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Novation is the substitution of a new obligation for an existing one. Cal. Civ. Code § 1530. The substitution is by agreement and with the intent to extinguish the prior obligation. Cal. Civ. Code §§ 1530 and 1531. The substitution of a new obligation for an existing one may be either (1) a new obligation between the same parties, or (2) a new obligation arising because of new parties, either a new debtor or new creditor. Cal. Civ. Code § 1531. Novation is made by contract, and is subject to all the rules concerning contracts in general. Cal. Civ. Code § 1532. A novation thus amounts to a new contract which supplants the original agreement and completely extinguishes the original obligation.
In 1929, a land now owned by plaintiff lessors was rented under a 95-year ground lease which had an escalation clause tied to the value of gold. In 1933, Congress enacted 48 Stat. 112, 112 (1933), which declared such clauses unenforceable. In 1977, Congress enacted 31 U.S.C.S.§ 5118(d)(2), which allowed those clauses after 1977. In 1981, defendant lessee acquired the lease, assuming all obligations. Under the terms of the 1929 lease, the former lessee was relieved of all responsibility under the lease. In 1991, plaintiffs brought suit for breach of contract and declaratory relief, claiming they were entitled to rent at the gold clause rate because defendant's acquiring the lease was a novation. The trial court ruled in favor of the defendant. On appeal, plaintiffs claimed that 31 U.S.C.S. § 5118(d)(2) no longer rendered the escalation clause tied to the value of gold unenforceable because of a novation in the 1929 lease.
Was there a novation in the 1929 lease, entitling the plaintiff lessors to enforce the gold clauses against the defendant lessee?
Reversing the trial court's decision for defendant, the court held that, because defendant's purchase of the lease completely extinguished the former lessee's obligation, a novation occurred in accordance with Cal. Civ. Code § 1530. Because the new obligation arose when gold clauses could have been enforced, plaintiffs were entitled to rent in accordance with it. The court rejected defendant's claims of estoppel and laches.