HERBST v. SANTA MONICA SWIM AND HEALTH CLUB INC (1987)

Lessees failed to timely exercise an option to renew, but in an ensuing unlawful detainer action the trial judge and jury found lessors had waived the error and were estopped to deny the extension.   There is substantial evidence to support that determination and we affirm.

I

Viewed in a light most favorable to the judgment, the evidence was as follows:  The parties are each successors in interest to a lease originally executed, somewhat ironically, on April 1, 1969.¹  The leasehold premises consist of a health spa in a Garden Grove shopping center.   Edward and Hyman Herbst have been the landlords since 1976, when they bought a portion of the shopping center;  Santa Monica Swim and Health Club, Inc. is the tenant.   In 1983 the lease was extended to March 31, 1985, at an increased monthly rent.   The new lease granted the club the option to renew for two additional five-year terms “by giving notice in writing to Lessor no later than ninety days prior to the termination period.”   The club conceded it failed to give a formal written notice until April 9, 1985, almost a hundred days late, although it did claim substantial compliance.

With the exception of the present matter, all disputes with the club were satisfactorily resolved on a friendly basis over the previous decade.   Rigid adherence to deadlines was never required.   When the club failed to make timely tax payments, for example, a telephonic reminder from the Herbsts was the only action taken or needed.

The Herbsts were certainly aware their tenant intended to exercise its two options.   The club spent some $250,000 to upgrade the leased premises in various ways in 1982 alone.   Although the Herbsts denied knowledge of any improvements by the club, the jury could, and probably did, find that testimony difficult to believe:  For example, a substantial sum was expended to convert the facility to co-ed use, and the roof was repaired at a cost of $50,000.   Such modifications could hardly have escaped the notice of the ordinary landlord.

In addition, the club cooperated in a major remodeling of the shopping center by the Herbsts and the other landlord in 1984, after being assured the temporary inconvenience would be easily worth the future business benefits.   On that basis the club accepted the detriments, which included operational interruptions and removal and replacement of its sign and distinctive nine-foot statue of Atlas bearing the world on his shoulders.

Also, in September of 1984, the club sent the Herbsts a letter requesting installation of a new permanent sign reflecting a change in the club's name, another rather clear expression of an intent to continue the tenancy beyond March of 1985.   The Herbsts did not order the sign, as they had done in the case of other tenants, although they assured the club they had.   By February 1985 the Herbsts realized the club missed the option deadline and, unsure of their legal position, hoped to extract a higher rent to renew the lease.   For that reason the Herbsts secretly postponed ordering the requested permanent sign.   Meanwhile, the club continued to offer annual memberships to the public through the waning days of the lease.

On April 3, 1985 the Herbsts accepted the rent at the usual rate and negotiated the check, although the lease term had literally ended on March 31.   The next day, however, they sent the club a letter advising that the lease had expired and the tenancy was now month-to-month at a fourfold increase in rent.   They also insisted upon a $23,000 security deposit.

On April 8 the Herbsts inconsistently demanded payment of the property tax through June 30, 1985.   The tax obligation was, of course, a creature of the lease purportedly disavowed by the Herbsts four days before.   Also, the payment required did not correspond chronologically to a monthly tenancy, even assuming taxes would be an implied part of the new, unilaterally announced month-to-month relationship.

The club had not yet received the April 4 letter and made the tax payment immediately.   The next day, April 9, the Herbsts' cancellation notice arrived.   The same day the club sent a mailgram purporting to exercise the option.   The Herbsts rejected the tender of the May rent and filed a 30–day notice to pay rent or quit, although their counsel continued to send notices to the club pursuant to provisions of the lease.   This lawsuit followed.

In sum, although the Herbsts had never before adopted a rigid posture with respect to various time constraints in the lease and knew the club intended to renew and hoped it would, they positioned themselves to take full advantage of the club's oversight.²  The club's alternatives were grim:  It would have the choice of paying a large deposit and quadrupled rent, which was considerably above market for a spa use according to the club's manager, Carmen Baratta, or losing most of its $250,000 investment in recent improvements and, perhaps, the business itself in the event its membership could not be persuaded to transfer to one of its other facilities or another acceptable location.

II

 The Herbsts first attack the sufficiency of the evidence to support the jury's finding of waiver and estoppel.   An optionor may waive or be estopped from asserting the strict requirements of a lease option provision (Leonhardi-Smith, Inc. v. Cameron (1980) 108 Cal.App.3d 42, 47, 166 Cal.Rptr. 135;  Simons v. Young (1979) 93 Cal.App.3d 170, 178–179, 155 Cal.Rptr. 460);  and unless the evidence is susceptible to but one inference, those issues are for the resolution of the trier of fact.  (H.O. Bragg Roofing, Inc. v. First Federal Sav. & Loan Assn. (1964) 226 Cal.App.2d 24, 28, 37 Cal.Rptr. 775;  O'Connell v. Weitzman (1959) 168 Cal.App.2d 400, 404, 336 P.2d 592.)   We find ample evidence to support the determination below with respect to both waiver and estoppel.   And, of course, either finding would support the judgment.

The Herbsts, with more than sufficient actual notice that the club intended to continue its tenancy and had merely overlooked the formal notice provision of the lease (cf. ADV Corp. v. Wikman (1986) 178 Cal.App.3d 61, 223 Cal.Rptr. 262), did not call the mistake to the tenant's attention as they had invariably done in the past or otherwise inquire.   Nonetheless, they accepted the usual rent for April after the lease expired and insisted that the property taxes be paid through the month of June as the lease provided with no suggestion of a monthly proration.

Thus, although the club had cooperated in the remodeling of the shopping center to the substantial detriment of its business but a short time before based on the assurances of the longterm benefit to its leasehold and had made clear its intent to remain indefinitely in a number of other ways, the Herbsts, rather than make a simple telephone call to confirm what they already knew, sought to have it both ways.   They attempted to extract an exorbitant additional rent as the price for the club's continued tenancy, while at the same time insisting on and accepting benefits that could only be due them pursuant to a lease they claimed had expired.   Under all these circumstances, the waiver and estoppel findings were certainly justified, if not compelled.

Moreover, we note the evidence established either alternative, payment of the additional rent demanded at four times the option price or loss of the lease, would have created an unconscionable forfeiture.   Waiver or estoppel or not, equity should intervene to prevent such forfeitures.  (Civ.Code, § 3275.)

 We believe the leading cases on this subject in California, Bekins Moving Van & Storage v. Prudential Ins. Co. (1985) 176 Cal.App.3d 245, 221 Cal.Rptr. 738 and Simons v. Young, supra, 93 Cal.App.3d 170, 155 Cal.Rptr. 460, are in error to the extent they would deny full equitable relief under these circumstances.   The correct rule is this:  Where the delay is slight, the damage to the optionor minimal or nonexistent, and denial of relief would result in an unconscionable forfeiture to the optionee, equity ought to intervene.   This is probably the majority view nationwide in real property matters and certainly the better one.  (See, e.g., Wharf Restaurant, Inc. v. Port of Seattle (1979) 24 Wash.App. 601, 605 P.2d 334;  J.N.A. Rlty. Corp. v. Cross Bay Chelsea, Inc. (1977) 42 N.Y.2d 392, 397 N.Y.S.2d 958, 366 N.E.2d 1313;  Benetti v. Kishner (1977) 93 Nev. 1, 558 P.2d 537;  Sosanie v. Pernetti Holding Corp. (1971) 115 N.J.Super. 409, 279 A.2d 904;  Xanthakey v. Hayes (1928) 107 Conn. 459, 140 A. 808; F.B. Fountain Co. v. Stein (1922) 97 Conn. 619, 118 A. 47.)

III

 The Herbsts have several other complaints on appeal, but all are similarly without merit.   They argue the testimony of Carmen Baratta as to the reasonable rental value of the premises was irrelevant and not based on sufficient expertise.   Baratta was a director of the club and then managed 31 spas, including the one in question.   A 29–year veteran of the health club business, both as a tenant and landlord, he also had recent experience in negotiating spa leases.   Baratta obviously knew considerably more than an ordinary layman about the subject.   He easily qualified as an expert.  (Evid.Code, § 720, subd. (a).)

Baratta's testimony was also relevant, contrary to the Herbsts' contention.   One of the Herbsts testified the fair market value of the leasehold premises for general purposes was $1 per square foot per month.   Although Baratta's conflicting testimony related only to the property's use as a spa, the trier of fact could have reasonably concluded that was the best use of the facility in light of the club's costly improvements.

Moreover, based on our comments above, the testimony takes on added relevance;  it demonstrates, in part, the extreme hardship that would be occasioned by an unyielding enforcement of the option clause.   The club would be finished at that location and have its business severely interrupted, or be forced to pay a grossly inflated rent for its use of the premises as a health club.   Neither of these alternatives would be equitable.

 The Herbsts also argue that the issue of estoppel should not have been submitted to the jury.   We need not discuss the contention in any depth.   The jury's finding of waiver is sufficient to support the verdict, and there is authority for the submission of mixed issues of law and equity to the jury in any event.  (Frahm v. Briggs (1970) 12 Cal.App.3d 441, 90 Cal.Rptr. 725.)   Even if the issues are severable, the court “may permit a jury trial on equitable issues.   If it does so, the jury's verdict is merely advisory and does not bind the trial court.  (Cutter Laboratories, Inc. v. R.W. Ogle (1957) 151 Cal.App.2d 410, 418 [311 P.2d 627.].)”  (Wyle v. Alioto (1987) 191 Cal.App.3d 1128, 1133, 236 Cal.Rptr. 849.^** )  This is essentially what occurred here.   The trial judge did submit the estoppel issue to the jury, but he specifically expressed his agreement with the verdict.   He would obviously have made the same finding in a trial to the court.

Moreover, even if the judge had arrived at a different decision on the merits of the estoppel issue and the jury had not found waiver, judgment for the club would nonetheless be required based on ordinary principles of equity;  for, as the maxim goes, equity abhors a forfeiture.   A finding of estoppel or waiver should not be essential where a forfeiture is threatened with little or no corresponding harm to the optionor.

The Herbsts submitted a set of instructions tailored after the Bekins/Simons cases.   They claim the court erred in rejecting them and in giving another instruction, a modification of BAJI No. 2.60, which allegedly conflicts with language in those cases.   Again, there is little to discuss.  Bekins and Simons were wrongfully decided in our view.

 Finally, the Herbsts complain that the court erred in rejecting their request for special interrogatories to the jury.   That is a matter of considerable trial court discretion and not subject to review in the absence of a clear abuse.  (Li v. Yellow Cab Co. (1975) 13 Cal.3d 804, 824, fn. 18, 119 Cal.Rptr. 858, 532 P.2d 1226;  Code Civ.Proc., § 625.)   None appears on this record;  and, even if it did, our view of the equities involved would not be affected by such an error.

Judgment affirmed.   Respondent may have its costs on appeal, including attorneys fees per the lease in an amount to be fixed by the trial court.

I respectfully dissent.   I would reverse the judgment.   In Simons v. Young (1979) 93 Cal.App.3d 170, 155 Cal.Rptr. 460, the court considered a lessee's similar request for equitable relief.   The lessee there had made substantial improvements and planned other additions.   The lessors were aware of this and expected the lessee to exercise the option.   However, the lessee did not give timely written notice of his intention to renew the lease.   The lessors promptly notified him the lease would terminate on the scheduled expiration date.   The trial court granted equitable relief, but the appellate court reversed, stating that “while a court may grant relief on traditional grounds for equitable intervention such as fraud, accident or mistake, it may not grant equitable relief ․ when ․ the failure to timely exercise the option is due entirely to the inadvertence or neglect of the optionee to which the optionor in no way contributed.”  (Id., at p. 182, 155 Cal.Rptr. 460;  accord:  Bekins Moving & Storage Co. v. Prudential Ins. Co. (1985) 176 Cal.App.3d 245, 221 Cal.Rptr. 738.)   The Simons court additionally held the lessors had not waived written notice and were not estopped from complaining merely because they were aware of the improvements made by the lessee.  (Simons v. Young, supra, 93 Cal.App.3d at p. 179, 155 Cal.Rptr. 460.)

I agree.   Where a lease specifies the manner in which an option is to be exercised, the lessee must be held to strict compliance with those terms.  (See ADV Corp. v. Wikman (1986) 178 Cal.App.3d 61, 223 Cal.Rptr. 262 [lessee's continued possession of premises at end of term is sufficient to exercise option where lease is silent as to manner of exercise].)  Contracting parties “ ‘should not be required to anticipate or guess how a panacean court of equity may “feel” a valid contract should be construed or enforced, because one of the contracting parties may breach the simple conditions precedent, agreed to by both parties before the contract can be renewed.’ ”  (Simons v. Young, supra, 93 Cal.App.3d at p. 187, 155 Cal.Rptr. 460.)   The policy of enforcing a contract in accordance with its written words not only provides greater certainty to the contracting parties, but it is especially appropriate in the context of an option, where the optionor is bound in advance to make a contract if the optionee elects to exercise the option.  “Since the optionor is bound while the optionee is free to accept or not as he chooses, courts are strict in holding an optionee to exact compliance with the terms of the option.  [Citation.]”  (Id., at p. 182, 155 Cal.Rptr. 460.)

Where a lessee's conduct conveys an unambiguous intention to exercise an option, a lessor who recognizes such intent may be held to have waived the requirement of written notice.  (Simons v. Young, supra, 93 Cal.App.3d at p. 179, 155 Cal.Rptr. 460.)   Thus, courts have found a waiver of written notice where the lessee gave timely oral notice or promptly paid the increased rents applicable to the option term.  (See, e.g., Tay-Holbrook, Inc. v. Tutt (1933) 218 Cal. 600, 24 P.2d 463;  Leonhardi-Smith, Inc. v. Cameron (1980) 108 Cal.App.3d 42, 166 Cal.Rptr. 135.)

Here, however, there was no conduct which would, as a matter of law, have been construed as an intention to renew.   The improvements were all made by the tenant two to four years prior to the expiration of the term.   Moreover, these repairs and improvements were made without the required notice to and consent from the landlord.   A lessee must demonstrate more than a current intention to stay on the premises for a long while.  (Simons v. Young, supra, 93 Cal.App.3d at p. 179, 155 Cal.Rptr. 460.)   Instead, it must manifest its unequivocal agreement to be bound by the terms of the renewal for the entire additional term.   A lessee's acceptance of an option should be binding upon him, so that the obligations of the parties will be mutually enforceable.  (See Wiener v. H. Graff & Co. (1908) 7 Cal.App. 580, 583, 95 P. 167.)   Here, had the club decided not to extend the lease, the Herbsts would have had no right to enforce the option based on their redecorating alone.

The club's waiver and estoppel arguments must fail.   In order to prevail on an estoppel theory, the club would have to show it relied to its detriment on conduct of the Herbsts.   No such showing was made.   The Herbsts did nothing to lull the club into a false sense of security.   Contrary to the scenario created by the majority, the club was not tricked into letting the option lapse.   It simply forgot about the requirement.  “[E]quitable relief will not be granted where the lessee-optionee's failure to exercise the renewal option within the specified agreed time was due entirely to his inadvertence or neglect and not contributed to by the lessor-optioner․”  (Simons v. Young, supra, at p. 186, 155 Cal.Rptr. 460.)

The club gave notice well after both the three-month notice period specified in the lease and after the lease itself had terminated.   As the Herbsts point out, the court can neither “resurrect the option which had already expired nor re-write the lease․”

FOOTNOTES

1.   “April Fools Day” was to arrive a few days late, 16 years hence.

2.   The Herbsts' attorneys are not overly preoccupied with deadlines either, it appears.   They, like counsel for the club, filed supplemental briefs in this court four days late.

FOOTNOTE.   Editors' Note:  The California Supreme Court denied review and ordered that the opinion be not officially published on July 23, 1987.

CROSBY, Associate Justice.

WALLIN, Acting P.J., concurs.