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Hadian v. Schwartz

    Brief Fact Summary.

    After Defendant refused to indemnify Plaintiff, Plaintiff sued Defendant for breach of contract to recover the cost of Plaintiff spent to reconstruct the frame and to replace the roof of a commercial property she owned. The trial court ruled in Plaintiff’s favor. The court of appeal affirmed.

    Synopsis of Rule of Law.

    A compliance with laws provision that requires a lessee to obey or comply with governmental demands regulating the lessee’s use of the leased property does not necessarily obligate the lessee to also comply with demands that do not regulate the use.

    Facts.

    On April 14, 1984, Edward Schwartz (Defendant) leased commercial property from Rose Hadian (Plaintiff). The term of the lease was for three years at $650 per month, with the option to renew for five more years at $800 per month. The parties used a form lease with pre-printed provisions. They struck out certain provisions, including a warranty that the property did not violate building codes, regulations or ordinances, as well as a warranty regarding the plumbing, lighting, and heating conditions. Furthermore, the parties struck out a provision requiring the lessee to pay property taxes. Instead, the parties arranged for Plaintiff to pay the property taxes while Defendant was to pay any increase in property taxes during the term of his lease. The lease also contained provisions requiring Defendant to comply with any applicable statutes, ordinances, and other requirements regulating his use of the property. Additionally, Plaintiff was relieved of any obligation to repair or maintain the property. After the three-year term expired, Defendant exercised his option to renew for another five years. About five months later, the City of Los Angeles informed Plaintiff that the building was susceptible to earthquake damage. In order to comply with the city’s earthquake hazard reduction program, enacted a few years prior to the signing of the lease, the building required seismic reconstruction. Plaintiff paid $34,450.26 to reconstruct the building’s frame and to replace the roof and requested that Defendant indemnify her for the cost. When Defendant refused, Plaintiff sued Defendant for breach of contract to recover the cost. The trial court found in Plaintiff’s favor. The court of appeal affirmed.

    Issue.

    Whether a compliance with laws provision that requires a lessee to obey or comply with governmental demands regulating the lessee’s use of the lease property obligates the lessee to also comply with demands that do not regulate the use.

    Held.

    No. The court of appeals’ ruling is reversed. A compliance with laws provision that requires a lessee to obey or comply with governmental demands regulating the lessee’s use of the leased property does not necessarily obligate the lessee to also comply with demands that do not regulate the use.

    Discussion.

    When considering whether a lessee intended to accept the obligation to comply with demands unrelated to the lessee’s use of the property, courts look to six factors. The first factor compares the cost of the curative action to the rent reserved. In Brown v. Green (1994), the lessee was required to pay over $250,000 to comply with asbestos regulations. Although the action was costly, the cost only comprised about five percent of the lessee’s total rent reserved over 15 years. Here, the cost of the seismic reconstruction is about one and one-half times the rent reserved by Defendant over his initial three-year lease, and almost half the total rent reserved over the entire eight-year rental period. The substantial cost of the curative action in comparison to the rent reserved counsels against imposing the cost of the curative action on Defendant. The second factor is the length of the lease. Where the length of the lease is short, courts are hesitant to impose costly repairs and improvements on the lessee, particularly because the lessee would not have the opportunity to amortize the cost over the life of the lease. An initial lease of three years, even with the option to renew for another five years, is considered a short lease. Therefore, this factor also counsels against imposing the cost of the curative action on Defendant. The third factor considers whether the lessee or the lessor would enjoy the benefits of the curative action. Here, the benefits of the seismic reconstruction are likely to continue after the expiration of Defendant’s lease. Thus, Plaintiff enjoys the primary benefit of the curative action, suggesting that Plaintiff should be responsible for the cost. The fourth factor considers whether the curative action is structural or nonstructural. Here, it is a structural improvement because the entire frame of the building was reconstructed and the roof was replaced. The fifth factor considers whether the undertaking of the curative action interfered with the lessee’s enjoyment of the property. There is insufficient evidence in the record to rule on this factor. The sixth and final factor is whether the parties contemplated the application of the governmental demand. Although there is little evidence regarding this factor, it is evident that Plaintiff knew the property was located in an earthquake danger zone, and was therefore more likely to be aware of the earthquake hazard reduction program. Considering these six factors, this court finds that the parties to the lease intended that the lessor would bear the cost of complying with governmental demands that do not stem from the lessee’s use of the property.


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