## Facts

- A lender made an approximately $44 million nonrecourse commercial loan secured by two office properties.
- The borrower leased the properties exclusively to Washington Mutual Bank under a negotiated lease.
- The loan’s nonrecourse structure included a “carve-out” making the debt recourse if the borrower “terminate[d] or accept[ed] a surrender of” the Washington Mutual lease without the lender’s prior written consent.
- An affiliate of the borrower executed a guaranty agreeing to be personally liable if a carve-out event occurred.
- The lease provided that, even if the tenant breached and vacated, the lease would continue unless the landlord terminated the tenant’s right of possession.
- The lease also provided that only the landlord’s written notice of termination to the tenant could terminate the lease or the tenant’s right of possession, and that these provisions controlled despite contrary law.
- Washington Mutual failed, stopped paying rent, and abandoned the premises.
- The borrower did not send written termination notice to Washington Mutual, later stopped making loan payments, and the lender completed a nonjudicial foreclosure.
- The lender then sued the guarantor for the remaining deficiency, claiming the borrower’s conduct amounted to lease termination or acceptance of surrender triggering the carve-out and guaranty.
- The trial court entered judgment for the lender and awarded attorney’s fees and costs; the guarantor appealed.

## Issues

1. Whether the borrower “terminate[d]” the tenant’s lease or “accept[ed] a surrender” despite lease language requiring written termination notice to effect termination.
2. Whether, absent termination or surrender under the lease’s terms, the loan’s recourse carve-out and the guaranty were triggered.
3. Whether the lender could recover attorney’s fees and costs after reversal of the merits judgment.

## Decision

- The Court of Appeal reversed the judgment imposing guaranty liability.
- The court held there was no lease termination because the borrower never delivered the contractually required written termination notice to the tenant.
- The court held there was no acceptance of surrender based on abandonment and the borrower’s inaction where the lease displaced common law implications and made termination dependent on written notice.
- Because no carve-out event occurred, the guaranty was not triggered and personal liability could not be imposed.
- The court reversed the post-judgment order awarding attorney’s fees and costs and remanded for further proceedings consistent with its opinion.

## Legal Principles

- A commercial lease is interpreted under ordinary contract principles; clear, negotiated terms governing termination are enforced as written.
- Where a lease specifies an exclusive method to terminate (e.g., landlord’s written termination notice) and states it controls notwithstanding contrary law, courts will not find termination by implication based on conduct alone.
- Contractual provisions can displace common law doctrines of implied surrender; inaction after tenant abandonment is not an acceptance of surrender when the lease provides otherwise.
- Nonrecourse “carve-out” provisions and related guaranties are construed according to their specific terms; recourse liability is not expanded beyond the defined triggering events.
- Attorney’s fee awards dependent on prevailing-party status fall with reversal of the underlying judgment establishing liability.

## Conclusion

The court held that the borrower neither terminated the lease nor accepted a surrender because the lease required written termination notice and none was given; therefore, the nonrecourse carve-out and guaranty were not triggered, requiring reversal of both the liability judgment and the lender’s attorney’s fee award.


GECCMC 2005-C1 Plummer Street Office Ltd. P’ship v. NRFC NNN Holdings, LLC, 204 Cal. App. 4th 998 (Ct. App. 2012)