Izzy's Deli v. LMA & SAI 1433 Wilshire CA2/5

Filed 5/11/22 Izzy’s Deli v. LMA & SAI 1433 Wilshire CA2/5
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
IZZY’S DELI, B306162, B306180
Plaintiff and Respondent, (Los Angeles County
Super. Ct. Nos.
v. SC129964,
18SMCV00315)
LMA & SAI 1433 Wilshire LLC,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Elaine W. Mandel, Judge. Affirmed.
Cozen O’Connor, Frank Gooch III, Matthew E. Lewitz;
Klapach & Klapach and Joseph S. Klapach for Defendant and
Appellant.
Mitchell Silberberg & Knupp, Stephen E. Foster, and
Andrew C. Spitser for Plaintiff and Respondent.
Does a tenant leasing commercial property or the
property’s owner bear the financial burden of complying with a
2017 local ordinance that requires seismically retrofitting a
building? That is the question we are asked decide, and the
answer turns on whether the leasing arrangement in this case—
which includes an early termination provision in the property
owner’s favor—is more like the arrangement in Hadian v.
Schwartz (1994) 8 Cal.4th 836 (owner held responsible) (Hadian)
or Brown v. Green (1994) 8 Cal.4th 812 (tenant held responsible)
(Brown).
I. BACKGROUND
A. The Commercial Lease and Its Subsequent Extensions
and Amendments
1. The original 1973 lease
In 1973, property owners Ernest and Lisa Auerbach agreed
to lease commercial property located at 1429-33 Wilshire
Boulevard in Santa Monica, California (the premises) to Kenny’s
Deli. Kenny’s Deli is the predecessor company to plaintiff and
respondent Izzy’s Deli (Izzy’s). (For simplicity’s sake, we will
refer to both companies as Izzy’s in the remainder of this
opinion.) Ownership of the premises was ultimately conveyed
from the Auerbachs to defendant and appellant LMA & SAI 1433
Wilshire LLC (LMA). (Again, for simplicity, we will refer to the
owner of the premises as LMA without distinction.)
The term of the original 1973 lease was 15 years: from June
1973 to May 1988. The lease specified the premises was to “be
used and occupied only for a delicatessen, restaurant and
catering business.” Izzy’s was obligated to pay base rent of
$438,000 in specified monthly installments. LMA was to receive
2
the rent “free and clear of any and all other impositions, taxes,
liens, charges or expenses of any nature whatsoever in connection
with the ownership and operation of the [p]remises.”
Additionally, Izzy’s was to pay “all impositions, insurance
premiums, operating charges, maintenance charges, construction
costs, and any other charges, costs and expenses which arise or
may be contemplated under any provisions of this Lease during
the term hereof.”1
Section 6 of the lease, governing “[u]se,” generally discusses
compliance with applicable law. It requires Izzy’s to promptly
comply with “all applicable statutes, ordinances, rules,
regulations, orders and requirements in effect during the term or
any part of the term hereof regulating the use by [the lessee] of
the [p]remises” at its own expense. Izzy’s also accepted the
premises in the condition existing as of the date the lease was
executed, “subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating
the use of the [p]remises . . . .”
Section 7 of the lease, governing “[m]aintenance, [r]epairs,
and [a]lterations,” obligated Izzy’s to “keep in good order,
condition and repair, the [p]remises and every part thereof,
structural or non-structural, and all adjacent sidewalks,
landscaping, driveways, parking lots, fences and signs located in
1
The lease also stated Izzy’s must pay additional rent in an
amount equal to 6 percent of its gross sales during each month of
the term, less the aggregate amount of the minimum monthly
rent paid that month. It is undisputed this gross profits
percentage was never paid during the life of the lease and all of
the later extensions.
3
the areas which are adjacent to and included with the
[p]remises.” It further provides LMA would “incur no expense
nor have any obligation of any kind whatsoever in connection
with maintenance of the [p]remises” and that Izzy’s waived the
benefits of any statute which would afford it the right to make
repairs at LMA’s expense. The lease provided, however, that
except for damage caused by Izzy’s, LMA would be responsible for
keeping the exterior roof of the premises in good order.
Section 7 additionally prohibits Izzy’s from “mak[ing] any
alterations, improvements, additions, or utility installations in,
on or about the [p]remises, except for non-structural alterations
not exceeding $1,000.00 in cost” without LMA’s consent. Further,
any alterations, improvements, additions or utility installations
made upon the premises would become LMA’s property at the
expiration of the lease term.2
Other provisions of the lease established who would pay for
certain expenses. Izzy’s was to pay the cost of all required
insurance (i.e., a comprehensive public liability policy and
property insurance) as additional rent. Izzy’s was also obligated
to indemnify LMA against any claims arising from Izzy’s use of
the premises and conduct of business. In the event
improvements on the premises were damaged or destroyed, Izzy’s
was to “repair, restore, and rebuild the [p]remises to their
condition existing immediately prior to such damage or
destruction,” with the lease continuing in full force and effect.
LMA would pay real property taxes for the premises, but Izzy’s
2
Izzy’s machinery and equipment “other than that which is
affixed . . . so that it cannot be removed without material damage
to the [p]remises” remained Izzy’s property.
4
was to pay any increases in real property taxes imposed after the
1973 to 1974 fiscal year.
Finally, the lease provided LMA’s consent was required for
Izzy’s to assign, transfer, mortgage, sublet, or otherwise transfer
or encumber any of its interest in the lease or the premises.
2. Early amendments to the lease
The parties signed the first amendment to the lease in July
1975. Pursuant to the first amendment, the furnishings and
fixtures used in operation of the deli were assigned to LMA for
the duration of the lease. The amendment also gave LMA the
right to use the lease as collateral to obtain a loan.
The parties executed a second amendment to the lease in
February 1988. Pursuant to the second amendment, the parties
agreed to extend the lease an additional fifteen years, from June
1988 through May 2003. The second amendment increased the
base monthly rent to $10,000 per month, and that amount would
be increased annually pursuant to an agreed-upon formula.
Izzy’s was also to pay the cost of all required insurance, any real
property taxes in excess of the real property tax bill for the 1973-
1974 fiscal year, and any increase in property taxes as a
consequence of a transfer or change in ownership of the premises.
The second amendment also amended paragraph 7.1 of the lease
to provide that, going forward, Izzy’s would be responsible “for
keeping the entire premises, including, but not limited to, the
interior and exterior roof, in good order, condition and repair.”
3. The third amendment
The parties executed a third amendment to the lease in
December 1992. The third amendment reduced the amount of
5
rent Izzy’s would pay in 1993 and set the amount of rent that
would be paid in 1994.
More important for our purposes, the third amendment to
the lease added new language that would permit LMA to
terminate the lease before the expiration of the agreed-upon term
if certain contingencies concerning one of Izzy’s founders and its
then owner, Israel Freeman (Freeman), occurred. Specifically,
the lease as amended provided that “[i]n consideration of the rent
reduction . . . and acknowledging that the personal involvement
of . . . Freeman in the restaurant business conducted by
[Izzy’s] . . . is essential to the continued success of [Izzy’s], the
parties agree[d]” (among other things) that “any sale, transfer or
other conveyance by . . . Freeman, whether voluntarily,
involuntarily or by operation of law, of thirty-five percent (35%)
or more of his shares of stock of [Izzy’s] shall be deemed to
constitute an assignment of the Lease.” Relatedly, the lease
amendment provided that in the event Izzy’s “voluntarily,
involuntarily or by operation of law” assigned the lease, sublet all
or any portion of the premises, or transferred or conveyed
substantially all of its assets, Izzy’s would have to provide
written notice to LMA and LMA would have the right, at its “sole
and absolute discretion” to elect to terminate the lease in 30 days.
4. The fourth and fifth amendments
The parties executed a fourth amendment to the lease in
May 2003.3 The fourth amendment extended the term of the
3
The fourth amendment specified that “[e]xcept as hereby
amended, the Lease shall remain in full force and effect, and, in
the event of a conflict between a provision contained in this
Fourth Amendment and a provision contained in the Lease, as
6
lease an additional 15 years, from June 2003 to May 2018—with
an option to further extend the lease for an additional five years
to May 2023. Beginning in June 2003, the fourth amendment
required Izzy’s to pay the entire annual property tax bill for the
premises. Izzy’s was also responsible for maintaining the general
liability insurance required by the second amendment to the
lease and for reimbursing LMA for the cost of any insurance LMA
elected to maintain with respect to the premises. Izzy’s further
agreed that it must keep the premises in good order, condition,
and repair at its own expense, and that LMA would “not be
required to contribute in any manner.”
Later, in March 2009, the parties executed a fifth
amendment to the lease. The fifth amendment extended the
lease for an additional ten years, from June 2018 to May 2028—
with an option for Izzy’s to extend the lease for an additional five
years to May 2033, which Izzy’s exercised in December 2016.
B. Santa Monica Ordinance No. 2537
In March 2017, the City of Santa Monica adopted
Ordinance No. 2537 (the Santa Monica Ordinance), which
updated certain seismic retrofit standards and adopted
mandatory seismic retrofit requirements. The Santa Monica
Ordinance ordered owners of buildings that fell within the scope
of the ordinance to comply with the newly adopted seismic
retrofit requirements. The City of Santa Monica contends the
Santa Monica Ordinance applies to the building located on the
premises.
heretofore amended, the provision contained in this Fourth
Amendment shall govern and control.”
7
C. Litigation Over Who Must Pay for Santa Monica
Ordinance Compliance
After enactment of the Santa Monica Ordinance, a dispute
arose between Izzy’s and LMA regarding who must pay for the
seismic retrofitting of the building on the premises. The dispute
soon blossomed into competing lawsuits.
LMA filed an unlawful detainer complaint against Izzy’s in
October 2018. LMA contended Izzy’s had failed to comply with a
“Thirty-Day Notice to Perform Covenants or Quit,” served on
Izzy’s and Freeman, that demanded Izzy’s agree in writing that it
was responsible to pay for all seismic retrofit costs and expenses
associated with the Santa Monica Ordinance.
Two months later, Izzy’s sued LMA seeking declaratory
relief. Izzy’s complaint disputed it was responsible for paying
costs and expenses associated with Santa Monica Ordinance
compliance and sought a declaration so stating. Izzy’s further
alleged LMA believed it was entitled to unilaterally determine
the nature and scope of the seismic retrofit upgrade work and
Izzy’s sought a declaration that, if it were required to pay for
some or all of the work, it was nevertheless entitled to select and
retain professionals to design and perform the work, including in
a manner that would not unreasonably interfere with its
business.
The trial court consolidated the unlawful detainer and
declaratory relief actions for purposes of trial.
D. Trial
The parties stipulated to bifurcate the trial so that the
issue of whether LMA or Izzy’s was responsible for costs of
compliance with the Santa Monica Ordinance was tried first.
8
The trial court held a two-day bench trial to decide the issue in
February 2020. The witnesses who testified were Freeman;
Helayne Levy, a real estate consultant; William Hughes, a
commercial general contractor; and Lorna Auerbach, the
Auerbachs’ daughter.
1. Freeman’s testimony
Freeman was 80 years old at the time of trial and suffered
from health problems, including being at risk of suffering a
stroke.
Freeman testified he did not read the lease or any of its
amendments before signing them. He explained Ernest
Auerbach was his partner and friend, and whatever he wanted
was fine with Freeman. Freeman assumed the lease was drafted
by Ernest Auerbach’s attorney because he said he would have an
attorney draw up an extension that Freeman requested.
Freeman described various times Ernest Auerbach either
paid for or contributed to repairs for Izzy’s. In 2007, he paid for
at least half of the remodel of a bathroom at Izzy’s. Earlier, in or
around 2001, he paid the legal fees related to a lawsuit over
Izzy’s parking rights. He also paid for damage to some tiles on
the exterior of the deli that were damaged in the 1994 Northridge
earthquake.
2. Hughes’s testimony
William Hughes, a commercial general contractor who
prepared a bid for the seismic retrofit of Izzy’s (he had not been
hired by the time of trial), opined about certain work required as
part of the retrofit. Hughes’s bid, which was based on
preliminary documents designated as “not for construction,” was
9
$462,369. That bid did not include, however, the cost of reroofing
the premises,4 which Hughes testified would be necessary, nor did
it include improvements to comply with the Americans with
Disabilities Act that Hughes knew the City of Santa Monica
would require. Hughes had not prepared an estimate of the total
cost to perform all of the work Santa Monica would require in
connection with performing the seismic retrofit upgrade.
Hughes estimated his work would take 12 to 14 weeks to
complete. It would involve, among other things, drilling into
concrete, tying in structural steel plates, and adding bracing to
the walls. Hughes asserted they would need to do the work in
the daytime but could “do a big part of it off hours.” Based on his
inspection of the premises, Hughes stated he would attempt to do
the work “from above” (i.e., above the acoustical ceiling) such that
Izzy’s—which operated as a 24-hour deli—could remain open.5
But he conceded the actual impact of the work on Izzy’s
operations was “to be determined.”
Hughes believed the seismic retrofit work on the building
situated on the premises would extend its life “a long time”
(assuming no intervening earthquake) and the contemplated
work on the roof would extend it about 20 years.
4
The record includes a separate bid for roofing work in the
amount of $72,000.
5
On the other hand, LMA submitted a report to the city
representing that based on LMA’s plans, “the [d]eli operation
would have to be closed during retrofit construction” and Izzy’s
was opposed to closing.
10
3. Levy’s testimony and facts judicially noticed
Helayne Levy, a consultant for Auerbach Realty, testified
that in May 2018, LMA took out a loan secured by the premises
in the amount of $1.25 million and executed a deed of trust.
The trial court took judicial notice of an actuarial table
from the Social Security Administration. The actuarial table
provided the life expectancy of an 80 year old man was 8.34
years. The court also took judicial notice of the fact that large
earthquakes occurred in Sylmar in 1971, in Whittier Narrows in
1987, and in Northridge in 1994.
E. The Trial Court’s Ruling
At the conclusion of trial, the trial court orally found in
Izzy’s favor. The court subsequently issued a statement of
decision elaborating on its reasons.
The trial court believed there was no specific language in
the lease or its amendments identifying which party must pay for
seismic retrofit upgrades and determined it should apply the two-
part test described in Hadian and Brown to decide who bore
responsibility to pay for the retrofit work. (See generally Hadian,
supra, 8 Cal.4th at 845-849 [a court considers, first, whether the
life of the lease and the extent to which it transfers the incidents
of full ownership of the property suggests that a tenant is made
responsible for paying for seismic retrofit work; and, if so, a court
then considers six factors first discussed in Glenn R. Sewell Sheet
Metal, Inc. v. Loverde (1969) 70 Cal.2d 666, 674 (Sewell) that are
intended to illuminate whether, despite the use of unqualified
language in the lease, the parties really did intend the tenant
would assume that responsibility].)
11
At the first step, the trial court concluded the lease did not
pass “substantially all of the responsibilities of property
ownership” or “the incidents of full ownership” of the premises to
Izzy’s. The court pointed to LMA’s retention of control over the
type of business Izzy’s was allowed to operate (including even
what type of signage was permitted), Izzy’s inability to sublease
the premises without LMA’s consent, and the provisions of the
lease that deem LMA the owner of furnishings and fixtures
installed by Izzy’s. The court also found it significant that LMA
took out a $1.25 million loan secured by the premises because the
premises would be forfeited and the lease terminated if LMA did
not timely repay the loan.
At the second step, the trial court found the Sewell criteria6
similarly counseled in favor of finding LMA responsible for the
cost of seismic retrofit work. The court believed the analytically
relevant lease term was the length of the current (fifth) lease
amendment and that term, though 15 years on paper, was
uncertain and could be quite short: the lease provided LMA could
unilaterally terminate it if and when Freeman died or otherwise
6
The criteria are: (1) the relationship of the cost of
compliance with a government mandate to the “rent reserved,”
i.e., the total rent payable over the lease; (2) the length of the
lease; (3) the relative degree to which the tenant or the owner
would benefit from the compliance work to be done; (4) whether
the compliance work is structural or nonstructural in nature; (5)
the degree to which compliance work will interfere with the
tenant’s operations; and (6) the likelihood that the parties
contemplated the application of the particular ordinance or
government mandate involved. (Hadian, supra, 8 Cal.4th at 847-
849.)
12
transferred 35 percent of his ownership share of Izzy’s. LMA, in
the court’s view, had not proven what the cost of compliance with
the Santa Monica Ordinance would be (Hughes’s bid was
“incomplete”), and the amount of rent reserved could not be
calculated due to the aforementioned uncertainty in the lease
term. The trial court further found: the structural retrofit work
would confer comparatively greater benefits on LMA, including
for many years after the termination of the lease; there were
some structural and some non-structural elements to the
anticipated work; Hughes’s testimony as to the length of the
proposed work and its lack of interference with Izzy’s business
was unpersuasive and did not appear to be based upon well-
founded assumptions about the nature and extent of the
interference; and, when the lease amendments were drafted and
executed, the parties had sufficient information that they could
have contemplated a potential need for seismic retrofitting and
who would pay for it, but no such term was included in the
amendments even though the amendments were drafted by
LMA’s attorneys.
In line with its stated rationale, the court subsequently
entered a judgment concluding LMA failed to meet its burden of
proof on the unlawful detainer claim and Izzy’s was entitled to
remain in possession of the premises, Izzy’s prevailed on its claim
for declaratory relief, and LMA was responsible for paying all the
costs and expenses associated with bringing the building on the
premises into compliance with the Santa Monica Ordinance. The
court further found Izzy’s was the prevailing party and entitled to
costs and attorney fees in an amount to be determined.
13
II. DISCUSSION
The circumstances in this case, including features of the
lease itself, are closer to the Hadian end of the spectrum defined
by our Supreme Court, not the Brown end. The law places the
burden of compliance with laws like the Santa Monica Ordinance
on a property owner like LMA unless both of the following are
true: (1) the terms of the commercial lease in question—including
the length of the lease and the extent to which it transfers indicia
of full ownership to the tenant—appear to place the burden on
the tenant, not the owner; and (2) consideration of the six
judicially developed Sewell criteria cited in Brown and Hadian
confirms both parties to the lease did actually intend the tenant
to be responsible for the expense of compliance. (Hadian, supra,
8 Cal.4th at 845-847; Brown, supra, 8 Cal.4th at 825-826.) As we
will explain, the facts here bearing on the first of these
considerations are somewhat equivocal: the length of current
lease term, while facially a 15-year term that Brown would
otherwise consider “long,” is made uncertain by the clause
permitting LMA to terminate the lease early if the Freeman
contingencies occur; there are also some significant indicia of
ownership that the lease withholds for LMA. Consideration of
the Sewell criteria, however, tips the balance in Izzy’s favor and
leaves us convinced the parties intended LMA to shoulder the
burden of complying with the Santa Monica Ordinance.
A. Applicable Law
1. Brown and Hadian’s two-step inquiry
In 1994, our Supreme Court issued two opinions—Brown
and Hadian—that address whether the owner of a commercial
building or its tenant bears the financial responsibility of
14
complying with government-ordered alterations. Both Brown,
which involved an order requiring asbestos remediation, and
Hadian, which involved an order requiring seismic retrofitting,
address the scenario we confront in this case: one in which a
lease contains a clause requiring the lessee to comply with
applicable laws regulating the lessee’s use of the property (a
compliance with law clause), a governmental entity issues an
order requiring some significant work to be done to the property,
and the governmental compliance order was not issued as a
result of the lessee’s particular use of the property. (See Brown,
supra, 8 Cal.4th at 823-826; Hadian, supra, 8 Cal.4th at 843-
844.)
In this scenario, Brown holds the tenant’s use of the
property “lies outside the literal scope of the compliance with
laws clause,” and it is necessarily “unclear from [such a clause],
standing alone, how the parties intended to allocate the risk of
compliance with respect to government orders arising from
property conditions unrelated to a particular use by the [tenant].
In the face of that ambiguity, [a court] may properly consider
other relevant provisions of the lease as well as the factors
employed by the courts to determine the intent of the parties to a
nonresidential lease . . . .” (Brown, supra, 8 Cal.4th at 826.)
The consideration that Brown requires notwithstanding the
inclusion of a general compliance with laws clause in a
commercial lease proceeds according to the two-step procedure we
already summarized. As stated in Hadian: “[T]he analysis
begins with the language of the lease itself. The literal text of the
agreement . . . is presumptively controlling in determining the
intent of the parties . . . . If . . . the language of the lease appears
to place the duty of compliance on the lessee, the court then takes
15
the second analytical step. It examines the lease terms in light of
a handful of judicially developed circumstantial factors as a
means of confirming that the allocation of risk suggested by the
text of the lease accurately reflects the probable intent of the
parties and leads to a reasonable construction of the lease terms.
[Citation] [¶] If, on balance, these factors reinforce the
conclusion suggested by an examination of the text of the lease,
the court will conclude that the obligation to make alterations to
comply with the law or regulation at issue falls on the lessee. If,
however, the assessment is inconsistent with the lease provisions
and points to the conclusion that the parties intended that the
lessor shoulder the burden of compliance, the court will conclude
that the actual agreement of the parties deviates from the literal
text of the lease and construe and enforce the agreement
accordingly.” (Hadian, supra, 8 Cal.4th at 844-845; see also
Brown, supra, 8 Cal.4th at 829-830.)
2. The specific facts and holding in Brown
The lease at issue in Brown was for a term of 15 years at a
monthly rent of $28,500. (Brown, supra, 8 Cal.4th at 819.) The
tenants in Brown agreed to pay annual property taxes and obtain
and pay premiums for liability insurance on the building. (Id.)
The lease contained a compliance with law clause that required
the lessee to comply with applicable laws “‘regulating the use by
the [l]essee of the premises.’” (Ibid.) It also contained a repair
clause that provided the lessee would “‘keep in good order,
condition and repair the Premises and every part thereof,
structural and non-structural . . . .’ [ ]” (Ibid.) The Brown lease
further stated the property owner had no obligation to repair or
maintain the premises and provided the tenant would hold the
16
owner harmless against any claims arising out of the use of the
property during the term of the lease. (Id. at 819-820.)
The tenant opened a retail furniture store on the premises
and later sublet the property to another furniture store. (Brown,
supra, 8 Cal.4th at 820.) Approximately two years into the lease
term, the county Department of Health Services found evidence
of asbestos contamination and directed it be abated. (Ibid.) The
estimated cost of the environmental cleanup was $251,856. (Id.
at 821.)
In conducting the first part of the analysis to determine
which party bore the burden of paying for the asbestos
remediation, our Supreme Court considered the provisions of the
lease “as a whole,” noting in particular the 15-year term of the
lease, the tenant’s agreement to pay property taxes and assume
the risk of third party liability, the broad repair clause, the
owner’s negative covenants with respect to any obligation to
maintain or repair the property, and the elimination of any
warranties on the part of lessor. (Brown, supra, 8 Cal.4th at
828.) Considering all of these, our Supreme Court concluded
“[f]inancial considerations implicit in the text of the lease
agreement make it clear that [the owner] negotiated a ‘net’
lease,” which “‘presumes the landlord will receive a fixed rent,
without deduction for repairs, taxes, insurance, or any other
charges, other than landlords’ income taxes.’” (Id. at 827.) The
court also held it was “reasonably clear from the four corners of
the agreement itself that the parties intended to transfer from the
lessor to the tenants the major burdens of ownership of real
property over the life of the lease.” (Id. at 828.)
In conducting the second part of its analysis, the court
determined four of the six Sewell factors militated in favor of
17
finding the tenants must pay for the asbestos remediation: the
estimated cost of the work was less than 5 percent of the total
rent reserved over the life of the lease; the 15-year lease qualified
as a long term lease under the circumstances; the remediation
was structural but the lease shifted responsibility for repairs to
the tenants; and both parties had notice of the possibility that
asbestos remediation might be necessary, which was significant
partly because the tenants had substantial experience in the
retail industry.7 (Brown, supra, 8 Cal.4th at 830-834.)
3. The specific facts and holding in Hadian
The lease in Hadian was a three-year lease at a rate of
$650 per month, with an option to renew for an additional five
years at $800 per month. (Hadian, supra, 8 Cal.4th at 840.)
Pursuant to the lease, the tenant agreed to pay any increase in
property taxes during the term of the lease, agreed to comply
with all applicable laws “‘regulating the use by the lessee of the
premises,’” and agreed to accept the building in its condition
existing at the time the lease commenced. (Id. at 841.) The lease
also required “the [tenant] to ‘keep in good order, condition and
repair the Premises and every part thereof, structural and
nonstructural . . . including . . . all . . . walls (interior and
exterior), foundation, ceiling, roofs (interior and exterior),
7
As to the remaining two factors, the court found the work
would substantially benefit both parties (because the hazardous
material was discovered in the third year of the 15-year lease)
and the work would not interfere with the tenant’s use of the
property to such a degree as to weigh heavily in favor of finding
the lessor had the responsibility to fund the work. (Id. at 832.)
18
floors . . . .’” (Ibid.) The lease additionally stated the property
owner had no obligation to repair or maintain the premises.
(Ibid.)
The tenant exercised the five-year option to renew the
lease. (Hadian, supra, 8 Cal.4th at 841.) Approximately five
months later, and five months before the end of the initial three-
year lease term, the City of Los Angeles advised the property
owner that it was required to seismically retrofit the building.
(Ibid.) The owner paid the costs of a survey, redesign of the
building, and the actual retrofit, which totaled $34,450.26. (Id. at
841-842.) The parties disagreed over who was responsible for the
costs, and the owner ultimately sued. (Ibid.)
In analyzing the lease itself, our Supreme Court
acknowledged the lease in Hadian was “virtually identical” to the
lease in Brown but held, on balance, the tenant in Hadian had
not intended to create a true net lease. (Hadian, supra, 8 Cal.4th
at 846.) The court emphasized the three-year lease with an
option to renew for five years was for a comparatively short term,
the property owner was responsible for paying all but a small
yearly increment in property taxes and for obtaining and paying
for insurance, and the property owner continued to own the
fixtures, operating systems, and improvements in the building.
(Ibid.)
Proceeding to consider the Sewell factors, the court believed
they on balance revealed the parties intended the property owner
would be responsible for complying with laws unrelated to the
particular use the lessee made of the property. The court
reasoned four factors favored exempting the tenant from paying
for the seismic retrofitting: the estimated cost of the work was
145 percent of the rent reserved over the initial three-year term
19
of the lease and 49 percent if the court added the five years of the
option to the term; the three year term was short and the five
year renewal option did not change that analysis; the primary
benefit of the seismic retrofit work would inure to the owner; and
the substantial retrofitting required would be intrusive and thus
did not count in the property owner’s favor. (Hadian, supra, 8
Cal.4th at 847-849.) The remaining two factors, in the court’s
view, seemed to be neutral: the work was structural in nature,
but the court did not say whether that favored either party; and
the owner could be charged with a general awareness of the
possibility that the government might demand seismic
renovation, but that factor did not tip decidedly in favor of either
party. (Id. at 848-849.)
Having held that the tenant was not responsible for the
seismic retrofitting, the Supreme Court also highlighted the facts
explaining the divergent result in Brown. In the court’s view,
“[t]he material features of the lease and surrounding
circumstances in this case and those in Brown [ ]differ[ed] with
respect to almost every controlling factor: [d]ifferences in the
amount of the monthly rent ($28,500 versus $800), the life of the
lease (fifteen years versus three years, with a five-year option),
the cost of compliance alterations as a percentage of the
aggregate rent (less than 5 percent versus 49 percent), prior
notice of the potential for compliance problems (written notice in
Brown [ ], none in this case)[,] and the extent of the alterations
entailed by compliance (removing fireproofing material sprayed
on beams supporting the roof versus a virtual reconstruction of
the building, including steel framing and reroofing) . . . .”
(Hadian, supra, 8 Cal.4th at 850.)
20
B. The Language of the Lease Here Is Not Decisive: Some
Elements Are Closer to Brown While Others Are
Closer to Hadian
The original lease between Izzy’s and LMA includes a
compliance with law clause stating “[tenant] shall, at [tenant’s]
expense, comply promptly with all applicable statutes,
ordinances, rules, regulations, orders and requirements in effect
during the term or any part of the term hereof regulating the use
by [tenant] of the [p]remises.” Like the compliance with law
clauses in Brown and Hadian, this clause limits the duty of
compliance to laws that regulate the “use of the property” and
applies only where the lessee’s particular use of the property
leads to the government’s compliance order. (Brown, supra, 8
Cal.4th at 824.) That is not the case here; the Santa Monica
Ordinance, which requires significant seismic retrofitting of the
property, applies to the premises because of the type of building
it is, not because of how Izzy’s is using it. Inclusion of a
compliance with law clause therefore does not decide the issue
and we undertake the same analysis as in Hadian and Brown.
We first address whether the lease transfers from LMA to
Izzy’s the “major burdens of ownership of real property over the
life of the lease.” (Brown, supra, 8 Cal.4th at 828.) We look at
the lease as a whole, paying particular attention to “the life of the
lease and the extent to which the incidents of full ownership of
the property are transferred to the lessee.” (Hadian, supra, 8
Cal.4th at 846.)
As we have already described, the original lease was
extended through a series of amendments over decades. The
original lease specified a term of 15 years. The second and fourth
amendments each extended the term an additional 15 years, and
21
the fifth amendment extended it yet another 10 years, with an
option to extend for five more. LMA contends this means the
lease is a long-term, 60-year lease.8 Izzy’s argues only the
current lease term, as extended, is relevant. Izzy’s has the better
argument under the circumstances.
While Izzy’s has continuously occupied the premises since
the initial lease term began in 1973, each amendment that
provided an extension of the lease term created a new, additional
lease term that was independent of the term that came before it.
This is underscored by the language the amendments used to
define those terms, each of which looked forward to the next term
prospectively. None of them acted retrospectively to encompass
past years within the extended lease term.9
8
LMA argues the “60-year lease” qualifies as a “‘change of
ownership’” for purposes of property tax reassessment. LMA
misreads the case law, which provides that a change in
ownership occurs only when a the prospective, or remaining, term
of a lease is 35 years or more. The past, or expired, portion of the
leasehold does not count. (See Dyanlyn Two v. County of Orange
(2015) 234 Cal.App.4th 800, 813-814; McDonald’s Corp. v. Board
of Supervisors (1998) 63 Cal.App.4th 612, 616.) At no time did
any current or prospective lease term extend for 35 years or
more.
9
Furthermore, even if the lease were evaluated over the
entire 60-year period, we would still find it quite significant that
the Santa Monica Ordinance was not enacted until 2017,
approximately 44 years after the original lease was signed and
years after even the most recent amendment. That would be
additional reason to train our focus on the most recent extension
of the lease.
22
So we focus on the current lease term: a ten-year term with
an option to extend for an additional five years, which Izzy’s
exercised in 2016. But, as we know, that is only part of the story.
The current lease permits LMA to terminate the lease if Freeman
transfers 35 percent or more of his interest in Izzy’s. This
renders the lease term significantly uncertain if for no other
reason than Freeman’s death would necessarily result in such a
transfer and actuarial tables judicially noticed by the trial court
establish he is unlikely to live much beyond 2028, particularly
with the health challenges he described during his testimony.
With this added uncertainty, the lease here cannot be described
as “long” in the same way that the lease in Brown was long—
even if it ultimately does not turn out to be quite as short as the
three-year-with-a-five-year-option term in Hadian.
Turning to the lease’s other relevant provisions, the current
lease does include some of the same features that the court in
Brown highlighted as transferring the incidents of ownership.
The rent provision of the lease is styled as a “net” lease, a
characterization that is informative but not decisive. (Brown,
supra, 8 Cal.4th at 828.) Izzy’s is responsible for keeping the
structural and non-structural aspects of the premises in good
condition and repair, and Izzy’s also must repair, restore, or
rebuild the premises if the improvements are damaged or
destroyed.10 (Ibid. [unqualified nature of repair clause is one
feature of the lease indicating an intent to transfer major
burdens of ownership].) Izzy’s has been responsible for paying
insurance costs and the full property tax bill for the premises
10
Since June 1988, Izzy’s has also been responsible for the
entire premises, including the exterior roof.
23
since June 2003. (Ibid. [agreement to pay property taxes and
insure against risk of third party liability also indicated intent to
transfer major burdens of ownership].)
On the other hand, the terms of the lease undisputedly
retain at least one notable hallmark of ownership for LMA: any
alterations, improvements, additions, or installations on the
premises made by Izzy’s would become LMA’s property at the
expiration of the lease term and furnishings and fixtures related
to the operation of the deli were assigned to LMA for the duration
of the lease. (Hadian, supra, 8 Cal.4th at 846 [clause providing
lessor continued to own all fixtures, operating systems, and
improvements undermined view that parties intended true net
lease].) We additionally believe the trial court did not err in
finding additional features of the lease and the parties conduct
relevant, including control of the type of business Izzy’s may
operate, a prohibition on nonconsensual subleasing, and LMA’s
use of the premises as security for a loan taken out in 2018. But
we accord these facts only marginal relevance because they do
not fall within the categories of ownership expressly discussed in
Brown or Hadian.
On balance, then, there are some indications the parties
intended to transfer the burdens of ownership to the lessee (the
repair provision and allocation of insurance and property tax
payments) and some that they did not (the uncertain lease term
and the lessor’s ownership of the fixtures and improvements). If
we had to resolve the appeal solely on the basis of the first step of
the Hadian and Brown inquiry, it would be a close call.
Fortunately, we do not. As we next explain, consideration of the
Sewell factors tips the analytical balance and leaves us convinced
LMA must pay the seismic retrofitting costs.
24
C. Consideration of the Sewell Factors Reveals an
Intention to Shoulder LMA with the Burden of
Seismic Compliance
“Whether the parties actually intended the allocation of
responsibilities suggested by the use of unqualified language in a
lease is an inquiry better approached through the application of a
handful of relevant factors than by a “four corners” analysis of
the text that focuses exclusively on the interlocking provisions of
the agreement itself and their legal consequences.” (Brown,
supra, 8 Cal.4th at 829.) As instructed, we therefore consider:
(1) the relationship of the cost of the curative action to the rent
reserved; (2) the term for which the lease was made; (3) the
relationship of the benefit to the lessee to that of the reversioner;
(4) whether the curative action is structural or nonstructural in
nature; (5) the degree to which the lessee’s enjoyment of the
premises will be interfered with while the curative action is being
undertaken; and (6) the likelihood that the parties contemplated
the application of the particular law or order involved. (Id. at
830-834; Hadian, supra, 8 Cal.4th at 847-850.)
1. Relationship of the cost of the curative action to
the rent reserved
“The relationship between the cost of compliance and the
aggregate rent payable over the life of the lease is . . . a
significant factor in divining the probable intent of the parties
and determining which of them agreed to bear the burden of
compliance. . . . It is, after all, highly unlikely that a lessee would
intend or expect to assume a repair/compliance burden that is,
25
say, equal to or even a substantial fraction of the total rent over
the life of the lease.” (Brown, supra, 8 Cal.4th at 831.)
The analysis of this relationship is context-dependent. In
Brown, for example, the analysis suggested the parties intended
the lessee bear the burden of compliance because the “hazardous
condition [was] discovered relatively early in a long-term lease,
the total rent reserved over the life of the lease [was] a very high
multiple . . . of the cost of disposal, and the provisions of the lease
agreement otherwise suggest that the parties intended that the
lessees assume the major burdens of ownership.” (Brown, supra,8 Cal.4th at 831.)
Our analysis of this factor is hindered by the absence of a
more definitive record on the cost of complying with the Santa
Monica Ordinance and the amount of reserved rent. At trial,
there was no comprehensive estimate of the cost of all the
required work; the best we can say, from the evidence presented,
is the work would cost at least $500,000. The record also does not
reveal the exact amount of the rent reserved over the term of the
lease. The only evidence in the record indicating the amounts
paid are the lease and amendments, which dictate the base rent
to be paid at the beginning of each lease term.11 Those numbers
11
LMA argues in its brief that Izzy’s either has paid or will
pay approximately $8.7 million in rent, insurance premiums, and
property taxes (the latter of which were also defined as rent in
the lease). In support of this argument, LMA cites to the lease
and amendments, which provide limited information about the
exact rent due each month of the lease term, plus three exhibits
the trial court ruled inadmissible at trial. We will not consider
any evidence that was not admitted by the trial court. (See
USLIFE Savings & Loan Assn. v. National Surety Corp. (1981)
115 Cal.App.3d 336, 343.) Accordingly, the record is devoid of
26
do not account for yearly increases in rent or the other expenses
the tenant agreed to pay as rent on the property. Further, as
already mentioned, the current lease term is uncertain because
LMA has the unilateral option to terminate the lease if Freeman
transfers 35 percent or more of his interest in the deli,
voluntarily or involuntarily.
All that said, the limited information we do have permits
drawing some conclusions. The lease provides a base rent for the
current term of $10,000 per month. At that rate, the estimated
seismic retrofit costs would be equivalent to somewhere around
five years of rent. Viewed from the perspective of what is
putatively a ten-year lease with a five-year option to extend that
effectively has an uncertain end date, we believe this amount
(and, we can infer, the hardship it would impose on Izzy’s) is
significant.
2. The term for which the lease was made
The term of the lease is relevant because a longer term
lease provides a tenant with a longer period of time over which to
amortize the costs of unexpected work. (Brown, supra, 8 Cal.4th
at 832.) What we have already said in discussing the length of
the lease at step one of the Hadian and Brown inquiry applies
equally here. Izzy’s cannot fully plan to amortize seismic
retrofitting costs over the remaining portion of the current lease
term because of the early termination provision we have
discussed. The term of the lease therefore cannot be considered
“long” even if it is not as short as the term in Hadian.
evidence demonstrating the precise amounts Izzy’s paid in rent
over any period of time.
27
3. The relationship of the benefit to the lessee to
that of the reversioner
Izzy’s had a maximum of 13 years left on the lease at the
time of trial in 2020. Given LMA’s early termination option and
looking at the actuarial data the trial court judicially noticed
(putting aside Freeman’s testimony about health problems), one
would expect the lease to be subject to termination in 2028.
Though the testimony at trial was not exactly precise,
Hughes indicated the roof would last 20 years, and the seismic
retrofitting would extend the building’s life by what we read to be
an even greater “many” years. Given the uncertainty in the lease
term, and the fact that the retrofit would benefit LMA for a
minimum of seven years past the end of the longest possible lease
term, this factor suggests a rational intention to make LMA
responsible for compliance costs. (Hadian, supra, 8 Cal.4th at
848 [primary benefit of work would be to building owner where
seismic retrofit would last more than five years remaining on
lease].)
4. Nature of curative action
Hughes’s testimony at trial indicated the required work
was “mostly structural.” Brown and Hadian, which both involved
structural compliance work and “virtually identical lease[s],” did
not treat the structural nature of the work as reason to infer the
tenant should not be responsible for the cost. Brown expressly
rejected the notion that the structural nature of compliance work
gave rise to an inference it should be excluded from a tenant’s
responsibility. (Brown, supra, 8 Cal.4th at 833 [reasoning that
the lease agreement, which shifted responsibility for all repairs to
28
the tenant and “d[id] so in an overall context supporting the
conclusion that the parties intended the [tenant] to assume the
burdens of compliance and repair,” negates the argument that
structural alterations should not be within the tenant’s
obligations].) Hadian, in some contrast, noted the work was
structural but did not say which way that cut. (Hadian, supra, 8
Cal.4th at 848-849.) We will adopt the same bottom line here,
treating the elements of structural work that would be required
on the premises as a point that does not favor inferring the
tenant was not meant to bear the cost of the work. In other
words, this factor does not affect our analysis one way or the
other.
5. Degree to which the lessee’s enjoyment of the
premises will be interfered with while the
curative action is being undertaken
The record indicates Izzy’s operates 24 hours a day, 365
days a year. This means there are no “off” hours for the deli. The
seismic retrofit work will necessarily occur during hours in which
Izzy’s is or would otherwise be serving customers.
Hughes testified the retrofit work would take
approximately three to four months. He thought at least some of
the work might be able to be done from above the acoustical
ceiling, such that the deli could in theory remain open to
customers while the retrofit was completed. He was not certain,
however, about any of the details. The trial court found Hughes’s
testimony unpersuasive because it did not appear to be based
upon well-founded assumptions about the nature and extent of
the interference with the deli’s operations. We review this
finding of fact for substantial evidence and conclude it is
29
sufficiently supported. (Gomez v. Smith (2020) 54 Cal.App.5th
1016, 1026.) Hughes’s testimony was based on preliminary plans
and his assertions regarding how he would perform the work
without impacting the deli’s operations were expressed as a
“hope[ ]”; he also admitted, at one point, that the impact of the
work on the tenant was “to be determined.” We accordingly infer,
particularly in light of the nature of Izzy’s operations, that the
necessary seismic renovations will be at least somewhat intrusive
to the operation of the business.
LMA argues Brown’s reasoning compels us to conclude that
where a tenant has agreed to a broad repair clause, it cannot
avoid its obligation to pay for repairs based on the claim that the
repairs will interfere with its business. Hadian, however,
concluded (with a nearly identical lease) that in the absence of
evidence regarding the extent of the interference, it could surmise
seismic retrofit work would not be “unintrusive,” and the factor
did not favor the property owner. (Hadian, supra, 8 Cal.4th at
849.) We treat the factor as one moderately favoring owner
responsibility for seismic retrofitting compliance.
6. Likelihood that the parties contemplated the
application of the particular law or order
involved
The parties executed their original lease in 1973, more than
forty years before the Santa Monica Ordinance became law.
There is no evidence in the record that either party was aware
such an ordinance could be passed when the lease was initially
signed. Nor does the record contain any actual evidence charging
either party with such knowledge over the years (though it was,
of course, common knowledge that large earthquakes hit the Los
30
Angeles area). Given the absence of evidence in the record, this
factor does not favor either party.12
D. Conclusion
To sum up our review of the Sewell factors, we have
uncertainty about the remaining lease term, which, depending on
whether the operative contingency occurs, could be as short as
four years; we have a retrofit at this stage of the tenancy that
seems quite costly; we have the substantial benefit to LMA of
retrofitting construction; and we have an adverse impact of
retrofitting work on the operation of the 24-hour deli. There are
no Sewell factors that would support an inference the parties
intended Izzy’s to pay for the contemplated seismic retrofitting
work. Thus, adding our Sewell factor consideration to our earlier
step-one observations about the features of the lease itself, we
conclude the trial court was correct in finding LMA responsible
for the seismic retrofit of the building on the premises.
12
Though both parties argue they were or should have
become aware of the possibility that a seismic retrofit ordinance
would affect the property at some point over the years, neither
points to any evidence the other was put on notice. This is in
contrast to the situation in Brown, where the lease contained a
written notice warning the lessee it was possible the property
contained hazardous material, including asbestos. (Brown,
supra, 8 Cal.4th at 818, fn 1.)
31
DISPOSITION
The judgment is affirmed. Respondent shall recover its
costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
BAKER, Acting P. J.
We concur:
MOOR, J.
FEUER, J.*
*
Associate Justice of the Court of Appeal, Second Appellate
District, Division Seven, assigned by the Chief Justice pursuant
to article VI, section 6 of the California Constitution.
32