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PURITAN LEASING COMPANY v. AUGUST (1975)

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

PURITAN LEASING COMPANY, a California Corporation, Plaintiff and Appellant, v. Robert Alan AUGUST doing business under the fictitious name of Endless Summer et al., Defendants and Respondents.

Civ. 44495.

Decided: August 19, 1975

Cavalletto, Webster, Mullen & McCaughey, by C. Richard Whiston, Santa Barbara, for plaintiff and appellant. William A. Wittman, Jr., Newport Beach, for defendants and respondents.

FACTS:

Appellant (lessor) leased personal property consisting of restaurant equipment to lessees pursuant to a written lease. Lessor purchased the equipment from vendors selected by the lessors, and paid a purchase price of $14,632.20. Respondents guaranteed lessees' performance.1 The term of the lease was for 60 months. After the first six months lessees defaulted and paid nothing thereafter. Lessees also failed to pay the personal property taxes and insurance payments due and as agreed to be paid by them under the lease. Following telephone and written communication with lessees calling the delinquency to their attention, lessor received a notice from the owner of the real property where the restaurant equipment was located. The landlord advised lessor that the lessees were in default and demanded that lessor re-lease the restaurant equipment or get it out of landlord's premises. About one month later landlord advised lessor that the real property where the equipment was located had been leased to new tenants. Shortly thereafter lessor received a letter from lessees' attorney advising lessor that a hoped-for arrangement whereby the new tenants would take over the personal property lease did not materialize. In the letter lessees' attorney suggested that lessor proceed with an immediate sale or removal of the property to prevent wear and tear by the new tenants of the restaurant, who did not take over the lease of the equipment. About 10 days later lessor at public auction sold the equipment for $4,250. Lessor sued lessees for a deficiency. The deficiency was determined by lessor by (1) totaling the rental for the entire life of the lease together with the unpaid taxes and insurance and expenses of sale and late charges, and (2) deducting therefrom the sum of the net proceeds of sale, the portion of rental paid, the security deposit, and a discount for present value of future rentals. The amount thus arrived at was $10,901.51. The trial court directed the jury to return a judgment in favor of lessor in the sum of $761.07 only. The reason for the significant difference and the basis of the contention on appeal is that the trial court disallowed recovery of any damages representing the amount of future rental payments which would have been due after the date of sale. The trial court allowed as damages (in addition to the expense of sale, taxes, insurance and late charges) only the rentals accrued and unpaid to the date of sale.

Lessor appeals the judgment of the trial court on the directed verdict.

Appellant contends that the trial court erred in denying appellant-lessor recovery of rental allocable to that portion of the lease period extending beyond the date of sale.

THE ISSUE:

The question here is: May the lessor of personal property recover any rental payments for that part of the lease term following sale of the property after default by lessee?

DISCUSSION:

We hold that under the facts here the lessor may so recover and we therefore reverse the judgment of the trial court.

The lease in the case at bench provides:

‘Upon the occurrence of any such default, Leasing Company at its sole option may elect that the rental payments due hereunder be accelerated and the entire amount of rental be due immediately; or Leasing Company may terminate this lease; or Leasing Company may enter upon Lessee's premises and without any court order or other process of law may repossess and remove said Property either with or without notice to Lessee. Any such repossession shall not constitute a termination of this lease unless Leasing Company so notifies Lessee in writing, and Leasing Company shall have the right, at its option, to lease the Property to any other person or persons upon such terms and conditions as Leasing Company shall determine; or to sell the Property to the highest bidder at public or private sale at which sale the Leasing Company may be the purchaser. In either of such events, there shall be due from Lessee and Lessee will immediately pay to Leasing Company the difference between the total amount of rentals to be received from any third person or the purchase price at said sale, as the case may be, and the total unpaid rental provided to be paid herein, plus all costs and expenses of Leasing Company in repossessing, releasing, transporting, repairing, selling or otherwise handling the Property.’ Respondents claim that the provision for the acceleration of rent is one for liquidated damages, and therefore void and unbenforceable.

In some real property cases it has been held that the provision for acceleration of rent upon breach of covenant is unenforceable if it is in effect an imposition of penalty or forfeiture. If it is intended to be a measure of liquidated damages, it has been held to that extent void under Civil Code section 1670, unless from the nature of the case it would be impractical or extremely difficult to fix the actual damages. (Civ. Code, § 1671; Ricker v. Rombough, 120 Cal.App.2d Supp. 912, 261 P.2d 328.)

Typical language appears in Ricker v. Rombough, supra, 120 Cal.App.2d Supp. at p. 919, 261 P.2d at p. 331, where it is stated: ‘[A] provision in a lease of real property for rent acceleration upon breach of a covenant to pay rent is unenforceable and void as being either an agreement for liquidated damages when the damages re readily ascertainable or a penalty. This is particularly true in this case for the reason that the lease here under consideration expressly declares the rent acceleration clause to be ‘in addition to any other remedies which lessor may have upon such default, failure or neglect.’ Under this lease, upon any default of the lessee, the lessor has the right to terminate the lease and reenter the premises and at the same time sue for all of the unpaid rent reserved for the entire term of the lease. Such a provision has no relation whatever to the actual damages which may be sustained and is the clearest king of a penalty.'

In real property cases the rules on damages have been summarized as follows:

‘[T]he lessor had three remedies: (1) To consider the lease as still in existence and sue for the unpaid rent as it became due for the unexpired portion of the term; (2) to treat the lease as terminated and retake possession for its own account; or (3) to retake possession for the lessee's account and relet the premises, holding the lessee for the difference between the lease rentals and what it was able in good faith to procure by reletting.’ (Kulawitz v. Pacific etc. Paper Co., 25 Cal.2d 664, 671, 155 P.2d 24, 28, accord Treff v. Gulko, 214 Cal. 591, 7 P.2d 697.) The same rules have been used in personal property cases. (Automobile etc. Co. v. Salladay, 55 Cal.App. 219, 222, 203 P. 163.)

Of such rules one relied upon here by respondents seems to be that ‘. . . a lessor cannot collect rent for the use of a chattel after he has repossessed himself of the chattel and terminated the lease. He cannot, at least in the absence of an express covenant to the contrary, withhold the chattel and still collect rent money for its use. . . . Each party is estopped to claim both the possession of the leased property and compensation for its use. Each, when he voluntarily terminates the lease, and, by regaining the property places it out of the power of the lessee to use it, terminates the lease for all purposes.’ (Automobile etc. Co. v. Salladay, supra, 55 Cal.App. at p. 222, 203 P. at p. 165; Challenge-Cook Bros., Inc. v. Lantz, 256 Cal.App.2d 536, 64 Cal.Rptr. 239.) Thus, another question seems to be: Did lessor ‘terminate’ the lease so that it is barred from recovering ‘rental’ for that period of the lease beyond the ‘termination?’

We hold that (a) the provision in the lease here is not a provision for the payment of liquidated damages, and (b) there was no ‘termination’ of the lease by lessor whereby the lessees were relieved from the obligation to pay the rental promised (less the credits for sale and down payment, etc.).

(a) The issue of liquidated damages.

That the lease contains an acceleration of rent, with available credits for the proceeds of sale, does not necessarily make such acceleration clause a liquidated damages clause. We do not accept any implication to the contrary contained in the cases of Ricker v. Rombough, supra, 120 Cal.App.2d Supp. 912, 261 P.2d 328 and Electrical Prod. Corp. v. Williams, 117 Cal.App.2d Supp. 813, 256 P.2d 403.

The agreement here is clear and understandable. Under it, the lessor could elect to proceed as it did herein. The part of the agreement quoted does not impose any penalty in addition to or in lieu of actual damages for breach not does it provide for the payment of liquidated damages. Civil Code section 1670 provides: ‘Every contract by which the amount of damage to be paid, or other compensation to be made, for a breach of an obligation, is determined in anticipation thereof, is to that extent void, except as expressly provided in the next section.’

The contract here does not determine any specific amount as liquidated damages. The particular provision under which lessor here proceeded is one which merely allows the lessor a method of mitigating its damage caused by lessees' breach. That method provides for a sale, the proceeds of which reduce what otherwise would be a greater liability of lessees. Inasmuch as section 1670 is not a bar to the contractual provision here, it is unnecessary to justify use of that provision as an exception to section 1670 under the provisions of section 1671. The provision under which lessor proceeded here was not simply an immediate acceleration clause. Lessor proceeded under the clause which provides for payment of the difference between rent promised and the amount received by lessor by sale. It provides for giving credit for the proceeds from (a) a reletting, or (b) from the sale. The remedy with credit under (a) is permitted by the cases (Kulawitz v. Pacific etc. Paper Co., supra, 25 Cal.2d 664, 671, 155 P.2d 24) and the provisions of Civil Code section 3308.2 The credit under remedy (b) seems even more favorable to the defaulting lessees. It allows full credit for all proceeds of sale.3 A just criticism for a provision for liquidated damages in some cases may be that the amount fixed bears no relation to what the probable actual damages might be and that such damages are not difficult to ascertain. Here, the balance of the rental payments, which respondents claim is but liquidated damages, is in reality the amount which the lessees promised to pay. The balance of the rental due is equivalent to the value of lessor's bargain; what it was entitled to receive.

(b) ‘Termination’ of lease by repossession or sale.

Language of cases summarizing the rule (e. g., Kulawitz v. Pacific etc. Paper Co., supra, 25 Cal.2d 664, 155 P.2d 24; Treff v. Gulko, supra, 214 Cal. 591, 7 P.2d 697; Automobile etc. Co. v. Salladay, supra, 55 Cal.App. 219, 203 P. 163) infers that if lessor retakes possession of the property after breach by lessees, such conduct ‘terminates' the lease and therefore there is no further lease or term thereof for which lessee is obligated to pay. Such statement isolated from the facts of each case is meaningless. We do not agree that such is the rule in all cases. At bench, the conduct of lessor in retaking and selling the property was not a termination of lessees' obligation to pay the balance of rental after the date of sale.

Here lessor tried to minimize its damage. Lessor tried to relet the property to the new parties who took over the location where the restaurant equipment had been used. That was a reasonable and good faith effort. The effort was unsuccessful. At that point lessor was faced with the dilemma of a prospective loss and of choosing a course of conduct which would best minimize the loss. There is no hint of any bad faith on the part of lessor. It elected to sell the property and to try and recoup as much cash in order to minimize its own loss and the liability of lessees. This retaking and selling was at the suggestion and with the acquiescence of lessees. At the crucial time lessees offered no better solution. It is unfair to now say, post mortem, that lessor unfortunately made the wrong selection. It is wholly incorrect to say that lessor terminated the lease. There is no evidence that the lessor intended to terminate or end the liability of lessees. The parties entered into a valid contract without fraud or unfair bargaining position on either side. Lessees as part of the bargain assumed the particular risk upon which they are now being asked to perform.

In Challenge-Cook Bros., Inc. v. Lantz, supra, 256 Cal.App.2d 536, 64 Cal.Rptr. 239, plaintiff lessor was required to repossess equipment after the default by lessee. The court there held that lessor could sue for the lease payments due and that the repossession and sale of the property was not an election of an incompatible remedy which ‘terminated’ the lease and barred the action. The court permitted the action of lessor against lessee to collect rental payments. Quoting Kreisa v. Stoddard, 127 Cal.App.2d 627, 631–632, 274 P.2d 164, 167 (a conditional sales case), the court applied the following language to the lease case before it:

‘[W]here a buyer has repudiated the contract, abandoned the goods, or in some other way manifested an intention not to fulfill his contractual obligations, the seller may, to secure the obligation owing to him, retake the property; and, after reselling the same and applying the proceeds to the outstanding balance, still be entitled to enforce the contract against the buyer for the payment of any deficiency. [Citations.]’

The Challenge-Cook Bros. v. Lantz court, 256 Cal.App.2d at page 544, 64 Cal.Rptr. at page 244, also noted that:

‘[W]hen the defendants not only refused to pay, but repudiated the contract and abandoned the property, the plaintiff's act in retaking possession of it certainly cannot be said to indicate any acquiescence on his part in the repudiation or any intent to end the sale. Whether he intended to insist upon the contract or not, the only sensible thing for him to do was to retake possession. He either had to do so for the protection of the property or allow it to be lost or destroyed for want of protection. He could, of course, have left it to its fate, but he was not required to follow any such hazardous and unreasonable course. The defendants thrust the necessity of taking possession upon him, and very plainly against his will, and without any thought on his part of acquiescing in their repudiation or himself termination the contract of sale.’

Lessor's act here was similarly an effort to minimize loss and not a termination or an act whereby lessor renounced any further right to recover.

The trial court may have felt compelled by the language and holding of Ricker v. Rombough, supra, 120 Cal.App.2d Supp. 912, 261 P.2d 328 and Electrical Prod. Corp. v. Williams, supra, 117 Cal.App.2d Supp. 813, 256 P.2d 403, to declare the acceleration of rent clause as one calling for liquidated damages or imposing a penalty or forfeiture. But in denying recovery to the lessor of what the trial court deemed liquidated damages, it did an injustice to lessor. Its directed verdict denied lessor not merely recovery of the amount of ‘future rental’ but denied lessor recovery of a substantial part of the purchase price which it paid for the equipment. That part remained unrecovered even after applying the proceeds of sale. In view of the fact that the equipment was purchased at the behest of lessees for their use, it seems unfair that lessor cannot recover at least the amount needed to recoup its out-of-pocket outlay. We believe the lessor is entitled to recover to this extent.4

The judgment is reversed and the cause remanded to the trial court with instructions to enter judgment in favor of plaintiff in accordance with this decision.

FOOTNOTES

1.  There is no issue as to the guarantee obligation.

2.  Civil Code section 3308 provides:‘The parties to any lease of real or personal property may agree therein that if such lease shall be terminated by the lessor by reason of any breach thereof by the lessee, the lessor shall thereupon be entitled to recover from the lessee the worth at the time of such termination, of the excess, if any, of the amount of rent and charges equivalent to rent reserved in the lease for the balance of the stated term or any shorter period of time over the then reasonable rental value of the * * * property for the same period.‘The rights of the lessor under such agreement shall be cumulative to all other rights or remedies now or hereafter given to the lessor by law or by the terms of the lease; provided, however, that the election of the lessor to exercise the remedy hereinabove permitted shall be binding upon him and exclude recourse thereafter to any other remedy for rental or charges equivalent to rental or damages for breach of the covenant to pay such rent or charges accruing subsequent to the time of such termination. The parties to such lease may further agree therein that unless the remedy provided by this section is exercised by the lessor within a specified time the right thereto shall be barred.’ (This section has been amended to exclude certain new leases of real property. The amendment is inconsequential to our decision.)

3.  We must at this point presume that a fair and reasonable sale is made. At bench, there is no evidence or question raised that the sale was other than honestly conducted and that a fair and reasonable price was received from such sale.

4.  The recovery of the capital investment or cost of the equipment may well be less than the total promised lease payments. It would seem that a proper measure of damage is to permit lessor to recover the sesser of either the total promised lease payments or the purchase price it paid for the personal property. In theory, recovery of the purchase price would enable lessor to reinvest its capital.

BEACH, Associate Justice.

FLEMING, Acting P. J., and COMPTON, J., concur.

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PURITAN LEASING COMPANY v. AUGUST (1975)

Docket No: Civ. 44495.

Decided: August 19, 1975

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

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