Golem v. Fahey: Can a Commercial Tenant Rescind its Lease?

Can a commercial tenant rescind its lease after becoming aware that both the landlord and itself were mistaken as to the property’s land use requirement?

This article will discuss and analyze California case law regarding the remedy of rescission applied to parties mutually mistaken as to the property’s proper land use.

A commercial tenant may rescind a lease if the parties were mutually mistaken as to the property’s land use requirement and the tenant promptly rescinds under Civil Code section 1691. (Golem v. Fahey (1961) 191 Cal.App.2d 474, 476.)

If the parties to a commercial lease are both mistaken about the property’s proper land use, a landlord risks having its lease rescinded if the tenant is unable to use the property as contemplated by the lease.

In Golem v. Fahey, a tenant entered into a lease for land, which at the time was used for agricultural purposes. However, the location near a Ford assembly plant made it seem suitable for a commercial purpose. The terms of the lease provided for the tenant to make improvements based on a commercial purpose and to hold the landlord harmless for all claims by reason of tenant’s use and occupation of the property.

“The lease clearly contemplated a commercial use of the property.” After the  parties executed the lease, they  discovered that the property was zoned for agricultural use only. Thus, tenant could not use the property as specified in the lease.  The court held that the case came within the mutual mistake principal making the lease voidable by the tenant.  However, the court denied rescission simply because the tenant “failed to rescind the lease” under Civil Code section 1691.

Section 1691 requires the rescinding party to “rescind promptly, upon discovering the facts which entitl[e] him to rescind…and [the tenant] restores to the other party everything of value which he has received from him under the contract; or must offer to restore the same.” The tenant here gave no notice of rescission and made no offer to restore value. The tenant failed to answer the letters of landlord’s counsel before suit was filed and even failed to plead rescission after the suit was filed. Because the tenant failed to rescind upon learning of the mistake or within a reasonable time after, he failed to comply with Civil Code section 1681, and was denied rescission relief. (Id.)

This case affirms the validity of mutual mistake as a basis for rescission of commercial leases when both commercial tenant and landlord are mistaken as to the property’s proper land use requirement. The case further demonstrates, that if mistaken tenants are to be granted relief, they must follow Civil Code section 1691’s procedure for rescission.