Thomas Center Owners Assoc. v. Robert E. Thomas Trust

IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
THOMAS CENTER OWNERS
ASSOCIATION, No. 80086-8-I
Appellant, DIVISION ONE
v.
UNPUBLISHED OPINION
THE ROBERT E. THOMAS TRUST, and
MICHAEL HYTOPOULOS, Trustee,
Respondents.
LEACH, J. — Thomas Center Owners Association appeals an order granting partial
summary judgment in favor of its landlord, the Robert E. Thomas Trust, and denying its
motion to vacate an appraisal used to establish rent amounts for a ground lease. The
Association claims the trial court should have decided as a matter of law that the
appraisers proceeded on a fundamentally wrong basis by excluding the impact of soil
contamination from their valuation.
Because the appraisers did not act arbitrarily and capriciously, they did not make
their evaluation on a fundamentally wrong basis. We affirm.
FACTS
Robert E. Thomas owned commercial real estate (Thomas Center Property) on
Mercer Island. In August 1963, Charles and Vicenta Sparling and George and Jean
Donnally, entered into a 99-year ground lease with Thomas for the property and
Citations and pin cites are based on the Westlaw online version of the cited material.
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purchased the improvements Thomas had built on it. Thomas created the Robert E.
Thomas Trust in his will. It became the owner of the Thomas Center Property after
Thomas passed away in 1976.
In July 1975, Sparling and Donnally assigned the ground lease to the John’s
Company. It created the Thomas Center Condominiums in 1976.
In 1985, John’s Company assigned the ground lease to the condominium owners’
association (Association). It is the current ground lease tenant. The ground lease
provides for a rent adjustment every 10 years using an appraisal process:
The amount of monthly rental payable by Lessees under paragraph
3.A above shall be adjusted on the 1st day of September 1973, 1983, 1993,
2003, 2013, 2023, 2033, 2043; and 2053, to an amount equal to six (6%)
per cent per annum of the appraised fair market value of said leased
premises, excluding buildings, and shall, for the 120 months next
succeeding the commencement of each such [10-year] period, be the
amount so determined by an appraisal; provided, however, that in no event
will the monthly rental be less than $800.00 per month. At least sixty (60)
days before the end of each said ten year period, the Lessor and Lessees
shall jointly appoint one appraiser, and said appraiser shall appraise the
leased premises at its fair market value, as of the date on which each such
ten year period commences.
...
In the event that the parties are unable to agree on one appraiser, or
in the event the valuation established by the one appraiser is unsatisfactory
to either party, then the parties shall each appoint one appraiser and the
two appraisers so selected shall appoint a third appraiser, and the
appraised fair market value as determined by the three appraisers shall then
be binding upon the parties hereto retroactively to the beginning of that ten
year period.
In 2013, the Association and the Trust agreed to have Peter Shorett appraise the
land to determine the new rent effective September 1, 2013. Shorett appraised the land
at $5.5 million. He included in his appraisal report a limiting condition stating, “It is
assumed that there are no hidden or unapparent conditions of the property, subsoil, or
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structures (including asbestos, soil contamination, or unknown environmental factors)
that render it more or less valuable.” In a letter dated September 20, 2013, Shorett told
the parties that after he finished his appraisal he learned about a feasibility study that
caused him to increase his valuation to $6.6 million. The Association did not accept the
$5.5 million or the $6.6 million valuations.
In 2014, the Trust learned the Hadley Property, a property across the street from
the Thomas Center Property, was contaminated by Tetrachloroethylene (PCE). A 2011
report prepared for a previous owner of the Hadley Property stated that a drycleaner and
coin-operated laundry on the Thomas Property in the late 1960s and 70s was a
recognized environmental condition. A recognized environmental condition “is the
presence or likely presence of any hazardous substances or petroleum products on a
property under conditions that indicate an existing release, a past release or the material
threat of a release of any hazardous substances or petroleum products into structures on
the property or into the ground, groundwater or surface water of the property.”
In late 2014, the Trust had investigative testing done at the Thomas Center
Property. It confirmed the presence of PCE and other degradient contaminants on the
property. Hadley sued the Association, the Trust, and other parties for offsite
contamination.
After learning about the contamination, the Association asserted the appraisement
process could not go forward until the contamination issue was fully and finally resolved.
In January 2015, the Association sued the Trust, seeking declaratory judgment that “it
has no liability related to the contamination of the Thomas Center Property,” and for an
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injunction “enjoining the re-evaluation of Ground Lease rent until the nature and extent of
the contamination and remediation liability has been determined.”
In 2015, the trial court granted partial summary judgment forcing the Association
to participate in the appraisement process:
The plaintiff says a reliable appraisal simply can't be done when there is so
much uncertainty about the amount of, and responsibility for, outstanding
remediation costs. The defense doesn't necessarily disagree but says this
is a question with which the appraisers, and not the court, should wrestle. If
the appraisers determine the task is impossible, so be it. The Court would
agree that the process should run its course - whether it leads somewhere
or not - and the plaintiff should be participating in the process.
To comply with the court order, the Association appointed Ken Barnes as its
appraiser, and the Trust appointed Anthony Gibbons as its appraiser. Barnes and
Gibbons mutually appointed Murray Brackett as the third appraiser.
In January 2017, Brackett told counsel the appraisers were close to completing the
work “without additional information about the contamination issue,” and asked if the
appraisers would be receiving further guidance or information on “this issue.”
The Trust’s counsel responded to Brackett suggesting the appraisers:
1. Complete the appraisal analysis of the Thomas Center Property, as
unimpaired as of the required appraisal date. Just so that task is
done.
2. Place an interim hold on the appraisal valuation of the property, as
impaired, as of the appraisal date, pending completion of further
studies and information which are now commencing...
3. When your group is ready to prepare a final report, we request that
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the report be prepared in “DRAFT” form and that we and our clients
have a reasonable opportunity to review, comment, question the
report before your group prepares a final report.
NOTE: For the sake of caution, I want to reiterate my position that as
of the appraisal date, the contamination which has been there [for]
decades was not known to the parties and [therefore] is not a
relevant factor in valuation. I understand that Chris disagrees and
that your group may disagree. I just want to make clear that I have
not waived or conceded that point.
On November 12, 2018, the Association told the appraisers it did not know when
the appraisers would receive additional information because of upcoming litigation dates.
The Trust responded noting that “no new material information about the contamination
itself is expected for the foreseeable future.”
On December 31, 2018, the appraisal panel concluded the fair market value was
$5.5 million as “clean.” The panel noted this valuation was made with “ongoing litigation
with respect to onsite environmental contamination” and that “[t]he best available
information indicates that the issue of contamination became known after the revaluation
date.” The appraisal also noted:
With regard to the retrospective receipt of information related to
contamination, it is noted that the highest and best use of the property would
call for a full investigation of the contamination, and ultimate clean-up. It is
standard practice to appraise a property as clean, and then address
contamination liability as a separate matter. Typically, when development
property such as this sells in the market place, the price of the property is
differentiated from the cost of clean-up. The price paid for the property, as
clean, is then used to help fund clean-up, presuming the owner is
responsible for the cost of clean-up. Typically, relevant funds would be
escrowed pending development of the project, and the money used to clean
up the site during the development process. In this manner other sources
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of clean-up funds can be obtained from potentially liable parties, and
insurance proceeds, if any.
We reiterate that issues of liability and related impacts to fair market rent
will be dealt with in the ongoing litigation, outside of the market rent
determination process.
The Association’s appraiser dissented. He agreed with the “clean” valuation but
stated the panel did not have enough information to provide an “as is” valuation.
From September 1, 2013, through June of 2017, the Association paid $27,500 per
month in rent based on Shorett’s original 2013 appraisal. On July 1, 2017, the Association
reduced its monthly rent payment to $10,000 per month. This resulted in a rent reduction
of $385,000 for the period from July 1, 2017, to April 2019.
On March 4, 2019, the Association asked the court to vacate the appraisal
decision. In response, the Trust asked the court to enforce the lease adjustment provision
using the appraisal and to award the Trust back rent and interest.
The trial court granted the Trust’s request on summary judgment. The trial court
found that the process as completed was not fundamentally wrong and also found that
the appraisal panel did not fail to follow directions.
The Association appeals.
STANDARD OF REVIEW
The Association appeals the trial court’s summary judgment decisions granting the
Trust’s requests and denying its own. We review an order granting summary judgment
de novo.1 Summary judgment is appropriate when “there is no genuine issue as to any
1
Loeffelholz v. University of Washington, 175 Wash. 2d 264, 271, 285 P.3d 854
(2012).
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No. 80086-8-I/7
material fact” and “the moving party is entitled to a judgment as a matter of law.” 2 We
view the evidence in the light most favorable to the nonmoving party.3
ANALYSIS
Fair Market Value
The Association claims that an appraisal to determine “fair market value” must
consider soil contamination as part of the determination. Because the challenged
appraisal did not do this, the Association asserts that controlling case law requires that
the trial vacate it. The Trust responds that the appraisers followed the lease, exercised
their professional discretion, and acted within that discretion to decide the contamination
would not be considered in determining fair market value because it “is standard practice
to appraise a property as clean, and then address contamination liability as a separate
matter.”
The parties agree on the standard our courts use to review a challenged appraisal
but disagree about the application of that standard to the facts of this case. “[I]n the
absence of mistake, arbitrary or capricious action or fraud, the decision by such an
appraiser is conclusive upon the parties. Only where the appraiser has proceeded upon
a fundamentally wrong basis may the court ignore the appraiser's findings.”4 This court
has explained an “appraiser may not ignore the express terms of a contract” and doing
2
CR 56(c); Ranger Ins. Co. v. Pierce County, 164 Wash. 2d 545, 552, 192 P.3d 886
(2008).
3
Loeffelholz, 175 Wash. 2d at 271.
4
Black Mountain Ranch v. Black Mountain Development Co., 29 Wash. App. 212,
216, 627 P.2d 1006 (1981).
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so is evidence that the appraiser proceeded on a “fundamentally wrong basis.”5 So, we
must decide if the appraisers acted in an arbitrary and capricious manner and ignored the
terms of the lease by excluding consideration of contamination when determining “fair
market value.” Arbitrary and capricious action is the “willful and unreasoning action
without consideration and in disregard to facts and circumstances.”6 Action is not
arbitrary and capricious where there is room for two opinions even though one may
believe an erroneous conclusion has been reached.7
The ground lease does not define “fair market value.” The lease also does not
specify a method an appraiser must use to determine “fair market value.” Washington
State courts define “‘Fair market value’ is the amount of money which a well informed
buyer, willing but not obliged to buy the property, would pay, and which a well informed
seller, willing but not obligated to sell it, would accept, taking into consideration all uses
to which the property is adapted and might in reason be applied.”8
The Association correctly notes that in Washington, a seller of unimproved
residential property must inform a buyer of “any substances, materials, or products in or
on the property that may be environmental concerns . . . or contaminated soil or water.” 9
And, the Association also notes that in condemnation proceedings, property is usually
5
Chatterton v. Business Valuation Research, Inc., 90 Wash. App. 150, 157, 951 P.2d
353, 357 (1998).
6
Bennett v. Board of Adjustment of Benton County, 29 Wash. App. 753, 755, 631
P.2d 3 (1981).
7
Bennett, 29 Wash. App. at 755 (citing Matter of Stockwell, 28 Wash. App. 295, 302,
622 P.2d 910 (1981); King County v. Washington State Bd. of Tax Appeals, 28 Wash. App.
230, 241, 622 P.2d 898 (1981); Zoutendyk v. Washington State Patrol, 27 Wash. App. 65,
616 P.2d 674 (1980)).
8
State v. Rowley, 74 Wash. 2d 328, 334, 444 P.2d 695 (1968).
9
RCW 64.06.015.
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valued under the zoning that existed on the date of possession unless a reasonable
probability exists that the zoning will change in the near future, and such change is not
caused by the project for which the property is being acquired.10
This case presents an unusual use of an appraisal. The parties acknowledge that
a 99-year ground lease with rent to be readjusted every 10 years using an appraisal and
a fixed rate of return is uncommon. Also, the contamination issue here is complex, and
the applicable law was largely undeveloped at the time the lease was written. The land
became contaminated sometime between the years 1961 and 1978. At the time, the rent
was to be readjusted in 2013, but the Trust claims it was unaware of the contamination.
And, at the time of the December 2018 appraisal report, the contamination litigation was
ongoing.
The panel here followed the Uniform Standards of Professional Appraisal Practice
(USPAP) in preparing their report. The USPAP states that appraisals of contaminated
properties are sometimes developed on an assumption, while extraordinary, that the
property is free of contamination. The USPAP states that a “clean” appraisal is an
acceptable practice under certain conditions.
The panel’s December 2018 appraisal report indicated, “[s]ince no Phase I
assessment was available at the renewal date, a rent renewal appraisal, if prepared at
that time, would not have included any comment on contamination, other than to assume
there was none as a standard limiting condition.”
10
State v. Kruger, 77 Wash. 2d 105, 107-08, 459 P.2d 648 (1969); State v. Sherrill, 13
Wash. App. 250, 261-62, 534 P.2d 598 (1975).
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The report also stated, “As of our date of value, the liability issues were unknown
and, therefore, unresolved. It is standard appraisal practice to assume that a site is clean,
absent information to the contrary. Our appraisal analysis, reflecting an opinion of Fair
Market Value without consideration of the future environmental issues, would have come
to the following determination of rent under the terms of the lease.” The report continued,
“It is standard practice to appraise a property as clean, and then address contamination
liability as a separate matter.” The Association did not present any evidence that the
panel’s statement was incorrect. So, it did not demonstrate any issue to whether the
panel acted within the discretion given to appraisers under the USPAP.
This case is not like Chatterdon where the court found the appraiser’s valuation
method frustrated the intent of the parties.11 Here, the Association made no showing the
soil contamination impaired its use of the leased property. Also, it made no showing the
amount of rent charged using the appraised value varied from the rents charged to
tenants of similar properties. Finally, the appraisal did not frustrate the parties’ intent
regarding contamination. As contemplated by the appraisal, the economic consequences
of the contamination for each party will be determined in pending litigation.
Deducting the estimated cleanup costs from the “clean value” to produce the
appraised value, used to calculate rent, would have the Association leasing the property
for $800 per month. Apparently, recognizing the inequity of this position at oral argument
the Association expressly disavowed this approach. It stated the appraisers should
exercise their discretion to determine how to adjust the property’s value because of the
11
90 Wash. App. 150, 951 P.2d 353, 357 (1998).
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presence of contaminated soil. This is what the panel did.
Because it is a standard practice to appraise a property as clean, and given the
unusual facts of this case, the panel did not act arbitrarily and capriciously when it
evaluated the fair market value as “clean.” The Association failed to show any issue about
whether the panel completed the appraisal process on a fundamentally wrong basis or
that the appraisal panel failed to follow directions.
CONCLUSION
We affirm. Because it is industry standard, based on context to appraise a property
as “clean,” the appraisal panel did not act arbitrarily or capriciously.
WE CONCUR:
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