California Retail Law Update
 
April 29, 2002
 

Many new laws and legal theories appear first in California. One new bill and several recent judicial decisions have potential impact on California retail real estate landlords and tenants, and may be a preview of what can be expected in other jurisdictions across the country.

Legislation

Effective January 1, 2002, it is unlawful to demand any payment of money, including payment of "key money" or the lessor's attorney's fees reasonably incurred in preparing the lease or rental agreement as a condition of initiating, continuing, or renewing a commercial lease unless the amount of the payment is stated in the written lease agreement.

The restriction was imposed by a bill that amended the California Civil Code with the addition of section 1950.8. The new law also provides that any individual violating the provision will be subject to a civil penalty of three times the amount of actual damages suffered by the person seeking to obtain the lease of the property. Persons damaged also will be entitled to an award of costs including attorney's fees reasonably incurred in connection with obtaining the civil remedy.

The new law does not prohibit the advance payment of rent in commercial leases so long as the amount and character of the payment are clearly ascertainable from the terms of the written lease agreement. Nor does it bar the charging of reasonable amounts for the purpose of conducting reasonable business activities in connection with the lease, such as obtaining credit reports. Lessors are not prohibited from increasing a commercial tenant's rent in order to recover increased operating costs provided the right to increase the rent, the method of calculating the increase and the period of time covered are ascertainable from the terms of the lease.

The bill, A.B. 533, was sponsored by the California Business Properties Association. Its genesis was the unscrupulous practice among landlords, primarily in the garment district of Los Angeles, of exacting under-the-table "key money" as a condition of initiating or renewing commercial leases in the tight downtown market, often from unsophisticated immigrant tenants. A key supporter of the bill was the Korean Apparel Manufacturers Association, which claimed that its members paid more than $20 million annually in key money in the 20-block area comprising the fashion district, with an average of $60,000 usually paid in "key money" for a three-year lease.

Case Law

A landlord's acceptance of a partial rent payment from a commercial tenant after filing an unlawful detainer action will not be a bar to further proceedings provided that the landlord notifies the tenant that acceptance is not a waiver of any rights prior to accepting the partial rent. The California Court of Appeal, in Woodman Partners v. Sofa U Love, 94 Cal. App. 4th 766 (Second Appellate District; December 19, 2001), affirmed the trial court's holding that the notice required to be given to tenants by the Code of Civil Procedure section 1161.1 was satisfied by a provision in the parties' lease that the "acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted." Section 1161.1 applies only to commercial rentals and provides that if the landlord accepts a partial rent payment after filing an unlawful detainer action, the landlord's acceptance of the partial payment is evidence only of that payment, without waiver of any rights or defenses of any of the parties. The landlord is entitled to amend its complaint in the unlawful detainer action to reflect the partial payment. The provision only applies, however, if the landlord provides actual notice to the tenant that acceptance of the partial rent does not constitute a waiver of any rights, including any right the landlord may have to recover possession of the property.

The tenant, Sofa U Love, argued unsuccessfully that the lease language was insufficient to constitute the actual notice required by section 1161.1 because it spoke in terms of non-waiver of "breaches" rather than "rights and defenses," as provided by section 1161.1. The court disagreed and found that the lease language was sufficient to provide the tenant with actual notice that the landlord's acceptance of rent would not constitute a waiver of any breach except a breach with respect to the amount owed and accepted. It was not necessary for the lease to set forth an enumeration of the rights and remedies that would not be waived, given the specification of the sole circumstance under which acceptance of a rent would constitute a waiver by the landlord.

A notice to quit or pay rent, given by a landlord to a commercial tenant, may contain an estimate of the rent due. In another case involving a commercial unlawful detainer action, the Court of Appeal modified statutory law in effect in California since the 1860s and concluded that inclusion of rent due for more than one year does not cause an unlawful detainer action to fail, provided that the notice to quit or pay rent also includes a demand for payment of rent within a year of the notice, and if the notice specifically indicates that it is an "estimated" rent notice. In Levitz Furniture v. Wingtip Communications, Inc., 86 Cal. App. 4th 1035 (First Appellate District; January 31, 2001), the trial court found that the landlord's inclusion of one month's rent that was more than a year past due invalidated the landlord's three-day notice to quit or pay rent and therefore precluded successful prosecution of the unlawful detainer action under Code of Civil Procedure section 1161, which has governed unlawful detainer actions in California since 1872 and which requires that the three-day notice not include any rent more than one-year old.

In reversing the lower court, the Court of Appeal found that section 1161.1 of the Code of Civil Procedure, enacted in 1990, had liberalized the notice requirements for commercial landlords, providing that where past-due rent is estimated in the notice, inclusion of rent that is more than a year past due is of no consequence, and will not result in an automatic invalidation of the notice, as long as the total rent set out in the notice is reasonably estimated. In the court's analysis, notices to quit or pay rent served on noncommercial tenants pursuant to section 1161 must include the amount due while a commercial tenant may be served with an estimate of past-due rent pursuant to section 1161.1. The Levitz court found that this legislative amelioration made sense in a commercial context since monthly rent is not always easily fixed or readily ascertained simply from reading the terms of the lease. Because commercial rents are often affected by a tenant's revenues and various pass-through charges, the court reasoned that requiring a landlord to fix the exact sum due would render the unlawful detainer action an elusive - or even unavailable - remedy. The court also noted that the 1990 provision benefits commercial tenants as well since they can avoid eviction by tendering the sum that the landlord has "reasonably estimated" to be due provided the sum is within 20 percent of the amount ultimately determined to be due and the tenant pays the difference within five days of the judgment.

Statutory law trumps contract law when recovery of attorney's fees is sought. In a very recent case involving premises leased by Rite Aid, the California Court of Appeal ruled that the right to attorney fees is governed by the definition of "prevailing party" set forth in section 1717 of the Civil Code and not by the terms of a contract such as a lease. Wong v. Thrifty Corporation et al., First Appellate District Case No. A094922, filed March 29, 2002). After vacating the leased premises, the parties' joint inspection revealed substantial damages. The landlord rejected Rite Aid's offer to pay only slightly more than 10 percent of the roughly $73,000 repair bill and then sued for breach of contract, including a prayer for attorney fees. Rite Aid responded with a statutory offer to compromise pursuant to Code of Civil Procedure Section 998 in the amount of $35,000 that included costs and attorney fees. The landlord rejected this offer informing Rite Aid that his attorney fees alone exceeded the amount of the offer. Rite Aid's next offer was for $43,600 but was silent as to fees and costs. The landlord accepted the new offer and a judgment for that amount was entered with the trial court making a tentative award to the landlord of $131,060.50 in fees and $6,145.75 in costs but denying the landlord's motion for attorney fees.

The Court of Appeal reversed the judgment as to attorney fees, agreeing with the landlord that the contractual fee provision was in conflict with the purposes and provisions of Civil Code section 1717. The lease provided that the tenant would pay the landlord's attorneys fees in the event an action was brought to enforce the lease if it was "determined" that the tenant is in default. Rite Aid argued that the landlord was not entitled to attorney fees because the trial court judgment was made in connection with a statutory offer to compromise and did not constitute a determination that it was in default under the lease.

The appellate court disagreed, holding that section 1717 provides that awards of attorney's fees shall go to the "prevailing party," defined in section 1717 to be "the party who recovered a greater relief in the action on the contract." The court further held that the statutory definition is mandatory and cannot be avoided or altered by contract and that contractual provisions conflicting with it are void. The court explained that the legislative intent of section 1717 was to establish uniform treatment of fee recoveries in contractual litigation and to eliminate distinctions based on whether recovery was authorized by statute or by contract.

Free speech continues to be a source of litigation respecting California retail establishments. A trio of cases appears to strengthen the ability of certain retail landlords to limit the activities of petitioners and solicitors on their property, the result of some judicial "Pruneyard trimming."

In a trend that seems to suggest that "big box" retailers have lower free speech obligations, the area in front of a Home Depot store entrance was found not to be a "public forum" by the U.S. District Court for the Northern District of California and it was not, therefore, a violation of California free speech rights for the store to have placed petitioners under citizen's arrest and subsequently have them removed by police. In Slevin v. Home Depot, 120 F. Supp. 2d 822 (July 12, 2000), the court distinguished the circumstances involved in the Home Depot store from those in the seminal 1979 case of Robins v. Pruneyard Shopping Center (23 Cal. 3d 89), in which the California Supreme Court held that large retail shopping centers, like the 65-store Pruneyard Mall, modernly serve as the functional equivalent of the traditional town square and thus invite the kind of expressive activity protected by the California Constitution.

Discussing the spectrum of cases that have followed Pruneyard, the Slevin court opined that a balancing test should be employed to weigh the interests of the property owner and those of society, taking into consideration the particular type of property involved. The relevant factors in this balancing analysis include whether the property owner has opened his property to the public, the scope of that invitation, whether the property includes places for people to congregate, as well as the purpose motivating people to come to the property. The court noted that the case law that forms the progeny of Pruneyard comprises a range of property types, from single-purpose, stand-alone buildings to large, regional malls like the Pruneyard shopping center, consisting of numerous businesses connected by areas where people meet, eat and are entertained. The Slevin court found that a hot dog stand and modest sitting area did not transform the Home Depot store into the hub of activity envisioned in Pruneyard and that Home Depot was not obligated to provide access for the petitioners.

In another case involving similar facts, the California Court of Appeal held that owners of a free-standing, warehouse-style supermarket could prohibit the solicitation of petition signatures on the privately owned sidewalk outside the store. Waremart, Inc. v. Progressive Campaigns, Inc., 85 Cal. App. 4th 679 (Third Appellate District; December 18, 2000). The Court of Appeal also distinguished the circumstances of Waremart from those in Pruneyard, holding that Waremart's stand-alone structure, which did not offer any type of gathering place, lacked any relationship to other establishments that would transform it into a public forum. The court found that Waremart was open to the general public but that its invitation was limited to the transaction of business.

This case is currently on appeal to the California Supreme Court, which could opt to revisit the retail-center-as-public-forum issue altogether since the current group of jurists is more conservative than those on the high bench in 1979 when Pruneyard was decided.

A third case, again involving Home Depot, was also resolved in favor of the store owner. In Lushbaugh v. Home Depot, U.S.A., 93 Cal. App 4th 1159 (Second Appellate District; November 20, 2001), the California Court of Appeal affirmed summary judgment for Home Depot and ruled that the store's written policy guidelines allowing non-commercial speech activities in a designated area, on a first-come, first-served basis and upon written application to store management complied with any duty it had to provide public access by enforcing reasonable time, place and manner rules. The court questioned whether Home Depot, as a free-standing facility, was even required to provide public speech access, but found that even assuming it did, Home Depot had provided sufficient public access for free speech activities and that Pruneyard did not require that the company give activists free rein to directly accost every customer entering the store.

Although the new legislation and case law discussed above apply only in California, they nonetheless are indicative of new approaches that may be adopted in other states.

For more information, contact Carolyn B. Hall at 888-688-8500 or via e-mail at cehall@hklaw.com.