Petco Animal Supplies Stores v. Encino Equity CA4/1 ( 2023 )

Filed 7/17/23 Petco Animal Supplies Stores v. Encino Equity CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for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.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
PETCO ANIMAL SUPPLIES STORES, D079793
INC.,
Plaintiff and Appellant,
(Super. Ct. No. 37-2019-
v. 00029800-CL-BC-CTL)
ENCINO EQUITY, LLC,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Diego County,
Joel R. Wohlfeil, Judge. Affirmed.
Procopio, Cory, Hargreaves & Savitch, Kendra J. Hall and Rebecca L.
Reed for Plaintiff and Appellant.
Williams Iagmin and Jon R. Williams for Defendant and Respondent.
Petco Animal Supplies Stores, Inc. (Petco) appeals from an adverse
judgment in the lawsuit it brought against Encino Equity, LLC (Encino
Equity), which owns a shopping center where Petco has a retail store. Based
on a disagreement about how to read a provision in its lease with Encino
Equity, Petco contends that since 2008 Encino Equity has been overcharging
Petco by using an incorrect property tax calculation to determine how much
Petco owes pursuant to the lease. In a bench trial, the trial court determined
that the language of the lease was ambiguous on the disputed issue, but it
found that the extrinsic evidence supported Encino Equity’s interpretation.
Based on that determination, the trial court entered judgment against Petco
on all of its claims.
We conclude that the trial court properly interpreted the lease based on
the proffered extrinsic evidence, and that Petco’s appeal therefore lacks
merit. We accordingly affirm the judgment.
I.
FACTUAL AND PROCEDURAL BACKGROUND
Since 1997, Petco has leased space for a store in a shopping center in
Encino. At the time of the original lease in 1997 (the Lease), the shopping
center was owned by a business entity known as Encino Valley Shopping
Center (EVSC), whose principal was Joseph Benjamin. The Lease had an
“Initial Term” of 10 years, seven months, which expired on January 31, 2008.
In January 2006, during the Initial Term of the Lease, Encino Equity
purchased the shopping center from EVSC and became Petco’s landlord
under the Lease. In July 2007, Petco exercised an option to renew the Lease
through January 31, 2013. Petco and Encino Equity then entered into a First
Amendment to the Lease in 2012, and a Second Amendment to the Lease in
2017.
The Lease is a triple net lease, under which Petco pays a share of the
shopping center’s expenses, taxes, and insurance. At issue in this litigation is
a provision in the Lease relating to the circumstances under which Petco is
obligated to pay for any increase in property taxes caused by a change in
ownership of the shopping center.
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Specifically, the relevant sentence in paragraph 15(b) of the Lease
states, “Tenant shall not be responsible for any increase in taxes caused
solely by a change in ownership of the Premises during the Initial Term” (the
Paragraph 15(b) Language). (Underscoring omitted.) The “Initial Term” is
defined in the Lease as ending on January 31, 2008. At trial, the Paragraph
15(b) Language was referred to as a “Prop 13 protection clause,” referring to
“Proposition 13, adopted in 1978, which limited ad valorem property taxes to
1 percent of a property’s assessed valuation and limited annual increases in
valuation to 2 percent without a change in ownership.” (Plantier v. Ramona
Municipal Water Dist. (2019) 7 Cal.5th 372, 380, citing Cal. Const.,
art. XIII A, §§ 1, 2, fn. omitted, italics added; see also 926 North Ardmore
Ave., LLC v. County of Los Angeles (2017) 3 Cal.5th 319, 326 [“A change in
ownership triggers reappraisal and reassessment for property tax
purposes.”].) The Paragraph 15(b) Language was not changed in either the
First Amendment or the Second Amendment to the Lease.
From the date it acquired the shopping center in January 2006 until
the end of the Initial Term on January 31, 2008, Encino Equity did not
charge Petco for any increase in property tax caused by the reassessment
after the change of ownership of the shopping center. However, after
January 31, 2008, Encino Equity began charging Petco for its proportional
share of the property tax bill, including the increased amount that was
caused by Encino Equity’s 2006 purchase of the shopping center. For nearly
a decade, Petco paid, without protest, its share of the increased property
taxes.
In August 2017, a consultant Petco hired to perform an audit of the
Lease notified Encino Equity that, under Petco’s interpretation of the
Paragraph 15(b) Language, Petco never should have been paying for the
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increase in property taxes caused by the change in ownership of the shopping
center in 2006. As Petco interpreted the Paragraph 15(b) Language, “if the
Taxes increase due to a change of ownership during Tenant’s Initial Term of
their Lease, going forward Tenant is not responsible for the increase in Taxes
resulting from this change in ownership.” (Italics added.) According to Petco,
since 2008 Encino Equity has been improperly overcharging Petco by
approximately $50,000 per year.
Encino Equity disputed Petco’s interpretation of the Paragraph 15(b)
Language. According to Encino Equity, the Paragraph 15(b) Language
expressed “that Petco not be responsible for the payment of tax increases
during the initial term but that Petco would be responsible during any
renewal period for tax increases occurring during the initial term.”
After receiving a three-day notice to pay or quit from Encino Equity,
Petco continued to pay the full amount due under the Lease, as interpreted
by Encino Equity, but it paid under protest and without waiving its rights
under the Lease.
Based on the parties’ dispute over the meaning of the Paragraph 15(b)
Language, Petco filed the instant lawsuit against Encino Equity in June
2018. The complaint alleged (1) breach of contract; (2) unjust enrichment;
(3) conversion; and (4) declaratory relief. Petco alleged that “[t]he Lease
expressly states that Petco is not responsible for any increase in property
taxes resulting from the sale of the property occurring before the expiration
of the Initial Term on January 31, 2008,” but Encino Equity had been
charging Petco for such an increase in violation of the Lease.
Recognizing that the outcome of the lawsuit would depend on which
party was correctly interpreting the Paragraph 15(b) Language, the parties
stipulated to bifurcate the action by having Petco’s cause of action for
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declaratory relief tried first in a bench trial. Specifically, the trial court
would adjudicate Petco’s request for “a judicial determination declaring that
the Lease prohibits [Encino Equity] from charging Petco and collecting from
it the real estate taxes caused by the 2006 sale.”
For the bench trial on the declaratory relief cause of action, the parties
submitted a list of stipulated facts regarding their dispute, in which they
jointly identified several trial exhibits, many of which were documents from
the original negotiation of the Lease in 1996 and 1997. The three trial
witnesses were (1) Encino Equity’s sole and managing member, Parham
“Paul” Minoo; (2) Petco’s Senior Director of Property Management and Lease
Administration, Pamela Myers, who started at Petco in 2016; and (3) Petco’s
Senior Manager of Real Estate, Anthony Fuller, who started at Petco in 2017.
None of the trial witnesses had personal knowledge of the negotiation of the
Lease.1
The documentary evidence presented at trial showed that Petco and
EVSC negotiated the Lease over several months in 1996 and 1997. The first
communication came from Petco’s representative as a proposal to enter into a
lease with EVSC. Petco specifically proposed a “Proposition 13 Protection”
provision that is consistent with Encino Equity’s current interpretation of the
Paragraph 15(b) Language: “If, during the initial term, a sale, transfer or
refinancing of the building is consummated, and as a result thereof, the real
property taxes for the building increase pursuing [sic] to a reassessment
1 Minoo testified that in connection with his purchase of the shopping
center in 2006 he had a conversation with EVSC’s principal, Mr. Benjamin
(now deceased) in which Benjamin told Minoo he would be able to pass on the
increased property taxes to Petco. However, the substance of that
conversation was admitted at trial only for the limited purpose of showing
Minoo’s state of mind.
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under the terms of Proposition 13, Petco shall not be obligated to pay, during
the first term of the lease, any portion of the increase of real property taxes.”
A revised proposal from Petco sent the next day contains the same language,
as does a further revised proposal from Petco.
Approximately two months later, a memorandum between Petco’s
broker and a Petco employee, which was also sent to EVSC’s representative,
summarized the “economic parameters” that had been discussed in a recent
meeting with EVSC. The parameters are described as including “Prop 13
protection up to year 10.”
Shortly thereafter, EVSC’s representative sent a letter to Petco, in the
form of a term sheet, setting forth his understanding of the parties’
agreement. The term sheet includes a “Proposition 13 Protection” provision
that is very similar to the provision in the three proposals sent by Petco: “If,
during the initial 10 year term, a sale, transfer or refinancing of the building
is consummated, and as a result thereof, the real property taxes for the
building increase pursuant to a supplemental reassessment, Petco shall not
be obligated to pay, during the first term of the lease, any portion of the
increase of real property taxes.” Petco made some revisions to the term sheet
and signed it on October 4, 1996, leaving intact the “Proposition 13
Protection” provision. The parties made further revisions, which also left
intact the “Proposition 13 Protection,” and EVSC signed the term sheet on
October 21, 1996. The term sheet stated that EVSC would prepare a lease,
with Petco to “provide [EVSC] a copy of the Petco’s Standard Lease to
facilitate [EVSC] marrying the terms thereof.”
After a gap of approximately four months, on February 10, 1997, a fax
was sent from an administrative assistant at Petco to EVSC’s representative.
It states, “Following please find the Encino Lease as promised. Please be
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advised that this Lease is subject to review by Landlord and further review
by Marc Drasin and Nancy Doran.” Attached was a 51-page document titled
Petco’s “Standard Form Lease.” Many provisions in the standard form lease
were redlined with revisions. However, one sentence, which was not
redlined, states in paragraph 15(b), “Tenant shall not be responsible for any
increase in taxes caused solely by a change in ownership of the Premises.” At
trial, a Petco witness testified that Petco’s standard form lease has, for many
years, contained the same language in paragraph 15(b) that appears in
Petco’s fax to EVSC on February 10, 1997.
The only remaining trial exhibit concerning the parties’ negotiations
was the Lease itself. The Lease, entered into on April 24, 1997, was a further
revised version of Petco’s standard form lease. With respect to paragraph
15(b), the final version of the Lease added four words to the end of the
sentence that appeared in the original standard form lease faxed on February
10, 1997, creating the Paragraph 15(b) Language at issue in this lawsuit.
Instead of saying that “Tenant shall not be responsible for any increase in
taxes caused solely by a change in ownership of the Premises,” the Lease
states, “Tenant shall not be responsible for any increase in taxes caused
solely by a change in ownership of the Premises during the Initial Term.”
(Underscoring omitted, italics added.)
Because Petco’s two witnesses (Myers and Fuller) had only begun their
employment at Petco in 2016 and 2017, neither had direct knowledge about
whether anyone at Petco had earlier recognized that Encino Equity was
passing through increased property tax charges that were due to a change in
ownership during the Initial Term of the Lease, or had earlier considered
whether such charges were consistent with the provisions of the Lease. One
document presented at trial showed that in 2006, after Encino Equity bought
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the shopping center, but before the expiration of the Initial Term of the Lease
in January 2008, Petco closely examined the amounts it was being charged
under the Lease and questioned the imposition of an increased property tax
charge, stating that “[u]nder the Lease 15(b), Petco is not responsible for tax
increases resulting from changes in ownership.” Further, a document showed
that in mid-2008, after the expiration of the Initial Term of the Lease, Petco
wrote to Encino Equity with questions about the charges under the Lease for
the first quarter of 2008 and specifically asked for a copy of the property tax
bill. After receiving the property tax bill, Petco then followed up to ask for
information about how Petco’s pro rata share was calculated based on that
tax bill. In November 2008, Petco wrote to Encino Equity with a detailed
analysis of the billed expenses it was disputing for the first and second
quarters of 2008. Petco indicated that it agreed with the property tax
amounts billed by Encino Equity except for the amount attributable to the
improper inclusion by Encino Equity of the property taxes for one tax parcel
that Petco pointed out it was not responsible for under the terms of the
Lease.
Minoo testified that throughout his ownership of the shopping center,
Petco consistently and diligently monitored the Lease and received backup
documentation, including for the property tax expenses. Minoo also
explained that his negotiation of the renewal and amendments to the Lease
“would have been completely different” if Petco had questioned its obligation
to pay the increased property taxes prior to 2017, which it did not do.
The trial court issued a statement of decision, finding in favor of Encino
Equity regarding the interpretation of the Paragraph 15(b) Language. The
trial court explained that “paragraph 15(b) is vague, ambiguous and
reasonably susceptible to more than one interpretation,” but that Encino
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Equity’s interpretation was “more consistent with the intention of the
parties.” Therefore, the trial court ruled that “after the expiration of the
initial term, [Encino Equity] was entitled to pass through increased real
estate taxes to [Petco].”
Petco submitted objections to the statement of decision, and the trial
court overruled them. The trial court subsequently granted a motion for
nonsuit on Petco’s remaining causes of action, and judgment was entered in
favor of Encino Equity.
II.
DISCUSSION
Petco contends that we should reverse the judgment because the
evidence does not support the trial court’s interpretation of the Paragraph
15(b) Language.
A. Applicable Legal Standards
We begin with the applicable legal standards governing contractual
interpretation when, as here, extrinsic evidence is offered on the issue.
“The fundamental goal of contractual interpretation is to give effect to
the mutual intention of the parties. (Civ. Code, § 1636.) If contractual
language is clear and explicit, it governs. (Id., § 1638.) On the other hand,
‘[i]f the terms of a promise are in any respect ambiguous or uncertain, it must
be interpreted in the sense in which the promisor believed, at the time of
making it, that the promisee understood it.’ ” (Bank of the West v. Superior
Court (1992) 2 Cal.4th 1254, 1264-1265.)
“The parol evidence rule is codified in Code of Civil Procedure
section 1856 and Civil Code section 1625. It provides that when parties enter
an integrated written agreement, extrinsic evidence may not be relied upon
to alter or add to the terms of the writing.” (Riverisland Cold Storage, Inc. v.
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Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1174.)
However, “extrinsic evidence is admissible to explain or interpret ambiguous
language.” (Lonely Maiden Productions, LLC v. GoldenTree Asset
Management, LP (2011) 201 Cal.App.4th 368, 376 [citing Code Civ. Proc.,
§ 1856, subds. (b) & (g)].) Deciding whether extrinsic evidence may be
admitted to interpret allegedly ambiguous contractual language “involves a
two-step process.” (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165 (Winet).)
At the first step, the question of whether “the contract is reasonably
susceptible to a party’s interpretation can be determined from the language
of the contract itself [citation] or from extrinsic evidence of the parties’
intent.” (Southern Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th
839, 848.) “Trial courts are required to receive provisionally any proffered
parol evidence that is relevant to show whether the contractual language is
reasonably susceptible to a particular meaning.” (Adams v. MHC Colony
Park, L.P. (2014) 224 Cal.App.4th 601, 620, fn. omitted (Adams).) “[T]he
court provisionally receives (without actually admitting) all credible evidence
concerning the parties’ intentions to determine ‘ambiguity,’ i.e., whether the
language is ‘reasonably susceptible’ to the interpretation urged by a party.”
(Winet, supra, 4 Cal.App.4th at p. 1165.) “ ‘Even if a contract appears
unambiguous on its face, a latent ambiguity may be exposed by extrinsic
evidence which reveals more than one possible meaning to which the
language of the contract is yet reasonably susceptible.’ ” (Dore v. Arnold
Worldwide, Inc. (2006) 39 Cal.4th 384, 391.) “Whether a contract is
ambiguous at this initial step of analysis presents a question of law subject to
independent review on appeal.” (Thompson v. Asimos (2016) 6 Cal.App.5th
970, 986 (Thompson).)
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At the second step, “[i]f in light of the extrinsic evidence the court
decides the language is ‘reasonably susceptible’ to the interpretation urged,
the extrinsic evidence is then admitted to aid in the second step—
interpreting the contract.” (Winet, supra, 4 Cal.App.4th at p. 1165.) At this
step, when a trial court resolves an ambiguity in the meaning of the contract,
“the appellate standard of review turns on whether the trial court based its
interpretation on the resolution of conflicts in the evidence. Our review is de
novo where the evidence is undisputed . . . .” (Thompson, supra,
6 Cal.App.5th at p. 987.) “ ‘This is true even when conflicting inferences may
be drawn from the undisputed extrinsic evidence [citations] or that extrinsic
evidence renders the contract terms susceptible to more than one reasonable
interpretation.’ ” (Brown v. Goldstein (2019) 34 Cal.App.5th 418, 433, italics
added.) “[B]ut where the trial court’s interpretation rests on its resolution of
conflicting evidence, ‘any reasonable construction will be upheld as long as it
is supported by substantial evidence.’ ” (Thompson, at p. 987, italics added.)
Here, although the parties presented extrinsic evidence during the
trial, we perceive no conflict in that evidence. Much of the trial was based on
the parties’ stipulated facts and on historical documentary evidence of
undisputed authenticity. Moreover, the three witnesses who testified did not
disagree between themselves on any relevant factual matter. The parties
have not identified a single material fact on which the evidence was actually
in conflict, and our own review of the record has not uncovered any such
conflict. Accordingly, we will apply a de novo standard of review to the trial
court’s application of the extrinsic evidence to interpret the Lease.
(Thompson, supra, 6 Cal.App.5th at p. 987.)
B. The Paragraph 15(b) Language is Facially Ambiguous
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Turning to the first step of the inquiry, we inquire whether the
Paragraph 15(b) Language is ambiguous by examining whether it is
“ ‘reasonably susceptible’ ” to the different interpretations urged by the
parties. (Winet, supra, 4 Cal.App.4th at p. 1165.) “Ambiguity exists when a
contractual provision is susceptible of two or more reasonable constructions.”
(Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 847.) Although
we may consider proffered parol evidence in deciding whether contractual
language is reasonably susceptible to a meaning urged by one of the parties
(Adams, supra, 224 Cal.App.4th at p. 620), resort to such evidence is not
necessary here because, as we will explain, the Paragraph 15(b) Language is
ambiguous on its face. (See Yahoo Inc. v. National Union Fire Ins. Co. etc.
(2022) 14 Cal.5th 58, 68-69 (Yahoo) [deciding the language in an insurance
policy was facially ambiguous because it was unclear whether a restrictive
clause modified a single word or a group of words].)
The sentence at issue is as follows: “Tenant shall not be responsible for
any increase in taxes caused solely by a change in ownership of the Premises
during the Initial Term.” (Underscoring omitted.) As we will discuss, the
meaning of the sentence changes depending on what part of the sentence
“during the Initial Term” is meant to modify. Any qualified speaker of the
English language would see two different possibilities, and neither the
sentence itself, nor the surrounding provisions in the Lease, contain any
definitive indication of which possibility is intended.
First, “during the Initial Term” may be intended to modify the entire
sentence, as if it was placed at the beginning of the sentence. The meaning
would be the same as stating “During the Initial Term, Tenant shall not be
responsible for any increase in taxes caused solely by a change in ownership
of the Premises.” Under that reading, the Tenant is not required to pay
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increased taxes during the Initial Term but would have to pay thereafter.
That interpretation is one of the plausible and natural readings of the
sentence.
Second, “during the Initial Term” may be intended to modify only the
concluding phrase “a change in ownership of the Premises.” Under that
reading, for the entire time that the Lease is operative, the Tenant is not
required to pay increased taxes if there is a change of ownership during the
Initial Term. This interpretation, too, is one of the plausible and natural
readings of the sentence.
Therefore, we conclude that the Paragraph 15(b) Language is
ambiguous on its face because it is susceptible to two reasonable
constructions.
C. The Extrinsic Evidence Shows That the Parties Intended the Protection
from Petco’s Payment of Increased Property Taxes to Last Only During
the Initial Term of the Lease
At the second step, having concluded that the Paragraph 15(b)
Language is ambiguous, we look to the extrinsic evidence identified at trial to
conduct our de novo interpretation of the parties’ intent in using that
language. (Winet, supra, 4 Cal.App.4th at p. 1165.) As we have explained,
the primary extrinsic evidence at issue is the documentary evidence of the
negotiations between Petco and EVSC in 1996 and 1997.
As Petco characterizes the documentary evidence, the Paragraph 15(b)
Language should be interpreted as creating Proposition 13 protection for as
long as the Lease is operative if the property is sold during the Initial Term
because such a provision represents a compromise between EVSC’s and
Petco’s competing proposals. Focusing on the content of the draft version of
the Lease that Petco faxed to EVSC on February 10, 1997, Petco argues:
“Petco’s proposed Proposition 13 period of protection was without limit.
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[EVSC’s] was for the Initial Term. None of the language proffered by either
party was accepted and instead paragraph 15(b) contains language reflecting
a middle ground.” We reject this characterization because it fundamentally
mischaracterizes the documentary evidence and the substance of the parties’
negotiations.
It was not EVSC who proposed a period of Proposition 13 protection for
the Initial Term. Instead, it was Petco who proposed that limited period of
protection in its very first offer to EVSC. And Petco consistently agreed to
that position throughout the course of the negotiations, including in the term
sheet that sets forth the terms of the parties’ deal. Further, there is no
evidence that EVSC ever disagreed in any manner with Petco’s proposed
provision regarding Proposition 13 protection being limited to the Initial
Term. There was agreement from the start.
It is only in Petco’s February 10, 1997 markup of its standard form
lease that the documentary evidence first reflects a Proposition 13 protection
provision that is different from what the parties consistently agreed upon
throughout their negotiations. Specifically, a marked-up version of Petco’s
standard form lease faxed by Petco on February 10, 1997 states, “Tenant
shall not be responsible for any increase in taxes caused solely by a change in
ownership of the Premises.” It is undisputed that this Proposition 13
protection provision was an original term in the standard form lease that the
parties had agreed to use as the skeleton for their written contract. Petco did
not revise that standard provision when it marked up the standard form
lease it faxed to EVSC on February 10, 1997. However, there was no
evidence presented at trial to suggest that Petco made an intentional and
knowing choice to include the unrevised Proposition 13 provision in the
February 10, 1997 draft. Therefore, the most reasonable inference from the
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evidence is that Petco’s standard Proposition 13 provision appeared in the
February 10, 1997 draft because the person charged with marrying the
parties’ term sheet with the language of Petco’s standard form lease
unintentionally neglected to revise that provision to conform to the
agreement set forth in the parties’ term sheet. We accordingly reject Petco’s
attempt to characterize Petco’s inclusion of the Proposition 13 protection
language from its standard form lease on February 10, 1997 as a new
proposal from Petco for blanket Proposition 13 protection during the entirety
of the lease, from which the parties were required to reach a “middle ground”
in the final version of the Lease.
With that background in mind, the intent of the parties in adopting the
Paragraph 15(b) Language that appears in the final version of the Lease
becomes clear. The phrase “during the Initial Term” was added to the
language of Petco’s standard form lease in an attempt to make it conform to
the consistent position of the parties throughout the negotiations about the
scope of the Proposition 13 protection. As the parties clearly agreed
throughout their negotiations, and in their term sheet, the Proposition 13
protection would last only through the Initial Term of the Lease. As that
meaning is one of the plausible and natural readings of the Paragraph 15(b)
Language, in our de novo review of the contractual language, we interpret the
Lease to include Proposition 13 protection only during the Initial Term of the
Lease.
In their briefing, the parties discuss two rules of contractual
interpretation to support their respective interpretations of the Paragraph
15(b) language. As we will explain, neither rule changes our conclusion that
the Lease limits Proposition 13 protection to the Initial Term.
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First, Petco relies upon the “last antecedent rule.” That “rule provides
that ‘ “ ‘qualifying words, phrases and clauses are to be applied to the words
or phrases immediately preceding [them] and are not to be construed as
extending to or including other[ ] [words or phrases] more remote.’ ” ’
[Citations.] The last antecedent rule is often applied where there is a list of
terms, and the qualifying words or phrases follow the last item in the list.”
(Yahoo, supra, 14 Cal.5th at pp. 73-74.) Indeed, “[t]he exemplar application
of the last antecedent rule is a case where a modifying phrase appears after a
list of multiple items or phrases.” (People ex rel. Lockyer v. R.J. Reynolds
Tobacco Co. (2003) 107 Cal.App.4th 516, 530 (R.J. Reynolds).) The last
antecedent rule is “ ‘ “not immutable” ’ and should not be ‘rigidly applied’ in
all cases.” (Ibid.) “ ‘[I]f the clear intent of the parties is opposed to the
application of the rule, the rule must yield.’ ” (Ibid.)
Here, the last antecedent rule is not helpful because the sentence at
issue does not consist of “a list of multiple items or phrases” (R.J. Reynolds,
supra, 107 Cal.App.4th at p. 530) or “a list of terms” (Yahoo, supra,
14 Cal.5th at p. 74). Instead, it consists of a single phrase, with the question
being what part of that single phrase is modified by the words “during the
Initial Term.” If we treat the entire sentence as the “ ‘ “ ‘phrase[ ]
immediately preceding’ ” ’ ” the modifier (Yahoo, at p. 73), then “ ‘there is only
one antecedent and the qualifying phrase therefore must attach to all of it’ ”
(R.J. Reynolds, at p. 531). Under similar circumstances, our Supreme Court
recently concluded that the last antecedent rule was not useful in
interpreting an ambiguous phrase that did not contain a list of items.
(Yahoo, at p. 75.) In that case, the ambiguous language in an insurance
policy was the phrase “ ‘[o]ral or written publication, in any manner, of
material that violates a person’s right of privacy.’ ” (Id. at p. 64.) The last
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antecedent rule did not aid in determining what part of the phrase was
modified by the concluding words “that violates a person’s right of privacy”
because there was “no list of items followed immediately by a modifier.” (Id.
at p. 75.) Instead, in attempting to apply the last antecedent rule, “the
possible antecedents [were] either (1) the entire phrase ‘[o]ral or written
publication, in any manner, of material,’ or (2) merely the final word of that
phrase, ‘material.’ ” (Ibid.) The last antecedent rule did “not resolve, . . .
whether the relative clause ‘that violates a person’s right of privacy’ modifies
just the word that immediately precedes it (i.e., the word ‘material’) or
whether the clause modifies the entire phrase that immediately precedes it.”
(Ibid.) The same problem exists here. Because there is no list of items
followed immediately by a modifier, the last antecedent rule shines no light
on whether the entire phrase comprising the Paragraph 15(b) Language is
modified by the concluding words “during the Initial Term” or whether only
the last seven words of the phrase—“a change in ownership of the
Premises”—are modified.
Moreover, even if we were to conclude that the last antecedent rule
applied in a manner that supported Petco’s interpretation, we would reject
that interpretation as contrary to the “ ‘clear intent of the parties.’ ” (R.J.
Reynolds, supra, 107 Cal.App.4th at p. 530.) As we have explained, the
undisputed documentary evidence shows that from the very beginning of
EVSC’s and Petco’s negotiations, they agreed that the Proposition 13
protection would last only through the Initial Term of the Lease.
Next, Encino Equity contends that we should look at the parties’ course
of performance to determine the meaning of the Paragraph 15(b) Language.
“ ‘It is well settled that although an agreement may be indefinite or uncertain
in its inception, the subsequent performance of the parties will be considered
17
in determining its meaning for they are least likely to be mistaken as to the
intent.’ ” (Oceanside 84, Ltd. v. Fidelity Federal Bank (1997) 56 Cal.App.4th
1441, 1449; see also Code Civ. Proc., § 1856, subd. (c) [“The terms set forth in
a writing . . . may be explained or supplemented by course of dealing or usage
of trade or by course of performance.”].) “[W]hen a contract is ambiguous, a
construction given to it by the acts and conduct of the parties with knowledge
of its terms, before any controversy has arisen as to its meaning, is entitled to
great weight . . . .” (Universal Sales Corp. v. California Press Mfg. Co. (1942)
20 Cal.2d 751, 761.)
Here, it is undisputed that Petco performed under the Lease from 2008
to 2017 by paying the increased amount of property taxes due to the change
in ownership of the shopping center. That course of performance would tend
to support Encino Equity’s interpretation of the Paragraph 15(b) Language.
However, Petco argues that its payment of the increased property taxes for a
decade is not probative because there is no evidence that Petco knew it was
being billed for the increased amount. (See Hewlett-Packard Co. v. Oracle
Corp. (2021) 65 Cal.App.5th 506, 543 [“The Restatement, which ‘ “California
usually follows” ’. . . suggests that . . . evidence of acceptance or acquiescence
in a course of performance requires ‘repeated occasions for performance by
either party with knowledge of the nature of the performance and opportunity
for objection to it by the other.’ (Rest. 2d, Contracts § 202(4))” (italics
added)].)
On our de novo examination of the undisputed extrinsic evidence, we
are not persuaded by Petco’s argument. The most reasonable inference from
the evidence presented at trial was that Petco would have been aware in 2008
that it had started to pay the increased property tax amounts billed by
Encino Equity. As Minoo testified, Petco consistently monitored the Lease
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and regularly received backup documentation, including for property taxes.
It is undisputed that the amount Petco paid for the property tax expenses
increased by a significant amount due to the change in ownership, namely, by
more than $50,000 over the previous year. It is not reasonable to conclude
that Petco would have failed to notice that significant increase. It is
especially unlikely that Petco would have failed to notice the increase
because the documentary evidence presented at trial showed that
immediately after Encino Equity starting billing Petco for the increased
property taxes, Petco examined the property tax charges for the first and
second quarter of 2008 in detail. It questioned one unrelated aspect of the
property taxes billed by Encino Equity, namely, the improper inclusion of the
charges from a particular tax parcel, but it did not question the inclusion of
the increased amount due to a change in ownership.
Even were we to accept Petco’s contention that the parties’ course of
performance is not probative, our interpretation of the Paragraph 15(b)
Language would not change. The only significance of the course of
performance evidence, if applicable, would be to bolster Encino Equity’s
interpretation of the Paragraph 15(b) Language. However, the course of
performance evidence is not needed for us to arrive at the interpretation
advanced by Encino Equity, because, as we have explained, the extrinsic
evidence of the negotiations between EVSC and Petco in 1996 and 1997
establishes the parties’ clear intent to limit the Proposition 13 protection to
the Initial Term of the Lease.
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DISPOSITION
The judgment is affirmed.
IRION, J.
WE CONCUR:
HUFFMAN, Acting P. J.
DO, J.
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