Case Name: D.E. Restaurants, Inc. v. The City of Santa Clara, et al.
Case No.: 2015-1-CV-275606

Currently before the Court is the demurrer of defendants City of Santa Clara (the “City”), the Redevelopment Agency of the City of Santa Clara (the “Agency”), and the Sports and Open Space Authority of the City of Santa Clara (“SOSA”) (collectively, “Defendants”) to the first amended complaint (“FAC”) of plaintiff D.E. Restaurants, Inc. (“Plaintiff”).

I. Factual and Procedural Background

On January 14, 2015, Plaintiff filed its complaint against Defendants, asserting two causes of action for breach of a lease agreement and declaratory relief.

Defendants demurred to each cause of action in the complaint on December 11, 2015. On February 4, 2016, the City and Agency’s demurrer was sustained as to both causes of action. In addition, SOSA’s demurrer was sustained as to the first cause of action for breach of the lease agreement and overruled as to the second cause of action for declaratory relief.

On February 26, 2016, Plaintiff filed the operative FAC, asserting three causes of action for (1) breach of a lease agreement; (2) breach of the implied covenant of quiet enjoyment and possession; and (3) declaratory relief.

In the FAC, Plaintiff alleges the following: In September 1986, SOSA and Plaintiff entered into a written lease agreement for the Santa Clara Golf and Tennis Club Restaurant (the “Restaurant Lease”). (FAC, ¶ 8.) SOSA, in turn, leased the property on which the restaurant is located from the City and the Agency. (FAC, ¶ 9.) The parties amended the Restaurant Lease to include two five-year lease options, the timely exercise of which could extend the lease from May 1, 2007 through April 30, 2012 and May 1, 2012 through April 30, 2017. (FAC, ¶ 12.) The written amendments provide that the minimum rent due from Plaintiff to Defendants would be $4,500 per month for the option period of May 1, 2007 through April 30, 2012 and $5,000 per month for the option period of May 1, 2012 through April 30, 2017. (FAC, ¶ 12.) Under the Restaurant Lease and its amendments, Plaintiff was also required to pay Defendants “certain percentages of gross revenue resulting from the operation of the restaurant each month.” (FAC, ¶ 12.)

In July 1999, the City and non-party D.E. II Restaurants, Inc. entered into a written lease agreement for the Santa Clara Banquet and Meeting Facility (the “Banquet Lease”) adjacent to the restaurant. (FAC, ¶ 16.)

In January 2012, Plaintiff provided SOSA with written notice of its intent to exercise the second lease option for the five-year term from May 1, 2012 through April 30, 2017. (FAC, ¶ 18.) Five months later, on May 8, 2012, David Ebrahimi (“Ebrahimi”), acting on behalf of Plaintiff, met with Assistant Santa Clara City Manager, Alan Kurotori, to discuss extending the Restaurant Lease option to coincide with the initial term of the Banquet Lease. (FAC, ¶ 19.) At that meeting, Mr. Kurotori informed Ebrahimi that Plaintiff’s written exercise of the Restaurant Lease was untimely. (FAC, ¶ 19.) “Mr. Kurotori, however, advised … Ebrahimi that Defendants were aware that the notice of intent to exercise the option was untimely, but the notice had been accepted and approved by and would be honored by Defendants.” (FAC, ¶ 19.) This agreement to accept the exercise of the option is consistent with section 46 of the Restaurant Lease, which provides that SOSA “shall have the right to grant reasonable extensions of time to Lessee for any purpose or for the performance of any obligation of Lessee hereunder.” (FAC, ¶20.) In reliance on Mr. Kurotori’s statement, Plaintiff continued to book future events at the restaurant and invest in the labor and materials required to sustain long-term restaurant operations. (FAC, ¶ 20.) On June 14, 2012, Plaintiff received a letter from Mr. Kurotori, in which Defendants changed their position, claiming that the untimely exercise of the option terminated the Restaurant Lease and created a holdover month-to-month tenancy. (FAC, ¶ 22.)

On April 1, 2016, Defendants filed the instant demurrer to the FAC. Plaintiff filed its opposition on April 22, 2016. On April 29, 2016, Defendants filed their reply.

II. Request for Judicial Notice

In support of their demurrer, Defendants ask the Court to take judicial notice of the Santa Clara City Code, SOSA meeting minutes, the Restaurant Lease and its amendments, several SOSA resolutions, and the Court’s order re: demurrer to the complaint.

The request for judicial notice is GRANTED. (See Evid. Code, § 452, subds. (b) [stating that a court may take judicial notice of regulations and legislative enactments issued by or under the authority of any public entity], (c) [stating that a court may take judicial notice of the official acts of the executive department of any state], (d) [stating that a court may take judicial notice of court records]; City of Monterey v. Carrnshimba (2013) 215 Cal.App.4th 1068, 1077 [taking judicial notice of provisions of a City Code]; Evans v. City of Berkeley (2006) 38 Cal.4th 1, 9, fn. 5 [taking judicial notice of public meeting minutes]; Warmington Old Town Associates, L.P. v. Tustin Unified School Dist. (2002) 101 Cal.App.4th 840, 858, fn. 3 [taking judicial notice of school district resolution]; H. Morrill Co. v. State (1967) 65 Cal.2d 787, 794-795 [stating that trial courts may take judicial notice of the official acts of public entities, including the provisions of public contracts]; Mendez v. Pacific Gas & Electric Co. (1953) 115 Cal.App.2d 192, 195 [same]; Clack v. State, Dept. of Public Works, Division of Highways (1969) 275 Cal.App.2d 743, 746 [finding the court could take judicial notice of provisions of a highway contract]; People ex rel. Lungren v. Community Redevelopment Agency (1997) 56 Cal.App.4th 868, 871, fn. 2 [taking judicial notice of the provisions of a municipal contract].)

III. Discussion
Defendants demur to each cause of action in the FAC on the ground of failure to state sufficient facts to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

A. First Cause of Action for Breach of Contract

1. The City and Agency’s Demurrer

The City and the Agency contend that the demurrer to the first cause of action for breach of contract should be sustained because they are not signatories to the Restaurant Lease. (See Clemens v. American Warranty Corp. (1987) 193 Cal.App.3d 444, 452 [stating that “[u]nder California law, only a signatory to a contract may be liable for any breach”].)

In opposition, Plaintiff first argues that Defendants should be considered the same entity because the City may exercise any powers granted to SOSA and declare itself to be SOSA. (See Santa Clara City Code, §§ 16.20.060, 16.20.220.) This argument lacks merit because Plaintiff does not allege that the City actually exercised the powers of SOSA or declared itself to be SOSA. As such, Plaintiff fails to demonstrate that the City and Agency are liable for the alleged breach of contract on this basis.

Next, Plaintiff asserts that Defendants should be considered the same entities because they share governing members. This argument is not well-taken because “[w]ell-established and well-recognized case law holds that the mere fact that the same body of officers acts as the legislative body of two different governmental entities does not mean that the two different governmental entities are, in actuality, one and the same.”
(Macy v. City of Fontana (2016) 244 Cal.App.4th 1421, 1429-1430.)

Finally, Plaintiff contends that the City is liable for SOSA’s breach of contract because the Restaurant Lease states that the City “to the extent it may hereafter hold any possessory interest in the Restaurant, hereby agrees to be bound by the terms and conditions of Section 5 of this Agreement.” While this provision indicates that City could be liable for the breach of Section 5 of the Restaurant Lease, it is unclear how the City’s agreement to the is provision renders it liable for SOSA’s breach of another contractual provision, namely, Section 4 of the Restaurant Lease concerning Plaintiff’s right to extend the lease.

In light of the foregoing, Plaintiff fails to state sufficient facts to constitute a cause of action for breach of contract against the City and the Agency. Since Plaintiff provides no indication in its opposing papers, nor is it readily apparent, how the foregoing deficiency can be remedied by amendment, the demurrer to the first cause of action is SUSTAINED WITHOUT LEAVE TO AMEND. (See Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 [stating that the burden is on the plaintiff to establish he or she can amend the pleading and how such an amendment changes the legal effect of pleading].)

2. SOSA’s Demurrer

SOSA contends that the first cause of action for breach of contract fails because Plaintiff did not timely exercise its option under the Restaurant Lease. (See Careau & Co. v. Sec. Pac. Bus. Credit, Inc. (1990) 222 Cal.App.3d 1371, 1389-1390 [stating that a plaintiff must allege performance of its obligations under the contract to state a cause of action for breach of contract].) In this respect, the Restaurant Lease provides the following: “Lessee’s right to renew the initial lease for the additional five year period allowed under the Agreement is subject to the following conditions: [¶] … Lessee shall give written notice to Lessor of its intent to renew the lease for the additional five year period on or before the date which is one hundred eighty (180) days prior to the end of the initial five year term of the lease….” (Request for Judicial Notice, Ex. C, p. 2.) Here, Plaintiff alleges that the first option period ended on April 30, 2012. (FAC., ¶ 12.) As such, Plaintiff was required to give written notice of its intent to renew the Restaurant Lease on or before November 2, 2011. Since Plaintiff alleges that it did not provide such notice until January 2012, the complaint fails to allege that it performed its obligations under the Restaurant Lease.

In opposition, Plaintiff first argues that Mr. Kurotori agreed to extend the time to exercise the option under Section 46 of the Restaurant Lease, which provides that SOSA “shall have the right to grant reasonable extensions of time to Lessee for any purpose or for the performance of any obligation of Lessee hereunder.” Plaintiff’s argument is not well-taken. According to its terms, the Restaurant Lease was terminated on April 30, 2012 since no timely notice of renewal was provided. (FAC, ¶ 12.) “[W]hen a contract specifies the period of its duration, it terminates on the expiration of such period.” (Beatty Safway Scaffold, Inc. v. Skrable (1960) 180 Cal.App.2d 650, 654.) A termination of a contract “abrogate[s] so much of it as remains unperformed, doing away with an existing agreement upon the terms and with the consequences mentioned in the writing.” (Sanborn v. Ballanfonte (1929) 98 Cal.App. 482, 488; see also Grant v. Aerodraulics Co. (1949) 91 Cal.App.2d 68, 75 [same].) Since the Restaurant Lease was terminated as of April 30, 2012, section 46 of the Restaurant Lease was no longer enforceable. As such, Mr. Kurotori could not have granted Plaintiff a reasonable extension of time pursuant to this provision. Accordingly, Plaintiff fails to demonstrate that it complied with its obligations under the Restaurant Lease on this basis.

Next, Plaintiff argues that SOSA should be equitably estopped from asserting that it did not timely exercise the Restaurant Lease option because Mr. Kurotori subsequently advised Plaintiff that the exercise of the option was accepted and Plaintiff relied on this representation to its detriment. (FAC, ¶ 20.) “The doctrine of equitable estoppel is based on the theory that a party who by his declarations or conduct misleads another to his prejudice should be estopped from obtaining the benefits of his misconduct. The required elements for an equitable estoppel are: (1) the party to be estopped must be apprised of the facts; (2) the party to be estopped must intend his or her conduct shall be acted upon, or must so act that the party asserting the estoppel had a right to believe it was so intended; (3) the other party must be ignorant of the true state of facts; and (4) the other party must rely upon the conduct to his or her injury. It is well settled that the estoppel doctrine is applicable to government entities where justice and right require it. Correlative to this general rule, however, is the well-established proposition that an estoppel will not be applied against the government if to do so would effectively nullify a strong rule of policy, adopted for the benefits of the public.” (Cotta v. City and County of San Francisco (2007) 157 Cal.App.4th 1550, 1567, internal citations omitted; see also Schafer v. City of Los Angeles (2015) 237 Cal.App.4th 1250, 1262 [stating that estoppel “ordinarily will not apply against a governmental body except in unusual instances when necessary to avoid grave injustice and when the result will not defeat a strong public policy”].) When asserting equitable estoppel against a public entity, the plaintiff must allege facts establishing the exceptional circumstances necessary to justify the application of estoppel against a public entity. (Poway Royal Mobilehome Owners Ass’n v. City of Poway (2007) 149 Cal.App.4th 1460, 1471.) Here, the FAC does not allege any facts indicating the grave injustice Plaintiff would suffer in the absence of the application of equitable estoppel. As such, the FAC fails to state sufficient facts to establish a claim for breach of contract based on equitable estoppel.

Finally, Plaintiff contends that SOSA waived its right to declare the exercise of the option untimely. “[W]aiver is the intentional relinquishment or abandonment of a known right or privilege.” (Smith v. Selma Community Hosp. (2008) 164 Cal.App.4th 1478, 1506.) “To be valid a waiver must be a clear expression made with a full knowledge of the facts and an intent to waive the right.” (White Point Co. v. Herrington (1968) 268 Cal.App.2d 458, 468-469.) Here, the FAC states facts indicating that Mr. Kurotori, acting as SOSA’s agent, was fully aware that Plaintiff’s notice of intent to exercise the option was untimely and intended to waive SOSA’s right to timely notice. (FAC, ¶ 19.) Accordingly, Plaintiff adequately alleges that it performed all of its obligations under the Restaurant Lease except for those obligations SOSA waived. (See Careau & Co., supra, 222 Cal.App.3d at pp. 1389-1390.)

In reply, SOSA asserts that Plaintiff cannot establish a claim for breach of contract based on the alleged waiver as a matter of public policy. However, the only legal authority it provides in support of this argument concerns the application of equitable estoppel to a public entity. While the doctrines of waiver and estoppel are similar, “[t]hey are two distinct and different doctrines that rest upon different legal principles.” (DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd. (1994) 30 Cal.App.4th 54, 59.) In addition, there is no indication that general legal principles concerning equitable estoppel apply to the doctrine of waiver, and SOSA fails to produce any authority to that effect. (See Davies v. Grossmont Union High School Dist. (9th Cir. 1991) 930 F.2d 1390, 1395 [indicating that waiver could apply to a public entity under California law].) Accordingly, SOSA fails to demonstrate that a claim for breach of contract based on an alleged waive is barred as a matter of law.
In light of the foregoing, Plaintiff alleges sufficient facts to constitute a cause of action for breach of contract based on waiver against SOSA. Therefore, the demurrer to the first cause of action is OVERRULED.

B. Second Cause of Action for Breach of the Implied Covenant of Quiet
Enjoyment and Possession

The City and the Agency argue that the second cause of action for breach of the implied covenant of quiet enjoyment and possession fails because a sublessee may not generally sue the lessor for breach of this covenant. In opposition, Plaintiff argues that it may sue these entities for breach of the covenant as a third party beneficiary of the lease agreements between the City, the Agency, and SOSA. This argument is well-taken. In Marchese v. Standard Realty & Dev. Co. (1977) 74 Cal.App.3d 142, 147, the Court of Appeal explained that generally a sublessee may not sue the lessor for breach of the covenant because “as between an original lessor and a sublessee, there is no privity of contract.” However, “if a lessor has expressly agreed to a sublease, the sublessee is a third party beneficiary to the implied covenant of quiet enjoyment in the original lease and has the right to go directly against the lessor for its breach” because “[i]f a lessor has agreed to a sublease, it can only be concluded that he intended to allow the sublessee to peacefully occupy the property.” (Ibid.) Here, the FAC states that the City and the Agency expressly agreed to the sublease at issue, i.e., the Restaurant Lease, in two lease agreements executed between the City, the Agency, and SOSA concerning the subject property. (FAC, ¶ 31.) Accordingly, the City and Agency fail to demonstrate that the second cause of action is subject to demurrer on this basis.

Next, Defendants contend that the second cause of action fails because Plaintiff does not allege that they substantially interfered with its right to use and enjoy the premises. (See Andrews v. Mobile Aire Estates (2005) 125 Cal.App.4th 578, 589 [stating that “the landlord’s act or omission must substantially interfere with a tenant’s right to use and enjoy the premises for the purposes contemplated by the tenancy” to constitute a breach of the implied covenant of quiet enjoyment].) Specifically, they contend that a letter declaring that Plaintiff holds only a month-to-month tenancy does not constitute substantial interference with its right to use and enjoy the premises. This argument lacks merit.

In Guntert v. City of Stockton (1976) 55 Cal.App.3d 131, 139, the Court of Appeal determined that an “arbitrary and unreasonable notice of termination violate[s] the lessor’s implied obligation to abstain from interference with the tenant’s use and enjoyment of the premises.” The court explained that such a notice could constitute substantial interference because it initiated a state of uncertainty which prevented the plaintiff from undertaking long-term commitments. (Ibid.) The same analysis applies here. Plaintiff alleges that Defendants unreasonably converted Plaintiff’s long-term lease into a month-to-month tenancy, which prevents it from booking future events and investing in the labor and materials required to sustain long-term restaurant operations. (FAC, ¶¶ 20, 32.) As such, Plaintiff adequately alleges facts indicating that Defendants substantially interfered with its right to use and enjoy the premises for the purposes contemplated by the tenancy.

In reply, Defendants argue that the letter at issue cannot constitute substantial interference because such a notice of termination is similar to commencing or threatening legal process. In this respect, they rely on several cases holding that commencing or threatening legal process cannot constitute substantial interference in the absence of bad faith or malice. (See Asell v. Rodrigues (1973) 32 Cal.App.3d 817 [stating that prosecution of a legal action in good faith and without malice does not constitute substantial interference with the tenant’s right to beneficial enjoyment of the premises]; Lindenberg v. MacDonald (1950) 34 Cal.2d 678, 683 [finding that a threat made in good faith to resort to legal process does not constitute a constructive eviction]; Nativi v. Deutsche Bank National Trust Company (2014) 223 Cal.App.4th 261, 312 [stating that “[w]here a landlord does not physically interfere with tenants’ possession and merely wrongfully serves a notice to quit, tenants can recover damages for a wrongful eviction only if the landlord acted with malice”].) These cases are distinguishable. As an initial matter, the rationale underlying these cases is the concern that the assertion of a cause of action for breach of the implied covenant of quiet enjoyment and possession could be a means to evade the strict requirements of an action for malicious prosecution. (See Asell, supra, 32 Cal.App.3d at p. 824, fn. 3.) No such concern is present in the instant case as the FAC does not allege that Defendants commenced or threatened to commence legal process. In any event, the FAC does allege facts indicating that Defendants did not act in good faith as Mr. Kurotori purportedly induced Plaintiff to continue booking future events and invest in the labor and material required to sustain long-term restaurant operations based on his representation that Plaintiff’s exercise of the Restaurant Lease option was accepted. (FAC, ¶¶ 19-20.) Accordingly, the second cause of action is not subject to demurrer on this basis.

Since Defendants do not otherwise argue that the second cause of action is defective, the demurrer to this cause of action is OVERRULED.

C. Third Cause of Action for Declaratory Relief

Defendants contend that the third cause of action for declaratory relief fails because there is no actual controversy between the parties. “[D]eclaratory relief operates prospectively, and not merely for the redress of past wrongs. It serves to set controversies at rest before they lead to repudiation of obligations, invasion of rights or commission of wrongs; in short, the remedy is to be used in the interests of preventive justice, to declare rights rather than execute them.” (Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1403.) A declaratory relief action may be maintained when the pleadings allege a continuing contractual relationship between the parties and the interpretation of the contract will have future consequences for the conduct of the relationship. (Osseous Technologies of America, Inc. v. DiscoveryOrtho Partners LLC (2010) 191 Cal.App.4th 357, 371.) Here, Defendants contend that the interpretation of the agreement will have little practical effect on the conduct of the parties’ relationship because the parties’ dispute will be fully resolved by the underlying cause of action for breach of contract. This argument is not well-taken because “[t]he mere circumstance that another remedy is available is an insufficient ground for refusing declaratory relief, and doubts regarding the propriety of an action for declaratory relief … generally are resolved in favor of granting relief.” (Filarsky v. Sup. Ct. (2002) 28 Cal.4th 419, 433.) As such, the fact that the FAC also includes a cause of action for breach of contract is not a sufficient basis for sustaining a demurrer. Accordingly, the demurrer to the third cause of action is OVERRULED.