In the case of Tufield Corporation v. Beverly Hills Gateway, Case No. B314862 (2022), the court got back to basics in this landlord-tenant dispute. It found that a lease exceeding 99 years is void under the law as a suppression of California public policy encouraging the free exchange and development of land. The primary issue on appeal is whether a lease that violates Civil Code section 718 is void or voidable and is essentially an issue of first impression. The court held that the part of the lease exceeding 99 years was void.
Factual Background
In this commercial landlord-tenant dispute, the parties disagree on the enforceability of a lease. The plaintiff, cross-defendant and appellate is Tufield Corporation- the landlord in this dispute. Beverly Hills Gateway L.P. (BHG) is the tenant. Tufield is a family-owned company that owns prime location commercial property in Beverly Hills. Back in 1960, Tufield agreed to rent this property to two tenants with a ground lease term of 99 years ending in 2058. The rent was 6% of the appraised value of the property subject to regular reappraisals. The tenants built an office building on the property in 1964. Douglas Emmett Realty Fund was the tenant staring in 2003.
Also in 2003, BHG bought Emmett's interest in the ground lease. Emmett rented and assigned its interest to BHG and two other businesses. Those two other businesses immediately granted and assigned their interest to BHG in an almost simultaneous transaction. BHG obtained financing for these transactions from a lender. In 2007, BHG was considering a remodeling project on the property, but wanted to extend the lease to make its expenditures more worthwhile. In an executed amendment to the lease in 2007, BHG and Tufield agreed to extend the lease term through December 31, 2123 and future rent was increased to 6.5% of the appraised value. BHG also paid Tufield $1.5 million as part of the new agreement. The parties also formulated a memorandum of the agreement in which Tufield agreed to give BHG a right of first refusal should any other party present a bona fide offer to purchase the property. As a result of this transaction, BHG refinanced its loan and borrowed $47 million from a new lender. Tufield also signed an estoppel certificate, which included a term verifying that the lease terminated on December 31, 2123.
BHG completed $8.8 million in renovations over several years. In 2016-2017, Tufield increased the monthly rent from $30,500- $200,000 based on an appraisal of the property value. BHG opposed this increase and the parties litigated the matter, but settled before any judgment was reached by the court. In late 2017, BHG refinanced its loan a second time borrowing $49 million. A second estoppel certificate was issued by Tufield again confirming that the lease terminated on December 31, 2123. BHG used some of the new loan monies to make further improvements to the property.
Soon after this occurred, Tufield's president found out that leases longer than 99 years are invalid under Civil Code section 718. Tufield then filed a complaint for declaratory relief and quiet title against BHG. Tufield requested a cancellation of the ground lease, or in the alternative, a cancelation of 2007 amendment based on the fact that the lease term was more than 99 years.
BHG cross-complained for declaratory relief, unjust enrichment and reformation of the contract. BHG claimed that section 718 was not applicable to the ground lease and also sought a declaration that the ground lease was valid for 99 years. The parties engaged in a bench trial in which the court concluded that BHG's acquisition of the lease from Emmet in 2003 was a novation and that the lease term should run through 2102. The court also determined that the lease was void pursuant to section 718 because it exceeded 99 years. It also found that BHG could not enforce its estoppel, laches and waiver defenses. It reasoned that allowing such equitable defenses would require enforcement of the ground lease through 2123, which was impossible according to the law in place. Both parties appealed.
Civil Code Section 718
Civil Code section 718, applicable to this case, states: "No lease or grant of any town or city lot, which reserves any rent or service of any kind, and which provides for a leasing or granting period in excess of 99 years, shall be valid." In determining the application of section 718 to the facts of this case, the court first looked to the legislative intent underlying the statute. The plain text of the statute does not directly address the issue at hand, which is whether a lease term that violates the statute is void or voidable. Section 718 does not use either term in its provisions. It does clearly state, however, that no lease term may exceed 99 years and that such a lease "will not be valid." The words "not valid" do not necessarily require that the term is void or voidable. Safarian v. Govgassian (2020) 47 Cal.App.5th 1053, 1067.
Going Back in Time to Find the Answer
At the time California gained its statehood in 1850 it was truly the wild, wild west. The California government was in its beginning stages and had to adopt a legal and judicial system from scratch. From its inception, the common law of England has served as the foundational law of the state, except where conflicted with the United States Constitution or California law. (Stas. 1850, ch. 95) As California's population quickly grew, the California Legislature finally adopted four codes, including the Civil Code. Known as the "Field Code", section 718 was first enacted as one of its provisions. It originally stated, "No lease or grant of any town or city lot, for a longer period than twenty years, in which shall be reserved any rent or service of any kind, shall be valid." (Former § 718, enacted by Stats. 1872). Section 718 has been amended many times, but the crux of its intent has remained virtually the same. A lease that has a term longer than a certain number of years will not be valid. In 1911 that the time limit was changed to no more than 99 years. (Stats. 1911. ch. 708 §1).
Looking back at American history helps modern courts to understand the reluctance to grant land in perpetuity. In 1855, the California Supreme Court held, "A covenant for a lease to be renewed indefinitely at the option of the lessee, is, in effect, the creation of a perpetuity; it puts it in the power of one party to renew forever, and is therefore against the policy of the law." Morrison v. Rossignol (1855) 5 Cal. 64, 65. Much concern surrounded the idea of granting real property in perpetuity and that is reflected in court decisions as well as the evolution of the law in this area. Public policy has always discouraged "tying up property for an undue length of time." Estate of Harrison (1937) 22 Cal.App.2d 28, 35. "The traditional rule against restraints on alienation is based on the public policy notion that the free alienability of property fosters economic and commercial development." City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420, 1426, fn.4).
Today this core public policy remains relevant. Throughout the evolution of section 718 this underlying intent and policy has informed legislators and the courts interpreting the provision. The Legislature stated, "Real property is a basic resource of the people of the state and should be made freely alienable and marketable to the extent practicable in order to enable and encourage full use and development of the property…" (§880.020, subd.(a)(1)).
In 1991, the California Legislature abolished the rule against perpetuities in commercial transactions. This is codified in the Uniform Statutory Rule Against Perpetuities (Prob. Code §21200 et.seq.; Uniform Act). The adoption of the Uniform Act was enacted while keeping section 718 in place. This indicates that the Legislature intended the two provisions to be read together. Shaver v. Clanton, 26 Cal.App.4th 568. 576 (1994). "The rule is that commercial leases are exempt from the Uniform Act, but for the period they are longer than 99 years, they are not valid under section 718." Id.
BHG asserts that the purpose of section 718 is to protect tenant rights. It looks to the case of Parthey v. Beyer (N.Y. App. Div. 1930) 228 A.D.308, 312, which stated "The public policy in New York was originally designed to protect the State and the inhabitants thereof from the consequences of the depreciation resulting therefrom because of the exhausting of the farm lands during the course of occupancies under long leases." BHG argues that because California law was modeled after the codes in New York when it was first instituted, California public policy reflects this value as well.
The court in the case at hand did not find this argument helpful as the language of section 718 is significantly different than anything adopted by New York. In addition, the California Supreme Court in Morrison ruled that "indefinite leases are against public policy even if they benefit tenants." Morrison, supra, 5 Cal.at p. 65. Therefore, the court disagrees with BHG that the Legislature had any intent to vary from this public policy in the enactment and subsequent amendments of section 718.
The public policy of California is to discourage excessively long commercial leases as they "unduly hinder the use, development and marketability of real property. Perpetuities are inherently problematic because it is very difficult for the current generation to predict conditions future generations will face. Future generations deserve the opportunity to find the solutions to the problems of their day, and they will most likely have greater success than people long gone from the scene." (Korngold, Resolving the Intergenerational Conflicts of Real Property Law; Preserving Free Markets and Personal Autonomy for Future Generations (2007) 56 Am. U. L.Rev. 1525, 1555-56). The court here determined that the proper application of public policy does not necessarily favor tenants, but rather is meant to discourage excessively long commercial leases that prohibit the use and development of commercial property.
A Lease that Violates Section 718 is Void
The issue presented to the court in this case is whether a lease term that exceeds 99 years is void or voidable. "A void contract is without legal effect." Rest.2d Contracts §7, com.a. "Generally when a contract or provision in a contract is prohibited by a statute, it is void." Asdourian v. Arai (1985) 38 Cal.3d 276, 291. A voidable contract, on the other hand, "is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance." Rest.2d Contracts §7. The difference is legally significant because if a contract is void, the equitable defenses of estoppel, waiver and laches will not apply. Colby v. Title Ins. & Trust Co. (1911) 160 Cal.632, 644.
BHG also argues that even if the statute voids the contract, their particular situation qualifies as an exception to the general rule. They contend that statutes that seek to protect certain parties rather than the public as a whole should be read as voidable rather than void. Estate of Reardon (1966) 243 Cal.App.2d 221, 229. This argument follows the maxim of jurisprudence: "Any one may waive the advantage of a law intended solely for his benefit, but a law established for a public reason cannot be contravened by a private agreement." In other words, if a statute confers only an incidental benefit to the public, then it should not be used to contravene the rights of private parties requiring a differing equitable solution.
The court disagreed with BHG's analysis on this point. Due to the fact that section 718 does not only confer a benefit on tenants, but also landlords and the public at large, it clearly serves a public benefit in more than an incidental manner. Therefore, the court found that the private benefit exception does not apply in this case.
The Novation of the Lease
Novation is "the substitution of a new obligation for an existing one." Civil Code §1530. A novation in a lease occurs "if a new tenant is substituted for an old one and the parties intend to release the old tenant of all obligations." Wells Fargo Bank v. Bank of America (1995) 32 Cal. App.4th 424, 431. A novation happened here when Emmet signed his interest in the lease over to BHG in 2003. The ground lease's language allowed a tenant to assign "all of its right, title and interest" in the lease to a third party. The lease also provides that, "upon such assignment or transfer, the liabilities and other obligations under this lease of the assignor who shall have so assigned shall cease and terminate to the extent not therefore accrued or incurred."
The 2003 transaction between Emmett and BHG was a novation of the lease contract. A new lease between Tufield and BHG was created and the contract between Emmett and Tufield was extinguished. This change in parties did not extend the lease term, but it did "reset" the 99 year limit to the date of the contract between Tufield and BHG. The new lease between Tufield and BHG subsumed all of the lease terms from the previous contract and all of the substantive terms of the lease remained the same. In effect, this means that the lease expiration date stayed the same, but the clock restarted and the 99 year limit set by section 718 was reset.
Is the Entire Lease Void, or Only the Period of the Lease that Extends Past the 99 Year Mark?
Tufield asserts that the trial court erred in holding that only the period of the lease longer than 99 years is void. They argue that the entire lease is void as an unlawful contract. They relied on the following case to support their argument: "If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate." Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 124.
The court disagreed with this analysis. Here the purpose of the contract was to lease the property. The extension of the lease period past the 99 years allowed by law is extraneous to its main purpose. Therefore, the invalid portion does not taint the entire document. The lease is only invalid for the period that exceeds the allowed 99 years.
Restitution
The trial court awarded restitution according to the 2007 lease amendment in which the lease was extended to 2123. The lower court correctly determined that under section 718 the lease term ended in 2102. It awarded BHG restitution on the basis that "Tufield was unjustly enriched as a result of the reduction of the lease term by 21 years." The trial court has "inherent equitable power to award restitution when it finds one party has been unjustly enriched." Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 177.
On appeal, the court found that the trial court was correct in its assessment of restitution. Tufield obtained a benefit from BHG for $1.5 million and BHG expected a 65 year lease extension in exchange for that money. Due to the fact that 21 years of the lease had to be voided as against the law, BHG did not receive its full benefit of the bargain as Tufield could not deliver what was promised in the agreement between the parties. Therefore, restitution was justified.
Conclusion
The Court has now provided guidance on the enforceability of commercial leases exceeding 99 years. As illustrated in Tufield Corporation v. Beverly Hills Gateway, Case No. B314862 (2022), the portion of a lease exceeding 99 years is void under California Civil Code Section 718, however portions of the lease within the 99 year limit will be enforceable.