Reported / Citable
Background
Ventura Harbor Restaurant Associates is a restaurant and bar operating at Ventura Harbor under a sublease with the Ventura Port District, a special district that owns and operates the harbor. Under the lease, the restaurant paid a minimum monthly rent plus a percentage of its gross income from all sales — food and alcohol alike — as additional rent. Over recent years the restaurant paid roughly $33,000 in percentage rent on food sales and $14,000 on alcohol sales annually.
The restaurant sued the District, arguing that the percentage rent clause violated two provisions of the California Constitution: (1) Article XIII C, which prohibits local governments from imposing a “tax” without voter approval (added by Proposition 218 in 1996 and strengthened by Proposition 26 in 2010), and (2) Article XX, section 22, which gives the state — not local governments — exclusive power to regulate the sale of alcoholic beverages. The trial court granted summary judgment for the District and awarded it $137,400 in attorney fees under the prevailing-party clause in the lease. The restaurant appealed both rulings.
The Court’s Holding
The Second District Court of Appeal (Division Six) affirmed on all counts. On the tax question, the court held that the percentage rent clause falls squarely within the fourth exception to Proposition 26’s definition of “tax”: a charge imposed for “the purchase, rental, or lease of local government property” (Cal. Const., art. XIII C, § 1, subd. (e)(4)). That exception contains no reasonableness requirement — and the court declined to read one in, noting that the first three exceptions to the tax definition expressly include a reasonableness cap while the fourth does not. Treating that omission as intentional, the court followed Howard Jarvis Taxpayers Assn. v. Bay Area Toll Authority (2020) and rejected the restaurant’s reliance on Zolly v. City of Oakland, distinguishing franchise fees from ordinary commercial percentage-rent leases.
On the alcohol regulation question, the court held that the percentage rent clause did not violate the state’s exclusive licensing power under Article XX, section 22. The clause was not designed to regulate alcohol — it applied to all sales made on the premises regardless of type. Because its purpose was to provide the landlord additional revenue tied to the tenant’s overall commercial success, not to control the manufacture, sale, or distribution of liquor, no constitutional conflict arose. The court affirmed the attorney fee award for the same reasons, finding the restaurant’s briefing insufficient to preserve its challenges.
Key Takeaways
- Local government commercial leases with percentage-of-gross-rent clauses are not taxes subject to voter approval under Proposition 26; they fall within the Article XIII C, section 1, subdivision (e)(4) exception for charges for the lease of government property.
- The fourth Proposition 26 exception carries no implicit reasonableness requirement — the Legislature’s decision to include cost-reasonableness language in the first three exceptions but not the fourth is dispositive.
- A lease clause that applies to all gross sales (food and alcohol together) does not regulate alcoholic beverages in violation of Article XX, section 22, as long as its purpose is revenue — not liquor control.
- Tenants of port districts, harbor authorities, and other special districts should expect that percentage-rent provisions will survive constitutional challenge under both Propositions 218 and 26.
- Prevailing-party attorney fee clauses in government leases are enforceable under Civil Code section 1717, even when the losing party is the tenant claiming constitutional violations.
Why It Matters
California has dozens of publicly owned marinas, airports, fairgrounds, and port facilities that lease commercial space to restaurants, retailers, and other tenants under percentage-rent leases. This decision gives those entities — and the municipalities and special districts that lease to them — clear authority that such leases do not trigger the voter-approval requirements of Propositions 218 and 26. Tenants who have considered challenging percentage-rent provisions on constitutional grounds now face a significantly harder road after this published decision.
For California real estate and municipal law practitioners, the ruling also provides a useful clarification of the interplay between Proposition 26’s tax-exception tiers: where the Legislature used explicit reasonableness language in some exceptions and omitted it from others, courts will treat the omission as deliberate rather than read a hidden cost-justification requirement into the broader exception. That interpretive principle extends beyond leases to any local-government fee or charge analysis under Article XIII C.