Judge: Teresa A. Beaudet, Case: 22STCV31684, Date: 2023-08-16 Tentative Ruling

Case Number: 22STCV31684    Hearing Date: August 16, 2023    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

Background

On September 27, 2022, Plaintiff Atlas VI JCP Carson LLC (“Plaintiff”) filed the instant action against Defendants Subway Real Estate, LLC (“Subway Real Estate”) and Behzad Salehi (“Salehi”).

On February 23, 2023, Plaintiff filed the operative First Amended Complaint (“FAC”). The FAC alleges causes of action for (1) breach of lease, and (2) breach of sublease.[1]

Salehi now demurs to the second cause of action of the FAC. Plaintiff opposes.

Discussion

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.    Allegations of the FAC

In the FAC, Plaintiff alleges that “[t]he leased premises which is the subject of this action is located in the County of Los Angeles, State of California and contains 1,400 square feet, commonly known as Store No. B-23 (the ‘Premises’), and is located at the street address of 20700 Avalon Boulevard, Carson, California 90746 in the shopping development known as SouthBay Pavilion...” (FAC, ¶ 4.)

On or about June 25, 2012, VCG-Southbay Pavilion, LLC, Plaintiff’s predecessor-in-interest, as landlord, and Subway Real Estate, as tenant, entered into a written Lease (the “Lease”) for a term of approximately one-hundred and twenty (120) months for the Premises...” (FAC, ¶ 7.) On or about July 13, 2012, Subway Real Estate, as sublessor, and Salehi entered into a sublease (the “Sublease”), designated as SUBLEASE #55450, for the Premises. (FAC, ¶ 8.)

Plaintiff alleges, inter alia, that Subway Real Estate “breached the Lease, by among other things, failing to pay the Rent due and owing under the Lease.” (FAC, ¶ 47.) Plaintiff further alleges that Salehi “breached the Lease and Sublease, by among other things, failing to pay the Rent due and owing under the Sublease.” (SAC, ¶ 53.)

C.    Second Cause of Action for Breach of Sublease

“A cause of action for damages for breach of contract is comprised of the following elements: (1) the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to plaintiff.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388.)

In the demurrer, Salehi asserts that Plaintiff “does not have grounds to seek recourse under the sublease agreement against [Salehi] - as there is no privity of any kind between [Plaintiff] and [Salehi] under the sublease agreement…[Salehi] is in privity only with his own sublessor, which is Subway Real Estate…” (Demurrer at p. 7:11-15.)  In support of this assertion, Salehi cites to Marchese v. Standard Realty & Dev. Co. (1977) 74 Cal.App.3d 142, 147, where the Court of Appeal found that “[t]he reason for the general rule that a sublessee may not sue the lessor for breach of covenant is that, as between an original lessor and a sublessee, there is no privity of contract. The sublessee is in privity only with his own sublessor. However, if the sublessee has assumed the covenants of the original lease, lessor is a third party beneficiary and has the right to go directly against the sublessee.” (Internal citation omitted.)

The subject Lease is attached as Exhibit “A” to the FAC. (FAC, ¶ 7, Ex. A.) Salehi notes that Section 19.01(a) of the Lease, which concerns “Rights Upon Default,” provides, inter alia, that “Landlord may at its sole discretion: (A) immediately terminate this Lease and Tenant’s right to possession of the Premises by giving Tenant written notice that this Lease is terminated, in which event, upon such termination, Landlord shall have the right to recover from Tenant the sum of (1) the worth at the time of award of the unpaid rental which had been earned at the time of termination; (2) the worth at the time of award of the amount by which the unpaid rental which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant affirmatively proves could have been reasonably avoided…” (FAC,  ¶ 7, Ex. A.) Salehi asserts that “[t]he Lease is absolutely clear on which party is liable in the event of a default, which is Subway Real Estate, LLC, as tenant, not [Salehi].” (Demurrer at p. 7:25-26.)

In the opposition, Plaintiff asserts that “notwithstanding claims of lack of privity, a landlord may sue a sublessee if the sublessee has agreed to perform the terms of the lease.” (Opp’n at p. 3:17-18.) Plaintiff cites to the case Vallely Invs. v. Bancamerica Commercial Corp. (2001) 88 Cal.App.4th 816, 819, which “presents the question of whether a tenant who takes an assignment of a mortgaged ground lease, expressly assuming its obligations, remains liable to the lessor after foreclosure of the mortgage. Vallely Investments, L.P. (Vallely), the lessor, sued for a declaration that BancAmerica Commercial Corporation (BACC), the assignee, was bound by the lease.” The Court noted that “[i]n April 1989, Balboa and BACC executed an instrument entitled assignment of leasehold interest. In it, BACC ‘accepts the within assignment and, in addition, does hereby covenant and agree to and with [Balboa] to faithfully observe, perform and fulfill all of the terms, covenants and conditions and obligations required to be observed, performed and fulfilled by [Balboa] as lessee under the Ground Lease . . . .’” (Id. at p. 820.)

The Court of Appeal noted that “[t]he first issue is the significance of BACC’s assumption of the lease obligations. Under settled law, BACC was contractually liable to Vallely.” (Vallely Invs. v. Bancamerica Commercial Corp., supra, 88 Cal.App.4th at p. 822.) The Court of Appeal explained that “[a]n assignee’s liability to the landlord turns on the nature of the assignment. If the assignee takes possession of the premises but no more, privity of estate exists and he is bound by all lease covenants which run with the land. Upon a subsequent assignment, privity of estate ends and, with it, all obligation to the landlord. If, however, the assignee expressly agrees with the assignor to assume the obligations of the lease, far different consequences attend. The assumption agreement creates a new privity of contract between landlord and assignee, enforceable by the landlord as a third party beneficiary, regardless of whether the landlord was a party to the assumption agreement. As a consequence, the assuming assignee is required to perform all covenants of the lease for the remainder of its term, absent a release by the landlord. Such is the case before us.” (Ibid. [internal citations omitted].)

Plaintiff asserts that “[i]n the present matter, like in Vallely Investments, [Salehi] expressly agreed with [Subway Real Estate] to assume the obligations of the Lease.” (Opp’n at  p. 5:4-5.) Plaintiff attaches as Exhibit “B” to the FAC a copy of the subject Sublease. (FAC, ¶ 8, Ex. B.) Plaintiff notes that Section 4 of the Sublease provides, inter alia, that “[t]he Sublessee agrees to perform and observe all of the obligations of the Sublessor under the Master Lease and make all rental payments directly to the Landlord in the manner set forth in the Master Lease.” (FAC, ¶ 8, Ex. B.) Plaintiff thus asserts that Salehi agreed to “assume the obligations of the lease,” creating a “new privity of contract between landlord and assignee, enforceable by the landlord as a third party beneficiary…” (Vallely Invs. v. Bancamerica Commercial Corp., supra, 88 Cal.App.4th at p. 822.) Salehi did not file a reply in support of the demurrer and thus does not respond to this point.

Plaintiff notes that Salehi asserts in the demurrer that “Lessor alleges that Sublessee assumed the Lease, however, this is not the case. An assignment of Lease never took place and there is no document attached to the Complaint which supports the assertion that Sublessee assumed the Lease.” (Demurrer at p. 5:12-14.) In the opposition, Plaintiff asserts that “[i]t is unclear what significance Sublessee attaches to this contention, but to the extent Sublessee means to argue that the court’s holding in Vallely Investments would only apply in the case of an assignment, Sublessee is incorrect. While the Vallely Investments happened to involve an assignment rather than a sublease, the court there (as well as other supporting case law) plainly stated that both sublessees and assignees are liable to the landlord, if the sublessee or assignee has agreed to assume the obligations of the Lease.” (Opp’n at p. 6:4-9.) In Vallely Investments, the Court of Appeal noted that “BACC attempts to wiggle out of the assignment by suggesting it took a sublease, or alternatively, some other interest it calls a ‘temporally limited leasehold assignment’ or ‘sub-set’ of Balboa’s rights. Both points are honed too fine.” (Vallely Invs. v. Bancamerica Commercial Corp., supra, 88 Cal.App.4th at p. 823.) The Court of Appeal found that “even if we did view this as a sublease, the outcome would be the same. A subtenant who expressly assumes the obligations of the prime lease, with the consent of the landlord, comes into privity of contract with the landlord, and the latter can enforce the assumption agreement as a third party beneficiary. So while we view this as an assignment, BACC would not escape liability even as a sublessee.” (Ibid. [internal citations omitted].)

In the demurrer, Salehi also notes that Section 19.01(g) of the Lease provides that “[i]n the event of a default by Tenant, if Landlord, in its sole and absolute discretion, terminates this Lease, then Landlord acknowledges an affirmative duty to use commercially reasonably efforts to mitigate its damages resulting from such termination. Further, Landlord and Tenant agree that Tenant’s liability to Landlord upon Tenant’s default shall not exceed the sum of Forty Thousand and No/100 Dollars ($40,000.00) and any available insurance proceeds.” (FAC, ¶ 7, Ex. A.) The Court notes that Salehi does not provide any analysis in the demurrer as to the application of this provision here.

In addition, in the opposition, Plaintiff asserts that “Section 19.01(g)…does not mention Sublessee at all. This is because the $40,000 limit of liability was not intended to apply to Sublessee.” (Opp’n at p. 8:12-13.) Plaintiff notes that Section 27.28 of the Lease provides, inter alia, that “Landlord also recognizes and acknowledges that Tenant intends to sublease the Premises… under which sublease the Sublessee will pay Rent directly to Landlord… Landlord recognizes and acknowledges that the sole and exclusive person or entity against which it may seek damages…. is Tenant or Sublessee.” (FAC, ¶ 7, Ex. A, emphasis added.) Plaintiff asserts that here, “the limit of liability at Section 19.01(g) references only Tenant, therefore it applies only to Tenant. In contrast, provisions that reference both ‘Tenant’ and ‘Sublessee’, such as Section 27.28 of the Lease, are intended to apply to Tenant and Sublessee; but the $40,000 limit of liability is not one of them.” (Opp’n at p. 9:10-13.)

            Plaintiff also asserts that it “does not consider Section 19.01(g) ambiguous, and contends it means only what it says – that the $40,000 limit of liability applies to Tenant, but not Sublessee,” but that to the extent Salehi raises a question about this, the “[i]nterpretation of ambiguous contractual provisions represents a question of fact, and requires the trier of fact to consider facts, circumstances and conditions surrounding [the contract’s] execution as well as the conduct of the parties to the contract.” (Zimmerman, Rosenfeld, Gersh & Leeds LLP v. Larson (2005) 131 Cal.App.4th 1466, 1489; see Opp’n p. 10:23-28, emphasis omitted.)

 Salehi did not file any reply disputing the foregoing points.    

Conclusion

Based on the foregoing, the Court overrules Salehi’s demurrer to the second cause of action of the FAC.

Salehi is ordered to file and serve his answer to the FAC within 10 days of this Order.¿ 

Plaintiff is ordered to give notice of this order.¿ 

DATED:  August 16, 2023                             ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court