HARTMAN RANCH CO v. ASSOCIATED OIL CO

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District Court of Appeal, Second District, Division 2, California.

HARTMAN RANCH CO. v. ASSOCIATED OIL CO. et al.*

Civ. 10860.

Decided: March 27, 1936

Robert M. Searls, of San Francisco, Harrison Guio, of Los Angeles, and Sloss, Turner & Finney, of San Francisco (William F. Humphrey, of San Francisco, of counsel), for appellant. James C. Hollingsworth, of Ventura, and Robert M. Clarke and Don G. Bowker, both of Los Angeles, for respondent.

This is an appeal by defendant from a judgment in favor of plaintiff in an action for damages predicated upon defendant's failure to perform an implied covenant to protect leased premises from drainage by wells located on adjacent property. The jury fixed the damage in the sum of $593,700.

The conceded facts are:

On October 18, 1913, plaintiff's vendor leased certain real property situated in the county of Ventura, state of California, to Joseph B. Dabney for the purpose of developing and taking therefrom oil, petroleum, and kindred substances. Thereafter Joseph B. Dabney assigned interests in said lease to Ralph B. Lloyd, E. J. Miley, and A. M. Buley. This lease, as modified by mutual agreement of the parties October 13, 1919, expressly required the drilling of ten wells upon the leased premises within a stated period of time. This was done. January 20, 1925, Joseph B. Dabney and his co-owners of the leasehold interest by written instrument gave defendant the right to drill for oil and petroleum on the premises leased from plaintiff's vendor. By this instrument the defendant expressly assumed and agreed to perform all obligations and covenants of the parent lease and any modifications thereof. During the four-year period embraced in the complaint, defendant, also lessee of adjacent property, produced from said contiguous premises a vast amount of oil and gas, which for the purpose of this appeal only it is assumed had the effect of draining oil and gas from under the property owned by plaintiff. Defendant did nothing to prevent this drainage.

Defendant relies for reversal of the judgment on these propositions:

First: The agreement by which defendant acquired its rights to drill on the premises from Lloyd and his associates was a sublease and not an assignment of the lessee's interest.

Second: A lessor may not maintain an action against a sublessee for breach of covenants in the parent lease.

Third: The sublessee who expressly assumes and agrees in the sublease to perform all of the terms, covenants, and conditions of the parent lease is not liable to the head lessor for breach of an implied covenant in the parent lease.

Fourth: The foregoing propositions may be urged on appeal for the first time, since they are directed to the total absence of an essential element in plaintiff's cause of action.

As to the first proposition, Mr. Chief Justice Myers, in determining whether an instrument was a sublease or an assignment, says (Barkhaus v. Producers' Fruit Co., 192 Cal. 200, 205, 219 P. 435, 437):

“It is elementary that a sublease, in order to operate as an assignment, must transfer to the sublessee the entire term of the original lessee in the whole or some part of the demised premises. * * * ‘To constitute an assignment of a leasehold interest, the assignee must take precisely the same estate in the whole or in a part of the leased premises which his assignor had therein. He must not only take for the whole of the unexpired time, but he must take the whole estate, or, in other words, the whole term. * * * If by the terms of the conveyance, be it in the form of a lease or an assignment, new conditions with a right of entry, or new causes of forfeiture are created, then the tenant holds by different tenure, and a new leasehold interest arises, which cannot be treated as an assignment or a continuation to him of the original term.”’ (Italics ours.)

Where the lessee reserves the right of re-entry upon failure of his transferee to pay rent or upon violation of covenants, the lessee does not part with his entire term or estate, and the retention of such contingent reversionary interests creates a subtenancy. Backus v. Duffy, 103 Cal.App. 775, 779, 284 P. 954; Kendis v. Cohn, 90 Cal.App. 41, 58, 265 P. 844.

In the case before us the document under which defendant took possession of the property owned by plaintiff (a) was designated as a sublease by the parties to it; (b) provided for surrender of the premises to Dabney and his associates by defendant upon certain conditions; (c) provided for new conditions and new causes of forfeiture other than those set forth in the parent lease and re-entry by Dabney and his associates on breach of any condition contained therein; (d) reserved a higher rental to Dabney and his associates than the rental in the original lease, i. e., the parent lease called for one-eighth royalty, while this instrument reserved a one-fifth royalty; and (e) contained a new provision relative to receiving the royalty in kind and storing it.

It is therefore clear this document was a sublease and did not constitute an assignment of the parent lease.

The defendant's second postulate is tenable. There is neither privity of contract nor privity of estate between the original lessor and a sublessee. Hence the original lessor may not successfully maintain a suit for breach of a covenant in the parent lease against a sublessee. The rule is clearly expressed in Thornton's Law of Oil and Gas (4th Ed.) vol. I, § 244, p. 652, as follows: “Unlike the assignee of a lease, there is no privity of estate between the original lessor and a sublessee, and the latter is not liable to the former for any part of rent due him, nor for the performance of the covenants in the original lease.”

The law is stated by Mr. Justice McKinstry in Bailey v. Richardson, 66 Cal. 416 421, 5 P. 910, 913, thus: “There is no privity of estate or contract between an original lessor and a subtenant, and such privity would not be created merely by the surrender of the original tenant,–a matter between him and his lessor.”

This principle has been uniformly followed in California. See Handleman v. Pickerill, 84 Cal.App. 214, 218, 257 P. 890; Webb v. Jones, 88 Cal.App. 20, 28, 263 P. 538; 15 Cal.Jur. 766, Landlord and Tenant, § 180.

Relative to defendant's third contention, a sublessee who by the sublease expressly assumes and agrees to perform all of the terms, covenants, and conditions of the parent lease is not liable to the lessor for breach of an implied covenant in the parent lease in the absence of a contractual stipulation between the original lessor and sublessees. It is not sufficient that the sublessee has promised his immediate lessor to perform the covenants of the parent lease. 15 Cal.Jur. 753, Landlord and Tenant, § 168.

In Bonetti v. Treat, 91 Cal. 223, at page 229, 27 P. 612, 613, 14 L.R.A. 151, an action by a lessor against his lessee's assignee for rent, our Supreme Court said: “Porter's covenant, contained in the assignment to him, ‘to pay all rent that may fall due from time to time by virtue of the provisions of the lease,’ and his entry into possession as assignee under the assignment, created the relation of landlord and tenant between him and the lessor, and his holding was by privity of estate, and not by privity of contract, as claimed by respondent. The lessor was not a party to, nor was he in any way benefited by, the contract of assignment. The liability of Porter to the lessor was, therefore, created solely by the covenant of the lease to pay the rent, which is a covenant running with the land, and not by the contract of assignment, the non-performance of which is enforceable only by the lessee.” (Italics ours.)

In Baker v. Maier & Zobelein Brewery, 140 Cal. 530, at page 534, 74 P. 22, 23, our Supreme Court reaffirmed this rule, remarking: “The principle stated in the case cited [Bonetti v. Treat, supra] is that the assignee is liable to the lessor by the covenant of the lease to pay the rent, which is a covenant running with the land, and not by the contract of assignment, the nonperformance of which is enforceable only by the lessee.” (Italics ours.)

Mr. Justice Curtis, speaking for our Supreme Court, quotes with approval from 15 California Jurisprudence, page 753, in Treff v. Gulko, 214 Cal. 591, 600, 7 P.(2d) 697, 701:

“The appellant did not sign the original lease or any acceptance of such lease and entered into no new agreement to assume the obligations of the lease or to pay the rent.

“In the absence of fresh contractual stipulations, there is no privity of contract between the assignee of the lessee and the landlord (Farber v. Greenberg, 98 Cal.App. 675, 277 P. 534), and when a tenant holds under a mere naked assignment of a lease, his liability is, as to the landlord, limited to his occupancy of the premises and terminates with his abandonment of possession. Chase v. Oehlke, 43 Cal.App. 435, 185 P. 425. The subject is carefully discussed in 15 California Jurisprudence at page 753, where it is said: ‘Privity of contract between landlord and lessee, however, is not affected by the latter's assignment, but continues until the end of the term notwithstanding he is no longer in possession of the premises. In the absence of fresh contractual stipulation, there is no privity of contract between the assignee and the landlord. But the assignee may, by express stipulation to be bound by the covenants of the lease, create a privity of contract between himself and the landlord, which will also enure till the term expires. By virtue of such an agreement the assignee becomes liable upon and entitled to the benefit of all the covenants of the lease as such. It seems, however, that to establish privity of contract between landlord and assignee, the necessary agreement must be made between them themselves.’

“See, also, Bush v. Bastian et al., 112 Cal.App. 644, 297 P. 976, decided March 17, 1931, in this court, wherein it was held that, under the allegations of a complaint in which it was alleged in substance that a lessee assigned a certain lease to the appellant with the express stipulation that the lessee would continue to be bound by all of the terms of the lease, and that pursuant to such assignment the appellant went into possession and occupation of certain premises, the liability of the appellant assignee to the lessor was limited to the rentals accruing prior to the assignee's abandonment of the possession of the leased premises.” (Italics ours.)

In the instant case there was only a sublease between the plaintiff and defendant. It contained, among others, this provision, “* * * and said lessee hereby expressly assumes and agrees to perform all obligations and covenants provided for in said parent lease and said modification thereof to be performed by the lessee in said parent lease or said modifications.” However, since there was no new contractual stipulation between the head lessor and the sublessee, defendant was not liable by privity of contract for breach of a covenant in the parent lease. As we have already stated, there was no privity of estate between the lessor and the sublessee.

It is unnecessary for us to consider plaintiff's claim that the present suit can be maintained on the theory of a contract expressly made for the benefit of a third party, for, in order to recover on such a theory it is necessary for the plaintiff to distinctly plead that it is entitled to a judgment according to the provisions of section 1559 of the Civil Code. Ericksen v. Rhee, 181 Cal. 562, 565, 185 P. 847. This plaintiff did not do.

Mr. Justice Melvin, in passing upon this question in Ericksen v. Rhee, supra, 181 Cal. 562, at page 565, 185 P. 847, 848, says: “It is now contended by plaintiff, however, that by setting up the contract between Rhee and the other defendants in the answer they stood squarely upon its terms, and that if it be an agreement made for plaintiff's benefit, he is entitled to judgment against all of the parties to it. The obvious answer to this contention is that by their pleading defendants were bound to set up the contract as indicating that there was no privity between Siller Bros. and the original lessor. They did not seek to establish by it any claim against Ericksen, nor to confess any obligation to him. If plaintiff, on being apprised of the full text of the agreement, believed that he was entitled to judgment under its terms according to the provisions of section 1559, Civil Code, as a third person for whose benefit it was expressly made, he should have put that matter in issue by a pleading distinctly demanding judgment based upon that contract interpreted according to said section. This he did not do. The cause was tried upon the theory of the liability of Siller Bros. under the original lease. There was no allegation that the contract between Rhee and the copartners, Siller Bros., was not rescinded by the parties thereto before the complaint in this action was filed. There was no allegation that the Sillers ever marketed any rice or converted any portion of it to their own use. In short, there was nothing to put in issue the contention that plaintiff might have recovered upon the farming agreement as one made for his benefit. It is therefore not necessary to discuss the very interesting question whether that agreement was in its essence such a contract as under section 1559 of the Civil Code permits a third person to take advantage of it, or was one in which the covenant as to rent in the agreement was merely incidentally for the benefit of plaintiff, and therefore not one which he might enforce because falling under the rule announced in such cases as Chung Kee v. Davidson, 73 Cal. 522, 15 P. 100, and Lake Ontario Shore R. Co. v. Curtiss, 80 N. Y. 219.” (Italics ours.)

Defendant's final claim is correct. An objection that a complaint does not state a cause of action or that there is a total absence of substantial evidence relative to an essential element of plaintiff's cause of action may be urged for the first time on appeal. Code Civ.Proc. § 434; Hentsch v. Porter, 10 Cal. 555, 562; Ryan v. Holliday, 110 Cal. 335, 337, 42 P. 891; Prichard v. Kimball, 190 Cal. 757, 765, 214 P. 863.

In view of the foregoing conclusions, it is unnecessary for us to consider the other questions ably presented by counsel in their briefs.

The judgment appealed from is reversed.

McCOMB, Justice pro tem.

We concur: CRAIL, P. J.; WOOD, J.

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