THE CALIFORNIA COURT OF APPEAL ESTABLISHED THAT ONLY THAT PORTION OF A LEASE TERM THAT EXCEEDS 99 YEARS IS VOID UNDER CIVIL CODE §718 WHICH STATES: “NO LEASE . . . WHICH PROVIDES FOR A LEASING . . . PERIOD IN EXCESS OF 99 YEARS, SHALL BE VALID.”
Tufeld Corporation v. Beverly Hills Gateway L.P (2022) B314862 (Second Appellate District, Fifth Division),involved a commercial landlord-tenant dispute. Plaintiff, cross-defendant, and appellant Tufeld Corporation (“Tufeld”) was the landlord. Defendant, cross-complainant, and cross-appellant Beverly Hills Gateway L.P. (“BHG”) was the tenant. In 1960, Tufeld rented its family-owned commercial real estate property – in Beverly Hills, California – to two original tenants.
On October 28, 2003, BHG purchased the lease from the original tenants and became the new tenant of the property. On May 24, 2007, BHG and Tufeld executed an amendment to the lease, extending the lease term to December 31, 2123. In January 2018, Tufeld learned that the lease, as amended, which had a term greater than 99 years, contravened Civil Code section 718 which states: “No lease or grant of any town or city lot, which reserves any rent or service of any kind, and which provides for a leasing or granting period in excess of 99 years, shall be valid.” Tufeld filed a complaint for declaratory relief and quiet title against BHG, demanding a cancellation of the ground lease or the 2007 lease amendment. Subsequently, BHG filed a cross-complaint for declaratory relief, unjust enrichment, and reformation. BHG sought a declaratory judgment finding that section 718 does not affect the ground lease, a declaration that the ground lease was valid for a period of 99 years commencing in 2003, and restitution of sums by which Tufeld was unjustly compensated.
A central issue was whether the lease was void or voidable. Interestingly, Civil Code §718 does not address the question of whether a lease term that violates the statute is void or voidable. Instead, it states that no lease with a term in access of 99 years “shall be valid,” which is not synonymous with “void.” The court found that the lease was not malum in se (inherently immoral, which would make it void) but was malum prohibitum, meaning illegal by statute (thereby potentially making it either void or voidable). The court of appeal held, however, that the lease to the “extent the lease term” was “longer than 99 years,” was void, not voidable, because it contravened the public policy underlying section 718.
The second issue was whether the 2003 assignment was a novation that reset the 99-year limit. A novation is a “new contract which supplants the original agreement and completely extinguishes the original obligation.” Tufeld argued the 2003 assignment did not result in a novation and, if it did, the 99-year limit did not start anew. The court rejected Tufeld’s argument and held that the 2003 assignment was a novation since it expressly provided that “upon such assignment or transfer, the liabilities and other obligations under this lease of the assignor who shall have so assigned shall cease and terminate to the extent not theretofore accrued or incurred.” The court held that the 2003 novation did not change the date the lease expired, it reset the 99 year limit of section 718 and section 718 limited the term to 2102.
The third issue was whether the 2007 lease amendment invalidated the lease entirely or only that portion that extended beyond the 99 year limitation of Civil Code §718. Under the 2007 amendment, the lease term was extended to December 31, 2123, which is beyond the 2102 limit set by Civil Code §718. Tufeld argued the entire lease, as amended, was void because it was an unlawful contract, stating “if the central purpose of the contract is tainted with illegality then the contract as a whole cannot be enforced.” The court, however, disagreed with this argument because the central purpose of the lease was to rent the property. Its invalid extension beyond 99 years was collateral to that purpose and did not taint the entire contract. The court of appeal held that the trial court correctly ruled that only the lease period that exceeded 99 years was void.
The fourth and final issue was whether restitution should be awarded to BHG for unjustly compensating Tufeld for the portion of the lease extension found to be void. Pursuant to the 2007 lease amendment, the lease was extended 65 years to 2123, for which Tufeld was paid $1.5 million. The Court of Appeal held that the trial court correctly found that the lease term must end in 2102 and that BHG was entitled to restitution in the amount of $484,615. “Tufeld was unjustly enriched as a result of the reduction of the lease term by 21 years.” Damages were properly calculated by multiplying the $1.5 million Tufeld received by the proportion of the term extension deemed void (21/65).
This article was written by Max Nemoy.
Simantob Law Group is a law firm of business attorneys and real estate lawyers. We have represented the business and real estate legal needs of individuals and companies, from start-ups to regional and national US corporations for over 20 years. Please contact us at 310.281.0041 or complete our online contact form to discuss covenants not to compete or other legal issues or legal documentation needs.
