Judge: Stephen P. Pfahler, Case: 22CHCV00613, Date: 2023-03-07 Tentative Ruling

Case Number: 22CHCV00613    Hearing Date: March 7, 2023    Dept: F49

Dept. F-49

Date: 3-7-23

Case # 22CHCV00613

Trial Date: Not Set

 

DEMURRER

 

MOVING PARTY: Cross-Defendant, 23801 San Fernando Road Landco, LLC

RESPONDING PARTY: Cross-Complainant, 23801 Newhall Avenue, LLC

 

RELIEF REQUESTED:

Demurrer to the Cross-Complaint

·         1st Cause of Action: Declaratory Relief

·         2nd Cause of Action: Breach of Implied Covenant of Good Faith and Fair Dealing

·         3rd Cause of Action: Breach of Contract

 

SUMMARY OF ACTION

On April 11, 2012, Plaintiff 23801 San Fernando Road Landco, LLC agreed to lease certain premises to Santa Clarita Convalescent Corporation, now identified as defendant 23801 Newhall Avenue, LLC, successor to Santa Clarita Convalescent Corporation. Defendants George Vergara, Henry Kim, and Jae Shin Song executed individual guarantees on the lease on January 5, 2015. The lease terms are for 11 years from April 11, 2012 to April 10, 2023.

 

Beginning in 2018, the parties began discussing an extension of the lease term. According to Plaintiff, it definitively told Defendants no extended lease term was forthcoming.

 

On June 29 2022, Plaintiff issued a notice of default based on the alleged failure of defendants to cooperate with the transfer of the facility operator pursuant to the lease terms. Because the transfer process goes through the California Department of Public Health, and can take six to nine months to process, Plaintiff sought to start the process in order to expedite a timely transition before the lease expiration. Plaintiff also contends cooperation with the Department of Housing and Urban Development (HUD) was required due to an existing loan secured by the facility through the agency.

 

Plaintiff alleges Defendants countered with a threatened lawsuit over the option clause within the lease. Plaintiff maintains its unilateral right to deny an extension.

 

On September 12, 2022, Plaintiffs filed its complaint for Breach of Contract, Breach of Contract – Anticipatory and Subsequent Breach, Breach of Contract – Breach of Implied Terms, Breach of Covenant of Good Faith and Fair Dealing, Breach of Guaranty, Tortious Breach of Contract, Negligence, Violation of California Business and Professions Code section 17200, and Specific Performance. On September 26, 2022, 23801 Newhall Avenue, LLC filed a cross-complaint for Declaratory Relief, Breach of Implied Covenant of Good Faith and Fair Dealing, and Breach of Contract. The cross-complaint adds in out of state defendants, Newpoint Real Estate Capital, LLC, Housing & Health Care Finance, LLC, and the United States Department of Housing and Urban Development. On November 30, 2022, the court sustained the demurrer of 23801 Newhall Avenue, LLC without leave to amend on the Tortious Breach of Contract cause of action, and with leave to amend on the Negligence, Violation of Business and Professions Code section 17200, and Specific Performance causes of action. The remainder of the demurrer was overruled.

 

On January 3, 2023, Plaintiff filed its first amended complaint for Breach of Contract, Breach of Contract – Anticipatory and Subsequent Breach, Breach of Contract – Breach of Implied Terms, Breach of Covenant of Good Faith and Fair Dealing, Breach of Guaranty, Negligence, Violation of California Business and Professions Code section 17200, Specific Performance, and Injunction.

 

RECOMMENDED RULING: Sustained with Leave to Amend.

Request for Judicial Notice: Granted.

The court takes judicial notice of the January 3, 2023, filed first amended complaint, and November 30, 2022, Notice of Ruling, but cannot take judicial notice of the content of the pleading or notice for the truth of the matter asserted.

 

Cross-Defendant, 23801 San Fernando Road Landco, LLC brings a demurrer to the entire cross-complaint of 23801 Newhall Avenue, LLC for Declaratory Relief, Breach of Implied Covenant of Good Faith and Fair Dealing, and Breach of Contract.

 

Like the complaint, the cross-complaint arises from an interpretation of the lease terms. Cross-Complainants also allege spending $427,000 for the “upgrade” of the facilities, presumably in anticipation of an extension of the lease term via the option agreement. Cross-Defendant brings the demurrer based on challenges to the interpretation of the lease terms, specifically the lack of any contractual obligation to offer an extension, and therefore the cross-complaint fails to state facts supporting the claims. Cross-Complainant in opposition maintains all causes of action are properly pled. Cross-Defendant in reply reiterates the argument regarding the lack of any obligation to negotiate the option agreement, conflicts within the “express terms” of the lease, maintains sufficient and adequate consideration, and a bar under the statute of frauds.

 

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . . .” ’ ” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) In applying these standards, the court liberally construes the complaint to determine whether a cause of action has been stated.  (Picton v. Anderson Union High School Dist. (1996) 50 Cal.App.4th 726, 733.)

 

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616; Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139 [“[U]nder our liberal pleading rules, where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled or plaintiff given leave to amend.]

 

1st Cause of Action: Declaratory Relief

Cross-Defendant challenges the declaratory relief cause of action on grounds that no contractual obligation for a lease extension exists in the pled cross-complaint or terms of the lease. Therefore, Cross-Complainant cannot state a claim for declaratory relief. To the extent the court finds a sufficient challenge to the operative breach of contract cause of action, addressed below, the court finds no existing controversy subject to declaratory relief. (Code Civ. Proc., § 1060.)

 

2nd Cause of Action: Breach of Implied Covenant of Good Faith and Fair Dealing

Cross-Defendant challenges the breach of implied covenant of good faith and fair dealing cause of action on grounds that no contractual obligation for a lease extension exists in the pled cross-complaint or terms of the lease. To the extent the court finds a sufficient challenge to the operative breach of contract cause of action, addressed below, the court finds the cross-complaint lacks a sufficiently supported breach of implied covenant of good faith and fair dealing. (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1033-1035.)

 

3rd Cause of Action: Breach of Contract

Cross-Defendant first challenges the cross-complaint based on alleged contradictions between the allegations of the complaint and the option agreement language, a bar under the statute of frauds, and finally a challenge to any obligation to negotiate a lease extension and/or curtail the right to unilaterally deny any exercise of the extension.

 

The “lease” is both identified in cross-complaint, and attached to the operative complaint. [Cross-Comp., ¶¶ 9-11, Ex. A. ] Cross-Complainant specifically contends a breach of the lease. [Cross-Comp., ¶ 56.] The incorporation and references to the “Assignment,” and “Second Amendment,” “HUD Addendum,” and “Lease Option” in no way undermine the breach of lease allegation.

 

Article 2 of lease contains a provision under the “Fixed Term” section, whereby the lease term is fixed at 11 years, with the possibility of up to “two consecutive extensions up to five (5) years each … to the lease term but only upon mutual agreement of the parties.” The language of the lease term is not disputed.

 

The court finds no bar under the statute of frauds, due to the language of the option agreement. “An agreement for the leasing for a longer period than one year, or for the sale of real property, or of an interest therein; such an agreement, if made by an agent of the party sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged.” (Civ. Code, § 1624, subd. (a)(3).) The exercise of the option in a written contract, whether by written or oral notice, removes the option agreement from any statute of frauds ban, in that the written lease itself satisfies the statute of frauds. (Ripani v. Liberty Loan Corp. (1979) 95 Cal.App.3d 603, 610; Keller v. Pacific Turf Club (1961) 192 Cal.App.2d 189, 196.)

As for the argument regarding obligations from the language of the lease itself, cross-defendant relies on an interpretation of the terms and allegations in the operative cross-complaint for the conclusion of no obligation to grant any extension. More simply, the lease language lacks any obligation to negotiate the option. (Racine & Laramie, Ltd. v. Department of Parks & Recreation, supra, 11 Cal.App.4th at p. 1031 [“[T]he Department had no obligation to negotiate new terms of the concession contract, that its commencement and continuance of negotiations over a long period of time had no effect upon this lack of obligation, and that its assumption of an arbitrary stance at some point in the negotiations cannot therefore be a breach of any contract term, including implied contract terms of good faith and fair dealing, even though such conduct might be found by a jury to be unreasonable, unfair, or otherwise bad faith negotiation tactics.”].)

 

Cross-Complainants in opposition provides a merged response as to the breach of contract language interpretation itself, and gratuitously incorporates the breach of implied covenant of good faith and fair dealing claim, as the apparent basis both the breach of contract and bad faith causes of action. “The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.” (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372; Kendall v. Ernest Pestana, Inc. (1985) 40 Cal.3d 488, 500; Mitchell v. Exhibition Foods, Inc. (1986) 184 Cal.App.3d 1033, 1043-1044.) Cross-Complainant particularly relies on the existence of the implied covenant of good faith particularly applicable to commercial leases in support of the claim that the covenant of good faith and fair dealing effectively imbues the lease with cross-complainants right to seek enforcement of the option agreement. (McClain v. Octagon Plaza, LLC (2008) 159 Cal.App.4th 784, 798.)

 

The contention relies on the argument that the option term is illusory, and therefore unenforceable. “‘Words of promise which by their terms make performance entirely optional with the ‘promisor’ ... do not constitute a promise. Although such words are often referred to as forming an illusory promise, they do not fall within the present definition of promise. They may not even manifest any intention on the part of the promisor. Even if a present intention is manifested, the reservation of an option to change that intention means that there can be no promisee who is justified in an expectation of performance.’ (Citation.) ‘One of the most common types of promise that is too indefinite for legal enforcement is the promise where the promisor retains an unlimited right to decide later the nature or extent of his or her performance. This unlimited choice in effect destroys the promise and makes it illusory.’” (Peleg v. Neiman Marcus Group, Inc. (2012) 204 Cal.App.4th 1425, 1438–1439; Automatic Vending Co. v. Wisdom (1960) 182 Cal.App.2d 354, 357-358.)

 

The court appreciates the argument regarding the lack of enforceability due to the discretion of landlord to arbitrarily reject any request for option negotiations, but the court finds the argument regarding the void option agreement and an implicit assumption of a duty of mutuality to grant the extension agreement lacking in support. “‘Where the parties assume to make a contract in which one's promise is the consideration for the promise by the other, the promises must be mutual. To be obligatory on either party, the contract must be mutual and reciprocal in its obligations. One who promises to do a thing only if it pleases him, is not bound to perform. (Citation.) Where a contract imposes no definite obligation on one party to perform, it lacks mutuality of obligation. It is elementary that where performance is optional with one of the parties no enforceable obligation exists. (Citations.)’” (Kowal v. Day (1971) 20 Cal.App.3d 720, 724.)

 

The court finds the operative language of the cross-complaint and opposition insufficiently establishes the basis of mutuality—the necessary precursor the claim. [Cross-Comp., ¶¶ 17-18, 35-39.] The reliance on a general obligation to negotiate in good faith under commercially reasonable standards lacks sufficient support as presented in the opposition. Alternatively, it remains unclear how an illusory term would render the option agreement viable given a finding of an illusory term.

 

The court declines to make certain determinations regarding the rights and obligations of the parties, as currently presented in the operative cross-complaint and briefed by the parties. “There was no tension between the parties' express agreement and their intention to be bound, and no necessity to impose an implied covenant to create mutuality. The conclusion to be drawn is that courts are not at liberty to imply a covenant directly at odds with a contract's express grant of discretionary power except in those relatively rare instances when reading the provision literally would, contrary to the parties' clear intention, result in an unenforceable, illusory agreement. In all other situations where the contract is unambiguous, the express language is to govern, and “[n]o obligation can be implied ... which would result in the obliteration of a right expressly given under a written contract.” (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 808.)

 

The court finds no sufficiently articulated basis for the breach of contract, as presented in the cross-complaint. Reliance on the existence of a bad faith claim without a contractual basis for the obligation will not reflexively establish breach of contract. The court finds the paucity of arguments regarding the plain language of the contract, and the lack of operative allegations addressing a basis of obligation to engage in negotiations for the option, renders the contract cause of action uncertain for purposes of the demurrer. [Cross-Comp., ¶¶ 53-56.] To the extent the preceding causes of action depend on the validity of the lastly pled breach of contract cause of action, the court grants cross-complainants 30 days leave to amend.

 

Demurrers to the first amended complaint set for April 10 and 24, 2023.

 

Moving Party to give notice.