Constellation-F, LLC v. World Trading 23, Inc.

Filed 2/7/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
CONSTELLATION-F, LLC, et al., B293033
Plaintiffs and Appellants, (Los Angeles County Super. Ct.
No. PC056984)
v.
WORLD TRADING 23, INC., et al.,
Defendants and Appellants.
_________________________________
B293883
CONSTELLATION-F, LLC, et al.,
(Los Angeles County Super. Ct.
Plaintiffs and Respondents, No. PC056984)
v.
WORLD TRADING 23, INC., et al.,
Defendants and Appellants.
APPEALS from a judgment and order of the Superior Court
of Los Angeles County, Stephen P. Pfahler, Judge. Affirmed in
part, reversed in part, remanded in part with directions, and
dismissed in part.
Shafron & Kammer, Shelly Jay Shafron, Kevin David
Kammer, and Douglas G. Carroll for Plaintiffs, Respondents and
Appellants.
No appearance for Defendants and Appellants.
__________________________
A commercial lease set the rent to increase if the tenant
stayed past a certain date. That date came and went. The
commercial tenant stayed put. Yet it would not pay rent at the
increased rate. The trial court improperly refused to enforce the
rent increase. We reverse this ruling. We also direct the trial
court both to amend the judgment to include a sanctions award
and to rule on two arguments concerning estoppel and agency.
We otherwise affirm the judgment, including the rejection of alter
ego liability. We dismiss the cross-appeal.
We also dismiss the separate appeal from an order after
judgment (case No. B293883), consolidated with this case on
March 28, 2019.
I
The facts begin with the identity of the plaintiff: the
commercial landlord. This was Constellation-F, LLC. We refer
to it and its successors collectively as Constellation unless we
note otherwise.
The tenant was World Trading 23, Inc., or World Trading
for short.
Constellation leased warehouse space to World Trading.
The lease was for a graduated rental: base rent would increase
by 150 percent if World Trading remained after the lease expired,
which it did on February 28, 2016. But Constellation and World
Trading amended their deal to extend the expiration date to 6:00
p.m. on April 1, 2016. This lease amendment suspended the
2
holdover rent. Constellation agreed to waive holdover rent
entirely if World Trading complied with certain terms, including
the new deadline.
World Trading missed the deadline. It did not vacate the
premises until June 15, 2016. In response, Constellation filed an
unlawful detainer action against World Trading, which (after
June 15, 2016) Constellation converted to a damages action
against World Trading and World Tech Toys, Inc. (“World Tech”)
for breach of contract. Constellation alleged World Tech was an
alter ego of World Trading. Constellation sought damages for
past-due rent, late fees, interest, failure to maintain and repair,
costs incurred by not being able to use the premises, and holdover
rent.
Before trial, the court granted Constellation’s discovery
motions against World Trading and awarded Constellation
$1,000 in sanctions. Constellation asked for payment. World
Trading would not pay.
A bench trial led the court to hold World Trading liable for
all damages except the holdover rent, which the court ruled was
an unenforceable penalty. The court ruled World Tech was not
an alter ego of World Trading. The court awarded Constellation
$13,695 and Constellation’s successors $35,801.74 plus $10,000 in
additional damages. The court declined to add the $1,000
sanctions to the judgment.
Constellation appealed. World Trading and World Tech
cross-appealed. World Trading and World Tech then filed a
separate notice of appeal in case No. B293883, appealing an order
after judgment denying their request to be determined the
prevailing parties and for attorney fees, and partially granting
Constellation’s request for attorney fees. We consolidated the
3
appeals under case No. B293033. World Trading and World Tech
did not respond to Constellation’s opening brief, file their own
opening brief on cross-appeal, or file their own appellants’ brief in
their separate appeal.
II
The trial court erred by ruling the commercial holdover
provision was an unlawful penalty.
Our review of this legal question is independent. (Harbor
Island Holdings v. Kim (2003) 107 Cal. App. 4th 790, 794.)
The lease clause in this case specified rent would increase
after the lease expired. The case law refers to such a clause as a
holdover rent provision or as “a graduated rental.” (Vucinich v.
Gordon (1942) 51 Cal. App. 2d 434, 435, 437 (Vucinich).)
Commercial provisions of this sort are enforceable even if the
increased rent is much greater than the base rent. (Id. at pp. 435
and 437–438 [500 percent increase enforced].)
The Vucinich decision is controlling here. It bears close
study. It began with the presumption that the leasing market is
competitive and that market actors are freely able to contract in
their own best interest. (See Vucinich, supra, 51 Cal.App.2d at p.
437.)
This presumption of competition in the commercial leasing
market fits common experience. In Southern California, at least,
many different people own many different parcels of land. These
are the sellers in the leasing market. The buyers in this market
are the many enterprises that would like to lease those
commercial premises.
Transactors in a competitive market are “free from
obligation to each other” when they enter their lease contract.
(Vucinich, supra, 51 Cal.App.2d at p. 437.) “They dealt at arm’s
4
length. Deliberately and free from coercion, they made the
provision for the rental to be paid for the use of the premises
after the expiration of the definite term. This they had the right
to do.” (Ibid., italics added.)
The Vucinich decision validates this commercial holdover
provision.
The trial court mistook Vucinich merely as “a case that
dealt primarily with a merger of fee title and leasehold interest.”
But the Vucinich defendant made the same erroneous argument
as World Trading did: the holdover provision is a penalty void
under section 1671 of the Civil Code. (Vucinich, supra,
51 Cal.App.2d at p. 437.) Vucinich rejected this erroneous
argument: “Neither the question of penalty nor of liquidated
damages is involved in this action.” (Ibid.) That holding applies
here.
The textual logic of Vucinich’s holding about Civil Code
section 1671 is apparent upon reflection. At that time, section
1671 of the Civil Code stated that contracting parties could agree
on an amount that would be “presumed to be the amount of
damage sustained by a breach thereof,” but only when, “from the
nature of the case, it would be impracticable or extremely
difficult to fix the actual damage.” (Former Civ. Code, § 1671,
italics added.)
Textually, the statute did not fit the facts. The statute
applied to an “amount of damage.” By contrast, however, a
holdover clause provides for “a graduated rental.” (Vucinich,
supra, 51 Cal.App.2d at p. 435.) Graduated rentals are not
damages. A graduated rental is the rate for leasing property. By
its terms, then, Civil Code section 1671 did not apply to a
5
holdover rent provision, as Vucinich held. (Vucinich, supra,
51 Cal.App.2d at p. 437.)
A parallel policy rationale reinforces this textual analysis.
Civil Code section 1671 and the case law interpreting it aim to
combat unfair and unreasonable coercion arising from an
imbalance of bargaining power. (See Garrett v. Coast & Southern
Fed. Sav. & Loan Assn. (1973) 9 Cal. 3d 731, 734, 740 [punitive
charges for consumers’ late payments of loan installments are
attempts by financial institutions to coerce timely payments by
levying unreasonable forfeitures] (Garrett); Ridgley v. Topa Thrift
& Loan Assn. (1998) 17 Cal. 4th 970, 978, 980 [same] (Ridgley).)
The core problem is that such a coercive arrangement,
“viewed from the time of making the contract, realistically
contemplates no element of free rational choice on the part of the
obligor insofar as his performance is concerned . . . .” (Blank v.
Borden (1974) 11 Cal. 3d 963, 971 (Blank), italics added.)
When the concern about oppressive coercion is absent, Civil
Code section 1671 does not apply. (See Blank, supra, 11 Cal.3d
at p. 970 [withdrawal-from-sale clause in an exclusive-right-to-
sell contract does not constitute a void penalty provision]; see id.
at p. 972 [“First, it is important to recognize that we are not here
concerned with a situation wherein the party who seeks to
enforce the clause enjoyed a vastly superior bargaining position
at the time the contract was entered into. On the contrary, the
contract before us was one which was freely negotiated by parties
dealing at arm’s length.”] italics in parenthetical added.)
Concerns about coercion are absent when one side has “a
considerable range of choice as to the type of arrangement [it]
wishes to enter” with the other side. (Blank, supra, 11 Cal.3d at
p. 972, fn. 8.)
6
In one pertinent respect, the law has changed since the
1942 decision in Vucinich. In 1977, the Legislature revised Civil
Code section 1671 to delete the presumption that a liquidated
damages clause in a commercial context is invalid, and to replace
it with a presumption of validity. (El Centro Mall, LLC v. Payless
Shoesource, Inc. (2009) 174 Cal. App. 4th 58, 62–63 (El Centro);
but see Harbor Island Holdings v. Kim, supra, 107 Cal.App.4th
at pp. 796–797, 799 [failing to note or to give effect to 1977
change in statute].) This change put the burden on the party
seeking to invalidate a contractual provision. (El Centro, supra,
174 Cal.App.4th at p. 63.) That party was World Trading.
World Trading failed to show this holdover provision
amounted to an illegal liquidation of damages. Vucinich
presumed transactors in a competitive market are free to
negotiate a deal best for their situation. The burden of attack
was on World Trading because it was the one seeking to
invalidate this presumptively valid provision. (Civ. Code, § 1671,
subd. (b); El Centro, supra, 174 Cal.App.4th at pp. 62–63.)
World Trading never overcame this burden. It never
proved Constellation had market power, which is the power a
monopolist has to oppress consumers by setting price at the
monopolist’s whim. (See, e.g., United States v. Aluminum Co. of
America (2d Cir. 1945) 148 F.2d 416, 424–426 (Learned Hand, J.)
[91 percent of a market amounts to monopoly and gives the
monopolist the power to raise price as it chooses].)
When buyers face a monopolist, they have no competitive
alternative. They are subject to the monopolist’s oppressive
coercion. But World Trading failed to establish it faced monopoly
coercion from Constellation when the parties struck their
bargain. (Cf. Vucinich, supra, 51 Cal.App.2d at p. 437
7
[“Deliberately and free from coercion, they made the provision for
the rental to be paid for the use of the premises after the
expiration of the definite term”] italics in parenthetical added.)
Given this failure by World Trading, the trial court should
have enforced the holdover agreement, “which the parties [had]
determined by their free, solemn and voluntary act.” (Vucinich,
supra, 51 Cal.App.2d at p. 438; see also Jade Fashion & Co., Inc.
v. Harkham Industries, Inc. (2014) 229 Cal. App. 4th 635, 649–
651.)
Nor was World Trading subject to coercion after the lease
amendment. World Trading was at complete liberty to avoid the
higher rent. It had merely to leave. (See Vucinich, supra,
51 Cal.App.2d at p. 438.)
The trial court cited inapposite cases.
Two cited cases, Garrett and Ridgley, concerned late fees on
home loan installment payments. Garrett was a class action
attack by residential home owners on late charges in their home
loan contracts. (See Garrett, supra, 9 Cal.3d at pp. 734 & 739.)
Ridgley was a suit by Robert and Marlene Ridgley, who
successfully challenged a penalty for late payment of a loan to
build a single-family home. (Ridgley, supra, 17 Cal.4th at pp. 974
& 979.) Garrett and Ridgley concerned neither graduated rentals
nor commercial holdovers. Neither cited Vucinich. Neither
applies here.
World Trading also cited El Centro, which upheld a
commercial lease provision because the tenant failed to overcome
the presumption of validity that commercial lease provisions
enjoy. (El Centro, supra, 174 Cal.App.4th at pp. 62 & 65.) This
holding supports Constellation.
8
In sum, this commercial holdover provision was valid.
Constellation was entitled to enforce it against World Trading.
III
The trial court ruled World Trade is liable for damages in
this case but World Tech is not. On appeal, Constellation argues
World Tech and World Trade are jointly and severally liable
under three theories: alter ego, estoppel, and agency. The alter
ego argument fails. We remand the estoppel and agency
arguments.
First we address alter ego liability. We do not disturb the
trial court’s conclusion on this question of fact if it is supported
by substantial evidence. (Misik v. D’Arco (2011) 197 Cal. App. 4th
1065, 1072.)
A plaintiff seeking to invoke the alter ego doctrine must
prove two conditions: (1) unity of interest and ownership
between the two entities and (2) an inequitable result if the two
entities are not equally liable. (Eleanor Licensing LLC v. Classic
Recreations LLC (2018) 21 Cal.App.5th 599, 615–617 (Eleanor).)
The trial court rightly found insufficient evidence on the
second condition, concluding Constellation did not show it would
be “contrary to the interests of justice to regard the two entities
separately.” At trial, a corporate officer testified World Tech was
its own corporation but also a “d.b.a.” of World Trading. World
Trading presented itself as World Tech “for brand identification”
and the two were “basically the same business.” The
shareholders and directors were the same for both companies.
While this evidence shows unity of interest and ownership, it
does not show treating World Trading and World Tech as
separate entities would promote injustice. The fact that one
company does business as another does not, without more,
9
support an alter ego finding. (See Eleanor, supra, 21 Cal.App.5th
at pp. 616–617.)
In this court, Constellation cites to no trial evidence
showing it would be contrary to the interests of justice to regard
the two entities separately.
The trial court’s alter ego ruling thus survives
Constellation’s attack.
Now we turn to the estoppel and agency liability theories.
The trial court did not rule on these theories. Constellation asks
us to take up these new questions. We decline. We direct the
trial court to rule on these arguments.
At oral argument, Constellation’s counsel conceded it was
conventional for a reviewing court to remand arguments that the
trial court had not addressed. We follow convention and do not
rule on the estoppel and agency liability theories.
We affirm the trial court’s finding that World Tech was not
jointly and severally liable as an alter ego of World Trade and
remand Constellation’s estoppel and agency arguments for the
trial court to decide.
IV
We direct the trial court to include the $1,000 sanctions in
the final judgment. The trial court had awarded Constellation
$1,000 in sanctions against World Trading for discovery abuse.
World Trading did not pay the sanctions. The trial court rejected
Constellation’s proposal to include the sanctions in the final
judgment, perhaps suggesting it might handle the matter with
the bill of costs. However, it never did.
World Trading did not file a response brief in this appeal,
and thus does not oppose Constellation’s appellate request to
include the sanctions award in the judgment.
10
Sanctions orders have the force and effect of a money
judgment. (Newland v. Superior Court (1995) 40 Cal. App. 4th
608, 615.) In the context of this case’s process, it is proper and
efficient to add this sanctions award directly into the judgment.
We therefore direct the trial court on remand to modify the
judgment to include the $1,000 in sanctions owed to
Constellation.
V
World Trading and World Tech filed a cross-appeal on
October 10, 2018. World Trading and World Tech then filed a
separate notice of appeal in case No. B293883 on November 15,
2018, appealing an order after judgment denying their request to
be determined the prevailing parties and for attorney fees, and
partially granting Constellation’s request for attorney fees. We
consolidated the cases on March 28, 2019. World Trading and
World Tech did not file any briefing in their cross-appeal or in
this appeal. We dismiss the cross-appeal and the separate appeal
from the order after judgment as abandoned.
11
DISPOSITION
The portion of the judgment denying Constellation holdover
rent is reversed. The trial court must hold a hearing and modify
the judgment to include the holdover rent due to Constellation.
We direct the trial court to include in the judgment the $1,000
sanctions award to Constellation. We further direct the trial
court to rule on Constellation’s arguments concerning estoppel
and agency as to World Tech. We otherwise affirm the judgment,
including the rejection of alter ego liability. We dismiss World
Trading and World Tech’s cross-appeal.
We dismiss World Trading and World Tech’s appeal from
an order after judgment.
Costs to Constellation.
WILEY, J.
I CONCUR:
BIGELOW, P. J.
12
STRATTON, J., Dissenting.
The primary question presented is whether the liquidated
damages provision in a pre-printed commercial lease, which
established the holdover rent at 150 percent of the base rent, is
an unenforceable penalty. I agree with the trial court that it is
and so would affirm.
As set out below, our Supreme Court has clearly explained
how to analyze the enforceability of liquidated damages
provisions. It did so in Ridgley v. Topa Thrift & Loan Assn.
(1998) 17 Cal. 4th 970 (Ridgley) and Garrett v. Coast & Southern
Fed. Sav. & Loan Assn. (1973) 9 Cal. 3d 731 (Garrett). My
problem with the majority opinion is that it completely
disregards the test set out in Ridgley and Garrett and instead
superimposes a new test by which one may challenge a liquidated
damages provision. Under the majority’s new test, contracting
parties need not attempt to tether a liquidated damages provision
to estimated anticipated losses; instead a challenger must
analyze each contracting party’s respective market power and
persuade a court that there was enough of an imbalance of
market power between the parties to invalidate the damages
provision. The majority establishes this new test by blithely
confining Ridgely and Garrett to their specific facts, as if the
decisions are outliers which we are free to ignore. I take issue
with that approach.
The lease at issue was a preprinted form lease published by
AIR Commercial Real Estate Association (AIR). The holdover
rent provision read as follows:
1
“26. No Right To Holdover. Lessee has no right to
retain possession of the Premises or any part thereof
beyond the expiration or termination of this Lease. In
the event that Lessee holds over, then the Base Rent
shall be increased to 150% of the Base Rent applicable
immediately preceding the expiration or termination.
Holdover Base Rent shall be calculated on a monthly
basis. Nothing contained herein shall be construed as
consent by Lessor to any holding over by Lessee.”
The parties later amended and extended the lease. The
amendment made clear that:
“4. All of the original terms of the Lease including the
holdover provision for increased Base Rent are hereby
ratified, restated and remain in full force and effect,
except as expressly modified herein.”
When World Trading missed the new extended deadline
and remained in possession of the property without paying rent,
Constellation ultimately sued for breach of contract. After a
multi-day bench trial, the trial court found World Trading had
breached the lease. The court held World Trading liable for
damages alleged by Constellation except the holdover rent, which
the court ruled was an unenforceable penalty. Instead, the court
awarded the overdue rent at the base amount of $14,500 per
month.
2
The Liquidated Damages Provision is an Unenforceable
Penalty.
Validity of holdover rent provisions is determined under
Civil Code1 section 1671, subdivision (b), which provides: “[A]
provision in a contract liquidating the damages for the breach of
contract is valid unless the party seeking to invalidate the
provision establishes that the provision was unreasonable under
the circumstances existing at the time the contract was made.”
Section 1671 applies to leases of real property. (§1951.5)
In Ridgley, our Supreme Court explained how to apply
section 1671. “A liquidated damages clause will generally be
considered unreasonable, and hence unenforceable under section
1671(b), if it bears no reasonable relationship to the range of
actual damages that the parties could have anticipated would
flow from a beach. The amount set as liquidated damages ‘must
represent the result of a reasonable endeavor by the parties to
estimate a fair average compensation for any loss that may be
sustained.’ [Citation.] In the absence of such relationship, a
contractual clause purporting to predetermine damages ‘must be
construed as a penalty.’ [Citation.]” (Ridgley, supra, 17 Cal.4th
at p. 977.)
Under California law, a “ ‘penalty provision operates to
compel performance of an act [citation] and usually becomes
effective only in the event of default [citation] upon which a
forfeiture is compelled without regard to the damages sustained
by the party aggrieved by the breach [citation].’ ” (Ridgley, supra,
17 Cal.4th at p. 977.) The “ ‘characteristic feature of a penalty is
1 All further undesignated statutory references are to the
Civil Code, unless otherwise indicated.
3
the lack of a proportional relation to the damages which may
actually flow from the failure to perform under a contract.’ ”
(Ibid.; Greentree Financial Group, Inc. v. Execute Sports, Inc.
(2008) 163 Cal. App. 4th 495, 497.)
Therefore, the general rule for whether a contractual
condition is an unenforceable penalty requires the comparison of
(1) the value of the money or property forfeited or transferred to
the party protected by the condition to (2) the range of harm or
damages anticipated to be caused that party by the failure of the
condition. If the forfeiture or transfer bears no reasonable
relationship to the range of anticipated harm, the condition will
be deemed an unenforceable penalty. (Grand Prospect Partners,
L.P. v. Ross Dress for Less, Inc. (2015) 232 Cal. App. 4th 1332,
1355, 1358.)
To be sure, a liquidated damages provision is not invalid
merely because it is intended to encourage a party to perform, so
long as it represents a reasonable attempt to anticipate the losses
to be suffered. (Weber, Lipshie & Co. v. Christian (1997)
52 Cal. App. 4th 645, 656.) Thus, there must be evidence tying the
liquidated damages provision to a reasonable estimate of
anticipated losses. An exception to section 1671’s requirements
of a “reasonable endeavor” occurs when the fixing of actual
damages which would be sustained upon a breach would be
4
“impracticable” or “extremely difficult.” (Garrett, supra, 9 Cal.3d
at pp. 738-739.)2
Here the undisputed evidence established that neither
Constellation nor World Trading made any effort whatsoever to
determine, together or separately, an estimate of anticipated
losses if World Trading overstayed its lease. Nor was there
evidence of extreme difficulty or impracticability in setting
damages. Not surprisingly, the trial court found that when the
parties executed the lease and the amendment, they did not
make a reasonable attempt to estimate Constellation’s losses in
the event of a breach. They never discussed the provision in any
way. The trial court concluded that without evidence of an effort
by the parties to arrive at a reasonable estimate of anticipated
losses due to breach, the holdover rent provision was untethered
to anticipated losses and was therefore an unenforceable penalty.
The trial court correctly followed the analytical contours of
Ridgley and Garrett.
1. Freedom of Contract
Constellation does not challenge this factual finding on
appeal and it remains undisputed. Instead, Constellation argues
the trial court should not have found the holdover provision
unenforceable as a penalty because the lease was freely
contracted by two business entities. However, that this was a
commercial lease presumably negotiated by seasoned business
2 Section 1671’s presumption of invalidity was changed after
Garrett to a presumption of validity. Thus it is incumbent on the
challenger, here World Trading, to show that the liquidated
damages provision was not the result of a reasonable endeavor by
the parties to estimate anticipated damages. World Trading
carried its burden.
5
entities, not a consumer lease between unsophisticated
individuals, has no bearing on the analysis. (Harbor Island
Holdings v. Kim (2003) 107 Cal. App. 4th 790, 799.) As the
Ridgley court explained: That the obligors “are small business
owners rather than consumers, however, does not deprive them of
section 1671’s protection against unreasonable penalties . . . .”
(Ridgley, supra, 17 Cal.4th at p. 981, fn.5.)
2. Alternative Performance
Constellation next argues that the 150 percent holdover
rent increase was not a penalty, but an option for alternative
performance; that is, World Trading had the option of vacating
the property on time, negotiating an extension, or overstaying
and paying the increased rent. Constellation contends this
theory was discussed and embraced in Garrett. I agree Garrett
did not eliminate the possibility of construing some lease terms
as options for alternative performance. However, Garrett and its
progeny compels me to conclude this lease cannot be construed as
offering World Trading an option of alternative performance.
A classic example of a valid option for alternative
performance is described in Ridgley, that is, a pre-payment
penalty for paying off a loan early at the option of the borrowers.
Payment before maturity is not a breach of the loan contract, but
simply an alternative mode of performance by the borrower.
Indeed, for that reason, according to Ridgley, it is a misnomer to
call it a penalty in the sense of retribution for a breach of the
agreement. (Ridgley, supra, 17 Cal.4th at p. 979.)
Garrett is instructive as it describes and circumscribes
what can be deemed an option for alternative performance.
In Garrett, plaintiffs in a class action were borrowers under
promissory notes secured by deeds of trust. The notes provided
6
that interest of 2 percent of the unpaid balance of the loans would
be charged by the lender if payment of the loans went into
default. Plaintiffs contended the interest fees were penalties.
The lender bank contended the requirement of additional interest
“merely gives a borrower an option of alternative performance of
his obligation. If he makes timely payments, interest continues
at the contract rate; if, however, the borrower elects not to make
such payments, interest charges for the loan are to be increased
during the period of optional delinquency.” (Garrett, supra,
9 Cal.3d at p. 735.)
Our Supreme Court did not adopt the bank’s simplistic
perspective on alternative performance. “The mere fact that an
agreement may be construed . . . to vest in one party an option to
perform in a manner which, if it were not so construed, would
result in a penalty does not validate the agreement. To so hold
would be to condone a result which, although directly prohibited
by the Legislature, may nevertheless be indirectly accomplished
through the imagination of inventive minds. Accordingly a
borrower on an installment note cannot legally agree to forfeit
what is clearly a penalty in exchange for the right to exercise an
option to default in making a timely payment of an installment.
Otherwise the legislative declarations of sections 1670 and 1671
would be completely frustrated. We have consistently ignored
form and sought out the substance of arrangements which
purport to legitimate penalties and forfeitures.” (Garrett, supra,
9 Cal.3d at p. 737, fn. omitted.)
The Garrett court went on to describe what is not a true
option for alternative performance: “Thus when it is manifest
that a contract expressed to be performed in the alternative is in
fact a contract contemplating but a single, definite performance
7
with an additional charge contingent on the breach of that
performance, the provision cannot escape examination in light of
pertinent rules relative to the liquidation of damages.” (Garrett,
supra, 9 Cal.3d at p. 738.) The court concluded the interest
provision was a penalty: “Inasmuch as this increased interest
charge is assessed only upon default, it is invalid unless it meets
the requirements of section 1671.” (Garrett, at p. 738.)
The lease here contemplated one definite performance:
possession of the warehouse by World Trading for a finite period
of time. World Trading did not have the option to choose to stay
with Constellation’s blessing after April 1 as long as it paid
holdover rent. This was clearly borne out by Constellation’s
speedy initiation of unlawful detainer proceedings to get World
Trading out of the warehouse. Moreover, Constellation made
very clear in the lease that it in no way consented to any holdover
or further extension of the lease past April 1. This express lack of
consent comported with the evidence at trial that when it
executed the lease, Constellation was planning on selling the
property. When it agreed to amend the lease to add a one-month
extension, it already had a buyer to whom it needed to give
timely possession of the property.
This was not a lease where both parties agreed to and
approved an option of alternative performance. Quite the
contrary. The holdover rent provision was clearly a penalty for
breach of the one primary obligation World Trading had under
the lease: to vacate by April 1. As both parties here did not agree
to an alternative mode of performance, it is disingenuous to call it
that. To construe this lease as authorizing alternative
performance would also subvert the significance of the actions of
the parties once World Trading failed to timely vacate.
8
3. The Pre-Printed Form Lease
To the majority, compliance with the requirements of
section 1671 (then and now) means the market power of the
parties to the contract must be analyzed and if no imbalance is
shown, section 1671 has been satisfied. Not so. Garrett is clear
that the amount of liquidated damages must represent the result
of a “reasonable endeavor by the parties to estimate a fair
average compensation for any loss that may be sustained.”
(Garrett, supra, 9 Cal.3d at p. 739.) The Garrett court found no
effort had been made to estimate anticipated damages in the
event of a breach; instead the bank set the additional damages,
across the board, at 2 percent of the unpaid loan balance,
regardless of the balance. “We are compelled to conclude that a
charge for the late payment of the loan installment which is
measured against the unpaid balance of the loan must be deemed
punitive in character. It . . . is not reasonably calculated to
merely compensate the injured lender.” (Id. at p. 740.) The
Garrett court mused it “is possible that on a proper showing [the
bank] might have been able to establish the impracticability of
prospectively fixing its actual damages resulting from a default
in an installment payment.” (Id. at p. 741.) However, because
the evidence of impracticability was lacking as well as evidence of
a reasonable effort to determine anticipated damages, the
interest charge was deemed an unenforceable penalty.
A similar situation exists here, in even starker relief. The
undisputed evidence at trial established there were no efforts by
the parties to reasonably endeavor to estimate fair average
compensation for any sustained losses in the event of a breach.
Instead, the pre-printed AIR form lease set the holdover rent,
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across the board for anyone using that form, at 150 percent of
base rent.
Constellation offers no plausible argument that the
150 percent rent increase in the event of a holdover was the
result of a reasonable endeavor by the parties to estimate
anticipated damages. Instead, it relies on the testimony of its
broker, Michael Zugsmith, and its expert witness, John
Pagliassotti. Zugsmith testified he has held a real estate license
since 1973. He is chairman and founder of NAI Capital, Inc.,
which is a commercial real estate brokerage firm with 14 offices
in the greater Los Angeles area. His custom is to use the AIR
prepared lease form which is the most widely used form in the
Southern California commercial and industrial real estate
market. He acknowledged the parties did not discuss the
holdover rent provision of 150 percent on the preprinted lease.
He uses the AIR form because it “cuts down” on the expenses of
negotiating a lease. “Most attorneys already are fully familiar
with it” and have their comments about it “premade.”
Pagliassotti had an even closer familiarity with the AIR
form lease. He testified that AIR Commercial Real Estate is an
association founded in 1960 to provide education and training
and a standard of rules and ethics for its broker members. It also
publishes over 50 real estate forms. AIR has 13,000 subscribers
to its forms.
Pagliassotti has been an active member of the AIR
Commercial Real Estate Forms committee since 2006. The
Forms Committee, composed of two attorneys and other real
estate professionals, meets quarterly. Forms are tested based on
transactions of people in the industry who then give feedback to
the committee for ongoing consideration. Pagliassotti called it
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“one of the beauties of our form.” The form leases have uniform
holdover rent provisions. The reason for holdover rent is because
the “landlord needs the building back, vacant.” He testified that,
based on his 30 years of experience with commercial leases,
150 percent holdover rent is “reasonable.” Its purpose is to
“provide a disincentive to the tenant to remain in possession past
the lease expiration, and provide a reasonable estimate of the
landlord’s damages and risks should that tenant holdover.”
Pagliassotti testified the committee picked and printed
150 percent in consideration of the risks generally inherent in
holdover tenancies. Most landlords in Southern California
charged between 125 and 200 percent in holdover rent so the
figure of 150 seemed workable. On cross-examination
Pagliassotti testified that he had done no analysis of costs
incurred or estimated to occur from a breach of this particular
lease.
Thus we face a uniform holdover rent provision of
150 percent of the base rent on this pre-printed lease. It is based
not on what the parties to this particular lease might have
estimated to be holdover damages, but on what Pagliassotti and
his committee concluded was reasonable and would “work” in the
industry as a whole.
That this AIR lease form is commonly employed in the
commercial leasing industry does not make it legal in this
particular context. A similar argument was made in Harbor
Island, where the landlord contended that it was the policy of the
state to facilitate freedom of contract by the parties to commercial
leases, so he should be able to use the form lease as he deemed
appropriate. The Harbor Island court was not having it: “[I]t is
no less the public policy of this state that any provision for the
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forfeiture of money or property without regard to the actual
damage suffered constitutes an unenforceable penalty.” (Harbor
Island, supra, 107 Cal.App.4th at p. 799.)
Our caselaw mandates that a reasonable effort be made by
the parties to a commercial lease to estimate anticipated
damages in the event of a breach of contract. None was made
here. I conclude the holdover rent provision is tethered to
nothing but the general convenience of the AIR member
subscribers, and, perhaps at best, some generalized practice in
the industry. The trial court correctly found it to be an
unenforceable penalty.3
4. Vucinich v. Gordon
Finally, Constellation contends Vucinich v. Gordon (1942)
51 Cal. App. 2d 434 (Vucinich) controls. I disagree.
The trial court reviewed Vucinich and concluded it was not
controlling for two reasons. First, it noted the issue on appeal
there was whether the merger of fee title and a leasehold interest
vitiated the tenant-now-partial-owner’s obligation to pay rent.
Next the trial court noted correctly that Vucinich has “not been
followed by any subsequent case as to its treatment of holdover
rent.”
3 There was no testimony whatsoever that estimating
damages in the industry is “impracticable” or “extremely
difficult” as discussed in Garrett. Had there been such testimony,
perhaps this 150 percent rate might have passed muster.
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I do not consider Vucinich persuasive. First, its throw-
away discussion of holdover rent was dicta appearing
gratuitously in the last paragraph of the decision. Vucinich is
also a case that precedes the amendments to section 1671 and so
does not discuss the statute in its current form. Most important,
however, is that Vucinich’s reliance on the option of alternative
performance in contracts has been severely curtailed by our
Supreme Court’s analyses in Garrett and Ridgley, as set out
above. A free-wheeling application of the principles of freedom of
contract and elevation of the significance of the presumed
equality of the contracting parties’ bargaining positions is
constrained by the Supreme Court’s requirements that the
parties make a reasonable endeavor to estimate anticipated
holdover damages and link holdover rent to the results of their
endeavors. Accordingly, I dissent from what appears to me to be
the majority’s departure from California law.
STRATTON, J.
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