BRE DDR BR Whittwood CA v. Farmers & Merchants etc.

Filed 8/29/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
BRE DDR BR WHITTWOOD CA B272168
LLC,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No. VC064482)
v.
FARMERS & MERCHANTS
BANK OF LONG BEACH,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Raul A. Sagahun and Roger T. Ito, Judges.
Reversed and remanded, with directions.
Law Offices of Michael Leight, Michael Leight and
John Gloger for Defendant and Appellant.
Yocis & Cox, James M. Cox for Plaintiff and
Respondent.
When a shopping center tenant defaulted on a secured
loan, the lender took possession of the premises through
foreclosure and transferred its interest to a third party.
Later, the third party surrendered the premises. The
landlord filed this action against the lender to enforce the
lease obligations, including payment of rent for the full lease
term. The trial court granted summary adjudication in favor
of the landlord because the foreclosure documents referred to
the lease, and the lease required transferees to assume the
lease obligations. On appeal, the lender contends that it was
obligated to pay rent only while it was in possession of the
premises, because it never expressly assumed the lease
obligations. We hold that the purchase of the leasehold
estate in this case—identified in the deed of trust by
reference to the lease—did not constitute an express
agreement to assume the obligations of the lease. The record
shows the lender did not expressly assume the lease. We
reverse the judgment, with directions.
FACTS
The Lease
On December 13, 2006, the original owner of a
shopping center entered into a 15-year lease with the
Breckenridge Group (Tenant) for restaurant space. The
2
shopping center was eventually sold to respondent BRE
DDR BR Whittwood CA LLC (Landlord).1
Section 8.1.1 of the lease required Landlord’s consent
to any transfer, sale, assignment, or other conveyance. The
section provided, “Any attempted or purported Transfer
without Landlord’s written consent shall, at Landlord’s
election, be void and shall confer no rights upon any third
Person.” Section 8.1.1 permitted Tenant to encumber its
leasehold interest through a mortgage, but presumed that a
mortgage lender who succeeded to Tenant’s interest
assumed Tenant’s obligations: “Tenant shall have the right
. . . to encumber Tenant’s leasehold interest under this Lease
. . . through a Mortgage (‘Leasehold Mortgage’) with an
institutional lender . . . . Landlord agrees that in the event
the Leasehold Mortgagee succeeds to Tenant’s interest under
this Lease (in which event it shall assume all of Tenant’s
obligations under this Lease), Landlord shall, at the time of
such succession, recognize such mortgagee, trustee or lender
as the then Tenant under this Lease upon the same terms
and conditions contained in this Lease and for the then
unexpired portion of the Term.” The leasehold mortgagee
had the right under the lease to acquire and succeed to the
Tenant’s interest through a foreclosure sale.
1 The original owner, PPF RTL 15603 Whittwood Lane,
LP, sold the property to Cole MT Whittier CA, LP on August
27, 2010, who then sold the property to Landlord on October
17, 2014.
3
Section 8.1.2 of the lease applied to transfers other
than leasehold mortgages. These transfers required Tenant
to submit a transfer document providing for “the assumption
by the Transferee of all of the obligations and liabilities of
Tenant” under the lease.
On January 3, 2007, Tenant recorded a memorandum
of lease (memorandum) in the Los Angeles County
Recorder’s Office, signed by the original owner and Tenant.
It gave notice of the lease term of 15 years. The
memorandum notified successors of the transfer restrictions
set forth in the lease: “All of the rights and obligations of the
Parties under the Lease shall bind and inure to the benefit of
their respective heirs, successors and assigns; provided,
however, that nothing [i]n this Section 9 shall be construed
to limit or waive the provisions concerning restrictions on
Transfer set forth [i]n Article 8 of the lease.”
Construction Deed of Trust, Foreclosure, and Transfer
Appellant Farmers & Merchants Bank of Long Beach
(Farmers & Merchants) loaned funds to Tenant and recorded
a construction deed of trust securing the loan on January 16,
2007. The deed of trust identified the property as “[a]n
unrecorded leasehold estate established by a memorandum
of lease . . . recorded January 3, 2017.” Tenant assigned its
right, title, and interest in all present and future leases of
the premises to Farmers & Merchants.
4
Tenant defaulted on the loan. On February 12, 2009,
Farmers & Merchants recorded a notice of trustee’s sale of
the property. One month later, Farmers & Merchants
recorded a trustee’s deed upon sale identifying itself as the
successful bidder of the leasehold estate. Both documents
described the property in the same language as the
construction deed of trust.
On August 5, 2009, Farmers & Merchants recorded a
grant deed transferring the property to Whittier Carino’s,
LLC.2 Whittier Carino’s did not meet the requirements in
the lease for an appropriate transfer because it had a net
worth of less than $3 million and operated fewer than three
restaurants. Based on trademark concerns, Farmers &
Merchants recorded another grant deed on November 16,
2009, transferring the leasehold interest to Whittier JC, LLC
(Whittier). Whittier’s managing member is Farmer’s &
Merchants.
Landlord’s Notification of Inappropriate Transfer and
Surrender of Premises
The shopping center was sold to a second owner in
August 2010. On August 10, 2010, the general manager of
2 The property description on the grant deed identifies
“[a] leasehold as created by that certain lease dated
December 20, 2006, executed by PPF RTL 15603 Whittwood
Lane, LP . . . as Lessor, and Breckenridge Group, Inc. . . . as
Lessee, as reference in the document entitled ‘Memorandum
of Lease’ . . . .”
5
the shopping center sent a letter to Farmers & Merchants
stating that it was not notified of any transfer, which
rendered Farmers & Merchants in default under the lease.
Farmers & Merchants replied that its “interest in the subject
property continues to be held . . . via an LLC in which
[Farmers & Merchants] is the majority member.”
The general manager requested that Whittier execute
a tenant estoppel certificate. The chief executive officer of
Farmers & Merchants executed the certificate on behalf of
Whittier. The certificate lists Whittier as the successor in
interest of Tenant and states that the lease termination date
is March 31, 2023.
The second owner received rent payments from
Whittier through July 2014. After the second owner sold the
property to Landlord in October 2014, Whittier stopped
paying rent and surrendered possession of the premises on
December 22, 2014, with the intent to terminate the
leasehold estate.
PROCEDURAL HISTORY
Landlord filed an amended complaint against Farmers
& Merchants and Whittier on January 13, 2015, alleging
causes of action for breach of contract and damages under
Civil Code section 1951.2. Landlord filed a motion for
summary adjudication on the issue of whether Farmers &
Merchants had a contractual duty as successor to Tenant to
comply with the lease. In opposing the motion, defendants
6
submitted a declaration by the vice president at Farmers &
Merchants that defendants neither “intended to, nor did
they assume the at issue Lease.”
In December 2015, the trial court granted plaintiff’s
motion for summary adjudication. The court found that the
construction deed of trust and notice of sale specifically
identified the lease, and the lease provided that Farmers &
Merchants was obligated by the lease terms upon
foreclosure. Farmers & Merchants elected to purchase the
leasehold estate and succeeded to Tenant’s rights and
obligations. “The language of the underlying documents
compels a finding that defendant owes contractual duties
under the subject lease.”
A bench trial was held on the issue of damages. The
vice president of Farmers & Merchants testified that neither
defendant executed a document expressly assuming the
obligations under the lease. Relying on the summary
adjudication ruling, the court found a breach of contract and
calculated damages. The trial court entered judgment
against Farmers & Merchants in favor of Landlord on March
3, 2016. Farmers & Merchants filed a timely notice of
appeal.3
3 In the parties’ briefs on appeal, they refer to
defendant Whittier as an appellant. The trial court did not
enter a judgment against Whittier. Only a party aggrieved
by the judgment has standing to appeal. (Code Civ. Proc.,
§ 902; County of Alameda v. Carleson (1971) 5 Cal.3d 730,
7
DISCUSSION
Standard of Review
“Motions for summary adjudication are procedurally
identical to motions for summary judgment ([Code Civ.
Proc.], § 437c, subd. (f)(2)), and our review of rulings on those
motions is de novo (Hartline v. Kaiser Foundation Hospitals
(2005) 132 Cal.App.4th 458, 464). Summary adjudication is
warranted only if the motion completely disposes of a cause
of action, an affirmative defense, a claim for damages, or an
issue of duty. (Code Civ. Proc., § 437c, subd. (f)(1).) The
motion shall be granted ‘if all the papers submitted show
that there is no triable issue as to any material fact and that
the moving party is entitled to a judgment as a matter of
law. In determining whether the papers show that there is
no triable issue as to any material fact the court shall
consider all of the evidence set forth in the papers, except
that to which objections have been made and sustained by
the court, and all inferences reasonably deducible from the
evidence . . . .’ (Id., subd. (c).)” (Dunn v. County of Santa
Barbara (2006) 135 Cal.App.4th 1281, 1290.) In reviewing
the summary adjudication ruling, we view the evidence
presented in the light most favorable to the party opposing
736-737.) Whittier did not file a notice of appeal and has no
standing to appeal because it is not an aggrieved party.
8
summary adjudication. (Seibold v. County of Los Angeles
(2015) 240 Cal.App.4th 674, 682.)
We apply a de novo standard of review to the
interpretation of a lease and subsequent documents. (ASP
Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th
1257, 1266.) “‘The precise meaning of any contract,
including a lease, depends upon the parties’ expressed
intent, using an objective standard. [Citations.] When there
is ambiguity in the contract language, extrinsic evidence
may be considered to ascertain a meaning to which the
instrument’s language is reasonably susceptible. [Citation.]
[¶] . . . We review the agreement and the extrinsic evidence
de novo, even if the evidence is susceptible to multiple
interpretations, unless the interpretation depends upon
credibility. [Citation.]’” (Id. at pp. 1266-1267.)
General Principles Governing Assumption of a Real
Property Lease
“A lease of real property is both a conveyance of an
estate in land (a leasehold) and a contract. It gives rise to
two sets of rights and obligations—those arising by virtue of
the transfer of an estate in land to the tenant (privity of
estate), and those existing by virtue of the parties’ express
agreements in the lease (privity of contract).” (Vallely
Investments v. BancAmerica Commercial Corp. (2001) 88
Cal.App.4th 816, 822 (Vallely).) A leasehold estate for years
is a sufficient interest in real property to be security for a
deed of trust that confers a power of sale affecting the
9
leasehold after breach of the obligation so secured. (Civ.
Code, § 2920.) “‘[W]here a trust deed to secure a loan is
taken . . . , the lessee’s interest under such lease is foreclosed
by the foreclosure of the deed of trust.’ [Citation.]” (R-
Ranch Markets #2, Inc. v. Old Stone Bank (1993) 16
Cal.App.4th 1323, 1327.) A mortgagee who takes lawful
possession of the premises from the lessee is considered an
assignee. (Schonfeld v. City of Vallejo (1975) 50 Cal.App.3d
401, 421, disapproved on other grounds in Morehart v.
County of Santa Barbara (1994) 7 Cal.4th 725; Johnson v.
Sherman (1860) 15 Cal. 287, 292-293 [“[h]e is therefore
substituted in the place of the mortgagor, who was lessee,
and therefore is assignee and liable as such”].)
“An assignee’s liability to the landlord turns on the
nature of the assignment. If the assignee takes possession of
the premises but no more, privity of estate exists and he is
bound by all lease covenants which run with the land. Upon
a subsequent assignment, privity of estate ends and, with it,
all obligation to the landlord. (Kelly v. Tri-Cities
Broadcasting, Inc. (1983) 147 Cal.App.3d 666, 678 [(Tri-
Cities)].) If, however, the assignee expressly agrees with the
assignor to assume the obligations of the lease, far different
consequences attend. The assumption agreement creates a
new privity of contract between landlord and assignee,
enforceable by the landlord as a third party beneficiary,
regardless of whether the landlord was a party to the
assumption agreement. As a consequence, the assuming
assignee is required to perform all covenants of the lease for
10
the remainder of its term, absent a release by the landlord.
(Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d
232, 244–245; Rest.2d Property, Landlord and Tenant, § 16.1
(4), com. c, p. 121.)” (Vallely, supra, 88 Cal.App.3d at p. 822.)
In Enterprise Leasing Corp. v. Shugart Corp. (1991)
231 Cal.App.3d 737 (Enterprise), this court found that there
must be an express assumption of the contractual
obligations of a real property lease to hold an assignee liable
for the lease obligations. (Id. at p. 746.)4 Lease covenants
that run with the land bind and inure an assignee only as
long as it remains in possession of the premises. “‘“As long
as he remains in possession the nonassuming lessee is bound
to pay the rent, maintain the insurance, make repairs, and
pay taxes, if the lease so provides. However, these
obligations terminate when the assignee terminates his
possession.”’” (Id., supra, at pp. 745–746, quoting Tri–Cities,
4 The requirements for the assumption of a lease of real
property are different than for those of personal property.
(Miller & Starr, Cal. Real Estate (4th ed. 2016) § 34:131, pp.
34-427-34-428.) The assumption of a lease of personal
property can be shown through words or actions without any
formal assumption, and even “implied from the assignee’s
acceptance of the benefits under the contract or its
acquiescence in the terms of the contract. However, the
same rules do not apply to the assumption of a lease of real
property, which requires a formal written assumption. The
entry into possession and acceptance of the benefits of the
lease will not render the assignee liable on the contract as an
assuming party.” (Ibid., fn. omitted.)
11
supra, 147 Cal.App.3d at p. 677; accord, Melchor Investment
Co. v. Rolm Systems (1992) 3 Cal.App.4th 587, 593.)
Express Agreement
It is undisputed that the deed of trust and sale upon
deed created an assignment to Farmers & Merchants.
Landlord contends that Farmers & Merchants also assumed
the lease obligations for the full term, because the
foreclosure and purchase of the deed of trust that referenced
the lease constituted an express assumption of the lease
terms. We disagree.
An express assumption of a real property lease
requires specific affirmation by the assignee to bind itself to
the lease obligations. In Bank of America National Trust &
Savings Association v. Moore (1937) 18 Cal.App.2d 522(Moore), the court found the defendant assumed the
obligations of a lease by stating so in a written assignment
agreement. The document was signed by the defendant, as
assignee, and the assignor. The document concluded, “‘It
being understood that said Assignee . . . is to accept, assume
and agree to perform all of the terms, conditions and
limitations contained in said lease.’ [¶] ‘The undersigned,
[defendant], hereby accepts, assumes and agrees to perform
all of the terms, conditions and limitations contained in the
aforementioned lease to be kept and performed by said
lessee.’” (Id. at p. 524.) This language established “privity of
contract.” (Id. at p. 525.) The court stated, “we have not a
12
naked assignment creating privity of estate only, ceasing
with cessation of possession, but one clothed with the
express assumption by the assignee of the obligations of the
lessee. . . . [T]he agreement of the defendant, in harmony
with the requirement of the lease, may be interpreted as a
contract directly with the lessor.” (Ibid.)
In Realty & Rebuilding Co. v. Rea (1920) 184 Cal. 565,
(Rea), the Supreme Court distinguished a “bare assignment”
from an “express agreement” to assume obligations in a
lease: “An occupant of real property who holds by virtue of a
bare assignment of the lease and without entering into any
contract, either with his assignor or the lessor, affirmatively
binding himself to fulfill the covenants of the lease, is subject
only to such obligations as he impliedly assumes by entry
and taking possession of the lease premises. [Citations.] . . .
Where, however, the assignee expressly agrees in writing to
be bound by the terms of the lease, there arises, as
distinguished from any obligation resulting from mere
occupancy, a new and different obligation . . . based upon
privity of contract.” (Id. at p. 569.)
Similarly, in First Nat. Bank v. Aldridge (1939) 33
Cal.App.2d 485 (Aldridge), the defendant sought to avoid
rent obligations by claiming that no privity of contract
existed with the plaintiff, who was an assignee under the
initial lease. (Id. at pp. 487, 490.) The court disagreed,
relying on the defendant’s signed agreement to “‘assume
future obligation of the original lessee and first party . . . in
payment of future rentals to the lessor . . . or other party
13
entitled thereto.’” (Id. at p. 487.) It noted that “[e]ven in the
absence of such an agreement, appellants would have been
liable for rent during the period of their occupancy” because
the covenant to pay rent ran with the land, “and the naked
assignment alone created a privity of estate . . . which placed
upon them the obligation to pay rent provided for while they
remained in possession of the premises.” (Id. at p. 490;
accord, Hartman Ranch Co. v. Associated Oil Co. (1937) 10
Cal.2d 232, 243 [sublease to defendant contained express
promise to assume parent lease]; Tyler v. Wilson (1943) 58
Cal.App.2d 583, 587 [partnership did not assume obligations
of lease, so monthly payments provided for in lease
continued “only so long as” the partnership remained in
possession.].)
Under the same legal principles, the Supreme Court
has declined to impose obligations on an assignee where the
assignee did not sign the lease or any document evidencing
an acceptance of the lease or its obligations. In Treff v.
Gulko (1932) 214 Cal. 591 (Treff), the court found that
although the assignee consented to an assignment and made
payments over time to the landlord, the assignee never
signed an “acceptance or agreement to take over the lease.”
(Id. at p. 596.) Finding the defendant “h[eld] under a mere
naked assignment of a lease,” the court upheld the obligation
to pay rent so long as the assignee remained in “occupancy of
the premises [which] terminates with his abandonment of
possession.” (Id. at p. 600). The court distinguished cases
that found “fresh contractual stipulation” to bind the
14
assignee under the lease. (See id. at pp. 594–595, citing
Bonetti v. Treat (1891) 91 Cal. 223 [assignee agreed in
writing “‘to pay all rent that may fall, due from time, to time
by virtue of the provisions of said lease’”]; Lopizich v. Salter
(1920) 45 Cal.App. 446 [assignee signed document “‘hereby
accept[ing] said assignment, and hereby obligat[ing] itself
upon said lease’”].) “‘In the absence of fresh contractual
stipulation, there is no privity of contract between the
assignee and the landlord. But the assignee may, by express
stipulation to be bound by the covenants of the lease, create
a privity of contract between himself and the landlord, which
will also endure till the term expires. . . . It seems, however,
that to establish privity of contract between landlord and
assignee, the necessary agreement must be made between
them themselves.’” (Treff, supra, at p. 600; accord, Ellingson
v. Walsh, O’Connor & Barneson (1940) 15 Cal.2d 673 [upon
admission of individual defendant as member of lessee
partnership, a new legal partnership was formed and
required express assumption of the lease to bind the
partnership to the lease’s contractual obligations].)
The facts in Tri-Cities are similar to the case before us.
There, a lease between the landowner and lessee required
any assignee to assume the lease obligations: “Lessee
hereby warrants and represents that in the event said
assignment shall ever take place, the assignee therein shall
assume all of the liabilities and obligations assumed by
Lessee in this Lease Agreement.” (Tri-Cities, supra, 147
Cal.App.3d at p. 671.) The lease further provided that the
15
“‘assigns and/or heirs of both parties shall carry out the
terms of this Lease Agreement.’” (Ibid.) The defendant
purchased the lessee’s business, including the lease. (Id. at
p. 670.) The purchase agreement “acknowledged the
[existence] of a land lease covering the real property,” and
attached an exhibit that states, “‘Land Lease covering real
property on which broadcasting transmitter is located.’” (Id.
at p. 671.) The bill of sale also lists the “Land Lease covering
real property on which broadcasting transmitter is located.”
(Ibid.) As part of plaintiffs’ petition to compel arbitration, it
argued that the purchase agreement, lease, and possession
of property by Tri-Cities was proof of an assumption of the
lease. (Id. at p. 672.) The trial court agreed, but the
appellate court did not.
The Tri-Cities court noted that “[i]n every case
examined where there has been an express assumption, the
assignee has stated specifically either orally or in writing
that he agrees to be bound by the terms of the lease.” (Tri-
Cities, supra, 147 Cal.App.3d at p. 673.) After considering
the evidence at issue,5 the court concluded “as a matter of
5 First, the court noted that the purchase agreement’s
language (“‘[h]owever, the assignability of such lease will be
subject to its terms’”) “cannot be stretched into an express
assumption of all the terms in the lease.” (Tri-Cities, supra,
147 Cal.App.3d at pp. 674–675.) Instead, the court
construed this language to reference the uncertainty as to its
“assignability.” (Id. at p. 675.) Second, the lease provision
stating that “‘assignee therein shall assume all of the
liabilities and obligations assumed by the Lessee in this
16
law no evidence was presented to the trial court . . . to
substantiate the conclusion Tri-Cities had assumed the
lease.” (Id., at pp. 674–676.)
We adhere to the reasoning set forth in Tri-Cities and
conclude no express assumption can be found in this case.
Farmers & Merchants was not a signatory to the lease. The
contract between the original owner and Tenant
contemplates engaging a mortgage lender, but the provisions
cannot form a binding contract on a non-party to the lease.
The foreclosure documents do not contain an express
agreement to assume the lease. The deed of trust, notice of
trustee’s sale, and deed upon sale reference the
memorandum of lease, but do not provide any express terms
by which Farmers & Merchants agreed to uphold the lease
covenants or provisions in the memorandum of lease. We
agree with the rationale set forth in Tri-Cities that the
language of the documents served to acknowledge the lease
rather than assume its obligations.
Farmers & Merchants was not a signatory to the
tenant estoppel certificate. Whittier executed the tenant
estoppel certificate, but no fresh contract was entered into
with Whittier, because Landlord refused to consent to
Agreement’” imposed a duty on the “lessee, not the assignee.”
(Ibid.) Finally, the lease provision that “‘assigns and/or heirs
of both parties shall carry out the terms of this Lease
Agreement’” constituted an obligation of the lessor and
lessee to obtain assumption agreements necessary to
perform the terms of the lease—“[i]t create[d] no privity of
contract with Tri-Cities.” (Id. at pp. 675–676.)
17
Whittier as assignee. The evidence establishes nothing more
than a “naked assignment” to Farmers & Merchants.
Farmers & Merchants never assumed the lease obligations
and was required to pay rent only until it surrendered
possession of the premises. (Enterprise, supra, 231
Cal.App.3d at pp. 745-746.)
Landlord could have protected itself by requiring the
mortgage lender to sign the lease or a document assuming
the lease obligations. It did not do so. Landlord, as a
signatory to the initial lease, was in the best position to
protect itself by including provisions in the lease requiring
consent and assumption. (See Bennett v. Leatherby (1992) 3
Cal.App.4th 449, 452 [“lessor[] consented to the sublease and
required ‘the specific assumption of all of the obligations’”];
Moore, supra, 18 Cal.App.2d at p. 525 [“the lease itself
declares that an assignment shall be void unless the
assignee agrees, in writing, to carry its burdens, the
agreement of the defendant, in harmony with the
requirement of the lease, may be interpreted as a contract
directly with the lessor”].) In such scenario, the landlord
could treat the lease as voidable and seek legal recourse.
(Judicial Council of California v. Jacobs Facilities, Inc.
(2015) 239 Cal.App.4th 882, 911 [“the unconsented
assignment of a lease can be voided by the lessor’s
declaration of forfeiture”].) The lease did not direct Tenant
to obtain an assumption from the mortgage lender as it did
in the event of a transfer under the lease in Section 8.1.2.
18
We reverse the judgment and the order granting
summary adjudication. We direct the trial court to deny
Landlord’s motion for summary adjudication and we remand
for further proceedings consistent with this opinion, which
may include the filing of a dispositive motion by Farmers &
Merchants on the issue of assumption of the lease. Farmers
& Merchants has requested an award of attorney fees on
appeal. The issue of its entitlement to attorney fees and the
appropriate amount, if any, is best left to the determination
of the trial court. (In re Marriage of Cheriton (2001) 92
Cal.App.4th 269, 320.)
19
DISPOSITION
The judgment and the order granting summary
adjudication in favor of BRE DDR BR Whittwood CA LLC
are reversed. The trial court is directed to enter a new and
different order denying the motion for summary
adjudication. Appellant Farmers & Merchants Bank of Long
Beach is awarded its costs on appeal.
KRIEGLER, Acting P.J.
We concur:
BAKER, J.
DUNNING, J.
 Judge of the Orange Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the
California Constitution.
20