Cannabis Company Denied Arbitration – Reminder To Avoid Conflicting Remedies In Lease Agreements – Real Estate and Construction

In a lease dispute between a ranch-owner and cannabis company, a
California state court of appeal ruled that the arbitration
provision included in the lease was not enforceable, as it would
nullify conflicting remedy rights granted to the landlords
elsewhere in the lease.

The dispute arose after Mary S. Etter and Mary V. Etter,
landlords and owners of the ranch, brought an unlawful detainer
action against MCB Valley Properties, LLC, a cannabis company and
tenant under the lease in question. The Etters argued that MCB was
in violation of the lease for failure to pay rent, taxes and
utilities totaling $178,087, and for failure to maintain the
property as required under the lease. In response to the
Etters’ eviction action, MCB moved to compel arbitration, which
was denied by the trial court.

The dispute as to whether the tenant could compel arbitration of
the landlords’ eviction lawsuit  arose from a clear
tension between two sections in the lease. Tenant MCB argued that
the issue must go to arbitration, as the “Miscellaneous”
section of the lease states that “[any] unresolved controversy
or claim arising out of or relating to this Lease shall be
submitted to arbitration.” However, the “Remedies”
section of the lease gives the Etters, as landlords, the right to
remedy certain defaults by stating that “Landlord may
elect” to enforce performance of certain provisions of the
lease by “appropriate judicial proceeding, either at law or in
equity.” This section of the lease also states that “each
right and remedy of Landlord…shall be in addition to every other
right and remedy provided for in this Lease.”

The appellate court affirmed the trial court’s decision
denying MCB’s motion to compel arbitration, allowing the Etters
to proceed with their judicial action. The court of appeal relied
heavily on the principle that contractual disputes should be
interpreted in a manner that gives meaning to every provision, and
courts should avoid interpreting a contract in a way that renders
certain provisions moot. The court noted that interpreting the
lease to require arbitration proceedings for all claims or
controversies would mean that

“no dispute whatsoever would fall within the ambit of [the
Remedies section]. Such an interpretation would completely
foreclose the Etters from seeking any remedy for any violation
through a judicial proceeding. This cannot have been the
parties’ intent.”

This outcome reminds attorneys to be careful when drafting
provisions that may result in conflicting rights and obligations of
the parties, as the court is most concerned with settling the
inconsistent terms on their face, rather than determining which
party may have been negligent in their drafting and review of the
contract.

Furthermore, this case serves as a reminder that skillful lease
drafting not only requires carefully reading the text within the
four corners of a contract, but also includes looking at the
applicable state and federal laws. Even if the appellate court
disagreed with the trial court and held that the landlords did not
have a right to bring judicial action, the arbitration clause is
not enforceable as written. The lower court had issued an
alternative ruling that held the arbitration provision is not
enforceable because it does not comply with California law and does
not fall under the scope of the Federal Arbitration Act. These
arguments over conflicting meaning and statutory compliance are
better handled in the early stages of negotiating the agreement,
rather than in front of the bench years into the lease term.

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