from the property prior to the arrangement and hence her obligations under the first trust were more or less protected. Her security in this regard was put in jeopardy by the appearance of the plaintiff and his ambitious plan, which, incidentally, he never was able to perfect.
There was no testimony in this case and inferences must be drawn from the formal documents. When the business situation is reviewed realistically, however, it is clear that both parties were taking considerable risks when the venture started. Certainly defendant as owner of the property had no assurance that rents would, in fact, be paid and she might well at some stage find herself with an unrentable property on her hands. Plaintiff was proposing to substitute the obligation under the note for defendant's obligation under the first trust. It was obvious for these reasons, since the trust was protected by the rental of the property, that he would have to guarantee rent sufficient to pay off the note so that defendant would not assume any additional risks for having accommodated him so he might go forward with the development of the property. A penalty would normally be exacted by a party lending the money for his own benefit. Here the lender is attempting to remove what is now called a penalty provision but which in fact is a provision which he advanced and which then benefited him. His proposal was a way of saying to defendant, as an inducement for her entering into the entire transaction, that he would commit to hold her harmless for substituting a first trust obligation apparently secured by rental income for an obligation to him in the same amount when his lease made rental income wholly uncertain.
The lease was cancelled and terminated as of February 1, 1965, because plaintiff failed to clear mechanics' liens from the property and foreclosure occurred under a large construction loan deed of trust which he had arranged in aid of remodeling the structure. The foreclosing lender did enter into a new lease in 30 days for the property on substantially similar terms and defendant thereafter again received rentals under the lease as soon as executed. Apparently there was a loss of about a few months' rent and expenses incident to arranging a new lease. Thus it is clear that the cancellation in fact, viewed from hindsight, operated substantially to defendant's benefit. It is equally clear, however, that the situation might have been quite different if there had not been a construction lender willing to take over and carry on the project. The property could well have remained in a nonrentable position for some time, tied up by uncertainties, litigation over mechanics' liens, or other contingencies, the precise nature of which was unforeseeable at the time the lease was entered into and the promissory note given. This was apparent to the parties at the time the lease and the note were signed.
The cases teach that the nature of the transaction should be viewed prospectively as of the time it was made and not from the safety of hindsight. The amount of the damages specified in the note and the lease does not appear disproportionate, viewing the transaction as a whole, and certainly not more than what could have been expected from its future breach. Plaintiff's argument that in the case of a minor infraction of the lease, such as nonpayment of a water bill on time, the full liquidated damage provision would come into effect, is not viewed sympathetically by the Court. It seems most doubtful that this was in the contemplation of the parties at the time the entire transaction was entered into. Responsible persons are involved. There is no reason to believe that defendant would press rights in this strict degree and, in any event, she did not and such a case is not before the Court. The provision is held to be an enforceable liquidated damage provision. The provisions of the contract, freely entered into, will be upheld. Nothing in this decision shall be taken to determine, one way or the other, whether defendant has in fact "other rights" she may pursue against plaintiff.
Judgment shall accordingly be entered for defendant. This Memorandum and the stipulated statements of fact, incorporated herein by reference, shall constitute the Court's findings of fact and conclusions of law.
Counsel to submit an appropriate order within one week from the date hereof.
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