Case Name: JONATHAN PECK et al. v. DAVID JAMES et al.

Case No.: 1-13-CV-257415

 

Defendants Dave James and Youth Wellness Associates Inc., in its own name and dba Fuze It For A Kid! and dba Powerplay Kids Club (collectively “Defendants”), demur to the first and third causes of action in the Second Amended Complaint (“SAC”) filed by plaintiffs Jonathan Peck, dba Peck Properties, and Peck Leasing Ltd. (collectively “Plaintiffs”).

 

Plaintiffs bring this breach of contract action against Defendants alleging that, over the course of a five-year period, Defendants breached a series of commercial leases by failing to pay rent on time, failing to pay the fees associated with the late payments, and failing to comply with the terms of a side agreement for the partial forgiveness of unpaid rent under one of the leases.

 

In January 2008, Peck Properties entered into a commercial real property lease (the “Multi-Tenant Lease”) with Mr. James and Youth Wellness Associates, Inc. (SAC, ¶ 7.) The Multi-Tenant Lease is attached to the SAC as Exhibit A. Under the terms of the Multi-Tenant Lease, Mr. James and Youth Wellness Associates, dba Powerplay Kids Club, were to rent a suite in a building owned by Peck Properties located at 15045 Los Gatos Blvd. in Los Gatos, California. (SAC, Ex. A, p. 1.) The lease indicates an effective date of May 1, 2008, and was to continue for a 60-month term. (Id., p. 2.)

 

In May 2008, Peck Leasing, Ltd. entered into a commercial real property lease (the “Ground Lease”) with Defendants, whereby Defendants leased an undivided 19% interest in the common areas of 15045 Los Gatos Blvd. (SAC, ¶ 8.) A copy of the Ground Lease is attached to the SAC as Exhibit B and, like the Multi-Tenant Lease, the Ground Lease indicates an effective date of May 1, 2008, and was to continue for a 60-month term. (SAC, Ex. B.)

 

Both leases provided for the payment of late fees and interest on late rent, as well as fees and expenses incurred for collection of payments due. (SAC, ¶ 9.)

 

On December 29, 2009, Peck Properties entered into a one-year rent deferral agreement with Defendants, whereby the total rent due per month under the Multi-Tenant Lease was reduced by $3,000 for the 2010 calendar year and deferred until the occurrence of any one of several events. (SAC, ¶ 11.) The parties executed a further rent deferral agreement on February 11, 2011, for the 2011 calendar year. (Id.) The rent owed by Defendants continued to be deferred by $3,000 per month, resulting in the accrual of approximately $120,000 in deferred rent by March 2013. (Id.)

 

On March 6, 2013, Peck Properties executed an agreement forgiving all but $50,000 of the deferred rent owed by Defendants (the “Rent Forgiveness Agreement”). (SAC, ¶ 12.) Under the terms of the Rent Forgiveness Agreement, Defendants were to make two payments of $25,000, the first payment due upon signing of the agreement, which Plaintiffs concede was paid, and the second payment due by December 31, 2013, which Plaintiffs contend was not paid. (Id., ¶¶ 12, 29.)

 

The 60-month term for the Multi-Tenant Lease and the Ground Lease expired in April 2013. (Id., ¶ 13.) From April 2013 until May 10, 2013, Defendants occupied the premises with no agreement in effect. (Id.)

 

On May 10, 2013, Peck Properties executed a new commercial real property lease governing Defendants’ tenancy (the “New Lease”). (Id., ¶ 14.) The New Lease is attached to Plaintiffs’ SAC as Exhibit E. Under the terms of the New Lease, Peck Properties agreed to rent the premises to Defendants for another 60-month term. (SAC, Ex. E, p. 2.) As with the Multi-Tenant Lease and the Ground Lease, the New Lease provides for late fees, interest on late rent, collection expenses to be paid for late rent payments, and attorneys’ fees to the prevailing party in litigation associated with the agreement. (SAC, ¶ 15.) Unlike the Ground Lease, Peck Leasing, Ltd. is not a party to the New Lease. (Id., ¶ 14.)

 

Plaintiffs allege that “[t]hroughout the term of the Multi-Tenant Lease, the Ground Lease, and under the New Lease to and including September 2013[,] the defendants paid their rent late by, on average, 25 days . . . .” (Id., ¶ 19.) Plaintiffs further allege that they have demanded payment of the late fees and expenses, that Defendants have refused to pay the fees, and that Defendants now owe Plaintiffs in excess of $10,000 for such fees and expenses. (Id.)

 

Plaintiffs further allege that Defendants failed to make the second payment of $25,000 under the parties’ Rent Forgiveness Agreement, which was due December 31, 2013. (Id., ¶ 29.)

 

Based upon the above allegations, Plaintiffs filed their initial complaint against Defendants in December 2013, alleging breach of contract. The SAC, which was filed on April 22, 2014, asserts three causes of action. The First Cause of Action states a claim for breach of contract for Defendants failure to pay late fees under the Multi-Tenant Lease, the Ground Lease, and the New Lease. The Second Cause of Action states a claim for breach of contract associated with the June 2008 tenant improvement agreement and the Third Cause of Action states a claim for breach of contract associated with Defendants’ failure to make the second payment of $25,000 (and associated late charges of $5,000 per month) under the Rent Forgiveness Agreement.

 

Defendants demur to the First Cause of Action (breach of the Multi-Tenant Lease, the Ground Lease, and the New Lease) and the Third Cause of Action (breach of the Rent Forgiveness Agreement) on the ground that Plaintiffs have failed to allege sufficient facts to state a claim for breach of contract. The gist of the argument is that, by executing the New Lease, Plaintiffs relinquished any rights associated with the prior agreements. Additionally, Defendants demur to the First Cause of Action on the ground of uncertainty.

Defendants’ demurrer to the First Cause of Action on the ground of failure to allege facts sufficient to state a cause of action is OVERRULED.

 

To state a cause of action for breach of contract, a party must plead the existence of a contract, his or her performance of the contract, the defendant’s breach and resulting damage. (Otworth v. Southern Pac. Transp. Co. (1985) 166 Cal.App.3d 452, 458.) Plaintiffs’ First Cause of Action meets each of these elements. The general allegations of the SAC, which are incorporated by reference into the First Cause of Action, (see SAC, ¶ 18), allege that the parties executed the Multi-Tenant Lease in January 2008, (id., ¶ 7), the Ground Lease in May 2008, (id., ¶ 8), and the New Lease in May 2013, (id., ¶ 14.) In the general allegations, Plaintiffs further allege that each of the leases contained provisions requiring Defendants to pay late fees and interest on late rent. (Id., ¶¶ 9, 15.) In the First Cause of Action itself, Plaintiffs expressly refer to the Multi-Tenant Lease, the Ground Lease, and the New Lease (each of which is also attached to the SAC), and allege that Defendants failed to pay their rent on time. (Id., ¶ 19.) Finally, Plaintiffs allege that Defendants failed to pay the late fees and other expenses associated with the late rental payments as provided for under the terms of each of the contracts resulting in more than $10,000 due to Plaintiffs. (Id., ¶ 20.) These factual allegations, in combination with the actual agreements at issue, which are attached to the SAC, set forth sufficient facts to state a cause of action for breach of each of the leases at issue.

 

The fact that Plaintiffs’ First Amended Complaint (“FAC”) and the SAC contain arguably inconsistent allegations concerning the nature and legal effect of the New Lease does not warrant the sustaining of Defendants’ demurrer. In ruling on a demurrer, the court is to consider exhibits attached to the complaint and, “to the extent the factual allegations [contained in the complaint] conflict with the content of the exhibits . . . [the court] accept[s] as true the contents of the exhibits and treat as surplusage the pleader’s allegations as to the legal effect of the exhibits.” (Barnett v. Fireman’s Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505.) Accordingly, the fact that Plaintiffs’ FAC states that the New Lease “replaced” the prior leases, and the SAC deleted the replacement language, is not a basis to sustain Defendants’ demurrer where the contractual provisions at issue appear in the exhibits attached to the SAC.

 

Defendants’ primary argument—that the New Lease superseded all of the parties’ prior agreements, including the Multi-Tenant Lease, the Ground Lease, and the Rent Forgiveness Agreement—is not well-taken. The argument essentially boils down to the position that the New Lease operated as a novation of the parties’ prior agreements. A novation is a contract that expressly extinguishes a prior contractual obligation. (Civ. Code, § 1530 [defining novation as “the substitution of a new obligation for an existing one.”].) The existence of a novation turns on the parties’ intention to discharge an old contractual obligation and substitute a new one. (Northern Counties Bank v. Earl Himovitz & Sons Livestock Co. (1963) 216 Cal.App.2d 849, 859.) The effect of a novation is to make the original agreement a nullity, whereby the rights and obligations of the parties are governed solely by the new agreement as if there had never been a former obligation, (Beckwith v. Sheldon (1913) 165 Cal. 319, 323-324), which is precisely what Defendants are asserting in this case.

To establish that a new contract was substituted in place of an old one it must “clearly appear that the parties intended to extinguish rather than merely modify the original agreement.” (Howard v. County of Amador (1990) 220 Cal.App.3d 962, 977, internal quotation marks omitted, emphasis added.) The problem with Defendants’ argument is that it does not “clearly appear” from paragraphs 34.1 and 45 of the New Lease (the provisions on which Defendants base their argument) that the parties intended the New Lease to substitute for the rights and obligations of the parties’ prior agreements. Indeed, the New Lease makes no mention of the Multi-Tenant Lease, the Ground Lease, or the Rent Forgiveness Agreement. And, as Plaintiffs point out, Peck Leasing, Ltd.—which was a signatory to the Ground Lease—is not a party to the New Lease.

 

Defendants’ reliance on the general integration clause contained in paragraph 45 of the New Lease is unavailing. The Multi-Tenant Lease and the Ground Lease both expired by their own terms prior to the execution of the New Lease. The New Lease did not substitute in place for the prior lease agreements, but was an entirely new agreement that makes no reference to the prior agreements. In other words, it makes no difference whether the New Lease is fully integrated because, in addition to any allegation that the New Lease was breached, Plaintiffs also are claiming that Defendants breached the Multi-Tenant Lease, the Ground Lease, and the Rent Forgiveness Agreement, which are entirely separate agreements.

 

Similarly, Defendants’ reliance upon paragraph 34.1 of the New Lease does not support their position. Paragraph 34.1 of the New Lease provides, in part, that “Landlord and Tenant expressly waive all claims for damages by reason of any . . . agreement . . . not confined in this Lease.” (SAC, Ex. E, at p. 17.) But, as Plaintiffs point out, the language appears in the section of the New Lease dealing with prior representations of the conditions of the premises and, like paragraph 45, makes no reference to the parties’ prior agreements. Lease agreements are subject to the usual rules of contract interpretation. (SeeCentral Building, LLC v. Cooper (2005) 127 Cal.App.4th 1053, 1058, citing Principal Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65 Cal.App.4th 1469, 1477-1478.) The most obvious rule of interpretation applicable to paragraph 34.1 of the New Lease, as suggested by Plaintiffs, is the rule requiring contractual language to be construed in the context of the surrounding language in which it appears and with reference to the instrument as a whole. (See Heidlebaugh v. Miller (1954) 126 Cal.App.2d 35, 40.) The waiver language in paragraph 34.1 relied upon by Defendants appears within the part of the New Lease entitled “ACCEPTANCE OF PREMISES,” and is preceded by the statement that “Tenant acknowledges that neither Landlord nor Landlord’s agent has made any representation or warranty as to the suitability of the leased Premises.” Given the situation of the waiver language within the provision dealing with the acceptance of the condition of the premises as well as the language immediately preceding the waiver language, Plaintiffs’ interpretation of the waiver clause as only waiving claims concerning representations and prior agreements concerning the condition of the premises is reasonable.

 

Defendants’ demurrer to the First Cause of Action on the ground of uncertainty is OVERRULED.

A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.  (See Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.)  A demurrer for uncertainty should only be sustained when the complaint is so unclear that the defendant cannot reasonably respond.  (Id.)  Here, the First Cause of Action is certain enough to allow Defendants to understand the nature of the allegations and the theory of liability (breach of the Multi-Tenant Lease, the Ground Lease, and the New Lease for failing to make rental payments on time and then failing to pay the late fees associated with the late payments in accordance with the terms of each of the contracts) in order to fashion an appropriate response.

 

Defendants’ demurrer to the Third Cause of Action on the ground of failure to state sufficient facts is OVERRULED.

 

The demurrer to the Third Cause of Action relies upon the same argument made with regard to the First Cause of Action—that the New Lease superseded the parties’ prior agreements. For the same reasons set forth in connection with the First Cause of Action, the Court rejects this argument.