Wong v. Di Grazia

• Decision Date: 21 November 1963
• Parties: , 386 P.2d 817 ELL M. WONG et al., Plaintiffs, Cross-Defendants and Appellants, v. Loris M. DiGRAZIA et al., Defendants, Cross-Complainants and Appellants. S. F. 21344.
• Court: California Supreme Court

Page 241

35 Cal.Rptr. 241

60 Cal.2d 525, 386 P.2d 817

ELL M. WONG et al., Plaintiffs, Cross-Defendants and Appellants, v. Loris M. DiGRAZIA et al., Defendants, Cross-Complainants and Appellants.

S. F. 21344.

Supreme Court of California, In Bank.

Nov. 21, 1963.

Charles F. Wong, San Francisco, for plaintiffs, cross-defendants and appellants.

Theodore M. Monell, San Francisco, for defendants, cross-complainants and appellants.

TOBRINER, Justice.

We hold here that an agreement which provided that the lease of a building to commence 'upon completion of said building' does not violate the rule against perpetuities. (Civ.Code, § 715.2) ¹ The nature of the circumstances of the transaction show that the contemplated building was to be completed within a reasonable time and that such reasonable time was less than 21 years. Hence the interest would either vest or fail within the statutory period. As to the remaining issues upon appeal we believe the trial court properly held that the duty of installation of a sprinkler system fell upon the lesses and that their refusal to perform that obligation constituted a breach. We therefore affirm the judgment in favor of the lessors except as to a minor matter of damages awarded them, which we remand to the trial court for clarification.

The factual background which produced this action is neither complicated nor disputed. On July 11, 1958, plaintiffs and defendants entered into a written agreement in which defendants agreed to lease to plaintiffs for a period of ten years a building to be constructed by defendants. The contract required defendants to construct only the shell of the building, exclusive of toilet facilities, lighting installations, and other improvements.

Paragraph 27 of the agreement provided: 'Lessor (defendants) shall forthwith commence the construction of a building upon the herein demised premises, in accordance with plans and specifications noted thereon, a copy of which is attached hereto and made a part hereof. * * * Said plans and specifications are complete, and the Lessor shall not be required to provide or pay for any additional construction. * * * Construction shall commence forthwith upon approval of completed plans and specifications and shall continue expeditiously until said buildings is completed, subject to material and/or labor shortages, strikes, lockouts, governmental actions and all causes beyond the control of lessor. Said building shall be completed within ninety (90) days after a building permit has been secured from the City and County of San Francisco of said plans and specifications, subject to the contingencies above mentioned, and Lessee shall not delay or impede said construction by making changes or alterations therein, it being understood that the time consumed in effecting any such changes shall be added to the time for the completion of said building. * * * Upon completion of said building * * * Lessor shall forthwith cause a Notice of Completion to be recorded, and the term of this lease shall commence upon the recording of said Notice of Completion. * * *'

Plaintiffs paid $7,875 to defendants as an advance rental payment upon the execution of the lease. Later plaintiffs learned that the San Francisco Building code required as a prerequisite to issuance of a building permit the installation of a sprinkler system costing approximately $9,500. Plaintiffs insisted that defendants pay the cost of this sprinkler system; defendants refused, contending that plaintiffs should bear this burden.

After fruitless negotiations between the parties, plaintiffs notified defendants that their refusal to proceed with the installation of the system and construction of the building effected a breach of the agreement. Plaintiffs then filed a complaint seeking rescission and the return of the $7,875 paid to defendants. Defendants cross-complained, alleging plaintiffs' breach. After a trial without a jury, the court rendered judgment for defendants, awarding them damages on the cross-complaint of $9,500.14 plus counsel fees of $1,250. The court credited plaintiffs with the $7,875 deposit, fixing the net amount owed under the judgment as $2,875.14. Both parties appealed.

The case raises as its major issue the validity of the agreement under the rule against perpetuities. If the agreement survives this attack, we must determine if the court properly held plaintiffs liable for its breach and correctly fixed damages.

Turning to the first point, we note that in an 'on completion' lease, such as the present agreement, the question of the application of the rule arises from the fact that the lease term commences upon completion of the building, an event expected to occur in the near future but subject to delay from various contingencies. If the lease were construed to postpone the 'vesting' of the lessee's interest until such commencement of the term, vesting might possibly be delayed longer than 21 years from the execution of the lease, thus purportedly rendering the lease invalid under the rule against perpetuities.

Since 'on completion' leases represent a relatively new commercial development. The question of their validity has been raised, so far as we have found, in only five cases. Tow cases, Haggerty v. City of Oakland (1958) 161 Cal.App.2d 407, 326 P.2d 957, and Southern Airways Co. v. De Kalb County (1960) 101 Ga.App. 689, 115 S.E.2d 207, have held such leases to be in violation of the rule against perpetuities; the latter case, however, was reversed upon the ground that the agreement did not constitute a lease but a management contract. (Southern Airways Co. v. De Kalb County (1960) 216 Ga. 358, 116 S.E.2d 602.) Three cases, Isen v. Giant Food, Inc. (1961) 111 U.S.App.D.C. 149, 295 F.2d 136, City of Santa Cruz v. MacGregor (1960) 178 Cal.App.2d 45, 2 Cal.Rptr. 727, and Halifax v. Vaughn Constr. Co. (Sup.Ct. Nova Scotia, 1957) 9 D.L.R.2d 431, revd. on other ground (Sup.Ct. Nova Scotia, in bank, 1958) 12 D.L.R.2d 159, have upheld such leases but advanced somewhat different reasons for doing so. ²

The rule has been the subject of great debate among scholars and writers; some have suggested basic changes in its application. ³ The rule has also been subjected in some states to sweeping statutory reform. ⁴ As we point out infra, it has been corroded by many exceptions. ⁵ Learned writers have questioned whether the concepts of vested and contingent interests may properly be applied to leases at all. ⁶ The majority have affirmed the legality of 'on completion' leases under the rule. ⁷

Many factors militate against a rigid mechanistic operation of the rule in the present case. Thus in drafting the lease the parties themselves did not anticipate the application of the rule; otherwise they would have avoided its impact by formalistic provision. ⁸ Indeed, the attention of the parties and their attorneys to its possible application was first drawn at the appellate level by the District Court of Appeal. ⁹ A noted authority in this field of law has pointed out that '* * * the esoteric learning of the Rule Against Perpetuities is, apart from dim memories from student days, a monopoly of lawyers who deal in trusts and estates. Those members of the bar who specialize in corporate matters, including commercial leases, are not intimately familiar with it or alerted to its caprices.' (Leach, Perpetuities: New Absurdity, Judicial and Statutory Correctives (1960) 73 Harv.L.Rev. 1318, 1322.) Even in the subject matter of estates this court has recognized the excusable failure of an attorney to comprehend all of its ramifications. ¹⁰

Unless the precedents compel a rigid application of the rule to the instant facts, these considerations proscribe its unexpected operation here. To determine if we must apply the rule to the instant lease, we briefly examine the history of the rule, its pertinence to the general field of commercial transactions involving leaseholds and its specific relevance to the facts of this case.

The rule against perpetuities originated as a rule of property law during the mercantilistic period of English history. Thus the 'celebrated decision which marks the beginning of the modern rule against perpetuities,' The Duke of Norfolk's Case, was decided in 1682. (3 Simes & Smith, The Law of Future Interests (2d ed. 1956) § 1211 at p. 91.) The social order of 1682 demanded as to its property transactions certainty in title and fixation of ownership; the idea of titles which had not vested or ownership which remained inchoate was necessarily anathema. Indeed, the basic purpose of the rule was to limit family dispositions, and in that context the period of lives in being plus 21 years served as a proper measurement. Only later by an overextension of nineteenth century concepts did the courts apply the rule to commercial transactions. (See Leach, Perpetuities: New Absurdity, Judicial and Statutory Correctives (1960) 73 Harv.L.Rev. at p. 1322.)

Rules which bear such birthmarks assume a different aspect when they are applied to contracts or leases in a modern society whose economic structure rests upon plaining for the future and whose life blood is credit. Since the rule against perpetuities was born in a society which extolled the tight ownership of inherited real property, it does not facilely operate as to commercial agreements in today's dynamic economy. 'The period of lives in being and 21 years, which works admirably with regard to gift transactions for family purposes, has no significance in the world of commercial affairs.' (Leach, Perpetuities in a Nutshell 1938) 51 Harv.L.Rev. 638.)

Certainly our function is not to interpret the rule so as to create commercial anomalies. A lease to commence upon completion of the leased building is a common business arrangement. ¹¹ Such a clause is a standard provision of leases in shopping centers, which have been and are being constructed throughout the country; ¹² the parties...