More On Lease Clauses

Re: Lease Condemnation Provisions

On May 17, 1995, I wrote to you regarding the recent case of Chula Vista v. Fields (34 Cal.App.4th 1234) in which the California District Court of Appeals for San Diego held that a commercial lease with a condemnation provision providing for automatic termination upon condemnation constituted a waiver of the tenant's statutory right to damages for the bonus value of its leasehold. On August 4, 1995, the California Supreme Court granted the petition for review of that decision. Until the appeal to the Supreme Court is either dismissed or decided, the Chula Vista v. Fields cannot be cited as law in California.

Several recent California cases have held that a waiver in contracts must be knowing and intentional and that rights cannot be waived by accident, such as where the party does not know that the legal effect of agreeing to a provision will be the waiver of a right. For example, the same Court of Appeal held in Cathay Bank v. Lee (14 Cal.App.4th 1533) that a guarantor of a loan secured by real property could not waive its right to be exonerated upon a foreclosure of the security interest because of the destruction of its right of subrogation, unless the guarantor was specifically told that it had such a right to be exonerated and was waiving such right. While it is only speculation, it is possible that the Supreme Court may intend to apply this concept that a waiver must be knowing and intentional to overturn the Chula Vista v. Fields case by holding that a lessor cannot "trick" a tenant into waiving its right to compensation for the loss of the bonus value of its leasehold.

We will keep you advised of further developments in this case. In the meantime, in the event you are faced with a difficult negotiation of the lease provision regarding a tenant sharing in condemnation proceeds, Chula Vista v. Fields is not available as an easy way out. Should you have any questions, please call me.

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