Opinion ID: 503091
Heading Depth: 2
Heading Rank: 2

Heading: Termination of the Lease

Text: 10 The Bankruptcy Code permits a trustee, with court approval, to assume or reject any executory contract or unexpired lease of the debtor. 11 U.S.C. Sec. 365(a). However, [t]he trustee may not assume or assign any executory contract or unexpired lease of the debtor ... if ... such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief. 11 U.S.C. Sec. 365(c)(3). The phrase applicable nonbankruptcy law means applicable state law. See City of Valdez v. Waterkist Corp. (In re Waterkist Corp.), 775 F.2d 1089, 1091 (9th Cir.1985). Simply put, if a lease of nonresidential real property has been terminated under state law before the filing of a bankruptcy petition, there is nothing left for the trustee to assume. See Kearny Mesa Crossroads v. Acorn Investments (In re Acorn Investments), 8 B.R. 506, 510 (Bankr.S.D.Cal.1981). 11 The first question we address, therefore, is whether the subject lease, which was of nonresidential real property, terminated under California law before WFI filed its bankruptcy petition. Vanderpark argues that in California a lease terminates no later than the day on which the lessor files his unlawful detainer action in state court following a properly given three-days' notice to pay rent or quit, coupled with the failure of the tenant to cure the default within the three-day period, and provided the three-days' notice contained the lessor's election to declare the lease forfeited. It relies on In re Escondido West Travelodge, 52 B.R. 376 (S.D.Cal.1985), as support for this proposition. 2 12 Buchbinder, on the other hand, argues that the lease had not terminated by the time WFI filed its Chapter 7 petition, because as of that date Vanderpark had not obtained a favorable judgment in its unlawful detainer action. Because the lease had not terminated, he contends the lease was assumable by him, he properly assumed it, sold it, and the proceeds belong to the WFI Chapter 7 estate. The BAP agreed with Buchbinder. See In Re Windmill Farms, Inc., 70 B.R. 618, 623 (BAP 9th Cir.1987). We agree with Vanderpark. If the three-days' notice to pay rent or quit was properly given, the lease terminated at least by the time Vanderpark filed its unlawful detainer action in California state court. We need not decide whether the lease terminated before Vanderpark filed its unlawful detainer action.
13 California Civil Code section 1951.2(a) provides that if [the lessee's] right to possession is terminated by the lessor because of a breach of the lease, the lease terminates. Cal.Civ.Code Sec. 1951.2(a) (West 1985). No one disputes that the lessee, WFI, breached the lease by not paying the rent and property tax impounds. It is also uncontroverted that in its three-day notice to pay rent or quit, the lessor, Vanderpark, notified WFI that if the back rent and delinquent tax impounds were not paid within the three-days period, the lease would terminate. The question, therefore, is whether the lessor's act of giving the three days' notice, which declared a forfeiture of the lease, coupled with the lessee's failure to cure the default within the three-day period, terminated WFI's right to possession under section 1951.2(a). If WFI's right to possession was terminated, then according to the plain language of California Civil Code section 1951.2(a), the lease was terminated. 14 We look to California's unlawful detainer statutes to determine when a lessee's right to possession is terminated in these circumstances. See Cal.Civ.Proc.Code Sec. 1161 (West 1982). A tenant who is guilty of unlawful detainer cannot possibly have the right to possession of the property. He still may be in possession of the property, but his possession is not rightful; it is unlawful. California Code of Civil Procedure section 1161 specifies when this possession becomes unlawful: 15 A tenant of real property ... is guilty of unlawful detainer: 16 .... 17 When he continues in possession ... without the permission of his landlord ... after default in the payment of rent, pursuant to the lease ... under which the property is held, and three days' notice, in writing, requiring its payment, stating the amount which is due, or possession of the property, shall have been served upon him.... 18 Cal.Civ.Proc.Code Sec. 1161(2). After the three-days' notice period has passed, if the tenant remains in possession, the landlord may file his unlawful detainer complaint and proceed according to Code of Civil Procedure section 1174(a), which provides: 19 If upon the trial, the verdict of the jury, or, if the case be tried without a jury, the findings of the court be in favor of the plaintiff and against the defendant, judgment shall be entered for the possession of the premises; and if the proceedings be for an unlawful detainer ... after default in the payment of rent, the judgment shall also declare the forfeiture of such lease or agreement if the notice required by Section 1161 states the election of the landlord to declare the forfeiture thereof, but if such notice does not so state such election, the lease or agreement shall not be forfeited. 20 Id. Sec. 1174(a) (West 1988) (emphasis added). As we interpret these statutes, upon the expiration of three days after the lessor has given the lessee the notice required by section 1161(2), if the lessee has failed to pay the rent in default, the lessor has terminated the lessee's right to possession. The lessor may then rely upon section 1174(a) to regain actual possession of the premises. And if the lessor stated a forfeiture election in his notice to the lessee, the lessor also is entitled to a judicial declaration of forfeiture of the lease. Id. 21 The BAP failed to distinguish between a judicial declaration of forfeiture of the lease and the lessor's termination pursuant to the three-days' notice. This confusion between termination of the lease and a court declaration of forfeiture was discussed in In re Escondido West Travelodge, 52 B.R. 376 (S.D.Cal.1985). There the court stated that there is a 22 tendency of the courts to collapse into one concept the two separate concepts of the time at which a lease is terminated, on the one hand, and the time at which there is a final judicial determination that a lease is terminated, on the other. Importantly, these two events are not necessarily coincident. It is possible to define termination in such a way that events sufficient to constitute termination of a lease occur long before a court determines that the termination is valid under state law. 23 Id. at 379 (emphasis added). After the three-days' notice period has expired, if the lessee has failed to pay the rent in default, the lessee from that point forward is unlawfully detaining the premises if he remains in possession. See Cal.Civ.Proc.Code Sec. 1161(2). Because his detention is unlawful, he has lost his right to possession. His right to possession has been terminated by the lessor because of a breach of the lease [and] the lease terminates. Cal.Civ.Code Sec. 1951.2(a). In an ensuing unlawful detainer proceeding, the court does not decide whether the lessor terminated the lease. That has already occurred. Instead, the court decides whether the termination was proper and if it was, the court grants the lessor a judgment for possession of the property. See Cal.Civ.Proc.Code Sec. 1174(a). If the lessor's three-days' notice contained a forfeiture election, the lessor also is entitled to a judicial declaration of forfeiture and may immediately enforce the judgment for possession. Id. Sec. 1174(c). If the lessor's notice did not elect a forfeiture, the lessor must wait five days from the entry of the judgment before the judgment for possession is enforceable, during which time the lessee may satisfy the judgment and the tenant [shall] be restored to the tenant's estate. Id. 24 If the tenant should prevail in the unlawful detainer proceeding, this does not mean that the landlord did not terminate the lease in advance of the judgment. Rather, the judgment in favor of the tenant is a judicial determination that the termination was improper. A prevailing tenant who has remained in possession retains his leasehold estate and may have an action for damages for the lessor's breach of the covenants of quiet enjoyment and possession. Guntert v. City of Stockton, 55 Cal.App.3d 131, 138-40, 126 Cal.Rptr. 690, 693-94 (1976). A prevailing tenant who has moved out also may have an action for damages. See Guntert, 55 Cal.App.3d at 139, 126 Cal.Rptr. at 694; B. Witkin, Summary of California Law, Real Property Sec. 575 (9th ed. 1987). 25 We hold that under California law a lease terminates for nonpayment of rent at least by the time the lessor files an unlawful detainer action, provided that a proper three-days' notice to pay rent or quit has been given, and the lessee has failed to pay the rent in default within the three-day period, and further provided that the lessor's notice contained an election to declare the lease forfeited. See In re Escondido West Travelodge, 52 B.R. 376, 379 (S.D.Cal.1985).