Opinion
B223427
09-13-2011
VMA PALOMAR, LLC, Plaintiff and Respondent, v. FARMERS AND MERCHANTS TRUST COMPANY OF LONG BEACH, as Trustee, etc. et al., Defendants and Appellants.
Palmieri, Tyler, Wiener, Wilhelm & Waldron, Don Fisher, Annie C. Chu for Defendants and Appellants Farmers and Merchants Trust Company of Long Beach, Thomas Stanaland, and Glendora Apartments, Inc. Blue Schoor & Diehl, Charles D. Schoor; Jones Ackerman & Corman and Michael S. Ackerman for Plaintiff and Respondent VMA Palomar, LLC.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Los Angeles County Super. Ct. No. BC385969)
APPEAL from a judgment of the Superior Court of Los Angeles County, Joseph R. Kalin, Judge. Reversed.
Palmieri, Tyler, Wiener, Wilhelm & Waldron, Don Fisher, Annie C. Chu for Defendants and Appellants Farmers and Merchants Trust Company of Long Beach, Thomas Stanaland, and Glendora Apartments, Inc.
Blue Schoor & Diehl, Charles D. Schoor; Jones Ackerman & Corman and Michael S. Ackerman for Plaintiff and Respondent VMA Palomar, LLC.
INTRODUCTION
Plaintiff and respondent VMA Palomar, LLC (VMA) brought a declaratory relief action against defendants and appellants Farmers and Merchants Trust Company of Long Beach (F&M), as Trustee for John G. Walker, Daniel K. Walker, Anne C. Walker, and William Henry Walker; Thomas Stanaland; and Glendora Apartments, Inc. (appellants) to determine if a ground lease was silent and ambiguous concerning the manner in which a component of rent should be calculated in the event that VMA exercised its option to extend the term of the lease. The trial court found that the ground lease was silent and ambiguous in connection with the computation and ordered language added to the lease setting forth how the challenged component of rent was to be calculated during any extension term. On appeal, appellants contend that the trial court erred in finding the ground lease ambiguous, in admitting extrinsic evidence to interpret the lease, and in adding language to the lease. We reverse the judgment.
BACKGROUND
In October 1976, F&M, the owner, and Sycamore Properties (Sycamore) entered into a ground lease relating to property located in San Diego County (Ground Lease). In 1977, F&M and Sycamore twice amended the Ground Lease. Beginning in July 1978, Sycamore developed the real property that was the subject of the Ground Lease into a shopping center known as Palomar Plaza. After completion of Palomar Plaza, Sycamore subleased portions of the property with structures in the shopping center and "sub-ground leased" land with no structures. In May 2007, VMA purchased Sycamore's interest in the Ground Lease.
The Ground Lease provides for an interim term followed by a base term of 42 years. The base term is scheduled to expire on October 14, 2019. Under the Ground Lease, the tenant has the option of extending the term of the lease for three different periods. Under Article III, Section 1 of the Ground Lease, the tenant may extend the lease for a new base term of 42 years. Under Article III, Section 2, the tenant may extend the lease for two additional 10-year periods. Whether extended under Section 1 or Section 2 of Article III, no combination of extensions may result in a lease term exceeding 99 years.
Under the Ground Lease, rent consists of two components. The first component, Base Rental (Article VII, Section 1), is to be paid monthly and consists of payments as specified in an amendment to the Ground Lease of $2,450 a month for the first 21 years of the base term, and payments of $2,850 a month for the second 21 years of the base term. As relevant here, the second component, Additional Rental (Article VII, Section 3), is to be paid yearly and consists of a percentage of the annual "increase" in the "fixed minimum rental"—i.e., the rent paid to the Ground Lease tenant. The Ground Lease does not specify the base from which the increase in fixed minimum rental is to be calculated. However, during the nearly 30 years that Sycamore was the tenant under the Ground Lease, F&M and Sycamore used the fixed minimum rental that Sycamore collected from its subtenants and sub-ground tenants during the period from May 1, 1979, to May 1, 1980, as the base for calculating the increase in fixed minimum rental. The fixed minimum rental for that period was $393,311. After its May 2007 acquisition of Sycamore's interest in the Ground Lease, VMA continued the practice of paying Additional Rent using $393,311 as the base for calculating the increase in fixed minimum rental.
Article VII, Section 2 of the Ground Lease provides for modification of the monthly Base Rental if the tenant exercises its option to extend the lease term. At the date on which such an extension term begins (the "reappraisal adjustment date"), the Base Rental is adjusted to an amount equal to one-twelfth of the product of eight percent of the then fair market value of the land constituting the leased premises based on its then existing use. The Ground Lease does not provide for a modification or adjustment in Additional Rental if the tenant exercises its option to extend the lease term.
On February 1, 2008, VMA filed its declaratory relief action against F&M in which it alleged, in part, that it and F&M had a dispute over the manner in which Additional Rental would be calculated under the Ground Lease if the tenant exercised its option to extend the lease term. VMA contended that the base from which increases in fixed minimum rental would be calculated should be reset consistent with the modification to Base Rental described in Article VII, Section 2 of the Ground Lease. That is, the base would be the fixed minimum rental collected during the first year that each applicable space is subleased during the option year. VMA alleged that F&M contended that the base for calculating increases in fixed minimum rental would not change if the tenant exercised its option to extend the lease term. Thus, any increases in fixed minimum rental would continue to be calculated using $393,311 as the base.
On February 11, 2009, VMA amended its complaint to add Stanaland and Glendora Apartments, Inc. as defendants. Stanaland and Glendora Apartments, Inc. were assignees of the rent under the ground lease.
At trial, VMA called three expert witnesses—Robert Lea, Alan Wayte, and William Whitney—over appellants' objection, to testify about ground leases generally and their interpretations of the Ground Lease in this case. Lea, a real estate appraiser, testified that he had read the Ground Lease and could not identify in the lease the base from which increases in fixed minimum rental are to be calculated. According to Lea, the prevailing practice for ground leases that contain more than one element of rent, such as base rental and additional rental, is to reset or bring current all elements if rent is reset during or after the term of a lease. Lea testified that an additional rent provision in a lease serves as an inflation hedge to protect the landowner and, if the base term on which an additional rent provision is based is not brought current, then there would be a "double counting" for inflation. In Lea's opinion, the base for calculating increases to fixed minimum rental should be brought current at the same time that base rent is brought current. Lea testified that there is no provision in the Ground Lease that states that the base for calculating Additional Rental is to be reset when there is an extension or a renewal of the lease.
Wayte, an attorney, also testified that he could not determine how to calculate Additional Rental under the Ground Lease because the lease is silent as to the base from which increases in fixed minimum rental are to be calculated. Wayte testified that VMA's proposed interpretation of Additional Rental—that the base for calculating fixed minimum rental should be reset as the fixed minimum rental collected during the first year of any extension period of the Ground Lease—is more consistent with custom and usage in the industry in drafting and negotiating ground leases and more commercially reasonable than appellants' interpretation. Wayte testified that there is no provision in the Ground Lease that states that the base for calculating Additional Rental is to be reset when there is an extension or a renewal of the lease. Wayte testified that in his opinion the absence of a base for calculating increases in fixed minimum rental is the only part of the Additional Rental provision that is ambiguous.
Whitney, an economist, testified that he could not determine how Additional Rental was to be calculated under the Ground Lease because the lease was silent about the manner in which fixed minimum rental was to be calculated. Whitney opined that VMA's position that the base for calculating fixed minimum rental should be reset at the beginning of any extension period is economically and commercially reasonable. F&M's position that the base for calculating fixed minimum rental should remain the same during extension periods is economically and commercially unreasonable. Whitney agreed that the parties could agree to define additional rental in the Ground Lease in whatever manner they wanted. Whitney's testimony concerned what is economically reasonable in light of a silent lease.
The trial court found Article VII, Section 3 of the Ground Lease to be ambiguous and stated that there was "no direct evidence of the intent of the parties at the time that the Ground Lease was entered into as to the calculation of Additional Rental in any period, including upon the exercise of an option to extend the Ground Lease. Based on the evidence adduced at trial, the trial court, in its statement of decision, stated, "The Court finds that the custom and practice in the leasing industry was and is to provide, in a variety of different ways, for inflation in lease payments and land values. The Court finds that it is economically and commercially reasonable to consider the issue of inflation in a lease that may extend 99 years. The Court finds that VMA's proposed interpretation is consistent with custom and usage, is consistent with the practice used for calculating Additional Rental during the initial base term, is economically and commercially reasonable, and takes into account the interaction of the Base Rental and Additional Rental under the Ground Lease." The trial court further found that appellants' "proposed interpretation is not consistent with custom and usage in the leasing industry, would be economically and commercially unreasonable and would result in economic distortion (i.e., double counting) so the Additional Rental would no longer function as an inflation hedge in the manner that it had during the initial base term of the Ground Lease."
Based on its findings, the trial court ordered Article VII, Section 3 amended to include language that provides that if the tenant elects to exercise an option to extend the lease term, the base from which the increase in "subrents" (fixed minimum rental) would be measured would be reset in the same manner as it was set in the initial base term. That is, the base would be recalculated and reset as the subrents received during the first year of any option period.
As revised by the trial court (the trial court's additions are in bold; words the trial court omitted or inverted, apparently inadvertently, from the original Ground Lease are in brackets), Article VII, Section 3 of the Ground Lease provides in pertinent part:
"(a) Additional Rental. During the term of this lease, at the end of each year of the term of the lease, Tenant shall pay to Landlord as 'Additional Rental', (a) an amount equal to fifteen (15%) [percent] of the increase, on a space by space basis, if any there be, in the fixed rental, base rental or minimum rental (herein 'fixed minimum rental') paid to Tenant during said year pursuant to any sublease of all or any portion of the leased premises and any improvements thereon over the 'base fixed minimum rental'; (b) an amount equal to twenty-five (25%) [percent] of the increase, on a space by space basis, if any there be, in the fixed minimum rental paid to Tenant during said year pursuant to any sub-ground lease of all or any portion of the leased premises herein over the 'base fixed minimum rental'; and (c) an amount equal to [thirty-five (35%) percent] of all 'overage rental' paid to Tenant during said year pursuant to any sublease or sub-ground lease of all or any portion of the leases premises herein. For the purposes of this
Section 3, the term 'base fixed minimum rental' during the initial base term, new base term, or any option term, respectively, shall mean the fixed minimum rental paid to Tenant by sublessees pursuant to any subleases or sub-ground leases, as applicable, of all or any portion of the leased premises and in the case of any subleases only, any improvements thereon, during the first 12 month period from and after the commencement of the initial base term, new base term, or any option term, respectively, that each space is subleased or sub-ground leased, including that if any space is vacant at such time, then, for such vacant space only, the 12 month period from and after such commencement date of the base term, new base term, or any option term, respectively, that each such applicable portion of the leased premises is first subleased or sub-ground leased."
DISCUSSION
The Trial Court Erred When It Added Language To The Additional Rental Provision Of The Ground Lease
Appellants contend that the Ground Lease is not ambiguous with respect to the calculation of Additional Rental. Therefore, appellants argue that the trial court erred by adding language to the Additional Rental provision (Article VII, Section 3) of the Ground Lease that defines the base from which increases in fixed minimum rental are to be calculated and by providing that the base is to be reset at the beginning of each extension term of the lease.
A. Standards of Review
An appellate court decides issues of contract interpretation de novo when there is no conflicting extrinsic evidence. (Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 847.) When the interpretation of a contract provision turns on the credibility of conflicting evidence, the trier of fact determines the meaning of the provision. (Ibid.)If that determination is supported by substantial evidence, an appellate court will not disturb it on appeal. (Ibid.) Whether a contract provision is ambiguous is subject to de novo review. (Ibid.)
B. Application of Relevant Principles
1. Ambiguity
A contract provision is ambiguous when it is susceptible of two or more reasonable constructions. (Benach v. County of Los Angeles, supra, 149 Cal.App.4th at p. 847.) Whether an ambiguity exists is a question of law for the trial court. (Ibid.) If the trial court finds that a contract provision is ambiguous, a party may introduce extrinsic evidence to aid in the interpretation of the contract. (Ibid.) "'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 in determining its meaning for they are least likely to be mistaken as to the intent. [Citations.]' (Crawford v. Continental Cas. Co. (1968) 261 Cal.App.2d 98, 102 ; Southern Cal. Edison Co. v. Superior Court [(1995)] 37 Cal.App.4th [839,] 851; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 689, p. 622.)" (Oceanside 84, Ltd. v. Fidelity Federal Bank (1997) 56 Cal.App.4th 1441, 1449.)
The Additional Rental provision in the Ground Lease is ambiguous because it does not specify the base from which increases in fixed minimum rental are to be calculated. Because the provision is ambiguous, the trial court properly admitted extrinsic evidence to aid in the interpretation of the provision. (Benach v. County of Los Angeles, supra, 149 Cal.App.4th at p. 847.) Here, for nearly 30 years, F&M and Sycamore calculated increases in fixed minimum rental using as the base the fixed minimum rental Sycamore collected from its subtenants and sub-ground tenants during the period from May 1, 1979, to May 1, 1980 ($393,311). Such performance established the base for calculating increases in fixed minimum rental under the Additional Rental provision. (Oceanside 84, Ltd. v. Fidelity Federal Bank, supra, 56 Cal.App.4th at p. 1449.) The parties do not dispute that the base throughout the initial term was $393,311. As we explain below, the Additional Rental provision is not ambiguous for failure to state whether and how the base for calculating increases in fixed minimum rental is to be adjusted if the tenant exercises an option to extend the lease term; rather, it is silent on that matter.
2. Adding Language
"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; and where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all." (Code Civ. Proc., § 1858.) '""It is a general rule governing the construction of contracts that unless a contract is ambiguous, its meaning must be determined from the words used; and courts will not, because a more equitable result might be reached thereby, construe into the contract provisions that are not therein. [Citation.] In constructing a contract which purports on its face to be a complete expression of the entire agreement, courts will not add thereto another term, about which the agreement is silent. [Citation.]"'" (Apra v. Aureguy (1961) 55 Cal.2d 827, 830-831, citations omitted; Edwards v. Arthur Andersen, LLP (2008) 44 Cal.4th 937, 954 ["when courts construe an instrument, a judge is 'not to insert what has been omitted, or to omit what has been inserted . . .'"]; Safeco Ins. Co. v. Robert S. (2001) 26 Cal.4th 758, 764 [it is a fundamental principle that in interpreting a contract, a court is not to insert what has been omitted]; Levi Strauss & Co. v. Aetna Casualty & Surety Co. (1986) 184 Cal.App.3d 1479, 1486 (Levi Strauss)[a court will not add a term to a contract about which the contract is silent].)
"[P]arties are free to contract for a lease on such terms as they please . . . ." (Cox v. Hollywood Film Enterprises, Inc. (1952) 109 Cal.App.2d 320, 325; Pearl v. General Motors Acceptance Corp. (1993) 13 Cal.App.4th 1023, 1030 [parties generally are "free to contract with each other upon such terms as they agree"].) "In construing a contract, it is not a court's prerogative to alter it, to rewrite its clear terms, or to make a new contract for the parties. [Citations.]" (Moss Development Co. v. Geary (1974) 41 Cal.App.3d 1, 9.) "The court does not have the power to create for the parties a contract which they did not make, and it cannot insert in the contract language which one of the parties now wishes were there." (Levi Strauss, supra, 184 Cal.App.3d at p. 1486.)
The Ground Lease is not ambiguous with respect to whether the manner in which Additional Rent is calculated is to be modified upon the tenant's exercise of its option to extend the term of the lease, it is silent as to that matter. Article VII of the Ground Lease, which sets forth rent under the lease, contains three relevant sections. Section 1 addresses Base Rental. Section 2 addresses how Base Rental is to be modified if the tenant exercises its option to extend the lease. Section 3 addresses Additional Rental. Article VII does not contain an additional section for the modification of Additional Rental if the tenant exercises its option to extend the lease. The trial court was not empowered to insert in the Ground Lease a modification provision for Additional Rental that F&M and Sycamore omitted, thereby creating a lease the parties did not make. (Code Civ. Proc., 1858; Apra v. Aureguy, supra, 55 Cal.2d at pp. 830-831; Edwards v. Arthur Anderson, LLP, supra, 44 Cal.4th at p. 954; Safeco Ins. Co. v. Robert S., supra, 26 Cal.4th at p. 764; Levi Strauss, supra, 184 Cal.App.3d at p. 1486.)
In its statement of decision and judgment, the trial court stated that the language it added to Section 3 of Article VII described the manner in which Section 3 "should be interpreted." (Italics added.) The added language is not an interpretation of any part of Section 3, but an entirely new provision that dictates the manner in which Additional Rent is to be calculated if the tenant exercises an option to extend the lease.
The trial court found that the language it added to Section 3 of Article VII was consistent with custom and usage in the leasing industry, consistent with the practice used for calculating Additional Rental during the initial base term, economically and commercially reasonable, and took into account the interaction of the Base Rental and Additional Rental under the Ground Lease. Even if the trial court's view of its added language were correct, absent an ambiguity in the Additional Rental provision, the trial court was not permitted to imply a provision into the Ground Lease because the provision might result in a more equitable agreement. (Apra v. Aureguy, supra, 55 Cal.2d at p. 830.)
F&M and Sycamore were free to enter a ground lease that did not contain a provision that modified the manner in which Additional Rental would be calculated if the tenant exercised its option to extend the term of the lease. (Cox v. Hollywood Film Enterprises, Inc., supra, 109 Cal.App.2d at p. 325; Pearl v. General Motors Acceptance Corp., supra, 13 Cal.App.4th at p. 1030.) In its statement of decision, the trial court expressly found that F&M and Sycamore were "experienced with ground leases" at the time they entered the Ground Lease. Consistent with that experience, F&M and Sycamore demonstrated that they knew how to include a provision for the modification of rent if the tenant extended the lease—they included Section 2 "Modification of Base Rental" in Article VII. Also consistent with their experience with ground leases, F&M demonstrated that they knew how to revise the Ground Lease if it did not express their mutual intent—they twice amended the lease in 1977. Thus, the absence of a modification provision for Additional Rental properly is viewed as an expression of F&M and Sycamore's intent that such a provision not be part of the Ground Lease.
DISPOSITION
The judgment is reversed. Appellants are awarded their costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
MOSK, J. We concur:
TURNER, P. J.
ARMSTRONG, J.