.E. 502, 90 A.L.R. 1446, and note pp. 1449 et seq.].) The trial court found on sufficient evidence that linoleum and kindred products constituted a big item in the furniture business; that such products were sold at the plaintiff’s furniture store, and that competition in that respect would result in serious losses to him.

This court said in Medico-Dental Bldg. Co. v. Horton & Converse, supra, at page 428, that in measuring the breach of such a covenant in a case where the objectionable competition is in connection with a business different from that of the lessee who is entitled to protection from the lessor, technical subterfuges would be disregarded and the substance of the situation would determine the issue. Even considering the businesses here involved to be of such different character, the defendant’s claim of pretext is not supported, in view of the trial court’s findings on sufficient evidence that the sale of linoleum and kindred products constituted an important item in the furniture business and that the plaintiff was preparing to reopen his furniture store on the leased premises at the time of the defendant’s breach. Here, as in the Horton & Converse case, the covenant was of such character that its contemplated breach would defeat the entire object of the lease, render further occupancy a matter of continued financial loss, and therefore in effect destroy the consideration for the lease. The sufficiency of the evidence in these respects, the surrender of the premises by the plaintiff following his notice to the defendant, the latter’s immediate denial of the breach in response thereto and its refusal to take any action thereon except to hold the plaintiff to his lease and at the same time collect the rents from Smith, were justification under the law for the trial court’s conclusion that the lease had been terminated. As was said in University Club v. Deakin, supra, 106 N.E. at page 792, if the lessor chose to ignore the provision of the contract it did so at the risk of the lessee’s exercising his right to terminate the lease and surrender possession of the premises.

Other contentions of the parties need not be discussed.

The judgment is affirmed.

Gibson, C. J., Curtis, J., and Edmonds, J., concurred.