JAMES SMYTH et al., Plaintiffs and Appellants, v. DARYL ANN BERMAN et al., Defendants and Respondents.
B286609
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION TWO
Filed 1/10/19
CERTIFIED FOR PUBLICATION. (Los Angeles County Super. Ct. No. BC628896). APPEAL from an order of the Superior Court of Los Angeles County. Michael P. Linfield and Richard E. Rico, Judges. Affirmed.
Barak Lurie, Michele A. Reikes and Brent A. Kramer for Defendants and Respondents Carmen Santa Maria and Pamela Ann Masters.
Yourist Law Corporation, APC, Bradley J. Yourist and Daniel J. Yourist, for Defendant and Respondent Daryl Ann Berman.
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A tenant rented a building for his audio recording business under several written leases, the most recent of which contained an undefined “right of first refusal to purchase.” After the landlord signed a contract to sell the building to a third party, the tenant submitted an offer to purchase it, but the landlord rejected the offer because the third party‘s offer was for “considerably more money.” The tenant sued the landlord, the landlord‘s real estate agent and the third party. After sustaining demurrers with leave to amend to two complaints, the trial court sustained a demurrer without leave to amend. The tenant now appeals, and in so doing, raises a question of first impression: Does a right of first refusal contained in a written lease expire when that leasehold ends and the tenant becomes a “holdover” tenant, and when the lease specifies “the continuing [holdover] tenancy will be from month to month“? We conclude that a right of first refusal is not an
FACTS AND PROCEDURAL BACKGROUND
I. Facts
A. Commercial leases
Plaintiff James Smyth (Smyth) owns and operates plaintiff Awesome Audio (Awesome), an audio recording company (collectively, plaintiffs). Since the mid-1990‘s, Smyth has leased 5725 Cahuenga Boulevard in North Hollywood (the Property) as Awesome‘s place of business. In 1999, Smyth bought the property next door as his residence. Also, in 1999, defendant Daryl Ann Berman (Berman) bought the Property and has since been plaintiffs’ landlord.
Plaintiffs and Berman signed their most recent written lease on December 2, 2011 (the 2011 Lease). By its terms, the 2011 Lease was set to expire on December 15, 2012, but contained an option to renew the lease for an additional three years. The lease also granted plaintiffs the right to make “alterations and improvements” to the Property and to sublet the Property as long as they obtained Berman‘s consent. The 2011 Lease further provided: “If the Tenant remains in possession after this lease ends, the continuing tenancy will be from month to month.”
In each of the two written leases that are part of the record in this case, Smyth inserted a handwritten term granting him an option to purchase the Property: In a 1999 lease, he wrote in “first option to purchase“; in the 2011 Lease, he wrote in “Right of 1st refusal to purchase.” Both Berman and Smyth initialed the addition to the 2011 Lease.
B. Smyth‘s July 2016 offer to purchase the Property
On June 29, 2016, defendant Carmen Santa Maria (Santa Maria) submitted a written offer to buy the Property from Berman. In that offer, Santa Maria offered to pay $60,000 in cash and to have Berman loan him $440,000 that would be repaid over 10 years with four percent interest. If the loan were repaid over the full 10 year period, Santa Maria would ultimately pay Berman $676,000, but Santa Maria would not be penalized if it elected to repay the loan early (even though it would mean Berman would receive less interest).
Between July 12, 2016 and July 14, 2016, Smyth‘s attorney and Berman exchanged several emails. In an email to Berman, plaintiffs’ attorney
On August 4, 2016, plaintiffs submitted an offer to buy the Property for $505,000, comprised of $101,000 in cash and the balance from a $404,000 loan from a third-party lender.1 In emails sent on August 10, 2016 and August 12, 2016, Berman rejected plaintiffs’ offer, explaining that Santa Maria‘s offer was “higher” and for “considerably more money.”
Berman moved forward with selling the property to Santa Maria and his business partner, defendant Pamela Ann Masters, and they recorded a grant deed and deed of trust on August 19, 2016.
II. Procedural Background
A. Original complaint and First Amended Complaint
1. Complaints
On August 16, 2016, and thus three days before Santa Maria and his partner recorded their grant deed and deed of trust, plaintiffs sued Berman2 for (1) specific performance of the right of first refusal, (2) breach of contract for not honoring the right of first refusal, and (3) intentional misrepresentation and fraud on the ground that Berman never had any “intention of fulfilling the right of first refusal.”
On October 11, 2016, plaintiffs filed their First Amended Complaint (FAC). Plaintiffs added four new defendants—Berman‘s real estate agent, the agent‘s agency, Santa Maria and Santa Maria‘s business partner. Plaintiffs modified the intentional misrepresentation and fraud claim to add an additional allegation—namely, that Berman had lied to Smyth about the cancellation of Santa Maria offer. Plaintiffs also added six new claims: (1) tortious interference with the contractual relations between plaintiffs and Berman (against Berman‘s real estate agent, the agency, Santa Maria and Berman); (2) negligence (against
2. Demurrers to FAC
Santa Maria, his business partner and Berman each separately demurred to the FAC. At the hearing on the demurrer, plaintiffs’ attorney referred to plaintiffs’ tenancy in 2016 as a “holdover tenancy.”
The trial court sustained the demurrer to the FAC with leave to amend. The court observed that all of plaintiffs’ claims “appear to be based upon” the valid exercise of a right of first refusal. The court went on to find that plaintiffs possessed no right to first refusal at the time of their August 2016 offer because (1) plaintiffs were “holdover” tenants by August 2016 because the 2011 Lease—even if extended by three years—had expired on December 16, 2015; and (2) the right of first refusal contained in the 2011 Lease did not carry forward as a term of the “holdover” tenancy under Spaulding v. Yovino-Young (1947) 30 Cal.2d 138 (Spaulding).
B. Second Amended Complaint
1. The complaint
The Second Amended Complaint (SAC) named the same defendants and alleged the same nine claims, but for the first time alleged plaintiffs and Berman had entered into an “oral agreement” in November 2015 “to extend the lease for one year to December 201[6] under the same terms and conditions,” including the term granting plaintiffs a right of first refusal.
2. Demurrers to SAC
Santa Maria and Berman (collectively, defendants) separately demurred to the SAC.
The trial court sustained both demurrers with leave to amend. In ruling on Santa Maria‘s demurrer, the court concluded that plaintiffs’ allegation in the SAC that the 2011 Lease had been renewed through December 2016 was
C. Third Amended Complaint
1. The complaint
The Third Amended Complaint (TAC) named the same defendants and alleged the same nine claims but elaborated on the oral lease extension theory and added a new theory for why the right of first refusal was still valid in August 2016.
With regard to the oral lease extension, plaintiffs in the TAC alleged that (1) the oral lease extension satisfied the statute of frauds because the extension was confirmed in a letter by Smyth in December 2015 as well as in other “numerous writings [and] confirmations by Berman,” which were sufficient because the parties had an “established practice, custom and conduct to have one person memorialize their discussions in writing,” (2) Berman was estopped from alleging the statute of frauds because plaintiffs had suffered detriment as a result of the oral lease extension because they stayed on as tenants, because they had made improvements to the Property, and because Smyth had purchased the property next door, and (3) plaintiffs had a valid explanation for alleging the oral lease extension rather than a holdover tenancy in the SAC—namely, that Smyth had at some point after filing the FAC “located documentary evidence” of the oral lease extension. Plaintiffs attached a December 2015 letter from Smyth as an exhibit.
For the first time, plaintiffs alleged that Smyth and Berman had, by virtue of the July 2016 email exchange between Smyth‘s lawyer and Berman, entered into a “separately enforceable” contract to grant plaintiffs a right of first refusal on the Property. Plaintiffs alleged that the consideration for this new contract was Smyth‘s expenditure of “time, energy and money to develop and submit” his August 2016 offer as well as Berman‘s receipt of Smyth‘s better offer.
Santa Maria and Berman separately demurred to the TAC.
The trial court sustained both demurrers without leave to amend. The court ruled that a right of first refusal did not exist in August 2016 by virtue of an oral extension of the 2011 Lease because (1) such an oral extension was still invalid under the statute of frauds because the December 2015 letter signed by Smyth did not satisfy the statute of frauds‘s requirement of a writing “signed by Berman or her agent” and because the other, unspecific writings did not reference any right of first refusal, and (2) Berman was not estopped from asserting the statute of frauds as a defense because none of the actions plaintiffs alleged as detrimental reliance—paying rent, making improvements or buying the property next door—happened “after or because of the alleged December 2015 [oral] extension.” The court also ruled that a right of first refusal did not exist in August 2016 by virtue of any July 2016 contract. Specifically, the court concluded that plaintiffs had not detrimentally relied upon any such promise by Berman because (1) plaintiffs had started their efforts to make a counter-offer long before the alleged July 2016 promise, and (2) they had not changed their position by foregoing any legal remedies (as evidenced by the currently pending lawsuit). Because this was plaintiffs’ “fourth attempt to plead a valid complaint” and because they had not articulated how a fifth attempt might succeed, the court denied leave to amend.
D. Judgment and appeal
After the trial court entered a judgment of dismissal, plaintiffs filed a timely notice of appeal.
DISCUSSION
Plaintiffs challenge the dismissal of the TAC on demurrer. “In reviewing a trial court‘s order sustaining a demurrer without leave to amend, we must ask (1) whether the demurrer was properly sustained, and (2) whether leave to amend was properly denied.” (Schep v. Capital One, N.A. (2017) 12 Cal.App.5th 1331, 1335 (Schep).) The first question requires us to independently examine “‘whether [the complaint] alleges facts sufficient to state a cause of action.“’ (Lee v. Hanley (2015) 61 Cal.4th 1225, 1230; Centinela Freeman Emergency Medical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994, 1010.) In so doing, we accept as true “all material facts properly pled” in the operative complaint. (Winn v. Pioneer Medical Group, Inc. (2016) 63 Cal.4th 148, 152.) We
The TAC alleges nine causes of action, and the eight of them at issue in this appeal ultimately turn on whether plaintiffs possessed an operative right of first refusal in August of 2016.4
The breach of contract, specific performance and tortious interference with a contractual relation causes of action each allege that Berman did not honor the right of first refusal, which necessarily presupposes its validity at that time. (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821 [breach of contract claim requires a valid contract and breach thereof]; Darbun Enterprises, Inc. v. San Fernando Community Hospital (2015) 239 Cal.App.4th 399, 409 [“specific performance” requires, among other things, proof of “the elements of a standard breach of contract“]; Pacific Gas & Electric Co. v. Bear Sterns & Co. (1990) 50 Cal.3d 1118, 1126 [tortious interference tort requires, among other things, proof of a “valid contract between plaintiff and a third party“].) Contrary to what plaintiffs allege, the intentional misrepresentation / fraud cause of action alleges that Berman never had the “intention of fulfilling the right of first refusal” and, relatedly, that Berman falsely reported that she had canceled Santa Maria‘s offer to spend time exercising that right, which necessarily presupposes the validity of that right (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 [intentional misrepresentation requires proof of a “false representation, concealment, or nondisclosure“]), and the cancellation of instruments cause of action similarly alleges that Santa Maria‘s grant deed and deed of trust are void or voidable due to such intentional misrepresentation and fraud, and thus similarly turns on the validity of the right of first refusal (U.S. Bank National Assn. v. Naifeh (2015) 1 Cal.App.5th 767, 778 [cancellation of instrument requires, among other things, proof that “the instrument is void or voidable due to, for example, fraud“]). The quiet title cause of action alleges that Berman‘s sale of the Property to Santa Maria and his business partner is invalid because Berman did not honor the right of first refusal (
In the FAC, SAC and operative TAC, plaintiffs have alleged three theories under which they had a valid right of first refusal in August 2016: (1) as holdover tenants after the 2011 Lease expired; (2) pursuant to an oral extension of the 2011 Lease; and (3) pursuant to a separate, July 2016 contract that granted them a right of first refusal. We will examine each.
I. Right of First Refusal Under A Holdover Tenancy
When a lease expires but the tenant remains in possession, the “relationship” of the landlord and tenant “changes.” (Schmitt v. Felix (1958) 157 Cal.App.2d 642, 647 (Schmitt).) The “lessor-lessee relationship” based on “‘privity of contract‘” ends, and a new “landlord“-“tenant” relationship based on “‘privity of estate‘” springs into being by the operation of law. (Id.;
We conclude that the answer is “no,” and do so for two reasons.
First, the only terms from the expired lease that are presumed to carry forward into a holdover tenancy are the “essential” terms of that lease (Spaulding, supra, 30 Cal.2d at p. 141)—that is, the “term[s] or condition[s] of the demise” such as the “‘amount and time of payment of rent‘” (ibid.; Shenson v. Shenson (1954) 124 Cal.App.2d 747, 753). In Spaulding, supra, 30 Cal.2d at p. 141, our Supreme Court held that an option to purchase property set forth in a lease was a “separate and distinct right[] and power[]” that was not an “essential covenant” of that lease, and thus presumptively did not carry forward into a holdover tenancy. Spaulding‘s logic applies with equal force to a right of first refusal. That is because a right of first refusal is a species of option to purchase: It is a conditional option that entitles the holder, if the seller decides to sell property and has obtained
Second, a rule presuming that rights of first refusal do not carry forward into holdover tenancies furthers the public policy favoring the stability of commercial tenancies. Holdover tenancies exist to ensure stability because they are a mechanism by which tenants may remain in possession without disruption, albeit typically only on a month to month basis. (
Plaintiffs make what boil down to three categories of arguments in favor of their position that rights of first refusal should automatically carry forward into holdover tenancies.
First, plaintiffs urge us to follow the precedent of several states holding that rights of first refusal (or other purchase options) presumptively carry
Second, plaintiffs contend that a right of first refusal is different from a purchase option, so Spaulding‘s presumptive rule against carrying forward the latter into a holdover tenancy should not extend to the former. A presumption against carrying forward options to purchase makes sense, as Spaulding itself noted, because such options obligate a landowner to accept an offer at a fixed price, and it is reasonable to presume that the parties did not intend such an offer to continue “indefinite[ly]” under a holdover tenancy. (Spaulding, supra, 30 Cal.2d at pp. 143-144.) Rights of first refusal, by contrast, obligate a landowner to accept an offer only after it has decided to sell and only if the right holder‘s offer meets or exceeds a competing offer; thus, plaintiffs reason, rights of first refusal—unlike options to purchase—do
Third, plaintiffs argue that Spaulding‘s presumption may be rebutted by proof of the parties’ contrary intent, and that intent is typically a question of fact that should not be resolved on a demurrer. Although intent is often a factual issue that can render summary judgment inappropriate (Alexander v. Codemasters Group Limited (2002) 104 Cal.App.4th 129, 147, disapproved on another ground in Reid v. Google, Inc., (2010) 50 Cal.4th 512, 524), here we are assessing the sufficiency of the allegations in the operative complaint as well as the documents attached thereto, and those sources point to one conclusion: Plaintiffs and Berman did not intend to make the right of first refusal a term of any holdover tenancy. (Accord, Hoffman v. 162 North Wolfe, LLC (2014) 228 Cal.App.4th 1178, 1194 (Hoffman) [noting that factual issue of reliance “‘may be decided as a matter of law if reasonable minds can only come to only one conclusion based on the facts.’ [Citation.]“].)
II. Right of First Refusal Under Oral Extension of the 2011 Lease
When a plaintiff files an amended complaint, it may not “omit harmful allegations . . . from previous complaints.” (Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425-426; Womack v. Lovell (2015) 237 Cal.App.4th 772, 787); Hendy v. Losse (1991) 54 Cal.3d 723, 742-743 (Hendy); Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1189 fn. 1 (Aryeh).) Unless the plaintiff provides a “plausible” explanation for dropping the harmful allegations (such as the need to correct a mistaken allegation or to clarify ambiguous facts), the trial court will take judicial notice of the harmful allegations and disregard the new and contrary allegations. (Owens v. Kings Supermarket (1988) 198 Cal.App.3d 379, 383-384.) This is known as the “sham pleading” doctrine and prevents the abuse of process that would arise if parties could circumvent prior adverse rulings by pleading the underlying facts in the alternative.
Plaintiffs’ allegations in the SAC and TAC that the 2011 Lease (and, specifically, its right of first refusal) was still in effect in 2016 by virtue of an oral extension of that lease in December 2015 is invalid under the “sham pleading” doctrine. That allegation is factually inconsistent with plaintiffs’ prior allegation, in the original complaint and FAC, that their lease with Berman ended in 2015 upon expiration of the three-year extension contained in the 2011 Lease. Because plaintiffs alternatively alleged no extension and then an extension, they changed the facts. (Accord, Schmit, supra, 157 Cal.App.2d at p. 647 [holding that a holdover tenancy is fundamentally different from a tenancy based on a lease].) What is more, plaintiffs’ explanation for why they changed the facts is not plausible. Plaintiffs allege that they did not initially allege the oral lease extension because they did not “locate[] documentary evidence” of that extension until after the FAC was filed. But this is not plausible: Smyth alleges that he was a party to the oral lease extension, which means he was present when it was created; he would accordingly know about the extension whether or not he later found a document memorializing it.
Plaintiffs offer three reasons why their oral lease allegation is not a sham pleading.
First, they argue that the trial court did not rely on the sham pleading doctrine in sustaining the demurrer to the TAC. This is true, but beside the point because the issue was raised below (and again on appeal), and we may affirm on any ground supported by the record. (Stowe v. Fritzie Hotels, Inc. (1955) 44 Cal.2d 416, 424-425.)
Second, plaintiffs assert that the FAC did not use the phrase “holdover tenancy,” so there is no inconsistency between the FAC and later complaints. Plaintiffs’ subsequent use of the phrase “holdover tenancy” to describe the FAC‘s allegation at the hearing on the demurrer to the FAC, they continue, does not retroactively insert that phrase into the FAC. Even if we looked solely to what is alleged in the FAC, the FAC alleges a tenancy that ends in December 2015; this by definition renders plaintiffs’ tenancy in 2016 a “holdover tenancy.” Thus, plaintiffs’ argument at the demurrer hearing did not add a new allegation to the FAC; it just accurately summarized the allegations that were already there.
Third, plaintiffs contend that any contrary allegations in the TAC cannot fall under the “sham pleading” doctrine because the trial court granted them leave to amend the SAC. We reject this argument. The grant of a leave to
Because we conclude that plaintiffs’ oral extension theory is barred by the “sham pleading” doctrine, we have no occasion to examine the trial court‘s alternative grounds for dismissing this theory.
III. Right of First Refusal in a Separate, July 2016 Contract
The statute of frauds provides that any agreement for “the sale of real property, or of an interest therein” is invalid unless it is “in writing and subscribed to by the party to be charged.” (
The allegations set forth in the TAC do not satisfy these requirements. The TAC alleges that the July 2016 contract is documented in the exchange of four emails between Smyth‘s attorney and Berman. Although Smyth‘s attorney in her first email states that Berman has agreed to give Smyth a “right of first refusal,” Berman responded by saying she “requested that [her real estate agent] respond with the contracts and other requests,” and responded to further emails by saying she had “retained council [sic].” Berman‘s equivocal and non-confirmatory responses do not “show[]” that plaintiffs’ counsel and Berman “made a contract” or set forth the “essential contract terms with reasonable certainty.” (Sterling, supra, 40 Cal.4th at p. 766.)
Plaintiffs respond with three arguments.
First, plaintiffs assert that the email exchange, despite its sparsity, constitutes a writing sufficient to satisfy the statute of frauds because the emails reflect what was “understood by the parties” in the broader context of their
Second, plaintiffs contend that Berman should be estopped from asserting the statute of frauds as a defense. A party may be estopped from asserting the statute of frauds as a defense to a contract in order to “prevent fraud that would result from refusal to enforce [an] oral contract[].” (Monarco v. Lo Greco (1950) 35 Cal.2d 621, 623-624 (Monarco); Notten v. Mensing (1935) 3 Cal.2d 469, 474.) Before estoppel applies, the party so pleading must allege that refusal to enforce the oral contract will result in (1) “unconscionable injury” because the party pleading estoppel “seriously . . . change[d] its position in reliance on the [oral] contract,” or (2) the “unjust enrichment” of the party pleading the statute of frauds as a defense because that party “receiv[ed] the benefits of the other‘s performance.” (Monarco, at pp. 623-624; Tenzer v. Superscope (1985) 39 Cal.3d 18, 27; Allied Grape Growers v. Bronco Wine Co. (1988) 203 Cal.App.3d 432, 444.)
The allegations contained in the TAC do not satisfy either prong of this estoppel doctrine. Plaintiffs allege that they “seriously changed their position” because they spent time working up the offer they made in August 2016; performed their part of the agreement by making the August 2016 offer; for many years paid rent, modified and improved the Property, and bought the property next door; and ultimately lost the opportunity to make an offer on the Property. None of these allegations constitutes a “serious change in position.” The time and money plaintiffs spent working up the offer in August 2016 does not qualify because “‘the payment of money is not ‘‘sufficient part performance to take an oral agreement out of the statute of frauds“‘” (Oren Realty & Development Co. v. Superior Court (1979) 91 Cal.App.3d 229, 235, quoting Anderson v. Stansbury (1952) 38 Cal.2d 707, 716). Because the payment of money is not sufficient to constitute part performance, neither is plaintiffs’ offer to pay money to
Finally, plaintiffs make the final argument that questions of reliance are factual in nature and thus should not be decided as a matter of law on a demurrer. This argument overlooks that even factual issues may be resolved short of a trial where, as here, they fail as a matter of law. (Hoffman, supra, 228 Cal.App.4th at p. 1194.)
In light of our conclusion that the alleged July 2016 contract is invalid for noncompliance with the statute of frauds, we have no occasion to consider defendants’ further arguments that this contract fails for lack of consideration (or plaintiffs’ responsive argument that promissory estoppel supplies the requisite consideration) or to consider defendants’ argument that the contract was never breached.
DISPOSITION
The judgment of dismissal is affirmed. Defendants are entitled to their costs on appeal.
CERTIFIED FOR PUBLICATION.
______________________, J.
HOFFSTADT
We concur:
_________________________, P. J.
LUI
_________________________, J.
CHAVEZ