Fox Chicago R. Corp. v. Zukor's

In Fox Chicago R. Corp. v. Zukor's (1942) 50 Cal.App.2d 129, the landlord and lessee entered a series of lease amendments reducing the rent to below the previously agreed-upon $4,100 per month. (Id. at p. 131.) As modified, the lease amendments included a clause providing that, in the event of a default, the lessee would be obligated to pay the entire unpaid portion of the $4,100 rent for each and every month the lessee had paid a smaller amount. (Ibid.) When the lessee breached the lease by removing certain fixtures from the premises without the landlord's consent, the landlord sued and demanded approximately $159,000 under the provision. (Id. at p. 133.) The lessee filed a demurrer, which the trial court sustained without leave to amend. (Id. at p. 130.) The appellate court affirmed on the ground the landlord's recovery of rent at the initial rate constituted a penalty. (Id. at p. 136.) On appeal, the landlord argued the $159,000 was merely a debt payable upon the happening of a certain event. (Fox Chicago, supra, 50 Cal.App.2d at p. 134.) The court concluded there was no debt. Instead, the language of the lease modification and surrounding circumstances convinced the court the provision was a penalty. (Ibid.) 1 "Where the language of a condition thus appears upon a fair construction to be a penalty, the obligation is thereby invalidated. Any provision by which money or property is to be forfeited without regard to the actual damage suffered calls for a penalty and is therefore void." (Ibid.) The appellate court also addressed the fact the obligation to pay prior rent reductions was worded as a condition: "There is nothing in ... the lease provision that might remove it from the category of a penalty. It is not necessary that a penalty be designated as such in specific terms before it may be so classified. A condition in a contract providing for the payment of money not earned is just as much a penalty as though it had been stipulated to penalize the promisor should he default in the performance of his promise. . If the lease had contained a provision that the breach of any condition thereof should obligate him to pay to the lessor the sum of $159,000, there would be no question of its being properly classified as a penalty. But cloaked in the innocent verbiage of a condition requiring the lessee to pay $159,000 in the event he should fail to perform some covenant which is collateral to the main covenant, it is equally a penalty. . 2 A provision in a contract exacting the payment of moneys for the violation of a collateral agreement is opposed to public policy and is not bereft of its vice because it may appear in the form of a condition. ." (Fox Chicago, supra, 50 Cal.App.2d at p. 134.)