Opinion
B199498
8-8-2008
OCTAGON PLAZA, LLC, Plaintiff and Respondent, v. KELLY McCLAIN et al., Defendants and Appellants.
Law Office of Joseph R. Brown and Joseph R. Brown for Defendants and Appellants. Law Offices of J. Steven Kennedy and J. Steven Kennedy for Plaintiff and Respondent.
Not to be Published
Kelly McClain, doing business as A+ Teaching Supplies, a sole proprietorship, leased a commercial shopping center unit from Octagon Plaza, LLC. The lease agreement required written consent from Octagon before McClain could assign the lease. McClain subsequently incorporated A+ Teaching Supplies as a limited liability corporation. McClain and her husband then formed a corporation, RKF Investments, Inc., and transferred ownership and control of A+ Teaching Supplies to RKF Investments, Inc. McClain never sought Octagons consent. Octagon sued McClain for failing to seek consent before assigning the lease. The trial court concluded that when McClain changed her sole proprietorship to a limited liability corporation and transferred control to another corporation, an assignment took place. The court held that McClains failure to seek prior written consent from Octagon breached the lease, allowing Octagon to terminate the lease. McClain appeals. We affirm, because McClain breached the unambiguous language of the lease requiring prior written consent to an assignment.
FACTS
On February 28, 2003, Kelly McClain entered into a commercial lease agreement with Octagon, which built and owns a commercial shopping plaza in Santa Clarita, California. McClain leased Unit 104 as "Kelly McClain dba A+ Teaching Supplies."
Section 12 of the lease, "Assignment and Subletting," requires McClain to make a written request for consent to an assignment (accompanied by a fee and information about the proposed assignee) and to obtain Octagons prior written consent to any assignment. If Octagon consents, the assignee must expressly and in writing assume the obligations under the lease:
"12.1 Lessors Consent Required.
"(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, `assign or assignment) or sublet all or any part of Lessees interest in this Lease or in the Premises without Lessors prior written consent. . . .
"(b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose. [¶] . . . [¶]
"(d) An assignment or subletting without consent shall, at Lessors option, be a Default curable after notice . . . or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable breach, Lessor may . . . terminate this Lease . . . .
"12.2 Terms and Conditions Applicable to Assignment and Subletting.
"(a) Regardless of Lessors consent, no assignment or subletting shall . . . be effective without the express written assumption by such assignee or sublessee of the obligation of Lessee under this Lease. [¶] . . . [¶]
"(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessors determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee . . . together with a fee of $1,000 or 10% of the monthly base rent."
In April 2006, Ted Charanian, who with his wife Wanda, was one of Octagons two managing members, received a Certificate of Liability Insurance for Unit 104, which listed the insured as "RKF Investments, Inc., dba A+ Teaching Supplies and Suzana Oaks Postal Center, 23310 Cinema Drive, 104, Valencia, CA 91355." Charanian had never heard of RKF Investments, Inc. He looked back at the 2005 Certificate, which listed "A+ Teaching Supplies, LLC." He had not noticed the corporate designation before.
Shortly thereafter, Octagon learned that RKF Investments, Inc. now owned A+ Teaching Supplies. McClain had sued Octagon over unrelated rental issues, and in a deposition in May 2006, she testified that A+ Teaching Supplies was currently owned "under RKF Investments." McClain and her husband, Russell Furie, were the sole officers, directors and shareholders of the corporation, which operated not only A+ Teaching Supplies at the leased location but another A+ Teaching Supplies in Simi Valley and two other businesses, Suzana Oaks Postal Center in Simi Valley and Check by Check in Sylmar. In May 2004, before forming RKF Investments, Inc., McClain and Furie had incorporated A+ Teaching Supplies as a limited liability corporation, with themselves as the sole members.
Other litigation regarding the lease, involving among other issues a dispute over the size of the unit, resulted in a recent appellate decision. (See McClain v. Octagon Plaza, LLC (2008) 159 Cal.App.4th 784, review denied April 30, 2008.)
Octagon terminated the lease and filed a complaint for unlawful detainer in November 2006 on the ground that McClain had assigned her leasehold interest without Octagons prior written consent, in violation of the lease. (Octagon made two other allegations which it subsequently abandoned.) After a nonjury trial, the court found that McClain had violated the assignment provisions of the lease. A judgment filed on April 12, 2007, forfeited the lease and awarded possession of the property to Octagon. McClain now appeals.
DISCUSSION
The interpretation of a lease is a question of law, which we review de novo. (Principal Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65 Cal.App.4th 1469, 1477-1478.) We use the general rules governing contract interpretation, relying on the straightforward meaning of the language of the lease, and interpreting its provisions in their ordinary and popular sense. (Bill Signs Trucking, LLC v. Signs Family Limited Partnership (2007) 157 Cal.App.4th 1515, 1521.)
The lease agreement unambiguously prohibits assignment without Octagons prior written consent. The request for consent must be in writing and must include information about the financial and operational status of the proposed assignee, accompanied by a fee. Should consent be granted, the agreement also requires that the assignee, in writing, assume all the obligations of the lease.
McClain does not dispute that she did not obtain Octagons prior written consent, or that she did not comply with any of the other requirements for assignment. She claims instead that no assignment occurred. McClain argues that the incorporation of A+ Teaching Supplies, the subsequent incorporation of RKF Investments, Inc., the placement of A+ Teaching Supplies, LLC under the control of RKF Investments, Inc., and RKF Investment, Inc.s substitution as the entity on the lease were mere formalities. Because she and Furie remained equal participants throughout, she reasons that converting "Kelly McClain, dba A+ Teaching Supplies" from a sole proprietorship to "A+ Teaching Supplies, LLC" and then transferring ownership and control to "RKF Investments, Inc., dba A+ Teaching Supplies [LLC]" as the lessee was not an assignment which required consent from Octagon.
McClain relies on Paragraph 12.1(b), which states: "A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose." No "change in control" took place, according to McClain, because she and Furie were married throughout, held their assets as community property, and retained joint control of RKF Investments, Inc., the corporation they formed to own and manage A+ Teaching Supplies and their other businesses. Because there was no "change in control," there was no assignment.
McClain misreads the lease. Paragraph 12.1(b) does not require that every assignment involve a "change in control" of the lessee. It merely provides that when a corporate lessee transfers more than a quarter of its voting shares, a "change in control" has occurred which requires prior consent as an assignment. Paragraph 12.1(b) describes one situation in which, although the identity and the corporate form of the lessee may not change, an assignment nevertheless takes place because the voting control has been transferred. (Paragraph 12(c) describes another situation which will constitute an assignment, when the lessor engages in a transaction that reduces its net worth by more than 25 percent.)
Here the corporate form of the lessee has changed twice and the identity once, as A+ Teaching Supplies, a sole proprietorship, became a limited liability corporation, and then became one of four businesses owned and operated by a new corporation, RKF Investments, Inc. This is a transfer of McClains initial sole proprietorship interest in the lease to two different corporate entities, rather than a mere change in control of a single entity. We cannot see this as anything but an assignment, done without obtaining prior consent or even notifying Octagon, the lessor of the unit.
McClain also contends that the change that took place was merely formal and was therefore not an assignment. In Sexton v. Nelson (1964) 228 Cal.App.2d 248, the Fourth District concluded that a lease with a clause prohibiting transfer was not automatically terminated when the lessor transferred the lease to a corporation formed and wholly owned by him, merely for tax advantage. The "transfer of the lease from the defendant to his corporation was a transfer in form only and not in substance," because the lessor continued his exclusive control of the premises and the business, and as the owner of all the stock, his control was equivalent to ownership of the business. (Id. at p. 259.)
McClain, however, did not merely change the legal form of her sole proprietorship to a limited liability corporation. She also transferred its ownership and control to another corporation, RKF Investments, Inc., which manages three other businesses as well. This was more than a "technical change of ownership" which does not affect the rights of the landlord. (Airport Plaza, Inc. v. Blanchard (1987) 188 Cal.App.3d 1594, 1602.)
There was conflicting evidence regarding whether McClain initially represented that she alone would be liable on the lease, when Furies earlier divorce and bankruptcy were disclosed, and what the couples motivation was for forming RKF Investments, Inc. We are concerned only with McClains failure to seek consent for the assignment, and it is "beyond the purview of this action" to resolve the question whether RKF Investments, Inc. would be liable under the lease exactly as "Kelly McClain, dba A+ Teaching Supplies" would have been. (Airport Plaza, Inc. v. Blanchard, supra, 188 Cal.App.3d at p. 1603 [declining to determine whether change in corporate form would result in satisfaction of lease obligations].)
It is unnecessary for us to decide whether, if McClain had requested the prior written consent required by the lease, Octagon would have been unreasonable in withholding consent. (See Airport Plaza, Inc. v. Blanchard, supra, 188 Cal.App.3d at p. 1604 [holding that lessor may reasonably refuse to consent to continue lease in effect while lessee corporation winds up and dissolves].) McClain never notified Octagon nor requested prior consent as the lease requires, so the assignment breached the lease regardless of whether Octagon would have been able to enforce the obligations under the lease.
Both Sexton and Airport Plaza predate the enactment of Civil Code section 1995.010 et seq. Civil Code section 1995.010 became effective on January 1, 1990, and superseded all prior law regarding restraints on transfer of a lessees interest in a commercial lease. (See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 354.) The legislation codified broader latitude for the parties to a lease, to contract to restrict the transfer of the tenants interest in the lease. (See, e.g., Civ. Code, § 1995.250 [restriction on transfer of tenants interest in lease may require landlords consent if also providing that consent may not be unreasonably withheld, or providing express standards or conditions for giving or withholding consent].) The breach of the lease in this case, however, was not Octagons unreasonable refusal to consent to assignment, but McClains failure to request consent in writing prior to assignment.
The parties disagree over a variety of factual issues, among others, whether McClain intended to include Furie in the initial negotiation of the lease; whether she represented that A+ Teaching Supplies was her sole and separate property; and when Octagon learned of Furies problems with his ex-wife and his bankruptcy. None of those issues is relevant, however, because each involves extrinsic evidence going to the intent of the parties. We determine the parties intent from the unambiguous language of the lease requiring written consent before an assignment. (Bill Signs Trucking, LLC v. Signs Family Limited Partnership, supra, 157 Cal.App.4th at p. 1521.)
Finally, although McClain points out that Octagon accepted rent payments after it was aware that she had incorporated A+ Teaching Supplies and RKF Investments, Inc., Paragraph 24 of the lease explicitly provided, "The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee." Paragraph 12.1(d) of the lease also gave Octagon the option to regard assignment without consent as a noncurable breach and to terminate the lease. We conclude that McClain violated the lease agreement by assigning the lease without Octagons written consent, and that the agreement entitled Octagon to terminate the lease.
DISPOSITION
The judgment is affirmed. Octagon is entitled to its costs of appeal.
We concur:
MALLANO, P.J.
ROTHSCHILD, J.