If Your Lease Term Exceeds 99 Years Revisions Should Be On Your Radar

• Jurisdiction: California,United States
• Law Firm: Wood Smith Henning & Berman LLP
• Subject Matter: Litigation, Mediation & Arbitration, Real Estate and Construction, Court Procedure, Trials & Appeals & Compensation, Landlord & Tenant - Leases
• Author: Alexi Antoniou and Summit Dhillon
• Published date: 04 April 2023

In the case of Tufield Corporation v. Beverly Hills Gateway, Case No. B314862 (2022), the court got back to basics in this landlord-tenant dispute. It found that a lease exceeding 99 years is void under the law as a suppression of California public policy encouraging the free exchange and development of land. The primary issue on appeal is whether a lease that violates Civil Code section 718 is void or voidable and is essentially an issue of first impression. The court held that the part of the lease exceeding 99 years was void.

Factual Background

In this commercial landlord-tenant dispute, the parties disagree on the enforceability of a lease. The plaintiff, cross-defendant and appellate is Tufield Corporation- the landlord in this dispute. Beverly Hills Gateway L.P. (BHG) is the tenant. Tufield is a family-owned company that owns prime location commercial property in Beverly Hills. Back in 1960, Tufield agreed to rent this property to two tenants with a ground lease term of 99 years ending in 2058. The rent was 6% of the appraised value of the property subject to regular reappraisals. The tenants built an office building on the property in 1964. Douglas Emmett Realty Fund was the tenant staring in 2003.

Also in 2003, BHG bought Emmett's interest in the ground lease. Emmett rented and assigned its interest to BHG and two other businesses. Those two other businesses immediately granted and assigned their interest to BHG in an almost simultaneous transaction. BHG obtained financing for these transactions from a lender. In 2007, BHG was considering a remodeling project on the property, but wanted to extend the lease to make its expenditures more worthwhile. In an executed amendment to the lease in 2007, BHG and Tufield agreed to extend the lease term through December 31, 2123 and future rent was increased to 6.5% of the appraised value. BHG also paid Tufield $1.5 million as part of the new agreement. The parties also formulated a memorandum of the agreement in which Tufield agreed to give BHG a right of first refusal should any other party present a bona fide offer to purchase the property. As a result of this transaction, BHG refinanced its loan and borrowed $47 million from a new lender. Tufield also signed an estoppel certificate, which included a term verifying that the lease terminated on December 31, 2123.

BHG completed $8.8 million in renovations over several years. In 2016-2017, Tufield increased the monthly rent from $30,500- $200,000 based on an appraisal of the property value. BHG opposed this increase and the parties litigated the matter, but settled before any judgment was reached by the court. In late 2017, BHG refinanced its loan a second time borrowing $49 million. A second estoppel certificate was issued by Tufield again confirming that the lease terminated on December 31, 2123. BHG used some of the new loan monies to make further improvements to the property.

Soon after this occurred, Tufield's president found out that leases longer than 99 years are invalid under Civil Code section 718. Tufield then filed a complaint for declaratory relief and quiet title against BHG. Tufield requested a cancellation of the ground lease, or in the alternative, a cancelation of 2007 amendment based on the fact that the lease term was more than 99 years.

BHG cross-complained for declaratory relief, unjust enrichment and reformation of the contract. BHG claimed...