REAL PROPERTY Copyright February, 2006 State Bar of California

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1 REAL PROPERTY Copyright February, 2006 State Bar of California Mike had a 30-year master lease on a downtown office building and had sublet to others the individual office suites for five-year terms. At the conclusion of the 30-year term, Olive, the building s owner, did not renew Mike s master lease. When Olive resumed control of the building, she learned that Mike had failed to comply with the terms in the 30-year lease that required him to renew an easement for weekday parking on a lot between the building and a theater. The theater, which, in the past, had always renewed the easement, used the lot for its own customers on evenings and weekends. Olive also learned that a week before the end of the 30-year lease Mike had renewed for another five years the sublease of one tenant, Toby, at a rate much below market. Toby ran an art gallery, which Mike thought was classy. Upon signing the renewal, Toby purchased and installed expensive custom lighting and wall treatments to enhance the showing of the art in his gallery. Because of Mike s failure to renew the parking easement, the theater granted it to another landowner. As a result, Olive had to request a variance from the town ordinance requiring off-street parking. The Board of Zoning Appeals (BZA) denied the request because a nearby parking-lot operator objected. The off-street parking requirement, combined with the loss of the parking easement, meant that several offices in Olive s building would have to be left vacant. The BZA had recently granted a parking variance for a nearby building under very similar circumstances. Olive commences the following actions: 1. A suit against Mike to recover damages for waste resulting from Mike s failing to renew the parking easement. 2. An action for ejectment against Toby and to require him to leave the lighting and wall treatments when he vacates the premises. 3. An appeal of BZA s denial of Olive s variance request. What is the likelihood that Olive will prevail in each action? Discuss.

2 Real Property Outline of Issues Copyright 2006 Scott F. Pearce, Esq. I. Olive v. Mike re: failure to renew the parking easement A. Waste B. Breach of the terms of the lease C. Conclusion II. Olive v. Toby A. Ejectment of Sublessee B. The lighting and wall treatments C. Conclusion III. Olive s appeal of BZA s denial of her variance request A. Due Process B. Equal Protection C. 5th Amendment Taking D. Conclusion

3 Real Property Model Answer Copyright 2006 Scott F. Pearce, Esq. I. Olive v. Mike re: failure to renew the parking easement Olive is the owner of a downtown office building. Mike had a 30-year master lease on the building, which Olive did not renew at the end of the term. When Olive took over the building, she discovered that Mike had breached a term of the lease that required him to renew an easement for parking from a nearby theater. Olive has sued Mike for damages. A. Waste A tenant is not permitted to physically damage the leasehold, except for the normal wear and tear associated with normal use and enjoyment of the property. Excessive damage to the property is called waste, and the owner of land is entitled to recover compensatory damages from the occupier who has caused the harm. Olive's suit against Mike relies on a waste theory of liability. The problem with this approach is that Mike did not physically damage the office building. Instead, Mike's actions have reduced the economic value of the property. Because Mike failed to renew the easement for weekday use of the parking lot, the theater granted it to another owner. A town ordinance requires that building owners provide off-street parking; because Olive was not granted a variance, she has to leave vacant several offices in her building. Thus, she has suffered damages. An easement appurtenant is an interest in land, held by the dominant estate against the servient estate. Here, the office building is the dominant estate and the theater's parking lot, between the building and the theater, is the servient estate. Technically, the easement is attached to the property, so in a sense it is logical to argue that the property is harmed by Mike's failure to renew the easement. There is no reason to think the theater would have refused to renew the easement, since it always had done so in the past and since it found a new user for the parking lot during daytime hours. It is possible that Olive has stated a cause of action for waste, though her approach is unorthodox. Even if this theory of liability is unsuccessful for Olive, she does have a theory that appears assured of success: suing Mike under a contract theory for breach of the lease. B. Breach of the terms of the lease Mike failed to comply with an express term of the lease, which required him to renew the parking lot easement. No facts are present that give Mike any excuse or justification for this clear breach of contract. The consequential damages suffered by Olive were foreseeable to Mike. As the holder of a long-term master lease on the building, Mike had to know that Olive would suffer harm as a consequence of his failure to renew the parking lot easement.

4 C. Conclusion Olive's waste theory is unconventional, and could well be rejected by the court because the property was not physically damaged. Should Olive pursue Mike for damages for breach of the lease, she should be able to recover all of the money she has lost as a result of losing the parking lot easement. II. Olive v. Toby Olive's next action is against Toby, a tenant Mike gave a discount lease to at the very end of Mike's master lease. Olive wants to eject Toby from the building and she wants Toby to leave behind certain improvements Toby had made to the office he had occupied. A. Ejectment of Sublessee As the holder of a valid, 30-year master lease of the office building, Mike did not have the right to extend any sublease beyond his own term. Presumably, at the end of Mike's long-term master lease, all the tenants would have to negotiate new deals with Olive, unless she had previously consented to their subleases with Mike. In this case, Mike renewed Toby's lease for five years, with the term starting only one week before the end of Mike's master lease. Mike did not have the right to do this, since Mike cannot convey an interest in real property that he does not control. Olive should be able to eject Toby from the property. Toby will have to find another place for his art gallery. It is likely he will have to pay full value for the new location, since he will not have a landlord like Mike, who was willing to give Toby a rental rate much below market. This may seem a harsh result, but Toby should be able to pursue Mike for any damages Toby suffers as a result of the early termination of his lease. B. The lighting and wall treatments Upon signing the five-year renewal with Mike, Toby purchased and installed expensive lighting and custom wall treatments to enhance the showing of art in his gallery. Olive wants Toby to leave behind these improvements when he vacates the premises. Whether or not Toby will have to abandon these improvements depends in part on whether or not they will be considered fixtures. A fixture is said to "merge" into the property, and cannot be removed by a tenant once they are in place. The custom lighting probably is not part of the structure of the office. Instead, it is likely that the lights are affixed to the walls and ceiling of Toby's gallery. It is likely that he would be able to remove them without leaving a trace, restoring the office to its condition before the custom lights were installed. If that is the case, Olive will not be able to prevent Toby from taking them with him when he leaves. The wall treatments are more likely to be considered fixtures, because it is likely these improvements are not easily removable. The analysis would be the same as for the lighting: if Toby can remove them without damage to the office, he should be allowed to do so.

5 It is possible that these improvements are one reason why Mike gave Toby a discounted rent rate for the new term, as well as his view that the gallery was "classy." Certainly Toby's improvements enhance the value of the property, otherwise Olive would not wish to keep them for herself. It would seem unfair to allow Olive to evict Toby and also to keep his valuable improvements to the office. C. Conclusion Unless the lighting and wall treatments are deemed fixtures, Toby should be allowed to remove them when he vacates the office. It would be unjust enrichment for Olive to be able both to repossess Toby's office and to keep his improvements. III. Olive s appeal of BZA s denial of her variance request Olive's final action is an appeal of the Board of Zoning Appeals denial of Olive's request for a variance from the town ordinance requiring off-street parking. Zoning and land use regulations are part of the police power possessed by governments. At the same time, as a government entity BZA must conduct its business within Constitutional standards. A. Due Process BZA must accord Olive an impartial and fair mechanism through which she can pursue her interests. In this case, Olive requested a variance from the town ordinance requiring off-street parking. That request was denied. Now Olive is pursuing an appeal. On the surface, it appears that Olive has been accorded a process that is up to Constitutional standards. A closer look suggests that she might have a better due process argument than first seems to be the case. First, the BZA had granted another parking variance for a nearby building under very similar standards. Second, BZA denied Olive's application because a nearby parking lot operator objected. One would think an off-street parking ordinance would be designed to make parking easier for the public and to reduce crowding. It is possible that BZA has treated Olive arbitrarily. If this is the case, Olive could win her appeal on due process grounds. B. Equal Protection Olive will also claim that she has been discriminated against because the BZA granted a parking variance to another building recently under very similar circumstances. Because no suspect class appears to be involved, and since parking is not a Constitutionally protected fundamental right, BZA's decision would be judged by a rational basis standard. Once again it would be necessary to examine BZA's acts and judge whether or not they were arbitrary, and thus not "rational" for equal protection purposes. C. 5th Amendment Taking The Fifth Amendment guarantees that the government cannot take away property without paying fair

6 compensation. This is Olive's least persuasive Constitutional argument. It is doubtful if she can show that she had a property interest in obtaining a parking variance from the government. D. Conclusion If Olive can show that her application for a variance from the off-street parking ordinance was denied arbitrarily, her appeal should be granted.