Shahram MORADZADEH, et al., Plaintiffs and Appellants, v. Steve ANTONIO, et al., Defendants and Respondents.
In this appeal, plaintiffs Shahram Moradzadeh, Sion Moradzadeh and Sadegh Moradzadeh (hereinafter sometimes referred to collectively as “plaintiffs”) assert that the trial court erred when it sustained, without leave to amend, a general demurrer to a cause of action for “lessor liability.” Plaintiffs brought this action after the premises they rented from the defendant-lessor were burglarized. They alleged in their complaint that the lessor failed to tell them that the premises could easily be broken into and this failure to so inform them caused their damages stemming from the burglary.
The trial court found that the defendant-lessor owed no duty of disclosure to plaintiffs. We disagree. We hold that a lessor of commercial real property owes a duty to disclose to a prospective lessee any characteristics or conditions of the rental premises which are known or accessible only to him and which materially affect the value or desirability of the premises, in light of the lessee's intended use thereof. We further hold that a breach of this duty can form the basis of a cause of action against the lessor for deceit. Thus, the court erred in sustaining the demurrer of the defendant-lessor without leave to amend.
PROCEDURAL AND FACTUAL BACKGROUND
Plaintiffs' second amended complaint, alleges that plaintiff Shahram Moradzadeh is an individual doing business as Walters Jewelers in the Westwood area of Los Angeles. The jewelry business is alleged to have had stock with a fair market value of approximately $879,000. The complaint also alleges that certain defendants stole the jewelry stock and that other defendants bought or received the stock from those defendants. The first four causes of action (violation of certain sections of the Penal Code, conversion, “civil conspiracy,” and negligence) are directed at these defendants. They are not parties to this appeal.
We are concerned here only with the fifth cause of action which is designated as one for “Landowner/Landlord Liability.” It is directed at defendant Steve Antonio (“Antonio”), who is alleged to be the owner of the premises at which Walters Jewelers was located. Antonio is the responding party in this appeal. The fifth count alleges that Antonio knew, when he leased the premises, that plaintiff Shahram Moradzadeh intended to use the premises for a jewelry business and also knew that (1) the leased premises were vulnerable to easy penetration, (2) the walls were easy to break into and indeed had been broken into in the past, and (3) the premises had been burglarized in the past. It is further alleged that plaintiffs were laypersons who did not know and could not discern, through routine inspection, that the premises possessed these negative qualities.
Finally, the fifth cause of action alleges that Antonio had a duty (1) to warn plaintiffs that the premises had certain qualities that might make them undesirable for use as a jewelry store, and (2) to provide plaintiffs with sufficient information regarding the premises so that they could determine if the premises were suitable for a jewelry business. Plaintiffs conclude that Antonio breached this duty to provide them with sufficient information regarding the premises.
Antonio generally demurred to this cause of action, contending he had no duty as a lessor to protect plaintiffs' property from harm.1 He relied upon Royal Neckwear Co. v. Century City, Inc. (1988) 205 Cal.App.3d 1146, 252 Cal.Rptr. 810. The trial court sustained the demurrer without leave to amend, agreeing that under Royal Neckwear, Antonio owed no duty to plaintiffs. Plaintiffs now challenge that ruling.2
ISSUE ON APPEAL
The issue before this court is whether a lessor of commercial property has any duty to a prospective lessee to inform the lessee of characteristics of the rental property which could reasonably make that property unsuitable for the known business purposes for which the prospective lessee seeks to use it.
This case presents an issue which does not appear to have been directly addressed in any published California opinion and the parties take markedly different approaches to it. Perhaps this results from their different perspectives as to the nature of the claim made by the plaintiff lessees. Plaintiffs treat this case as one of non-disclosure and rely primarily upon the rationale of Vermes v. American Dist. Tel. Co. (1977) 312 Minn. 33, 251 N.W.2d 101. Antonio, on the other hand, views the case as one where plaintiffs are seeking to impose an expanded duty in negligence upon a commercial lessor to protect the personal property of his tenants. He relies on Royal Neckwear, Co. v. Century City Inc., supra, 205 Cal.App.3d 1146, 252 Cal.Rptr. 810. Our resolution of this matter necessarily requires us to closely consider each of these cases.
1. The Vermes Case
In Vermes v. American Dist. Tel. Co., supra, 251 N.W.2d 101 (“Vermes” ), a jewelry store owner brought an action against, among others, the landlord of the premises rented by the plaintiff for his jewelry business. The action was brought after the premises were burglarized. The Supreme Court of Minnesota concluded that the landlord had a duty to inform its prospective jeweler-tenant of any qualities in the premises which might reasonably be considered undesirable by such a prospective tenant. In that particular case, the burglary was accomplished by entry through the ceiling of the vault area. The ceiling was thin and “The construction design allowed easy entry into the vault from above.” (Vermes, supra, 251 N.W.2d at p. 102.)
In addressing the issue of whether the landlord could be found liable to the plaintiff on a negligence theory, the Minnesota court said: “The duty of [the landlord], if it can be defined as such, was to sufficiently inform Vermes concerning the store which was being considered for rental to the extent that Vermes had enough information from which he would be able to properly assess the store's suitability for his jewelry business. In the commercial context this would seem to be a ‘basic’ duty. A commercial tenant will often have specific needs peculiar to his business which will require the premises to be leased to have certain attributes. Space suitable for a restaurant, for example, might be completely unsuitable for a bank․ In cases where suitability factors might not be obvious upon casual inspection, as with ineffective air conditioning if the premises were inspected in winter, it would be a basic duty of the landlord to inform the prospective tenant of any qualities of the premises which might reasonably be undesirable from the tenant's point of view. [¶] A jewelry store, in addition to the usual requirements for a retail store, requires physical security. The landlord's duty, prior to the signing of the lease, would be to point out any facts about the premises which would tend to make them insecure; for example, a side door accessible from the street or a thin partition separating them from a storage room. In this case it was ․ the ‘particular duty’ of [the lessor] to point out to Vermes any facts about the proposed premises which might reasonably make them unsuitable for his use. As noted by Vermes in his brief, this duty was basic to the relationship between [the lessor] and Vermes. It is fair to say that if Vermes had been informed of his insecure ceiling, he might have insisted that changes be made as conditions to the lease. He did so as to lighting.” (Vermes v. American Dist. Tel. Co., supra, 251 N.W.2d at p. 105.)
2. The Royal Neckwear Case
Antonio argues that Royal Neckwear Co. v. Century City, Inc., supra, 205 Cal.App.3d 1146, 252 Cal.Rptr. 810 (“Royal Neckwear”) has already decided, in his favor, the issue before us because the court in that case rejected the holding in the Vermes case. However, we do not so read the Royal Neckwear decision.
The rental property involved in Royal Neckwear was a store in a shopping mall. The mall was owned by the defendant. Plaintiff negotiated a lease for the store in August 1976. In early November 1979 three burglaries occurred in the mall. Defendant met with the merchants in the mall and discussed the security situation with them. Defendant revised its security plan and hired an extra security guard. Later in that month, plaintiff's store was burglarized twice and plaintiff lost over $200,000 worth of merchandise. Plaintiff sued defendant for negligence, alleging that the burglaries occurred because defendant had failed to provide adequate security services.3
The trial court rejected a certain jury instruction proffered by the plaintiff regarding its negligence cause of action and on appeal the plaintiff contended that the instruction should have been given. Regarding that contention, the Royal Neckwear court said: “The question presented by the facts in this case is whether a commercial landlord owes a duty to its tenant to safeguard that tenant's property from reasonably foreseeable criminal activity by third parties. No California case has held that such a duty exists; and ․ we decline to find such a duty.” (Royal Neckwear Co. v. Century City, Inc., supra, 205 Cal.App.3d at p. 1151, 252 Cal.Rptr. 810.) The court held that although the law requires landowners to act reasonably in preventing injury to persons coming upon their property, that rule does not extend to injury to personal property. (Id. at p. 1152, 252 Cal.Rptr. 810.)
The Royal Neckwear court noted that the plaintiff in that case was relying on Vermes to support its contention that the defendant owed it a duty to prevent the burglary; however, the court rejected the applicability of the Vermes case to the facts before it. The court stated: “Vermes ․ discussed whether a commercial landlord owed a duty to warn the tenant that the roof over tenant's jewelry store was vulnerable to easy penetration. The [Vermes ] court found such a duty existed. Even if we were inclined to follow the Vermes court's lead, no allegation has been made that hidden defects or vulnerabilities in the appellant's store contributed to these burglaries.” (Royal Neckwear Co. v. Century City, Inc., supra, 205 Cal.App.3d at p. 1152, fn. 3, 252 Cal.Rptr. 810.)
3. Analogous Duties Imposed by California Law on Sellers of Real Property
Civil Code section 17094 provides that “One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.” Additionally, section 1710 states in part that “A deceit, within the meaning of [section 1709] is either: ․ 3. The suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact; ․” To establish liability under section 1710, subdivision 3, the plaintiff must show that the defendant was under a duty to disclose the concealed or nondisclosed facts. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735, 29 Cal.Rptr. 201.)
In Lingsch, the plaintiffs sued the former owners of certain real property as well as the broker employed by those former owners. Plaintiffs had purchased the property from and through these defendants, respectively. Plaintiffs alleged the defendants failed to tell them that the building on the property was in such disrepair that the units therein were illegal. Plaintiffs further alleged that they did not discover this problem until four months after they purchased the property.
The Lingsch court noted that in their complaint, plaintiffs had charged the defendants with fraud based on inactive concealment and nondisclosure, but had not charged them with fraud predicated on affirmative misrepresentations, negligent misrepresentations or false promises, which are the other three types of deceit defined in section 1710. Nor had the plaintiffs charged that the defendants actively covered up the problems in the building. Thus, the situation in Lingsch is similar to that in the instant case; it concerned plaintiffs who alleged that the defendants failed to convey to them material information about the real property they were buying. The situation is further similar in that the Lingsch court was asked by the plaintiffs to rule on the propriety of the trial court's order sustaining a general demurrer to their complaint, without leave to amend.
In determining whether plaintiffs could state a cause of action for fraud under section 1710, subdivision 3 (i.e., in determining whether defendants were under a duty to disclose the complained-of material information to plaintiffs) the Lingsch court said: “It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. [Citations.] Failure of the seller to fulfill such duty of disclosure constitutes actual fraud. [Citations.]” (Lingsch v. Savage, supra, 213 Cal.App.2d at pp. 735–736, 29 Cal.Rptr. 201.) (The court went on to hold that when the real estate agent or broker representing the seller also possesses knowledge of facts that materially affect the value or desirability of the property, the agent or broker is under the same duty of disclosure. (Id. at pp. 736–737, 29 Cal.Rptr. 201.)) This rule has been consistently applied. (Nussbaum v. Weeks (1989) 214 Cal.App.3d 1589, 1599–1600, 263 Cal.Rptr. 360; Easton v. Strassburger (1984) 152 Cal.App.3d 90, 99, 199 Cal.Rptr. 383; Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 187–188, 183 Cal.Rptr. 881; see also the fourth paragraph in BAJI No. 12.36 (7th ed. 1986).)
The Lingsch court set out the elements of the cause of action which the plaintiffs were seeking to plead in their complaint. The court stated: “The elements of a cause of action for damages for fraud based on mere nondisclosure and involving no confidential relationship would therefore appear to be the following: (1) Nondisclosure by the defendant of facts materially5 affecting the value or desirability of the property; (2) Defendant's knowledge of such facts and of their being unknown to or beyond the reach of the plaintiff; (3) Defendant's intention to induce action by the plaintiff; (4) Inducement of the plaintiff to act by reason of the nondisclosure[;] and (5) Resulting damages. [Citations.]” (Lingsch v. Savage, supra, 213 Cal.App.2d at p. 738, 29 Cal.Rptr. 201.)
4. The Rationale of Vermes is Applicable Here
By urging this court to adopt the reasoning and rules set out by the Minnesota Supreme Court in Vermes v. American Dist. Tel. Co., supra, 251 N.W.2d 101, plaintiffs are actually asking us to extend, to lessors of commercial real property, the rules of disclosure which govern sellers of real property in California. The logic and justice of such an extension is compelling. The lessee of commercial property is in no less need of a true picture of the property he seeks to rent than would be a prospective purchaser of that property. The finite nature of a rental arrangement should not be controlling. Indeed, as a practical matter, that is not a significant factor. Commercial leases are frequently negotiated for extended periods of time and, except for the existence of possible conditions as to use and the presence of a term, are often the functional equivalent of a sale of the premises.6
Thus, we hold that a lessee of commercial real property will have a cause of action against his lessor for fraud based on nondisclosure of known facts where the following elements are established: (1) the lessor knows of facts which could reasonably and materially affect the value and desirability of the rental premises in light of the proposed lessee's intended and disclosed use of it; (2) the lessee does not know of these facts nor could they be discovered by a reasonable and diligent inspection or investigation; (3) the lessor knows that such facts are neither known to the lessee nor discoverable by a reasonable and diligent inspection or investigation; (4) the lessor fails to disclose those facts to the lessee; (5) the lessor intended by his nondisclosure to induce the lessee to act; (6) the lessee has been induced to act by reason of the nondisclosure; and (7) the lessee thereby suffers damage.
There is, in reality, little difference between this duty of disclosure and the well established rule that a landlord who has actual knowledge of defects in the premises which are unknown to the tenant and not apparent, and who fails to disclose such defects is liable for damages sustained by the tenant. (See, 4 Witkin, Summary of Cal. Law (9th ed. 1987) Real Property, §§ 599–600, pp. 778–781.) While this rule has generally been applied to permit recovery for personal injuries sustained by a tenant, it has also been applied to an injury to property. (Shotwell v. Bloom (1943) 60 Cal.App.2d 303, 309–311, 140 P.2d 728.) In Shotwell, an action to recover the value of personal property destroyed in a fire caused by an undisclosed chimney defect, the court, after noting the general rule of nonliability of a lessor for defects in the leased premises described a recognized exception: “ ‘The rule above stated, that the lessor is under no obligation to the lessee as regards the condition of the premises at the time of the demise, is subject to an exception to the effect that, if there is some hidden defect in the premises, or danger thereon, which is known to the lessor at the time of making the lease, but which is not apparent to the intending lessee, the lessor is bound to inform the latter thereof, and failing so to do, he is liable for injuries to the tenant arising therefrom.’ (Citations.)” (Shotwell v. Bloom, supra, 60 Cal.App.2d at pp. 309–310, 140 P.2d 728, citing 1 Tiffany, Landlord and Tenant, p. 562, § 86, subd. (d) as its source of the quoted matter.)
The conclusion which we reach imposes no duty upon a commercial lessor to protect or safeguard a tenant's property or to prevent or control the criminal or negligent conduct of third parties. What it does do is simply recognize the applicability to the facts of this case of a well established principle requiring the disclosure of latent defects.
5. Plaintiffs Should Have Been Given An Opportunity To Amend
Like the Lingsch court, we find that when we examine plaintiffs' second amended complaint, in light of the required elements of a cause of action for deceit based on nondisclosure of facts, the pleading falls far short.7 However, as the required elements have not heretofore been specifically articulated and plaintiffs were clearly attempting to assert the claim which we here recognize, they should be given an opportunity to plead the necessary allegations if they can truthfully do so. We therefore conclude, in light of all of the circumstances, that there is a “reasonable possibility that [the] ․ defects [of the second amended complaint] can be cured by amendment.” (Lingsch v. Savage, supra, 213 Cal.App.2d at 739–740, 29 Cal.Rptr. 201; see also Okun v. Superior Court (1981) 29 Cal.3d 442, 460, 175 Cal.Rptr. 157, 629 P.2d 1369.)
We conclude that, in California, lessors of commercial real property have a duty to prospective tenants to disclose material facts affecting the value or desirability of the leased premises. While we find that plaintiffs have failed to allege all the elements of a cause of action based on that duty, nothing in the record or the briefs indicates that plaintiffs cannot cure the defects in their amended complaint. Therefore, the trial court should vacate its order sustaining Antonio's demurrer without leave to amend and enter an order sustaining the demurrer, but with leave to amend.
The order of dismissal is reversed and the cause is remanded to the trial court for further proceedings consistent with the views expressed herein. Costs on appeal to the plaintiffs.
1. By this argument, Antonio underscored his misapprehension of the thrust of plaintiffs' claim. Plaintiffs complain that Antonio failed to disclose relevant facts to them at the time the lease was negotiated and entered into; this claim rests in deceit (non-disclosure), not negligence. There is no claim asserted here by plaintiffs that Antonio negligently failed to protect their property. Antonio's demurrer only succeeded in knocking over a straw man.
2. As the fifth cause of action was the only one in which Antonio was named as a defendant, the trial court's ruling resulted in an appealable order dismissing him as a defendant.
3. The plaintiff in Royal Neckwear also sued the defendant for breach of contract. However, that claim was based on water damage to plaintiff's store caused by a leak in the mall roof and a drainage problem in the common area near plaintiff's store. Those claims were unrelated to the plaintiff's negligence cause of action and are not relevant to the issue before this court.
4. Unless otherwise indicated, all statutory references herein are to the Civil Code.
5. In discussing the factor of “materiality,” the Lingsch court observed that, “whether the matter not disclosed by the seller or his agent is of sufficient materiality to affect the value or desirability of the property ․ depends on the facts of the particular case.” (Lingsch v. Savage, supra, 213 Cal.App.2d at p. 737, 29 Cal.Rptr. 201.)
6. At common law, the real estate lease was considered as a conveyance or sale of the premises for a term of years. (Green v. Superior Court (1974) 10 Cal.3d 616, 622, 111 Cal.Rptr. 704, 517 P.2d 1168.)
7. This is particularly true with respect to plaintiffs' allegations that they (1) did not know of the negative facts regarding the property and (2) could not have discerned them through “routine inspection.” This allegation does not satisfy plaintiffs' burden. It is not enough for the latent defects to be beyond a prospective tenant's “observation” or “routine inspection.” They must be beyond discovery by a reasonable and diligent inspection or investigation.
CROSKEY, Associate Justice.
KLEIN, P.J., and DANIELSON, J., concur.