Case: California National Bank v. Woodbridge Plaza LLC, Case No. 05CC03999 (Cal. Ct. App. 6/20/08)

The One Sentence Summary: California Court of Appeal held that a bank’s retail lease providing for an extended lease term at the lesser of the then prevailing rental rate or the latest square foot rental rate of a competing bank in the center or its “successor” in the center is construed to require rent at the then prevailing rental rate where the competing bank was defunct and the space previously occupied by the competing bank was occupied by six non-bank tenants.

What They Were Fighting About: The plaintiff was a bank whose predecessor entered into a 25 year lease in 1979 for retail banking space in the defendant’s shopping center. The lease provided that the plaintiff had an option to extend the term for 10 years at the then prevailing rate, but the rent for the extended term would not exceed the latest square foot rental paid by the competing bank in the center or its “successor” in the center.

Five years later, the competing bank in the shopping center ceased doing business, and the landlord was unable to lease the space to a bank or other single tenant. The landlord remodeled and divided the space previously occupied by the competing bank and leased the space to six new tenants who were not engaged in the banking business. When the plaintiff’s lease term concluded, it claimed a right to extend the lease term at a new rental rate that was the lesser of the fair market rental rate or the blended rental rate charged to the six tenants in the space previously occupied by the competing bank. The landlord contended that since the six tenants were not banks, there was no “successor” to the competing bank in the center. Thus, the landlord asserted a right to rent the space to the plaintiff at the fair market rental rate. A lawsuit was filed to have the court determine the rental rate for the extended lease term.

Court Holdings:

  • The appellate court reviewed the trial court’s construction of the lease de novo.

 

  • The court held that the term “successor” in the lease was ambiguous, and therefore, the court looked to the circumstances surrounding the execution of the lease.

 

 

  • The court noted that when the lease was executed in 1979, the plaintiff and the competing bank in the center were competitors and the two major tenants in the center. Their lease terms were comparable, but rental rates for office space in the center were lower. The court concluded that: “[u]nless the parties anticipated use by a financial institution, there would be no point in tying plaintiff’s rent to rent for those purposes.”
  • The court rejected the plaintiff’s argument that the landlord’s interpretation of the lease was unfair even though it was the landlord that divided the space previously occupied by the competing bank and leased it to non-banks.