Defendants, sub-lessor and a limited partner, appealed from the judgment of the Superior Court of Los Angeles County (California), in favor of plaintiff sub-lessee for wrongful termination of the sublease, contending that the trial court incorrectly held that the sublease would terminate if defendant sub-lessor failed to exercise its purchase options and that the termination fee was an unlawful penalty and not recoverable.
California Business Lawyer & Corporate Lawyer, Inc. are California Incorporation Lawyers
Plaintiff sub-lessee brought an action for an action for wrongful termination, caused by forfeiture of the underlying lease, of its 10-year sublease, which provided for a termination fee. Defendant sub-lessor, as a condition precedent to its right to maintain the lease in force, was required to exercise options to purchase the property, but did not. The parties’ negotiations showed that they intended the termination fee provision to apply if the sublease were terminated for any reason, including failure to exercise the options. The court held that the termination fee provision was not a provision for liquidated damages void under Cal. Civ. Code § 1670, because defendant sub-lessor was not to pay the fee for any breach of duty, but as consideration for its right to terminate and buy out plaintiff’s sub-lease for an agreed price. The court held that the corporate general partner of defendant sub-lessor was solely liable for the obligations under the sublease because a third party dealing with a corporation was required to reasonably rely on the solvency of the corporate entity. Defendant limited partner had no personal liability for such obligations.
The court affirmed the judgment against defendant sub-lessor because the sublease terminated when defendant sub-lessor failed to exercise its purchase options and the termination fee was not an unlawful penalty because it was consideration for the right to terminate. The court reversed the judgment against defendant limited partner because third parties dealing with a corporation were to rely on the solvency of the corporate entity.