We granted review of the Court of Appeal's judgment in this case as a companion to our decision in Brown v. Green (1994) 8 Cal.4th 812
On April 14, 1984, plaintiff Rose Hadian and defendant Edward Schwartz signed a lease agreement involving commercial property at 2906 Sunset Boulevard in the Silver Lake district of Los Angeles. Hadian owned the building, constructed of unreinforced masonry, and Schwartz intended to lease it for use as a combined bar and cabaret. The term of the lease was three years at a monthly rental of $650, with an option to renew for an additional five years at a rental of $800 a month. The lease agreement itself took the form of a preprinted "fill-in-the-blank" document entitled "Standard Industrial Lease — Net" published by the American Industrial Real Estate Association, several features of which the parties amended prior to signing it.
Among other amendments to the form lease, the parties struck by lining through two subsections of both the "compliance with law" and "condition of premises" provisions. The first of these stricken provisions consisted of a warranty by the lessor that the premises did not violate applicable building codes, regulations or ordinances in effect at the commencement of the term; in the second, the lessor warranted the condition of the plumbing, lighting, heating and similar building systems. Both stricken provisions would have required the lessor to correct promptly any breach of the warranties. The parties also struck a provision requiring the lessee to pay the real property taxes (and added a provision requiring the lessee to pay only any increase in property taxes occurring during the term of the lease) and made additional changes — none of which are pertinent here — by attaching a typewritten addendum to the form lease.
In a letter to Hadian dated October 1, 1986, Schwartz exercised his option to renew the lease for an additional five years at the increased rent, the new term to commence on July 24, 1987, the date on which the initial three-year term expired. On March 4, 1987 — five months after Schwartz exercised the renewal option and almost five months before the initial three-year term ended — Hadian received a letter from City of Los Angeles officials advising her that the unreinforced masonry construction of the Sunset Boulevard building made it susceptible to substantial structural damage in the event of an earthquake. The letter explained that, under a so-called "earthquake hazard reduction" program enacted by the city in 1981, Hadian, as the building's owner, was required to arrange for a structural survey of the property to determine its susceptibility to earthquake damage and was liable for the cost of any quake-proofing (or "seismic retrofitting") indicated by the survey results; accompanying the letter was an "Earthquake Hazard Reduction Compliance Order" directing Hadian, as the building owner, to meet minimum earthquake standards for a structure of that type within a specified time.
Discussions between Hadian and Schwartz then took place, intended to resolve liability between the parties for the required seismic alterations. After failing to reach an agreement with her lessee, who denied any responsibility for the cost of the quake-proofing work, Hadian authorized and paid
Following completion of the seismic upgrade work and issuance of a certificate of completion by the city, Hadian filed this breach of contract action against Schwartz to recover the cost of the alterations. Her complaint alleged in substance that Schwartz had agreed through a provision of the lease to bear the cost of complying with any alterations ordered by municipal authorities, that the seismic retrofit so qualified, and that Schwartz, having refused to pay the cost himself, was liable to her by way of indemnity. At the conclusion of a bench trial, the superior court ruled in favor of Hadian. Schwartz appealed.
In an unpublished opinion, the Court of Appeal affirmed the judgment of the trial court. It reasoned that such a result was "impelled" by our opinion in Sewell, supra, 70 Cal.2d 666, because the terms of the lease in issue, like the lease in Sewell, obligated the lessee to assume the duty of keeping the building in repair and complying with all applicable laws. In addition, the court reasoned that, as in Sewell, the lessor had assumed no obligation of repair or compliance with laws; nor had the lessor made any representations respecting the condition of the property. Although pointing out that its judgment required Schwartz to pay, in effect, for capital improvements to the building and that such a result was "arguably unfair" because the improvements would benefit primarily the lessor, the Court of Appeal felt compelled by the rule of Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455 [20 Cal.Rptr. 321, 369 P.2d 937], to follow what it perceived to be our analysis in Sewell. We granted the lessee's ensuing petition for review and now reverse.
As we explain in greater detail in Brown v. Green, supra, 8 Cal.4th 812, also filed today, our opinion in Sewell, supra, 70 Cal.2d 666, "is apt to be misinterpreted as one which, in the search for the parties' intent, exalts a
Our opinion pointed out that a change in use that invokes government ordered alterations is one of the principal ways by which a lessee may be deemed to have assumed the cost of compliance. (Sewell, supra, 70 Cal.2d at p. 674.) Indeed, we went so far as to observe that anyone using leased property for the purpose of operating a trailer park "must know that laws respecting and regulating such facilities [i.e., waste disposal] would be of primary importance ... and would be those most obviously included in a clause requiring compliance with all applicable laws." (Id. at p. 676.)
As we conclude in Brown v. Green, supra, 8 Cal.4th at page 825, these considerations are decisive in distinguishing Sewell, supra, 70 Cal.2d 666, from cases in which the use is not one that provokes the government order at issue. The distinction is, moreover, consistent with both common sense and a reasonable construction of the lease provision. After all, a lessee who, like the one in Brown v. Green, undertakes the retail sale of furniture on leased property is hardly likely to anticipate that such a use will trigger a municipal demand that asbestos laden fireproofing material coating the building's structural frame be removed at a cost of roughly a quarter of a million dollars. Nor is the government's cleanup demand in such a case one that lies within the reach of a compliance with laws provision confined to laws or orders "regulating the lessee's use" of the property. (See Brown v. Green, supra, ante, at p. 824.)
A compliance with laws provision that is limited to requiring the lessee to obey or comply with laws, orders and other governmental demands regulating the lessee's use of the leased property does not, by its literal terms, obligate the lessee to comply with laws, regulations, et cetera, that do not purport to regulate the use. (See, e.g., Wolf v. 2539 Realty Associates (1990) 161 A.D.2d 11 [560 N.Y.S.2d 24]; Bush Term. Assoc. v. Federated Dept. Stores (1980) 73 A.D.2d 943 [424 N.Y.S.2d 28]; Ingalls v. Roger Smith Hotels Corporation (1955) 143 Conn. 1 [118 A.2d 463]; 2 Friedman on Leases, supra, § 11.1, at p. 689.) It is no answer to reason, as the Court of Appeal appeared to do in this case, that the lessee is responsible for the cost of compliance because the failure to comply might otherwise lead to the destruction of the leasehold; were that the law, there would be no limit on the lessee's liability for governmental demands, even those demonstrably of benefit solely to the property owner.
Naturally, the analysis begins with the language of the lease itself. The literal text of the agreement — even so-called preprinted "form" leases — is
If, on balance, these factors reinforce the conclusion suggested by an examination of the text of the lease, the court will conclude that the obligation to make alterations to comply with the law or regulation at issue falls on the lessee. If, however, the assessment is inconsistent with the lease provisions and points to the conclusion that the parties intended that the lessor shoulder the burden of compliance, the court will conclude that the actual agreement of the parties deviates from the literal text of the lease and construe and enforce the agreement accordingly. (See Brown v. Green, supra, 8 Cal.4th at pp. 829-830, and cases cited; Sewell, supra, 70 Cal.2d at p. 674, fn. 10 and authorities cited.)
We come, then, to a consideration of the particulars of the lease at issue in this case. Although the form used by the parties
The life of the lease, for example — three years with an option to renew for an additional five years — makes the lease one for a comparatively short term. In addition, the lessor agreed both to pay all but a small yearly increment in property taxes and to obtain and pay the premiums for casualty insurance on the building, obligations that suggest her intention to retain the major benefits and burdens of ownership and which thus tend to negate the conclusion that the parties intended a true "net" lease. (Cf. Brown v. Green, supra, 8 Cal.4th at pp. 827-828.) Moreover, in the typewritten addendum to the preprinted form, the parties agree that the lessor continues to own all the "fixtures, operating systems and other improvements" in the building, "including the bar, freezer, lighting fixtures, bar cabinets, bar mirrors ...," an acknowledgment of continuing ownership that also tends to undermine the view that the parties intended a true net lease.
On balance, these features lead us to conclude that, despite the form characterization of the lease as "net," the lessor did not intend to "forego the speculative advantages of ownership in return for the agreed net rental," nor was the lessee "gambl[ing] on the continued value of the location and the improvement ... and assum[ing] all risk in connection therewith." (Van Doren, Some Suggestions for the Drafting of Long Term Net and Percentage Leases (1951) 51 Colum. L.Rev. 186; see also Brown v. Green, supra, 8 Cal.4th at p. 826.)
(1) The relationship of the cost of the curative action to the rent reserved.
As noted, the initial three-year term of the lease called for a monthly rental of $650. The total rent reserved over the life of the initial term was thus $23,400. Expressed as a percentage, the cost of compliance with the city's order is almost one and one-half times (145 percent) the cost of the entire rent reserved over the three-year life of the lease. Thus, using the initial lease term as a benchmark, the cost of the curative action fairly dwarfs the total rent reserved.
Even if we add to the initial term the five years of the option, renewed by Schwartz some nine months before the end of the initial term and several months before the city's compliance order was served on Hadian, the relationship is still one of significant imbalance. In Brown v. Green, supra, 8 Cal.4th 812, we point out that although the cost of complying with the county's asbestos abatement order there — over $250,000 — was high as an absolute number, it represented less than 5 percent of the total rent reserved over the 15-year life of the lease, "an expression of value," we said, "that throws a different light on the relative financial magnitude (and hardship) of the undertaking." (Id. at p. 830.) Here, of course, these comparative values are inverted. Instead of compliance costs of less than 5 percent of the aggregate rent, the cost of earthquake-proofing the Sunset Boulevard property is roughly half of the total rent payable by the lessee over the combined eight years of the term, or 49 percent.
(2) The term for which the lease was made.
Although the question of the length of a lease term is irreducibly relative, most would agree that a term of three years qualifies as "short"; neither do
(4b) (3) The relationship of the benefit to the lessee to that of the reversioner.
Here again, it is plain that, as the Court of Appeal itself pointed out, the primary benefit of the seismic work will inure to Hadian, the building's owner. Although the record does not inform us of the estimated useful life of the building, it is safe to assume that its substantial reconstruction and "hardening" against earthquake damage will last for more than the five years remaining on the lease. The record here, we conclude, unlike that in Brown v. Green, supra, ante, is sufficient to support the conclusion that the work will primarily benefit the lessor. The record is also clear that the earthquake-proofing reconstruction ordered by the city resulted from the classification of the building itself as being of a type — unreinforced masonry — that is especially susceptible to severe damage during an earthquake. The city's compliance order was not the result of activity on the property or prompted by the lessee's particular use. Thus, this factor as well points to the building owner as the party responsible for compliance costs.
(4) Whether the curative action is structural or nonstructual in nature.
Little argument is needed to establish both the substantiality and structural nature of the seismic retrofit required at the Sunset Boulevard building. As
(5) The degree to which the lessee's enjoyment of the premises will be interfered with while the curative action is being undertaken.
The record is unfortunately silent on this aspect of the analysis. We may, however, surmise that the substantial reconstruction of the building's structural frame and the addition of a new roof were not unintrusive, and conclude that application of this factor does not, at least, favor the lessor. (See Brown v. Green, supra, 8 Cal.4th at pp. 832-833.)
(6) The likelihood that the parties contemplated the application of the particular law or order involved.
A negative answer to this query favors the case for the lessee: responsibility for the consequences of events affecting leased property that are truly unanticipated is likely to be that of the lessor, who generally has the financial resources and long-term investment interest to respond to such events. Yet here again, the record is not definitive. Although it is common knowledge that southern California is "earthquake country," the extent to which the parties were aware of a city code program designed to upgrade unreinforced buildings and that that eventuality could have been contemplated by both or either at the time the lease was signed are questions not clearly answered by the record before us.
The record does include copies of letters to Mrs. Hadian from the city's department of building and safety dated September 20, 1967, and July 31, 1968, ordering the removal of building parapets along the Sunset Boulevard side and the anchorage of exterior walls to the roof frame, and subsequently acknowledging the completion of those changes. These alterations were ordered as part of the city's code program of removing building parapets that might pose a threat to pedestrians in the event of an earthquake. It is also likely that Hadian, as the owner of a building constructed of unreinforced masonry, was more likely than her lessee to be aware of the city's earthquake hazard reduction program, enacted in 1981, some three years before the lease commenced. On balance, it is appears fair to charge the owner with at least a general awareness, based on past experience, of the possibility that the ownership of property within an earthquake zone might entail government demands that the building be renovated in particular ways.
Perhaps the most that can be said of this factor is that it does not tip decidedly in favor of either party.
Although the uses by the lessees in neither Brown v. Green, supra, 8 Cal.4th 812, nor this case fell within the text of the compliance with laws clauses or triggered the government orders at issue, a comparison of the circumstances relevant to determining compliance responsibility in the two cases leads us to conclude that, unlike the case in Brown v. Green, the probable intent of the parties here was that the lessor would bear the cost of complying with orders not arising from the lessee's particular use of the property. The material features of the lease and surrounding circumstances in this case and those in Brown v. Green differ with respect to almost every controlling factor: Differences in the amount of the monthly rent ($28,500 versus $800), the life of the lease (fifteen years versus three years, with a five-year option), the cost of compliance alterations as a percentage of the aggregate rent (less than 5 percent versus 49 percent), prior notice of the potential for compliance problems (written notice in Brown v. Green, none in this case) and the extent of the alterations entailed by compliance (removing fireproofing material sprayed on beams supporting the roof versus a virtual reconstruction of the building, including steel framing and reroofing), support that conclusion, leading us to reverse the judgment of the Court of Appeal.
We also are carried to our conclusion by the manifest unfairness of the result reached by the Court of Appeal, a fact that court acknowledged. Although the Court of Appeal regarded itself as constrained by the duty of deference owed to a prior decision of this court, we have concluded that it construed our opinion in Sewell, supra, 70 Cal.2d 666, as one imprisoned by its own logic. We now correct that misreading, confident that our reasoning in Sewell was never intended to produce the result reached by the courts below.
The judgment of the Court of Appeal is reversed and the cause is remanded with directions to vacate the judgment of the trial court and to enter judgment in favor of defendant.
Lucas, C.J., Mosk, J., Kennard, J., Baxter, J., George, J., and Werdegar, J., concurred.