Avalon Pac.-Santa Ana v. Llc

• Citation: 122 Cal.Rptr.3d 417,2011 Daily Journal D.A.R. 2,11 Cal. Daily Op. Serv. 2398,192 Cal.App.4th 1183
• Decision Date: 22 February 2011
• Docket Number: No. G043049.,G043049.
• Court: California Court of Appeals
• Parties: AVALON PACIFIC-SANTA ANA, L.P., Plaintiff and Respondent, v. HD SUPPLY REPAIR & REMODEL, LLC, et al., Defendants and Appellants.

192 Cal.App.4th 1183

122 Cal.Rptr.3d 417

11 Cal. Daily Op. Serv. 2398

2011 Daily Journal D.A.R. 2777

AVALON PACIFIC-SANTA ANA, L.P., Plaintiff and Respondent,

v.HD SUPPLY REPAIR & REMODEL, LLC, et al., Defendants and Appellants.

No. G043049.

Court of Appeal, Fourth District, Division 3, California.

Feb. 22, 2011.

**421 Allen Matkins Leck Gamble Mallory & Natsis, Thomas E. Gibbs and Brian R. Bauer, Irvine, for Defendants and Appellants.

Waldron & Bragg, Gary A. Waldron and Jacob C. Gonzales, Newport Beach, for Plaintiff and Respondent.

*1189 OPINION

FYBEL, J.

Introduction

Avalon Pacific—Santa Ana, L.P. (Avalon), leased a parcel of real property in Santa Ana to HD Supply Repair & Remodel, LLC (HD Supply), which intended to convert the property from vacant warehouses and office space into a retail facility. After demolishing the office space, HD Supply halted renovations due to economic conditions and allowed the property to fall into disrepair. Avalon sued HD Supply and the guarantor of the lease, The Home Depot, Inc. (Home Depot), for breach of the maintenance and repair obligations of the lease and for waste. (HD Supply and Home Depot are collectively called Defendants.) However, Avalon did not terminate the lease, the initial term of which runs into 2017. HD Supply continues to pay, and Avalon continues to receive, about $50,000 a month in rent.

The jury found in favor of Avalon, and awarded it $677,000 in damages for breach of lease against Defendants and $561,000 in damages for waste against HD Supply, both damage awards based on the cost of repairs. The trial court trebled the waste damages based on the jury's finding that HD Supply acted willfully or maliciously. Defendants appeal from the judgment in Avalon's favor.

We reverse. The most significant facts, indeed the facts driving our decision, are that Avalon has not terminated the lease, the lease has not expired, HD Supply continues to pay Avalon monthly rent of about $50,000, and, contrary to Avalon's assertion, HD Supply has not abandoned the lease. HD Supply, which remains the lessee, has the possessory interest in the leased property into at least 2017, while Avalon has a reversion interest.

Those salient facts mean that Avalon's measure of damages for breach of the maintenance and repair covenants and for waste is the diminution in value of its reversion interest. Yet Avalon sought, **422 and the jury awarded it, cost of repair damages, the measure of damages applicable when the lease has expired or been terminated and the lessor has regained possession. By obtaining cost of repair damages without terminating the lease, while continuing to receive monthly rent, Avalon has been unjustly rewarded. Avalon is having and eating the proverbial cake.

As we explain, under the terms of the lease, California case law, and prevailing law across the nation, a lessor may not recover cost of repair damages for breach of a lease's maintenance and repair obligations when the *1190 lease has neither expired nor been terminated. A lessor is limited to damages it actually suffered: injury to the reversion interest—the interest the lessor has in the leased property. Similarly, to recover for waste while a lease remains in effect, a lessor must prove the acts of waste caused damage that was sufficiently substantial and permanent to injure the lessor's reversion interest. The trial court erred by instructing the jury that waste need only cause substantial or permanent depreciation in market value.

Avalon did not present evidence of injury to its reversion interest. It had full and fair opportunity to do so at trial but opted instead to present evidence of cost of repairs. Accordingly, we reverse the judgment and remand with directions to the trial court to enter judgment for Defendants.

Summary of Landlord/Tenant Law

We deviate from the usual practice by first providing a brief review of some fundamentals of landlord/tenant law to provide a legal framework for understanding the facts and discussion sections of the opinion.

A lease is both a conveyance of an estate in real property and a contract between the lessor and the lessee for the possession and use of the property in consideration of rent. (12 Witkin, Summary of Cal. Law (10th ed. 2005) Real Property, § 517, p. 593.) " '[T]he lease has two sets of rights and obligations—one comprising those growing out of the relation of landlord and tenant, and said to be based on the "privity of estate," and the other comprising those growing out of the express stipulations of the lease, and so said to be based on "privity of contract." ' " ( Samuels v. Ottinger (1915) 169 Cal. 209, 211, 146 P. 638.)

A leasehold estate gives the lessee the exclusive possession of the premises against all the world, including the owner, for the term of the lease. ( Howard v. County of Amador (1990) 220 Cal.App.3d 962, 972, 269 Cal.Rptr. 807.) While the lessee has a present possessory interest in the premises, the lessor has a future reversionary interest and retains fee title. ( Kolstad v. Ghidotty (1963) 212 Cal.App.2d 228, 231, 28 Cal.Rptr. 123; see also 6 Cal. Real Estate Law & Practice (2010) Landlord & Tenant, ch. 150, § 150.02, p. 150-5 (rel. 46-3/95).) "A reversion is the residue of an estate left by operation of law in the grantor or his successors ... commencing in possession on the determination of a particular estate granted or devised." (Civ.Code, § 768.) "A future interest entitles the owner to the possession of the property only at a future period." ( Id., § 690.)

Thus, the lessee has the right during the term of the lease to the full use and enjoyment of the leased property limited only by a restriction not to *1191 commit waste and by the terms of the lease. ( Eastman v. Peterson (1968) 268 Cal.App.2d 169, 174-175, 73 Cal.Rptr. 803.) Every lease includes an implied covenant **423 of quiet enjoyment protecting the lessee from any act or omission by the lessor, which interferes with the lessee's right to use and enjoy the premises for the purposes contemplated by the lease. ( Petroleum Collections Inc. v. Swords (1975) 48 Cal.App.3d 841, 846, 122 Cal.Rptr. 114.)

Facts

In December 2006, HD Supply's predecessor, as tenant, and Avalon's predecessor, as landlord, entered into a long-term lease (the Lease) of the premises located at 1044 E. Fourth Street in Santa Ana (the Premises). The Premises included two vacant warehouses, one of which had some interior office space. HD Supply leased the Premises with a plan to conduct major renovations to convert the warehouses into a retail facility selling building supplies to contractors. HD Supply's parent company, Home Depot, executed a written guaranty, guaranteeing HD Supply's performance under the Lease.

The term of the Lease initially was a little over 10 years, concluding in 2017, and the Lease included three five-year options to extend the term into 2032. Base monthly rent was $47,508 for the first three years, with increases to $51,783.72 for the following three years, and continual base rent increases throughout the remainder of the lease term.

Section 6 of the Lease limited HD Supply's use of the Premises to "general office, warehousing, distribution, fabrication, retail and wholesale sales and rental of building materials, construction supplies, tools, hardware, equipment and related materials, and any other legal use which is reasonably comparable thereto." Section 6 of the Lease also provided that HD Supply "shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance."

The Lease stated that before its effective date, Avalon and HD Supply agreed on conceptual plans for conversion of the Premises into a retail facility. The conceptual plans included removal of a two-story office space on the north end of building A to provide a turnaround area for trucks, reconstruction of a portion of another building, and construction of a new loading dock. In addition, the Lease required HD Supply to slurry seal the parking lot and repair any damage to the asphalt. Section 4.7 of the Lease provided that HD Supply may not make material changes to the conceptual plans without Avalon's prior approval unless the changes were required by the City of Santa Ana.

Section 9.1 of the Lease sets forth HD Supply's obligations to maintain and repair the Premises. It states: "Except as otherwise provided in this Lease, *1192 from and after the Possession Date, [HD Supply] shall repair as necessary and maintain in good condition all parts of the Premises not [Avalon]'s responsibility in this Lease ..., including all interior building systems, and [HD Supply] shall warrant to [Avalon] for a period of three (3) years after [HD Supply]'s completion of the Proposed Removal and the Proposed Addition, as applicable, that each of the Proposed Removal and the Proposed Addition, as applicable, is free from material defects, and [HD Supply] agrees to repair or cause to be repaired any such defects of which [HD Supply] receives notice within such three (3) year warranty period."

Section 9.3 of the Lease, which concerns HD Supply's obligations on lease termination, provides in relevant part: "[HD Supply] shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces, except for those which [Avalon] is obligated to maintain, broom clean and free of debris, and in good operating**424 order, condition and state of repair, ordinary wear and tear excepted.... [HD Supply] shall repair any damage caused by the installation, maintenance or removal of structures, trade fixtures, furniture, equipment, systems and other personal property ..., and [HD Supply] owned furnishings."

From December 2006 to May 2007, representatives of HD Supply and Avalon met with the City of Santa Ana Planning and Building Agency, police department, and city council to obtain necessary approvals to implement the conceptual plans. On March...