Many commercial leases give the tenant one or more options to renew. If your lease contains such an option, it is important be aware of any conditions to the exercise of the option, including any time restraints. Given the very strict construction given to options by the courts, even minor failures to strictly comply with the terms of the option can result in the loss of the option. Time Constraints. Options to renew generally come with time constraints. For example, a lease may provide that the option can be renewed not more than six months, or less than three months prior to the expiration of the initial lease term. Failure to timely comply with the notice provisions may result in a loss of the option to renew. In one case, the tenant was required to provide notice of its intent to exercise the option no less than six months before the expiration of the term. The tenant, after making substantial improvements to the premises and to an adjacent building in reliance upon the continuation of the lease, gave notice four months before the expiration term. The court held that the tenant had failed to satisfy a condition to the exercise of the option (timely notice), and even refused to enforce the option on equitable grounds to avoid a forfeiture.
Other Conditions – No Default. Options to renew also generally require that the tenant not be in default when the option is exercised. For example, the lease may provide that “so long as tenant is not in default when the option is exercised, tenant will have one option to renew.” Clever landlords who wish to get out of a lease will often rely on seemingly minor defaults in order to not honor the exercise of an option. Given the strict construction given to option conditions, courts will generally enforce this, even for seemingly minor defaults. To give an example of this strict construction, in one case, a tenant had been cited for a fire code violation. The court held that the tenant’s exercise of option was invalid even though the landlord did not even know of the alleged fire code violation at the time it refused to honor the tenant’s purported exercise of the option.
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This July, the California Supreme Court agreed to hear an appeal involving the issue of whether a dual agency relationship exists when two salespersons employed by the same real estate broker separately represent the buyer and seller in a real estate transaction. The appeal stems from the case of Horiike v. Coldwell Banker Residential Brokerage Company. In Horiike, the listing agent and selling agent were both employed by Coldwell Banker, but separately represented their respective principals. The listing prepared by the listing agent stated the Malibu home “offers approximately 15,000 square feet of living areas.” When specifically asked by the buyers about the size of the home, the listing agent advised them to hire a specialist to verify the square footage. The buyer did not verify the square footage, closed escrow, and thereafter discovered the home was “just” 12,000 square feet. The buyer sued the listing agent and Coldwell Banker for fraud and breach of fiduciary duty. The trial court refused to instruct the jury on the breach of fiduciary duty claim on the grounds the listing agent was not a fiduciary of the buyer. The case when to trial on the fraud claim alone and the jury returned a verdict in favor of the listing agent and Coldwell Banker. The jury found the listing agent had “reasonable grounds” for believing the home was 15,000 square feet, and thus, had no fraudulent intent. The judgment was reversed on appeal. The court of appeal held that a dual agency relationship existed as a matter of law by virtue of the fact both salespersons were employed by the same broker. The court quoted from the Miller & Starr treatise for the proposition that “When there is one broker, and there are different salespersons licensed under the same broker, each salesperson is an employee of the broker and their actions are the actions of the employing broker.... That broker thereby becomes a dual agent representing both parties.” As a result, the listing agent was the unsuspecting fiduciary of the buyer, and had a duty to “learn the material facts that may affect the principal’s decision” and to “perform the necessary research and investigation in order to know those important matters.” The decision also makes it clear that the relationship between the broker and the salesperson is immaterial to the analysis. Specifically, it is immaterial whether the salespersons were employees or independent contractors of the broker. Although a salesperson can be classified as an independent contractor for tax purposes, for purposes of the Real Estate Law, such distinctions are immaterial with relation to the salespersons dealings with the public.
As a practical matter, the existence of a fiduciary relationship relieves the buyer of proving any element of fraudulent intent – always a huge obstacle to any claim of misrepresentation or concealment. A fiduciary can be charged with “constructive fraud” based solely on the failure to disclose material information, even if there is no fraudulent intent, and even if the fiduciary actually believed he was not providing misleading information. The Small Wine Producer Tax Credit allows certain small wine producers to offset up to 90 cents per gallon in excise taxes (IRC §5041(c), 27 C.F.R. §24.278). The credit was passed to afford some relief to small wine producers from dramatic increases in the exists tax on wine which occurred in the early 1990’s.
The credit is available only to proprietors who produce less than 250,000 gallons of wine per year. There are rules against creating different entities commonly controlled in order to fall below the 250,000 gallon limit. There is no minimum level of production needed to claim the credit, but some wine must be produced in order to claim the credit. Thus, if wine is removed for consumption or sale during the calendar year, but no wine is actually produced, the credit cannot be claimed. Wine production includes primary fermentation, secondary fermentation, sweetening, wine spirits addition, and the blending of a formula wine. A custom crush arrangement would not meet the definition of “production” (since the entity performing the custom crush is treated as the producer and is liable for the excise tax). However, an alternating proprietor arrangement would qualify as production for purposes of claiming the credit. The amount of the credit is 90 cents per gallon of wine (which gradually gets reduced if the proprietor produces more than 150,000 gallons per year). The credit can be claimed on the first 100,000 gallons of wine removed for consumption or sale during the calendar year, representing a maximum credit amount of $90,000 per year for qualifying small producers. If a producer transfers wine in bond to another bonded wine premises (such as a warehouse) for storage pending subsequent removal, the producer cannot claim the tax credit because the producer has not removed the wine for consumption or sale. Under certain circumstances, the warehouse (called the “transferee”) can claim the tax credit for itself if, amongst other things, the producer would have qualified for the credit had the producer removed the wine itself for sale or consumption (§24.278(b)(2)). If the warehouse claims the tax credit it will reduce the available credit for wine the producer removes itself. (§24.278(e)(2)). Thus, if the warehouse claims a credit for 60,000 gallons of the producer’s wine it removes, the producer will only be able to claim the credit for 40,000 gallons of wine it removes. There is no requirement that the credit be applied toward the same wine which is produced. Therefore, a proprietor could produce a small amount of wine solely to claim the credit on the first 100,000 gallons of wine removed (even if that wine was not produced by the proprietor). This might be attractive to a proprietor who removes wine during the year, but does not produce any wine. By producing a small amount, the proprietor could claim upwards of a $90,000 per year tax credit. Health & Safety Code §1597.40(b) voids any clause in a residential lease (or CC&R’s) which prohibits or even restricts the use of real property “as a family day care home for children.” As a result, a tenant can use their premises for purposes of operating a day care center for up to twelve children without the consent of the landlord. Needless to say, this section comes as an unwelcome surprise to many landlords. Third, nothing in the Code expressly prohibits the landlord from not renewing a lease on the grounds the tenant is operating a day care center. In theory, this could be an opportunity to impose additional requirements (or to not renew the lease altogether). However, given the public policy of the State of California with respect to home day care centers, this strategy has its own risks. If a landlord cannot restrict the use of the property for a home day care center, it is uncertain whether the landlord can elect to not renew the lease on that basis alone without exposing itself to additional liability. Fourth, talk to your insurance broker to make sure your own liability policy will adequately protect you against the risk of injury or death to a house filled with twelve children. |
blogHi. I'm Stephen Flynn. Attorney and founder of the Law Offices of Stephen M. Flynn. This is my blog. Enjoy! Archives
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