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Landlord Not Locked in to Lower Payments After Accepting Such Amount – Glass & Goldberg | Financing, Property & Bankruptcy Law
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Landlord Not Locked in to Lower Payments After Accepting Such Amount

An issue which frequently arises in commercial lease disputes was waged in the context of a Chapter 13 bankruptcy action pending in California. In the matter of In Re Cain, Case No. 13-45030 MEH (US Bankr. Ct. N.D. Calif. 2014), the bankruptcy court did not accept the Debtors’ assertions that the commercial lease upon which they defaulted – and which they seek to assume – had been modified by the agreement or actions of the landlord and the tenants.

The parties had previously entered into the Lease Agreements for two contiguous properties on March 15, 2011 with a term lasting from March 15, 2011 to March 31, 2016. Under the agreements, the base rent for the premises was $2,740 per month from August 1, 2011 until December 30, 2011, and then would eventually increase to $4,110 per month from January 1, 2012 until March 31, 2016. Although the agreement stated the rent would increase beginning in January 1, 2012, the tenants continued to pay only $2740.00 per month and such amount was accepted by the Landlord. Also the Landlord’s July 8, 2013 Three-Day Notice to Pay Rent or Quit indicates that the monthly rent owed from January 2013 until July 2013 was $2,740. Other filings from the Landlord in the case list this amount as well.

Nevertheless, when the Debtors submitted its Seventh Amended Chapter 13 Plan (the “Plan”) on February 6, 2014 to the Court calling for monthly payments in the same amount plus monthly cure payments of $767.07, the Landlord objected. The Debtor argued the objection was not substantiated because the original lease agreement had been modified and the Landlord had, by accepting the lower rental payments repeatedly, waived the right to recover the higher amounts set forth in the lease. The Court disposed of both issues in favor of the Landlord.

Because the length of the lease exceeded one year, California’s statute of frauds (Cal. Civ. Code § 1624(a)(3) prohibited the modification. The statute holds that “an agreement to lease real property for a period longer than one year must be made in writing and signed by the party to be charged.” As the tenants/debtors could not produce any reliable evidence of such written modification (only oral testimony), the Court found that no such modification occurred.

As for the issue of whether the Landlord waived the right to expect the escalating monthly payments, the Lease itself contained a provision regarding waiver (Section 24) which states that “[n]o waiver by the parties hereto of any default as breach of any term, condition or covenant of this Lease shall be deemed a waiver of any subsequent default or breach of the same or any other term, condition, or covenant contained herein.” The fact the Landlord accepted less prior to January 2014 does not mean that such lower amount controls the lease going forward.

Accordingly, the Court rejected the Debtors’ proposed plan. It calculated what the appropriate payments going forward will most likely be if the Debtors assume the lease as is their stated intention. The Court intends to make further rulings on the matter after conducting additional hearings in the case.

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