[1]Erewhon’s counsel indicates that “Cross-Defendants utilized financial records in support of [their Motion for Summary Adjudication] (as Exhibit H to the Compendium of Exhibits) which were previously produced with an ‘Attorneys’ Eyes Only’ designation by Erewhon on or around October 15, 2024. Information from these records was also included in Cross-Defendants’ Memorandum of Points and Authorities.” (Levine Decl., ¶ 5.)

[2]Erewhon’s counsel attaches as Exhibit 1 to his declaration a copy of the parties’ Stipulation and Protective Order. (Levine Decl., ¶ 3.)

 

 

Superior Court of California

County of Los Angeles

Department 50

 

Background

Plaintiff SL Retail Owner LLC (“SL Retail”) filed this action on September 21, 2022 against Defendants Nowhere Silver Lake, LLC dba Erewhon (“Erewhon”) and Nowhere Holdco, LLC. SL Retail filed the operative First Amended Complaint (“FAC”) on September 25, 2024, alleging causes of action for (1) breach of contract, (2) intentional misrepresentation,

(3) negligent misrepresentation, and (4) declaratory judgment.

On October 13, 2022, Erewhon filed a Cross-Complaint against Cross-Defendants SL Retail, Sportsmen’s Lodge Owner, LLC, and Midwood Management Corp. aka Midwood Investment & Development (collectively, “Cross-Defendants”). Erewhon filed a First Amended Cross-Complaint (“FACC”) on December 20, 2022, alleging causes of action for (1) breach of contract (specific performance), (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) intentional interference with prospective economic advantage,

(5) negligent interference with prospective economic advantage, (6) fraud (intentional misrepresentation), (7) fraud (concealment), (8) negligent misrepresentation, (9) violation of Business and Professions Code section 17200 (unfair competition), (10) private nuisance,

(11) public nuisance, (12) declaratory relief, and (13) breach of the covenant of quiet enjoyment.  

SL Retail, Sportsmen’s Lodge Owner, LLC, and Midwood Management Corp. aka Midwood Investment & Development previously demurred to each of the causes of action of the FACC and moved to strike portions of the FACC. On May 31, 2023, the Court issued an Order sustaining the demurrer to the second, third, fourth, fifth, sixth, eighth, tenth, and eleventh causes of action of the FACC, with leave to amend. The Court overruled the demurrer to the first, seventh, ninth, twelfth, and thirteenth causes of action of the FACC. The motion to strike was granted in part, with leave to amend, and denied in part. 

On June 30, 2023, Erewhon filed a Second Amended Cross-Complaint, alleging causes of action for (1) breach of contract (specific performance), (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) fraud (concealment), (5) negligent misrepresentation, (6) violations of Business and Professions Code section 17200, et seq.,

(7) declaratory relief, and (8) breach of the covenant of quiet enjoyment. Thereafter, Erewhon moved for leave to file a third amended cross-complaint. On September 5, 2024, the Court issued an order granting Erewhon’s motion for leave to file a third-amended cross-complaint.

On September 5, 2024, Erewhon filed the operative Third Amended Cross-Complaint (“TACC”) alleging causes of action for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) fraud (concealment), (4) fraud (concealment), (5) fraud (intentional misrepresentation), (6) negligent misrepresentation, (7) violations of Business and Professions Code section 17200, et seq., and (8) declaratory relief.

Sportsmen’s Lodge Owner, LLC, SL Retail, and Midwood Management Corp. (collectively, “Cross-Defendants”) now demur to the fourth, fifth, sixth, and eighth causes of action of the TACC. Cross-Defendants also move to strike portions of the TACC. Erewhon opposes both.

Request for Judicial Notice

The Court grants Cross-Defendants’ request for judicial notice filed on October 8, 2024

 in support of Cross-Defendants’ demurrer. The Court also grants Cross-Defendants’ supplemental request for judicial notice filed on November 4, 2024 in support of Cross-Defendants’ demurrer.

            The Court grants Erewhon’s request for judicial notice filed in support of its opposition to Cross-Defendants’ demurrer. 

Demurrer

A.    Legal Standard

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) For the purpose of testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer “does not admit contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.)

B.     Fourth, Fifth, and Sixth Causes of Action

In the demurrer, Cross-Defendants argue that “Erewhon’s claims for fraud and negligent misrepresentation fail as a matter of law as to [SL Retail] because [SL Retail] did not exist at the time the purported misrepresentations underlying these claims were made.” (Demurrer at p. 7:21-23.)

In the fourth cause of action for fraud-concealment, Erewhon alleges, inter alia, that “[b]oth in negotiations leading up to the execution of the Lease and in the Lease itself, Cross-Defendants falsely represented that their ‘good faith’ estimate of the amount of Operating Costs Rent for the first Operating Cost Year was based on an annual rate of $12.25 per square feet of floor space used by Erewhon. This representation was initially made in a draft Letter of Intent (‘LOI’) provided to Erewhon by Ron Bondy on or around December 5, 2017. It was later reaffirmed in the final version of the LOI, which was executed on or around March 14, 2018, and then again in the final Lease Agreement, which was executed on April 25, 2019.” (TACC, ¶ 77.)

The fourth cause of action further alleges that “[i]n or around March 2019, Erewhon asked Cross-Defendants to provide a categorical breakdown of the costs that comprised the $12.25 per square foot figure. On March 29, 2019, before the final Lease was signed, Ron Bondy provided Yuval Chiprut with a document which purported to set forth the categories of expenses that would comprise Erewhon’s Operating Costs Rent and the associated costs. This document reaffirmed a per square foot charge of approximately $12.25.” (TACC, ¶ 78.) “Consequently, Erewhon executed a written Lease for space at the Center. In Section 6.4(B) of the Lease, Cross-Defendants again represented and reaffirmed the 12.25 per square foot figure for the first Operating Cost Year, falsely describing it as a good faith estimate. Specifically, Section 6.4(B) of the Lease states: ‘The amount of Operating Cost Rent payable by Tenant to Landlord for the first Operating Cost Year during the Term is currently estimated to be an amount calculated on the basis of an annual rate of Twelve and 25/100 Dollars ($12.25) per square foot of the Floor Space of the Premises…such estimated amount of Tenant’s Operating Cost Rent is just a good faith estimate…’” (TACC, ¶ 79.)

The fourth cause of action alleges that “Cross-Defendants at all relevant times knew that the $12.25 per square foot price communicated to Erewhon was not accurate, and that Cross-Defendants’ own internal calculations and market research (information available only to Cross-Defendants and not to Erewhon) reflected anticipated costs much higher than $12.25 per square foot.” (TACC, ¶ 81.) Erewhon alleges that “on or around February 14, 2019, Ron Bondy informed his colleagues at Midwood, including Ben Besley, that Erewhon had requested a categorical breakdown of the costs that comprised the $12.25 per square foot estimate that was provided for CAM costs. Mr. Bondy further stated that negotiations with Erewhon began when CAM estimates were still $12.25 and that this estimate was intentionally not revised during the parties’ negotiations. Accordingly, Mr. Bondy requested high level numbers that he could provide to Erewhon as this was the last item needed to get Erewhon to sign a lease. In response to Mr. Bondy’s request, Midwood’s Senior Vice President of Development, Ben Besley, instructed other Midwood representatives, to ‘play with the numbers’ to get them closer to the $12.25 per square foot figure previously represented to Erewhon during the parties’ negotiations.” (TACC, ¶ 81.)

In the fifth cause of action for intentional misrepresentation, Erewhon alleges, inter alia, that “[a]s set forth herein, while the parties were negotiating the Lease, Cross-Defendants falsely represented to Erewhon that it would be responsible for paying Operating Costs Rent of approximately $12.25 per square feet of floor space used by Erewhon. These representations were made in, among other things, the LOI provided by Ron Bondy, a document provided by Ron Bondy which contained manipulated financial figures and purported to set forth a categorical breakdown and calculation of those costs, and in the parties’ Lease…Erewhon is informed and believes that Cross-Defendants knew that these representations were false at the time that they were made. For example, Erewhon is informed and believes that Cross-Defendants’ internal calculations and market research reflected operating costs much higher than $12.25 per square foot being represented to Erewhon.” (TACC, ¶¶ 90-91.)

In the sixth cause of action for negligent misrepresentation, Erewhon alleges, inter alia, that “Cross-Defendants falsely represented, in the Lease itself, and in negotiations leading up to the execution of the Lease, that Erewhon would be responsible for paying Operating Costs Rent of approximately $12.25 per square feet of floor space used by Erewhon. Specifically, in Section 6.4(B) of the Lease, Cross-Defendants represented that this figure was calculated based on a ‘good faith estimate’ by the Cross-Defendants: ‘The amount of Operating Cost Rent payable by Tenant to Landlord for the first Operating Cost Year during the Term is currently estimated to be an amount calculated on the basis of an annual rate of Twelve and 25/100 Dollars ($12.25) per square foot of the Floor Space of the Premises…such estimated amount of Tenant’s Operating Cost Rent is just a good faith estimate…’…In reality, Cross-Defendants grossly miscalculated these figures and in September 2022 presented Erewhon with a bill for Operating Costs Rent at a per-square-foot price of approximately $26.00 – more than 110% higher than the ‘good faith’ estimate…When Cross-Defendants made these false representations, they had no reasonable grounds for believing them to be true.” (TACC, ¶¶ 98-100.)

In the demurrer, Cross-Defendants assert that “Erewhon alleges that Cross-Defendants’ fraudulent conduct in 2017 through April 2019 induced it to enter into the Lease in or around April 2019…But it is indisputable that [SL Retail] did not exist until June 2019.” (Demurrer at p. 7:23-25.) Cross-Defendants cite to Exhibit 1 to their Request for Judicial Notice, which is a “Secretary of State Application to Register a Foreign Limited Liability Company (LLC)” filed on June 18, 2019. (Cross-Defendants’ RJN, Ex. 1.) The Application pertains to “SL Retail Owner LLC” and provides that the LLC was formed on June 12, 2019 in the home jurisdiction of Delaware. (Ibid.)

Cross-Defendants cite to Munoz v. Patel (2022) 81 Cal.App.5th 761, 780-781, noting that the Court of Appeal in this case found as follows:

 

“Although Munoz has established that the trial court erred in sustaining the demurrer to his seventh cause of action against Rajesh, we cannot say the same with regard to his seventh cause of action against Inn Lending.

 

As noted, Munoz alleges fraud based on at least three categories of misrepresentations. However, Inn Lending did not exist as an entity when any of the alleged misrepresentations were made. Inn Lending was not organized until August 23—after the Hotel offering memorandum was circulated, after Munoz was told the July 17 Lease was the final lease, after the leases were swapped, and after Munoz received the letter of intent for the loan. Because Inn Lending did not exist until after the alleged misrepresentations were made, we discern no error in the trial court’s ruling that Munoz failed to plead a fraud cause of action against Inn Lending. (See 1A Fletcher Cyclopedia of the Law of Private Corp. (Sept. 2021) § 218, Torts by and against promoters (Fletcher) [“A corporation is not liable for torts that its promoters committed before it came into existence.”]; see also, e.g., Alkanani v. Aegis Defense Services, LLC (D.D.C. 2013) 976 F.Supp.2d 1, 8 [an “LLC cannot be held liable for injuries that occurred prior to its corporate existence”].)”

Cross-Defendants assert that similarly here, “the purported false representations all occurred prior to the formation of [SL Retail], which could not have made the alleged misrepresentations. For this reason, similar to the plaintiff in [Munoz], Erewhon fails to state claims for fraudulent concealment, intentional misrepresentation, and negligent misrepresentation as to [SL Retail].” (Demurrer at p. 8:21-25.)  

In the opposition, Erewhon does not appear to dispute that SL Retail did not exist at the time the alleged misrepresentations were made. However, Erewhon asserts, inter alia, that it “alleges sufficient facts that [SL Retail] is Cross-Defendants’ alter ego…” (Opp’n at p. 6:5.)

Erewhon notes that the Court of Appeal in Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1249-1250 found as follows:

 

“Generally, alter ego liability is reserved for the parent-subsidiary relationship. However, under the single-enterprise rule, liability can be found between sister companies. The theory has been described as follows: ‘In effect what happens is that the court, for sufficient reason, has determined that though there are two or more personalities, there is but one enterprise; and that this enterprise has been so handled that it should respond, as a whole, for the debts of certain component elements of it. The court thus has constructed for purposes of imposing liability an entity unknown to any secretary of state comprising assets and liabilities of two or more legal personalities; endowed that entity with the assets of both, and charged it with the liabilities of one or both.”

The Las Palmas Court further noted that “[u]sually, a disregard of the corporate entity is sought in order to fasten liability upon individual stockholders…It has been stated that the two requirements for application of this doctrine are (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow…However, only a difference in wording is used in stating the same concept where the entity sought to be held liable is another corporation instead of an individual. A very numerous and growing class of cases wherein the corporate entity is disregarded is that wherein it is so organized and controlled, and its affairs are so conducted, as to make it merely an 

instrumentality, agency, conduit, or adjunct of another corporation.” (Las Palmas Associates v. Las Palmas Center Associates, supra, 235 Cal.App.3d at p. 1249 [internal quotations and emphasis omitted].) Erewhon asserts that it alleges SL Retail is “part of a single enterprise with its admitted predecessor-in-interest, Lodge Owner, and Midwood.” (Opp’n at p. 12:16-17.) Erewhon points to, inter alia, paragraph 8 of the TACC, which alleges as follows:

 

“Erewhon is informed and believes, and on that basis alleges, that at all relevant times mentioned herein, the business activities and affairs of SLR Owner, Lodge Owner, and Midwood, and each of them, are and were so intermingled as to constitute one single business enterprise conducted by, between, and among them. Erewhon is further informed and believes, and thereon alleges, that cross-defendants SLR Owner, Lodge Owner, and Midwood are, and at all times relevant hereto were, mere shells without adequate, sufficient, or reasonable assets or capital with which to carry on the businesses in which they were engaged. Additionally, Erewhon is informed and believes that there exists a unity of interest and ownership between SLR Owner, Lodge Owner, and Midwood, such that any individuality and separateness between the companies has ceased and SLR Owner, Lodge Owner, and Midwood are the alter egos of one another. Based on the foregoing, Erewhon is informed and believes that adherence to the fiction of a separate existence between SLR Owner, Lodge Owner, and Midwood would sanction fraud by permitting SLR Owner, Lodge Owner, and Midwood to avoid the responsibility for their business undertakings and to promote injustice by depriving Erewhon from recovering for the damages alleged herein.”

In the demurrer, Cross-Defendants assert that “[Munoz] makes clear that the alter ego doctrine does not render an LLC liable for misrepresentations that occurred prior to its formation.” (Demurrer at pp. 8:27-9:1.) However, Munoz does not appear to contain any discussion of the application of the alter ego doctrine.

In addition, Erewhon asserts that SL Retail’s “assumption of the Lease means it carries its burdens.” (Opp’n at p. 14:26.) SL retail cites to Civil Code section 1589, which provides that “[a] voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting.” Erewhon also cites to White v. Kaiser-Frazer Corp. (1950) 100 Cal.App.2d 754, 760, where the Court of Appeal noted that “[a] corporation is liable as a party to a contract entered into by its promoters before it comes into existence, if it knowingly accepts the benefits of the contract.” Erewhon asserts that here, SL Retail “assumed the Lease from Lodge Owner, its predecessor.” (Opp’n at p. 15:9.) The TACC alleges that “[o]n or about November 19, 2019, the parties entered into a First Amendment to the Lease (‘First Amendment’),” and that “[a] true and correct copy of the First Amendment is attached hereto as Exhibit C…” (TACC, ¶ 28.) Exhibit C to the TACC defines “SL RETAIL OWNER LLC” as “Landlord.” (TACC, ¶ 28, Ex. C.) Exhibit C further provides that “Sportsmen’s Lodge Owner LLC, a Delaware limited liability company (predecessor-in-interest to Landlord) and Tenant entered into a certain lease dated April 25, 2019…” (TACC, ¶ 28, Ex. C [emphasis added].) Erewhon asserts that accordingly, SL Retail “has accepted the benefits of the Lease, i.e., the receipt of rent, meaning it must assent to all the obligations arising from the Lease—that was fraudulently induced—including the liability stemming from that fraudulent inducement.” (Opp’n at p. 15:10-12.)

In the reply, Cross-Defendants assert that “Erewhon cites no authority for the proposition that an entity which assumes a lease is liable for the misrepresentations of its assignor.” (Reply at p. 4:26-27.) But as discussed above, Erewhon cites to, inter alia, Civil Code section 1589, which provides that “[a] voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting.” Cross-Defendants do not appear to address this provision in the reply. Moreover, as discussed, “[a] corporation is liable as a party to a contract entered into by its promoters before it comes into existence, if it knowingly accepts the benefits of the contract.” (White v. Kaiser-Frazer Corp., supra, 100 Cal.App.2d at p. 760.)

Based on the foregoing, the Court finds that Erewhon has shown that the fourth, fifth, and sixth causes of action of the TACC are properly pled against SL Retail. Thus, the Court overrules Cross-Defendants’ demurrer to the fourth, fifth, and sixth causes of action.

C.     Eighth Cause of Action

In the eighth cause of action for declaratory relief, Erewhon alleges that “[a]n actual controversy has also arisen and exists concerning guest parking at the Center in that: a. Erewhon contends that Cross-Defendants must utilize the parking fee revenue to offset Operating Costs charged to the tenants, including Erewhon. b. Erewhon is informed and believes that Cross-Defendants deny the foregoing paragraph and claim that Cross-Defendants may keep that revenue for themselves as pure profit without incurring any costs of operation (as those costs are paid for by the tenants).” (TACC, ¶ 113.) Erewhon further alleges that “[a]n actual controversy has also arisen and exists concerning the Operating Costs Rent in that: a. Erewhon contends that the Operating Costs Rent set forth in the Lease was not the product of a ‘good faith estimate’ and Cross-Defendants are precluded from more than doubling the amount of Operating Costs Rent owed by Erewhon. b. Erewhon is informed and believes that Cross-Defendants deny the foregoing paragraph and contend that the original Operating Costs Rent identified in the Lease was the product of a ‘good faith estimate’ and that Cross-Defendants are permitted to increase the amount of Operating Costs Rent owed by Erewhon as set forth herein.” (TACC, ¶ 114.)

Erewhon alleges that “[a] judicial declaration is necessary and appropriate at this time under the circumstances in order for the parties to ascertain their rights and obligations.” (TACC, ¶ 115.)

Cross-Defendants assert that Erewhon’s declaratory relief cause of action fails. First, Cross-Defendants assert that the declaratory relief cause of action “should be dismissed…because…it amounts to an improper attempt to rewrite the Lease…” (Demurrer at p. 9:12-13.) In BMC Promise Way, LLC v. County of San Benito (2021) 72 Cal.App.5th 279, 285, cited by Cross-Defendants, the Court of Appeal noted that “[w]hile the court in a declaratory relief action may properly determine questions as to rights and duties arising out of an existing contract…it may not make a new contract for the parties or, in lieu of construing an existing contract, incorporate new obligations into it.”

Here, Erewhon’s Prayer for Relief alleges, inter alia, that Erewhon seeks “a declaration by the Court that: a. Cross-Defendants must apply all parking fee revenue as an offset against Operating Costs Rent charged to the Center’s tenants, including Erewhon, in amounts proportionate to their respective share of Operating costs; b. Establishing the amount of first-year Operating Costs Rent that Erewhon is required to pay and setting the permissible increase that Cross-Defendants are permitted to apply to second-year charges…” (TACC, p. 26, ¶ 4.)

            Cross-Defendants assert that “Erewhon seeks much more than an interpretation of the parties’ rights under the Lease as intended at the time of the Lease’s formation. Rather, Erewhon seeks to rewrite the Lease to vary its terms and impose new obligations…” (Demurrer at p. 11:15-17.) In BMC Promise Way, LLC v. County of San Benito, supra, 72 Cal.App.5th at page 281, “[a] tax sharing agreement between the County of San Benito and the City of Hollister require[d] the city to pay the county a fixed fee (referred to as the ‘Additional Amount’) per residential unit constructed on land annexed into the city from the county during the period covered by that agreement. Plaintiff’s predecessor in interest entered into an annexation agreement with the city under which it agreed to comply with ‘all applicable provisions’ of that tax sharing agreement in return for the city’s agreement to annex certain land. When plaintiff purchased the annexed land and sought to develop it into two subdivision projects, the city informed plaintiff that it was liable for the Additional Amount fees. Plaintiff paid the fees under protest and then sued both the city and the county seeking a declaration of its rights and duties under various written instruments.” The Court of Appeal found, inter alia, that “[a]ssessing whether the Additional Amount was properly calculated when the city and county negotiated their 1999 tax sharing agreement over 20 years ago (or even whether that amount was properly included in the annexation agreement in 2000) would potentially require us to rewrite the underlying annexation agreement and is therefore not within the scope of our review.” (Id. at p. 285.)

            In the opposition, Erewhon asserts that “courts may interpret a contract and imply terms, which are not present, which may lead to its reformation pursuant to a declaratory relief claim.” (Opp’n at p. 18:12-13.) Erewhon cites to Putnam v. Putnam (1942) 51 Cal.App.2d 696, 697, where the “Plaintiff sued in declaratory relief seeking a declaration of his rights and duties under a separation agreement.” The Putnam Court noted as follows:

 

“The appeal presents the simple question whether the code sections providing for this form of relief are to be given a reasonable and sensible interpretation to afford the relief which the equities demand or whether they are to be nullified by the strict rules of legal procedure. The clear purpose of section 1060 of the Code of Civil Procedure is to permit the court in such proceedings to ‘make a binding declaration of such rights or duties, whether or not further relief is or could be claimed at the time. . . .’ and, under section 1062, these remedies are cumulative ‘and shall not be construed as restricting any remedy, provisional or otherwise. . . .’ We mention this at the outset because our conclusion from the entire record is that the plaintiff was entitled to an interpretation of the contract determining his rights and duties under it, and that if such interpretation took on the nature of a reformation of the contract it was nevertheless within the contemplation of the code section.” (Putnam v. Putnam, supra, 51 Cal.App.2d at pp. 697-698.)

 

The Putnam Court further found as follows:

 

“It would serve no purpose to discuss the question of the power of the court in the divorce proceeding to modify the terms of the separation agreement. That issue does not determine anything here. In suing for declaratory relief the appellant seeks an interpretation of the contract -- not a modification of it. A declaration of the rights and obligations under a contract which results in a reformation is but a determination of the intention of the parties and of the legal effect of the contract, not a modification of its terms. By its express terms the alimony payments were to be made jointly for the benefit of the wife and the minor son. When the latter reached his majority all payments for his benefit automatically ceased to be due. What portion of that amount is to be paid to the wife alone is something upon which the contract is silent. It is also silent as to the contingency that the wife might die while the son was still a minor. We cannot assume that a court of equity is unable to reform the contract to meet these contingencies which the contracting parties overlooked.” (Putnam v. Putnam, supra, 51 Cal.App.2d at p. 699.)

But here, Erewhon does not appear to assert that there are certain “contingencies which the contracting parties overlooked.” (Putnam v. Putnam, supra, 51 Cal.App.2d at p. 699.)

Cross-Defendants note that Section 6.4(B) of the lease attached to the TACC provides that “[t]he amount of Operating Cost Rent payable by Tenant to Landlord for the first Operating Cost Year during the Term is currently estimated to be an amount calculated on the basis of an annual rate of Twelve and 25/100 Dollars ($12.25) per square foot of the Floor Space of the Premises, which shall be payable and subject to adjustment pursuant to this Section 6.4 and Section 5.8 herein; provided, however, that Tenant acknowledges and agrees that such estimated amount of Tenant’s Operating Cost Rent is just a good faith estimate and shall not limit or affect Tenant’s obligation to pay to Landlord the actual amount of Tenant’s Operating Cost Rent payable by Tenant for the first Operating Cost Year of the Term.” (TACC, ¶ 27, Ex. B, § 6.4, emphasis added.) As noted by Cross-Defendants, Erewhon appears to seek to rewrite the alleged lease such that this “good faith estimate” of the “Operating Cost Rent” be converted into a “hard cap.” Erewhon seeks a declaration, inter alia, “[e]stablishing the amount of first-year Operating Costs Rent that Erewhon is required to pay and setting the permissible increase that Cross-Defendants are permitted to apply to second-year charges…” (TACC, p. 26, ¶ 4(b).) But as discussed, “[w]hile the court in a declaratory relief action may properly determine questions as to rights and duties arising out of an existing contract…it may not make a new contract for the parties or, in lieu of construing an existing contract, incorporate new obligations into it.” (BMC Promise Way, LLC v. County of San Benito, supra, 72 Cal.App.5th at p. 285.) 

Erewhon also alleges that “Cross-Defendants must utilize the parking fee revenue to offset Operating Costs charged to the tenants, including Erewhon,” and seeks a declaration that “Cross-Defendants must apply all parking fee revenue as an offset against Operating Costs Rent charged to the Center’s tenants, including Erewhon, in amounts proportionate to their respective share of Operating costs…” (TACC, ¶ 113(a); Prayer for Relief, ¶ 4(a).) Erewhon does not appear to point to any provision in the alleged lease allowing for such an offset. Again, as discussed, the court in a declaratory relief action may not, “in lieu of construing an existing contract, incorporate new obligations into it.” (BMC Promise Way, LLC v. County of San Benito, supra, 72 Cal.App.5th at p. 285.) Erewhon also cites to Code of Civil Procedure section 1856, subdivision (c), which provides that “[t]he terms set forth in a writing described in subdivision (a) may be explained or supplemented by course of dealing or usage of trade or by course of performance.”[1] “[C]ourts can rely on usage and custom to imply a term where the contract itself is silent in that regard.” (Southern Pacific Transportation Co. v. Santa Fe Pacific Pipelines, Inc. (1999) 74 Cal.App.4th 1232, 1241.) However, as noted by SL Retail, Erewhon does not appear to “cite to any allegation in the TACC that there is an industry custom or practice that parking revenues offset CAM…” (Reply at p. 6:27-28.)

Based on the foregoing, the Court sustains Cross-Defendants’ demurrer to the eighth cause of action, with leave to amend.[2]

Motion to Strike

A court may strike any “irrelevant, false, or improper matter inserted in any pleading” or any part of a pleading “not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.” (Code Civ. Proc., § 436.) Cross-Defendants move to strike a number of allegations from the TACC.

First, Cross-Defendants move to strike the portions of paragraphs 87, 95, and 103 of the TACC providing as follows: “Erewhon further alleges that the Cross-Defendants should be held to the $12.25 per square foot figure for first year Operating Costs.” (TACC, ¶¶ 87, 95, 103.) In addition, Cross-Defendants move to strike the portion of Erewhon’s Prayer for Relief providing, “[f]or reformation, as and if appropriate.” (TACC, p. 26:10.) In the motion, Cross-Defendants assert that “Erewhon’s attempted reformation of the lease should be stricken.” (Mot. at p. 11:19.)

Cross-Defendants argue, inter alia, that “reformation of the Lease to treat the CAM estimate as a hard contractual limit would be no different than the Court creating a new agreement between the parties, which the law governing reformation expressly prohibits.” (Mot. at p. 13:1-3.) Cross-Defendants cite to Komorsky v. Farmers Ins. Exchange (2019) 33 Cal.App.5th 960, 974, where the Court of Appeal noted that “[r]eformation is an equitable remedy the essential purpose of which is to ensure the contract, as reformed, reflects the parties’ mutual intention. In reforming the written agreement, a court may transpose[], reject[], or suppl[y] words…but has no power to make new contracts for the parties…Rather, the court may only reform the writing to conform with the mutual understanding of the parties at the time they entered into it, if such an understanding exists.” (Internal quotations and citations omitted.)

Cross-Defendants assert that here, “treating the good faith estimate as a hard cap would improperly rewrite the Lease to be entirely inconsistent with the mutual understanding of the parties at the time they entered into it. This is an impermissible use of reformation.” (Mot. at p. 13:18-21.) In the opposition, Erewhon argues that it may “seek reformation to ‘enforce[e] [sic] the actual agreement already made by the parties’ such that Cross-Defendants are ‘held to the $12.25 per square foot figure for first year Operating Costs’ as they had represented all along.” (Opp’n at p. 10:16-18.) But as noted by Cross-Defendants, Erewhon alleges that the $12.25 per square foot figure was only a good faith “estimate.” (TACC, ¶ 77.) Further, as discussed, Section 6.4(B) of the alleged lease provides that “[t]he amount of Operating Cost Rent payable by Tenant to Landlord for the first Operating Cost Year during the Term is currently estimated to be an amount calculated on the basis of an annual rate of Twelve and 25/100 Dollars ($12.25) per square foot of the Floor Space of the Premises, which shall be payable and subject to adjustment pursuant to this Section 6.4 and Section 5.8 herein; provided, however, that Tenant acknowledges and agrees that such estimated amount of Tenant’s Operating Cost Rent is just a good faith estimate and shall not limit or affect Tenant’s obligation to pay to Landlord the actual amount of Tenant’s Operating Cost Rent payable by Tenant for the first Operating Cost Year of the Term.” (TACC, ¶ 27, Ex. B, § 6.4, emphasis added.) Here, Erewhon appears to seek to “treat the estimate as a cap.” (Reply at p. 5:12.) As discussed, paragraphs 87, 95, and 103 of the TACC allege, inter alia, that “the Cross-Defendants should be held to the $12.25 per square foot figure for first year Operating Costs.” (TACC, ¶¶ 87, 95, 103.) But as Erewhon acknowledges, “[r]eformation is not the court creating a new agreement but rather enforcing the actual agreement already made by the parties.” (Panterra GP, Inc. v. Superior Court (2022) 74 Cal.App.5th 697, 713-714 [emphasis omitted].)

Based on the foregoing, the Court grants Cross-Defendants’ motion to strike the portions of paragraphs 87, 95, and 103 of the TACC providing as follows, with leave to amend: “Erewhon further alleges that the Cross-Defendants should be held to the $12.25 per square foot figure for first year Operating Costs.” (TACC, ¶¶ 87, 95, 103.) The Court also grants Cross-Defendants’ motion to strike the allegation “[f]or reformation, as and if appropriate,” with leave to amend. (TACC, p. 26:10.)

Next, Cross-Defendants move to strike the portion of Erewhon’s Prayer for Relief providing, “Cross-Defendants must apply all parking fee revenue as an offset against Operating Costs Rent charged to the Center’s tenants, including Erewhon, in amounts proportionate to their respective share of Operating costs,” and “[e]stablishing the amount of first-year Operating Costs Rent that Erewhon is required to pay and setting the permissible increase that Cross-Defendants are permitted to apply to second-year charges.” (TACC, p. 26:4-9.)

Cross-Defendants assert, inter alia, that “declaratory relief cannot be used to vary the terms of the existing contract…” (Mot. at p. 15:9.) Cross-Defendants cite to BMC Promise Way, LLC v. County of San Benito, supra, 72 Cal.App.5th 279. As set forth above, the Court of Appeal in this case noted that “[w]hile the court in a declaratory relief action may properly determine questions as to rights and duties arising out of an existing contract…it may not make a new contract for the parties or, in lieu of construing an existing contract, incorporate new obligations into it.” (Id. at p. 285.) Cross-Defendants assert that here, “Erewhon’s proposed judicial declarations exceed the scope of declaratory relief by seeking to reform the Lease to (i) create a new obligation to use parking revenues to offset CAM…and (ii) create a new first-year cap on CAM that was never negotiated.” (Mot. at pp. 15:26-16:1.)

In the opposition, Erewhon asserts that “[d]eclaratory relief may be used to reform a contract even when a contract is silent,” citing to Putnam v. Putnam, supra, 51 Cal.App.2d 696. (Opp’n at p. 13:14:15.) Erewhon also asserts that “[t]he terms of a writing can also ‘be explained or supplemented by course of dealing or usage of trade or by course of performance.’” (Opp’n at p. 14:1-2, citing Code Civ. Proc., § 1856, subd. (c).) These arguments are addressed above in connection with Cross-Defendants’ demurrer. The Court finds that Cross-Defendants have shown that the Court should strike the portion of Erewhon’s Prayer for Relief providing, “Cross-Defendants must apply all parking fee revenue as an offset against Operating Costs Rent charged to the Center’s tenants, including Erewhon, in amounts proportionate to their respective share of Operating costs,” and “[e]stablishing the amount of first-year Operating Costs Rent that Erewhon is required to pay and setting the permissible increase that Cross-Defendants are permitted to apply to second-year charges.” (TACC, p. 26:4-9.) The Court grants Cross-Defendants’ motion to strike these allegations with leave to amend.

Cross-Defendants also move to strike the portions of paragraphs 86 and 94 of the TACC providing as follows: “[a]s a result of these increases, Erewhon is informed and believes that it will pay millions of dollars more in Operating Costs Rent that it otherwise would not have been charged.” (TACC, ¶¶ 86, 94.) Cross-Defendants argue, “[t]hat Erewhon believes it may – in the future – pay more does not mean that it has suffered any damages at this time. This claim is not ripe, and the allegation of this supposed hypothetical harm which may never come to pass should be stricken.” (Mot. at p. 17:11-14.) Cross-Defendants cite to Del Cerro Mobile Estates v. City of Placentia (2011) 197 Cal.App.4th 173, 186, where the Court of Appeal noted that “[w]hile a party may seek declaratory judgment before an actual invasion of rights occurs, it still must demonstrate the controversy is justiciable. The ripeness necessary in the declaratory judgment statute’s ‘actual controversy’ requirement (Code Civ. Proc., § 1060) ‘does not embrace controversies that are ‘conjectural, anticipated to occur in the future, or an attempt to obtain an advisory opinion from the court.’”

In the opposition, Erewhon cites to Farm Sanctuary, Inc. v. Department of Food & Agriculture (1998) 63 Cal.App.4th 495, 502, where the Court of Appeal noted that “[i]n determining whether a controversy is ripe, we use a two-pronged test: (1) whether the dispute is sufficiently concrete to make declaratory relief appropriate; and (2) whether the withholding of judicial consideration will result in a hardship to the parties.” Erewhon asserts that “[b]oth prongs are satisfied here. First…this dispute is sufficiently concrete because an actual controversy has arisen between Erewhon and Cross-Defendants regarding their rights and obligations under the Lease, which Erewhon alleges was fraudulently induced.” (Opp’n at p. 15:9-12, emphasis omitted.) Erewhon also asserts that it “will face hardship if contractually obligated to pay CAM at a rate that was not disclosed, and which Cross-Defendants artificially increased by including development costs, among other things.” (Opp’n at p. 15:24-26.)

However, Erewhon does not appear to directly address Cross-Defendants’ arguments that the following allegations are not ripe: “[a]s a result of these increases, Erewhon is informed and believes that it will pay millions of dollars more in Operating Costs Rent that it otherwise would not have been charged.” (TACC, ¶¶ 86, 94.) This specific allegation does not appear to be discussed in Erewhon’s opposition. The Court agrees with Cross-Defendants that such allegation is conjectural. Thus, the Court grants Cross-Defendants’ motion to strike the subject portions of paragraphs 86 and 94 of the TACC, with leave to amend.

Lastly, Cross-Defendants move to strike the portion of paragraph 12 of the TACC providing as follows: “Cross-Defendants’ misrepresentation of estimated Operating Costs also induced Erewhon to agree to a substantially higher base rent than Erewhon would have agreed to had it known Cross-Defendants’ true, significantly higher, ‘good faith estimate’ of operating expenses.” (TACC, ¶ 12.)

Cross-Defendants assert that “Erewhon is speculating regarding what might have been negotiated and agreed to had it known the supposed truth of Cross-Defendants’ first-year CAM estimate. Speculation over what parties may or may not have agreed to absent alleged fraud is too speculative as a matter of law and should be stricken.” (Mot. at p. 17:19-22.) In support of this assertion, Cross-Defendants cite to Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, 1262-1263, where the Court of Appeal noted that “[f]or obvious reasons, damages for breach of a contract to negotiate an agreement are measured by the injury the plaintiff suffered in relying on the defendant to negotiate in good faith. This measure encompasses the plaintiff’s out-of-pocket costs in conducting the negotiations and may or may not include lost opportunity costs. The plaintiff cannot recover for lost expectations (profits) because there is no way of knowing what the ultimate terms of the agreement would have been or even if there would have been an ultimate agreement.”

In the opposition, Erewhon asserts that “Cross-Defendants misconstrue this allegation. Erewhon is not alleging Cross-Defendants would have agreed to a lower Base Rent, nor is Erewhon attempting to allege what Cross-Defendants’ negotiation positions would have been. Erewhon is simply providing context for this dispute had it known the true CAM figures Cross-Defendants unfortunately misrepresented and concealed.” (Opp’n at p. 17:9-13.) However, the court finds that Cross-Defendants have the better argument that the subject allegation is speculative. Thus, the Court grants Cross-Defendants’ motion to strike the portion of paragraph 12 of the TACC providing as follows, with leave to amend: “Cross-Defendants’ misrepresentation of estimated Operating Costs also induced Erewhon to agree to a substantially higher base rent than Erewhon would have agreed to had it known Cross-Defendants’ true, significantly higher, ‘good faith estimate’ of operating expenses.” (TACC, ¶ 12.)  

Conclusion 

For the foregoing reasons, the Court sustains Cross-Defendants’ demurrer to the eighth cause of action of the TACC, with leave to amend. The Court overrules Cross-Defendants’ demurrer to the fourth, fifth, and sixth causes of action of the TACC. 

The Court grants Cross-Defendants’ motion to strike in its entirety, with leave to amend.  

The Court orders Erewhon to file and serve an amended cross-complaint, if any, within 20 days of the date of this Order. If no amended cross-complaint is filed within 20 days of this Order, Cross-Defendants are ordered to file and serve their answer within 30 days of the date of this Order.¿¿ 

Cross-Defendants are ordered to give notice of this Order.  

 

DATED:  January 6, 2025                             

________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Cour