Harbor Marina v. Golden Hills Properties CA4/3 ( 2016 )

Filed 8/1/16 Harbor Marina v. Golden Hills Properties CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
HARBOR MARINA, LLC,
Plaintiff and Appellant, G051955
v. (Super. Ct. No. 30-2014-00706930)
GOLDEN HILLS PROPERTIES, LLC, OPINION
Defendant and Respondent.
Appeal from a judgment of the Superior Court of Orange County, Randall
J. Sherman, Judge. Reversed and remanded with directions.
Loeb & Loeb, Andrew S. Clare and Robert J. Catalano for Plaintiff and
Appellant.
Steckbauer Weinhart, William W. Steckbauer and Sean A. Topp for
Defendant and Respondent.
* * *
This dispute arises out of a ground lease of commercial property developed
into an office building and marina in Newport Beach. Defendant and respondent Golden
Hills Properties, LLC (Defendant) is the ground lessor. Plaintiff and appellant Harbor
Marina, LLC (Plaintiff) is the ground lessee.
Defendant exercised an option to purchase Plaintiff’s leasehold interest.
The lease provided the purchase price was to equal the fair market value of the leasehold
interest, based upon the present value of the projected net operating revenue to be
generated during the remaining lease term.
Defendant refused to pay the purchase price unless it received an offset for
the amount of net operating revenue Plaintiff earned after the purchase option was
exercised but before the purchase and sale transaction closed. Litigation ensued.
The court found the valuation provision of the lease was ambiguous, and
while nothing in the lease required it, the court ordered Plaintiff to pay Defendant the
amount of net operating revenue it earned before the purchase and sale transaction closed.
Plaintiff appealed, arguing the valuation provision of the lease is not
ambiguous and the court erred by ordering Plaintiff to pay that amount to Defendant. We
agree, reverse the judgment, and remand with directions to correct the error.
FACTS AND PROCEDURAL HISTORY
The parties’ predecessors in interest, County of Orange as lessor and
Thomas A. Cox as lessee, entered into the ground lease (Lease) in 1964. Later, Plaintiff
exercised an option (Extension Option) which extended the Lease term through 2018.
An amendment (Amendment) to the Lease gave the lessor an option
(Purchase Option) to purchase the lessee’s leasehold interest during the last five years of
the extended Lease term. Paragraph 11(c) (Paragraph 11(c)) of the Amendment stated:
“During the last five years of the [Extension] Option period, [Defendant] shall have the
option to purchase [Plaintiff’s] leasehold estate and improvements at the fair market
value existing on the date such [Purchase Option] is exercised.”
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The fair market value was to be determined by an appraisal. Paragraph
11(c) provided: “Fair market value for this purpose means the cash price a willing
purchaser would pay and a willing seller would accept for the leasehold estate and
improvements in an arms-length transaction in which the parties have comparable
bargaining positions, calculated on the basis of the then present value of all net operating
revenues (before debt service) projected to be realized by [Plaintiff] from the date the
[Purchase Option] is exercised to the expiration date of the [Extension Option] period.”
The purchase and sale transaction was to close on the later to occur of: (a)
90 days after the Purchase Option was exercised, or (b) 30 days after the Purchase Option
was exercised and the fair market value was determined.
Defendant exercised the Purchase Option in 2013. Eventually, the
appraisers determined the fair market value was $5,065,000 (Purchase Price).
Plaintiff then asked Defendant to pay the Purchase Price and deliver any
security deposits Defendant held under the Lease. Plaintiff offered to deliver any security
deposits Plaintiff held as landlord under various subleases.
Defendant said it would pay the Purchase Price, only if Plaintiff would pay
all “appropriate operating revenues (before debt service) as determined by the appraisers
in accordance with the Lease which were collected by” Plaintiff from the date Defendant
exercised the Purchase Option until the transaction closing date “and which were utilized
by the appraisers in determining the fair market value” (Interim Operating Revenue).
Defendant stated, that is “precisely the result that any reasonable person would agree to
pay and to receive under the Lease.” Defendant demanded Interim Operating Revenue in
the amount of $1,165,672, plus rent collected for July and August 2014.
Plaintiff sued Defendant for breach of contract for failure to pay the
Purchase Price. Plaintiff sought specific performance or, alternatively, damages.
Defendant’s cross-complaint for breach of contract and declaratory relief sought a
declaration Plaintiff was required to pay Defendant the Interim Operating Revenue.
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After a bench trial the court ruled in favor of Defendant. The court said
there was only one issue, i.e., should there be an offset against the Purchase Price for the
Interim Operating Revenue. The court ruled the Amendment governed but found it was
ambiguous “and the reason for that is that the clause provides that [Defendant] shall have
the option to purchase [Plaintiff’s] leasehold estate and improvements at the fair market
value existing on the date such [Purchase Option] is exercised.”
The court went on, “Well, if you’re buying a leasehold estate and
improvements, then you’re buying the right to receive rent, and if the purchase price is to
include the income stream from [the date the Purchase Option is exercised until the end
of the Lease term], and that’s the amount the buyer is paying, then the buyer should
receive the income stream [for that period of time].”
The court further stated, “Although Paragraph 11(c) doesn’t say that the
plaintiff pays the defendant those collected rent monies, it doesn’t say that they don’t pay
them over; hence, an ambiguity. [¶] So the court looks to what seems to be a logical
interpretation of this provision, which is that if the price is based on x, y and z being
valued, you should get x, y, and z. If you’re paying for it, you should get it. That’s a
pretty straightforward concept, I believe.”
The court ordered specific performance, and the judgment required Plaintiff
to pay Defendant the Interim Operating Revenue. After adjusting the Purchase Price for
that payment and adding prejudgment interest, the net purchase price was $3,212.815.
DISCUSSION
1. Standard of Review and General Principles of Contract Interpretation
We review a trial court’s construction of a lease de novo as long as no
conflicting extrinsic evidence was admitted to assist in determining the meaning of the
language. (ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal. App. 4th 1257,
1266-1267, 1268 (ASP).) In so doing we rely on general principles of contract
interpretation.
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Our main task is to determine the mutual intent of the parties at the time the
contract was formed. (ASP, supra, 133 Cal.App.4th at p. 1269; Civ. Code, § 1636; all
further statutory references are to this code unless otherwise stated.) “‘“Such intent is to
be inferred, if possible, solely from the written provisions of the contract. [§ 1639.] The
‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular
sense,’ . . . controls judicial interpretation. [§ 1638.]” [Citations.] . . . [L]anguage in a
contract must be interpreted as a whole, and in the circumstances of the case, and cannot
be found to be ambiguous in the abstract. [Citation.] Courts will not strain to create an
ambiguity where none exists. [Citation.]’ [Citation.] Interpretation of a contract ‘must
be fair and reasonable, not leading to absurd conclusions. [Citation.]’ [Citation.] ‘The
court must avoid an interpretation which will make a contract extraordinary, harsh,
unjust, or inequitable. [Citation.]’ [Citation.]” (ASP at p. 1269.)
Although there was testimony from the parties’ representatives and experts,
neither that testimony nor other extrinsic evidence was probative regarding the intent of
the original lessor or original lessee. For example, the property manager testified that in
exercising the Purchase Option, Defendant “expected” Plaintiff would pay Defendant all
of the net revenues Plaintiff had collected after the Purchase Option was exercised. But
Defendant’s expectations are not evidence of the original parties intent.
Similarly, Defendant’s valuation expert testified the appraisers correctly
determined the Purchase Price by “discounting to present value the cash flow that the
interest produces,” and Defendant was “purchasing the value of the cash flows” through
the remainder of the Lease term, which was the value of the interest. This testimony was
no more than the expert’s opinion as to how the appraisal should be conducted, and
expert opinion as to the meaning of a lease is irrelevant. (In re Tobacco Cases I (2010)
186 Cal. App. 4th 42, 51 [“the interpretation of contractual language is a legal matter for
the court . . .and ‘[e]xpert opinion on contract interpretation is usually inadmissible’”].)
Thus we look only to the provisions of the Lease to determine its meaning.
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2. Erroneous Interpretation of Paragraph 11(c)
Even though both parties argued Paragraph 11(c) was not ambiguous, the
court found it was ambiguous because it did not mention the Interim Operating Revenue.
The court reasoned Paragraph 11(c) gave Defendant the option to purchase Plaintiff’s
leasehold interest and improvements, including the right to receive the Interim Operating
Revenue. Again the court explained, “Well, if you’re buying a leasehold estate and
improvements, then you’re buying the right to receive rent, and if the purchase price is to
include the income stream from [the date the Purchase Option is exercised until the end
of the Lease term], and that’s the amount the buyer is paying, then the buyer should
receive the income stream [for that period of time].” Thus, the court concluded if
Defendant was paying for the Interim Operating Revenue, Defendant should receive it.
The court correctly observed Paragraph 11(c) did not address Interim
Operating Revenue, but incorrectly concluded Defendant was purchasing the Interim
Operating Revenue. The plain language belies this construction. Again the fair market
value, is “calculated on the basis of the then present value of all net operating revenues
(before debt service) projected to be realized by [Plaintiff] from the date the [Purchase
Option] is exercised to the expiration date of the [Lease under the Extension O]ption.”
Hence, the “present value of all net operating revenues” was just the
method by which the value of the leasehold was to be calculated, it was not what was
being sold. What was being sold was the leasehold interest and the improvements. (See
Howard v. County of Amador (1990) 220 Cal. App. 3d 962, 973-974 [“A leasehold estate
transfers a present interest to the lessee which includes the beneficial use of the
property”].) In sum, Defendant was not purchasing the Interim Operating Revenue itself.
Defendant points out that at the end of the Lease term, the marina and other
improvements will have no value, because the marina will revert to the City of Newport
Beach and the other improvements will revert to Defendant. This is true. But Defendant
willingly exercised the Purchase Option knowing that. It was not forced to do so.
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Further, the court erred by concluding the Lease was ambiguous simply
because it said nothing about what was to happen to the Interim Operating Revenue when
the purchase and sale transaction closed. First, the failure to mention something does not
necessarily create an ambiguity. (See Cain v. Hunter (1958) 161 Cal. App. 2d 808, 812
[where no provision allowing interest on deferred payments in contract, no interest could
be charged; no ambiguity in contract due to omission of provision].)
Second, pursuant to the Lease Plaintiff had the right to collect rent from its
tenants and concessionaires and the duty to pay Defendant a percentage thereof, until the
purchase and sale transaction closed. A seller retains all rights of ownership until the
property is actually transferred, unless the purchase and sale contract provides otherwise.
So Plaintiff was entitled to keep the pre-closing rents it collected. No special provision in
Paragraph 11(c) was necessary to address the Interim Operating Revenue.
Defendant argues any buyer would “without a doubt,” expect to receive all
rental income, including the Interim Operating Revenue. It quotes testimony of one of
the appraisers that the fair market value of the leasehold was to be calculated using a
discounted cash flow analysis, which he stated was consistent with the appraisal method
set out in Paragraph 11(c). He also testified the discounted cash flow analysis projected
“net income that is reasonably anticipated to be received on a forward looking basis
calculating what those cash flows will be going into the future.” Nothing in this
testimony supports the conclusion the Lease required Plaintiff to pay Defendant the
Interim Operating Revenue.
Likewise, the testimony of Defendant’s expert that the value of the
leasehold interest is determined by discounting the cash flow to present value does not
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mean Defendant is entitled to receive the Interim Operating Revenue.
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The other expert testimony on which defendant relies, that Defendant was
“purchasing the value of the cash flows for that specific period,” was stricken by the
court.
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In any event, as noted above, no expert testimony as to the meaning of
Paragraph 11(c) is relevant as it is the court’s function to determine that meaning.
Defendant also argues Plaintiff’s interpretation of the Lease is not “‘fair’”
and is unjust. In this regard Defendant seems to erroneously conflate the meaning of
“fair market value” as defined in the Lease with what is “fair” in some larger sense.
But the law is clear and well settled that the court has neither the duty nor
the authority to rewrite a lease merely because the terms might be unfair. “Our task is to
construe the . . . lease[] as [it is], not as [Defendant] want[s it] to be. ‘We do not have the
power to create for the parties a contract that they did not make and cannot insert
language that one party now wishes were there.’ [Citation.]” (Abers v. Rounsavell
(2010) 189 Cal. App. 4th 348, 361-362.) “[C]ourts assume that each party to a contract is
alert to, and able to protect, his or her own best interests. [Citations.] Therefore, courts
will not rewrite contracts to relieve parties from bad deals nor make better deals for
parties than they negotiated for themselves. [Citation.]” (Series AGI West Linn of
Appian Group Investors DE, LLC v. Eves (2013) 217 Cal. App. 4th 156, 164.) “In the
construction of a statute or instrument, the office of the Judge is simply to ascertain and
declare what is in terms or in substance contained therein, not to insert what has been
omitted, or to omit what has been inserted . . . .” (Code Civ. Proc., § 1858.)
On the other hand, Defendant’s interpretation of the Lease would lead to an
unjust result for Plaintiff. The language of Paragraph 11(c) sets out the terms of the deal
the parties made. It must be enforced according to those terms.
We reject Defendant’s argument Plaintiff failed to prove its request for
specific performance of the terms of the Purchase Option. Citing Boulenger v. Morison
(1928) 88 Cal. App. 664, 669, Defendant contends Plaintiff did not prove an element of
specific performance, i.e., that the Lease was “just and reasonable, and the consideration
adequate.” As noted above, there is nothing unfair or unreasonable about the terms of
Paragraph 11(c). The consideration to be paid was agreed upon. Plaintiff met its burden.
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3. No Gift of Public Funds
Defendant claims Plaintiff’s interpretation of the Lease cannot be correct
because the original lessor, the County of Orange, would have illegally been gifting the
Interim Operating Revenue being purchased, in violation of the prohibition against
gifting public funds. (Cal. Const., art. XVI, § 6.) This argument has no merit. Since
Defendant was not purchasing the Interim Operating Revenue, there was no such gift.
4. Specific Performance Directions
On remand the court shall enter a judgment in favor of Plaintiff ordering
specific performance of the purchase and sale. The court must determine and allocate
income and expenses to place the parties in the same position they would have been in if
the transaction had closed on date specified in the Lease. (Stratton v. Tejani (1982) 139
Cal. App. 3d 204, 212.) “[B]ecause execution of that judgment will occur at a date
substantially after the date of performance provided by the [Lease], financial adjustments
must be made to relate their performance back to the [Closing Date].” (Ibid.)
The court shall calculate the date on which the transaction should have
closed (Closing Date) based upon Paragraph 11(c) [transaction to close by the latter of
“90 days after the option to purchase is exercised or . . . 30 days after the option to
purchase is exercised and the purchase price finally determined”].
As provided in Paragraph 11(c), Defendant shall pay the Purchase Price to
Plaintiff in cash and return to Plaintiff “all unexpended security deposits made under the
Lease,” and Plaintiff shall deliver to Defendant “all unexpended security deposits
received from subtenants, concessionaires, operators and licensees.” Plaintiff shall also
deliver to Defendant all net operating revenues (before debt service) realized by Plaintiff
after the Closing Date.
The Purchase Price and the security deposits shall bear interest from the
Closing Date, and the net operating revenues shall bear interest from the date earned, in
each case at the legal rate until the date upon which the judgment is entered.
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DISPOSITION
The judgment is reversed and remanded. The trial court is to enter a new
judgment in accordance with this opinion. Plaintiff is entitled to costs on appeal.
THOMPSON, J.
WE CONCUR:
BEDSWORTH, ACTING P. J.
IKOLA, J.
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