Commercial Leases in California

March 12, 2014

A typical commercial lease in California requires a commercial tenant to maintain and repair the leased property and not commit "waste." For legal purposes, waste is defined as permanent harm done to real property by a person or persons in legal possession of that property, such that the property's value is diminished. If the tenant breaches the maintenance requirement, the landlord may provide a notice of default. If the tenant does not cure the breach, the landlord may terminate the lease and sue to recover the cost of repairs for damage to the property. But, what happens if the tenant does not cure the breach, and the landlord does not terminate the lease or the lease has not expired? Can the landlord sue to collect the cost of repairs for damage to the property? A recent decision by the California Court of Appeals for the Fourth District answers this question.

In Avalon Pacific-Santa Ana v. HD Supply Repair & Remodel, 192 Cal. App. 4th 1183 (2011), the Appeals Court held that a commercial landlord could not recover from a tenant the cost of repairs for damages where the parties continued to perform under their lease agreement, which had neither expired nor been terminated. The facts of the case are instructive.

HD Supply Repair & Remodel leased vacant warehouse and office space from Avalon Pacific-Santa Ana, intending to convert the space into a retail facility. The 10-year lease was set to expire in 2017, but included an option to extend. After demolishing the office space, HD Supply stopped renovations because of the economic downturn. HD Supply unsuccessfully attempted to sublease the property. The property eventually fell into disrepair, was vandalized, burglarized, and became home to vagrants. Avalon sued HD Supply for breach of the maintenance and repair obligations of the lease and for waste; however, Avalon never terminated the lease and HD Supply continued to pay rent of $50,000 per month. The case proceeded to trial, where a jury found in favor of Avalon, awarding $677,000 in damages for breach of the lease and $561,000 in damages for waste.

The Appeals Court reversed, ruling that under California Civil Code Section 1951.2(a), a landlord may not recover the cost of repair damages for breach of a lease where the lease has neither expired nor been terminated. In this case, a landlord is limited to damages for the amount of injury to its reversion interest, evidence of which must be presented at trial (Avalon failed to present his evidence). Of particular interest, the Court noted that it was entirely possible HD Supply would make the repairs by the time the lease expired in 2017. In this case, the Court found that the lease had not been abandoned as Avalon claimed because (1) Avalon had not terminated the lease, (2) the lease had not expired, and (3) HD Supply continued to make monthly rent payments.

It is important for commercial landlords and tenants to understand their rights and obligations following the Avalon decision. The Law Office of Kristina M. Reed can help. We represent individuals and business in a wide range of real estate matters. Whether handling a litigation matter or negotiating and closing a transaction, Kristina Reed routinely represents both buyers and sellers, agents/brokers, and landlords or tenants. If you have a real estate issue and feel you may need legal help, please contact our office.