Judge: Alison Mackenzie, Case: 23STCV28072, Date: 2025-03-21 Tentative Ruling

Case Number: 23STCV28072    Hearing Date: March 21, 2025    Dept: 55

NATURE OF PROCEEDINGS: Hearing on Plaintiff's Motion for Summary Judgment

Plaintiff's Motion for Summary Judgment is granted.

BACKGROUND

Plaintiff Hanna Gamson, as Trustee of the Gamson Family Trust dated July 19, 2018, filed this action against Proconsul, LLC and 4 What It's Worth, Inc.(Defendants), alleging that Proconsul breached its lease and 4 What It’s Worth breached its guaranty of that lease.

The causes of action are: (1) Breach of Lease and (2) Breach of Guaranty.

Plaintiff filed a Motion for Summary Judgment. Defendants filed an Opposition.

EVIDENTIARY OBJECTION

1.      Sustained. Improper Legal Conclusion. See Hayman v. Block (1986) 176 Cal.App.3d 629, 639 (“[A]ffidavits must cite evidentiary facts, not legal conclusions or ‘ultimate’ facts.”).

LEGAL STANDARD

A party is entitled to summary judgment only if there is no triable issue of material fact and the party is entitled to judgment as a matter of law. § 437c, subd. (c). A plaintiff or cross-complainant moving for summary judgment “bears the burden of persuasion that ‘each element of’ the ‘cause of action’ in question has been ‘proved,’ and hence that ‘there is no defense’ thereto.” Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850. “Once the plaintiff … has met that burden, the burden shifts to the defendant … to show that a triable issue of one or more material facts exists as to the cause of action or a defense thereto. The defendant … shall not rely upon the allegations or denials of its pleadings to show that a triable issue of material fact exists but, instead, shall set forth the specific facts showing that a triable issue of material fact exists as to the cause of action or a defense thereto.” § 437c, subd. (p)(1).

“The party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law.” Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850. A triable issue of material fact exists if the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof. Ibid.

“When deciding whether to grant summary judgment, the court must consider all of the evidence set forth in the papers (except evidence to which the court has sustained an objection), as well as all reasonable inferences that may be drawn from that evidence, in the light most favorable to the party opposing summary judgment.” Avivi v. Centro Medico Urgente Medical Center (2008) 159 Cal. App. 4th 463, 467; Code Civ. Proc., § 437c, subd. (c).

ANALYSIS

I.                    Breach of Contract and Guaranty

It is undisputed that Plaintiff and Proconsul entered into a written five-year lease beginning on October 1, 2018, and that Proconsul paid no rent or Common Area Operating Expenses (CAM) charges from July 1, 2020, through June 30, 2022. UMF 2, 33. Likewise, it is undisputed that 4 What It's Worth executed a written guaranty of the lease, in which it unconditionally promised to pay all rents and other sums payable by Proconsul under the lease. UMF 3. However, Defendants argue that Proconsul was excused from performing under the doctrine of frustration of purpose.

“The doctrine of frustration excuses contractual obligations where ‘[p]erformance remains entirely possible, but the whole value of the performance to one of the parties at least, and the basic reason recognized as such by both parties, for entering into the contract has been destroyed by a supervening and unforeseen event.’” SVAP III Poway Crossings, LLC v. Fitness Internat., LLC (2023) 87 Cal.App.5th 882, 895 (Poway Crossings) (quoting Dorn v. Goetz (1948) 85 Cal.App.2d 407, 410). “A party seeking to escape the obligations of its lease under the doctrine of frustration must show: (1) the purpose of the contract that has been frustrated was contemplated by both parties in entering the contract; (2) the risk of the event was not reasonably foreseeable and the party claiming frustration did not assume the risk under the contract; and (3) the value of counterperformance is totally or nearly totally destroyed. Ibid.” “Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.” Ibid.

A. Purpose of the Contract

The lease defines the “Agreed Use” as “Retail sales of high-end men’s and women’s clothing, shoes, and accessories and related incidental uses, and no other use.” Compl. Ex. 1 ¶ 1.10. The lease further provides, “Lessee shall use and occupy the Premises only for the Agreed Use, and for no other purpose…. Lessor shall have the right in Lessor’s sole and absolute discretion to consent or withhold consent to any written request for a modification of the Agreed Use.” Id. ¶ 6.1. (a). Additionally, the lease provides for “Continuous Operation,” requiring Proconsul to “operate and conduct the Agreed Use…[and be] continuously open for business Monday through Friday from 9:00 a.m. to 6:00 p.m., Saturday from 9:00 a.m. to 6:00 p.m.; and Sunday from 10:00 a.m. to 6:00 p.m.” Id. ¶ 6.1. (b).

Based on these provisions, the Court concludes that the purpose of the lease was not simply Proconsul’s payment of rent in exchange for the use of the property but specifically to run a retail clothing store.

B. Foreseeability

The Court concludes that the COVID-19 pandemic and related shutdown orders were not reasonably foreseeable when the parties signed the lease in 2018. Nor did Proconsul assume the risk of such a pandemic in the lease.

C. Value of Counterperformance

“Even more clearly with respect to leases than in regard to ordinary contracts the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which … the transaction was entered into.” Lloyd v. Murphy (1944) 25 Cal.2d 48, 53. “Where commercial frustration does apply, the ‘legal effect … is the immediate termination of the contract.’” Poway Crossings, supra, 87 Cal.App.5th at p. 896 (quoting Johnson v. Atkins (1942) 53 Cal.App.2d 430, 433).

In Poway Crossings, the court rejected a tenant fitness center’s frustration of purpose defense. There, the tenant argued that the March 2020 executive order directing all nonessential businesses to cease operating immediately constituted a frustration of the lease’s purpose, to operate a health club and fitness facility. The court held that the closure orders “did not result in the destruction of the lease's purpose and value such that [the tenant]’s performance was excused.” Poway Crossings, supra, 87 Cal.App.5th at p. 895 (fn. omitted). It reasoned, “[t]he temporary government closure for a period of months, when the premises have been leased for more than 19 years—and the lease term spans more than 23 years total—does not amount to the kind of complete frustration required for the doctrine to apply.” Ibid. Moreover, the court held “because the application of the doctrine of frustration under California law compels the termination of the contract, the law does not recognize the ‘temporary’ frustration defense…” Id. at p. 896.

Here, it is undisputed that “[t]he City’s March 19, 2020 Safer at Home Public Order and subsequent similar orders required the temporary closure of Proconsul’s store, but it was later allowed to and did reopen and continue doing business on the Premises.” UMF 19. Proconsul reopened on May 27, 2020, approximately 10 weeks later. UMF 56. While the five-year lease at issue here is shorter than the 23-year lease in Poway Crossings, the Court likewise concludes that the months-long disruption did not amount to the destruction of the lease’s purpose and value such that Proconsul’s performance was excused.

Proconsul did not respond to the shutdown orders by attempting to rescind the lease. The fact that Proconsul reopened shows that the shutdown order did not constitute the immediate termination of the contract. As the court explained in Poway Crossings, the fact that “the government closure orders here were temporary, … precludes the application of a commercial frustration defense.” Id. at p. 896. As in Poway Crossings, it is “clear from the parties' actions and argument that neither considered the contract to terminate as a result of the orders. On the contrary, [Proconsul] continued to occupy the premises throughout the closure periods and did not attempt to rescind the lease. It therefore remains obligated to pay rent while in possession of the premises.” Ibid.

Nor is there merit to Defendants’ argument that “[a]s a result of the pandemic and these public protests, Tenant lost virtually all of its customers, and foot traffic to Tenant’s store dropped to nearly nothing, making continued operations unsustainable.” AUMF 58. That changing circumstances rendered the operation of the retail store unprofitable does not amount to frustration of purpose because the purpose of the lease was not Proconsul’s profit.

II. Mitigation

Defendants contend there is a triable issue of fact as to whether Plaintiff adequately mitigated its damages.

Civil Code §1951.2, subdivision (a), provides in relevant part: “Except as otherwise provided in Section 1951.4, if a lessee of real property breaches the lease and abandons the property before the end of the term or if his right to possession is terminated by the lessor because of a breach of the lease, the lease terminates” and the lessor may recover certain damages from the lessee. However, the damages are only recoverable if “(1) The lease provides that the damages he may recover include the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award … exceeds the amount of such rental loss for the same period that the lessee proves could be reasonably avoided; or  [¶] (2) The lessor relet the property prior to the time of award and proves that in reletting the property he acted reasonably and in a good-faith effort to mitigate the damages….” Civ. Code § 1951.2, subd. (c). Put differently, Civil Code section 1951.2, subdivision (c) places the duty on the landlord to mitigate damages.

However, “[Civil Code s]ection 1951.4 provides, in essence, that a lessor can avoid the statutory duty to mitigate damages (see Civ. Code, § 1951.2) by contracting to shift that duty onto the lessee.”  Kendall v. Ernest Pestana (1985) 40 Cal.3d 488, 505. It states, “[e]ven though a lessee of real property has breached the lease and abandoned the property, the lease continues in effect for so long as the lessor does not terminate the lessee’s right to possession, and the lessor may enforce all the lessor’s rights and remedies under the lease, including the right to recover the rent as it becomes due under the lease, if any of the following conditions is satisfied … (3) The lease permits the lessee to sublet the property, assign the lessee’s interest in the lease, or both, with the consent of the lessor, and the lease provides that the consent shall not be unreasonably withheld….” Cal Civ Code § 1951.4, subd. (b).

Here, the lease provides that “In the event of a Breach, Lessor may …  (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession.” Compl. Ex. 1 at p. 25 ¶ 13.2.

It is undisputed that the lease terminated on June 30, 2022. UMF 12. Therefore, Plaintiff exercised its option to continue the lease through that date and was entitled to recover rent as it became due. Defendants argue that Plaintiff voluntarily assumed the duty to mitigate by undertaking efforts to market and re-let the premises under the Agreement to Market Space. Suppl. Brf. at p. 4:2-4. However, section 1951.4 and the lease clearly state that a landlord's efforts to relet do not terminate a tenant’s right to possession. Cal Civ Code § 1951.4, subd. (c); Compl. Ex. 1 at p. 25 ¶ 13.2. Because the Agreement to Market Space did not terminate Proconsul’s right to possession, it likewise did not terminate Plaintiff’s right to collect rent as it became due.

Moreover, the terms of the agreement make clear that Plaintiff was not assuming the duty to mitigate. The Agreement to Market Space was “an accommodation to Lessee to assist the Parties in mitigating their losses arising from defaults under the Lease…[not] a waiver of any of Lessor’s rights or remedies.” Soladay Supp. Decl. Ex. 1 at p. 7 ¶ 7. The agreement expressly provides that “Lessor makes no representation that a suitable replacement tenant will be found from the Premises, and Lessor is not obligated to locate or accept any replacement tenant.” Id. at p. 6 ¶ 4. It also states, “Lessor may terminate its efforts to market the Premises at any time as determined by Lessor in Lessor’s sole and absolute discretion, but Lessor shall provide Lessee timely written notice of its decision to terminate its efforts to market the Premises.” Ibid. This notification requirement suggests that Proconsul remained ultimately responsible for mitigating damages.

Finally, the provision stating that “[Plaintiff] shall have sole and absolute discretion to select a replacement tenant” did not eliminate Proconsul’s right to sublease the property while Plaintiff marketed the property. Ibid. A “replacement tenant” is distinct from a subtenant or assignee. The Agreement to Market Space states, “If and only if a replacement tenant is obtained, the Parties have agreed to effectuate an early termination of the Lease on the terms and conditions stated herein.” Id. at p. 5 ¶ F. While Plaintiff had unilateral discretion to select the replacement tenant, terminating the lease, Proconsul retained the ability to sublet or assign under the existing lease. Therefore, Plaintiff’s voluntary attempt to relet the premises under the Agreement to Market Space did not transfer the duty to mitigate from Proconsul to Plaintiff.

Because the Court finds no issues of material fact, Plaintiff’s motion for summary judgment is granted.

CONCLUSION

Plaintiff's Motion for Summary Judgment is granted.