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DRE #5 v. La Jolla Investment Co. Inc.

California Court of Appeals, Fourth District, First Division
Jul 31, 2008
No. D050268 (Cal. Ct. App. Jul. 31, 2008)

Opinion


DRE #5 et al. Plaintiffs and Appellants, v. LA JOLLA INVESTMENT COMPANY, INC., et al., Defendants and Respondents. D050268 California Court of Appeal, Fourth District, First Division July 31, 2008

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of San Diego County No. GIC846157 Patricia A. Y. Cowett, Judge.

BENKE, Acting P. J.

A master lessee under a long-term lease is an owner of property within the meaning of Business and Professions Code section 7044 such that it is not required to obtain a contractor's license in order to enter into a "build-to-suit" lease with a sublessee. Accordingly, we affirm the judgment entered below in favor of the master lessee in the sublessee's action to recover amounts it paid the master lessee for building an aircraft hangar.

All further statutory references are to the Business and Professions Code unless otherwise specified.

FACTUAL AND PROCEDURAL BACKGROUND

In 1998 defendants and respondents La Jolla Investment Company, Inc., and Willis M. Allen, Jr. (La Jolla Investment), entered into a 30-year master lease of 11.18 acres of land at Gillespie Field in El Cajon. The land is owned by the County of San Diego (the county), and under the terms of the lease La Jolla Investment agreed that it would construct $1.5 million of improvements on the property. Under the terms of the lease, the county gave La Jolla Investment notice that the lease might create a possessory interest in the land subject to real property taxation under the provisions of Revenue and Taxation Code section 107.6 and that La Jolla Investment would be responsible for any such real property taxes.

In 2000 plaintiffs and appellants DRE #5, a Delaware limited liability company, Eugene L. Charles and Constance E. Charles (collectively the Charleses) entered into a sublease with La Jolla Investment. Under the terms of the lease, La Jolla Investment agreed to construct the exterior of an airplane hangar on 3,224 square feet of the property it leased from the county. The Charleses agreed to pay La Jolla Investment a base rent of $200 a month and $295,000 for construction of the exterior of the airplane hangar. Under the terms of the lease, the Charleses were permitted to construct a residence above the hangar, and they did so.

La Jolla Investment retained a general contractor, Hunter Construction Company (Hunter), to complete construction of the exterior of the hangar. Construction was completed in February 2003, the Charleses paid La Jolla Investment the entire $295,000 due under the terms of the sublease and, consistent with the terms of the lease, La Jolla Investment delivered the premises to the Charleses. After the Charleses took possession, they noticed a number of defects in the hangar and brought them to La Jolla Investment's attention. The Charleses' complaints were not resolved, and they filed a construction defect complaint against La Jolla Investment.

At trial, La Jolla Investment moved in limine to exclude any reference to the fact La Jolla Investment does not have a general contractor's license. La Jolla Investment argued it was not required to have a general contractor's license to enter into a "build-to-suit" lease with the Charleses, and therefore its lack of a license was irrelevant. The Charleses opposed the motion. The Charleses argued the sublease was a construction contract within the meaning of section 7026, and because La Jolla Investment did not have a contractor's license, they were entitled to recover all of the money they paid La Jolla Investment for construction of the hangar. The trial court granted La Jolla Investment's motion. Thereafter the jury returned a verdict in favor of La Jolla Investment on all of the Charleses' remaining claims.

Following entry of judgment in favor of La Jolla Investment, the Charleses filed a timely notice of appeal. On appeal the only contention they make is that the trial court erred in granting La Jolla Investment's in limine motion excluding reference to the fact that La Jolla Investment does not have a general contractor's license.

DISCUSSION

I

Because the practical effect of the trial court's ruling on the motion in limine was to terminate any claim under section 2031 as a matter of law, we review the order de novo. (Aas v. Superior Court (2000) 24 Cal.4th 627, 634-635.)

II

In California, contractors are governed by the Contractors' State Licensing Law, section 7000 et seq. Section 7026 provides in pertinent part: "[A] contractor is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure." The scope of section 7026 is broad: "Section 7026 plainly states that both the person who provides construction services himself and one who does so 'through others' qualifies as a 'contractor.' The California courts have also long held that those who enter into construction contracts must be licensed, even when they themselves do not do the actual work under the contract. [Citations.] Indeed, if this were not the rule, the requirement that general contractors be licensed would be completely superfluous." (Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, 941 (Vallejo Development.) Thus a developer cannot escape the licensing requirements of the Contractors' State Licensing Law by simply employing others who have appropriate licenses. (Ibid.)

In Vallejo Development the "master developer" of a planned community sold the land in individual neighborhoods to builders who would construct homes and sell them to consumers. At the time the master developer sold each neighborhood, it agreed that after the close of escrow it would make a number of infrastructure improvements required by a municipality as a condition of approving the project. Although the master developer did not have a contractor's license, it retained a licensee and licensed subcontractors to construct the improvements. A dispute arose between the master developer and the purchasers of neighborhoods with respect to whether the master developer had adequately provided the agreed upon improvements. In response to a suit filed by the purchasers, the master developer recorded mechanics' liens against the purchasers' property and attempted to foreclose on the liens. The purchasers defended the mechanics' lien action by arguing the master developer was acting as a contractor within the meaning of section 7026 and therefore was barred by section 7031 from pursuing any claim against them. The Court of Appeal agreed with the purchasers and rejected the master developer's argument that it merely acted as an administrator of the construction contracts which were actually performed by licensed contractors: "The Legislature has determined that ultimate responsibility for construction work must rest with a licensed contractor−in this case, a licensed general engineering contractor−who has demonstrated the requisite competence in the construction business. This policy ensures that all subcontractors and materialmen on a project will be answerable to and directed by someone whose knowledge and experience meet uniform requirements. In addition, this policy protects consumers of the contractor's services by making all persons who are responsible for construction projects subject to the regulatory powers of the [Contractors' State Licensing Board]." (Vallejo Development, supra, 24 Cal.App.4th at p. 942.)

The penalties for performing contracting services without a license are severe. In addition to the criminal penalties set forth in section 7028, section 7031 prevents an unlicensed contractor from recovering any compensation for work the unlicensed contractor performed. "Regardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek 'compensation' for illegal unlicensed contract work. [Citations.] Thus, an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials. [Citations.] The statutory prohibition operates even where the person for whom the work was performed knew the contractor was unlicensed. [Citations.]" (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 997.)

Section 7031 states: "(a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.

Of importance here, however, is the fact that with respect to a whole class of contracts which would otherwise fall within the scope of section 7026 and hence be subject to the penalty set forth in section 7031, the Legislature has created a categorical exception to the Contractors' State License Law. Section 7044 states in pertinent part:

"This chapter does not apply to any of the following:

"(a) An owner of property, building or improving structures thereon, or appurtenances thereto, who does the work himself or herself or through his or her own employees with wages as their sole compensation, provided none of the structures, with or without the appurtenances thereto, are intended or offered for sale.

"(b) An owner of property, building or improving structures thereon, or appurtenances thereto, who contracts for such a project with a subcontractor or subcontractors licensed pursuant to this chapter.

"However, this exemption shall apply to the construction of single-family residential structures only if four or fewer of these structures are intended or offered for sale in a calendar year. This limitation shall not apply if the owner of property contracts with a general contractor for the construction."

As the court in Communications Relay Corp. v. County of Los Angeles (2005) 130 Cal.App.4th 162, 168, stated: "The purpose of the Contractors' State License Law . . . is to protect consumers who hire contractors from incompetence and dishonesty by those who provide building and construction services. [Citations.] Because property owners who perform the construction work themselves on their own property do not need this protection, the Legislature exempted them from the contractor licensing requirements. [Citation.]"

III

Applying these principles to the record before us, it is clear that the sublease La Jolla Investment entered into with the Charleses was a contract within the meaning of section 7026 but that La Jolla Investment was an owner within the exemption provided by section 7044, subdivision (b).

Notwithstanding La Jolla Investment's arguments to the contrary, when it executed the sublease in 2000 it plainly undertook to build for the Charleses an airplane hangar. The sublease states: "Sublessor shall use its good faith efforts to substantially complete the work to be completed by Sublessor for delivery of the Premises to Sublessee, as described in Exhibit 'C' to this Sublease (the 'Sublessor's Work'). If possession of the Premises (including, without limitation, substantial completion of the Sublessor's Work) is not delivered to Sublessee on or before December 31, 2001, either party may thereafter terminate this Sublease by giving written notice to the other party before such possession is delivered (except that such date shall be extended to the extent the delay in possession is caused or contributed by Sublessee, or by force majeure ['Act of God'] as set forth in Exhibit 'C')." Exhibit C to the sublease was a separate agreement under which La Jolla Investment agreed to build the hangar and the Charleses agreed to pay La Jolla Investment $295,000 when the hangar was complete.

In agreeing to build the hangar described in Exhibit C and that in the event the hangar was not built the Charleses would be relieved of any obligation under the sublease, La Jolla Investment clearly made an agreement to construct an improvement within the broad scope of section 7026. (See Vallejo Development, supra, 24 Cal.App.4th at p. 941.) The fact La Jolla Investment planned to use a licensed general contractor did not take the sublease outside the scope of section 7026. (Ibid.) The fact that the Charleses did not sign Exhibit C until shortly before they occupied the hangar in 2003 is also irrelevant. La Jolla Investment made the agreement to build the hangar when it signed the sublease. La Jolla Investment's failure to have Exhibit C executed by the Charleses until shortly before they took possession of the premises did not alter the fact that La Jolla Investment agreed to make an improvement when it executed the sublease. The later execution of Exhibit C merely confirmed that obligation and the Charleses' liability for the cost of the hangar. That confirmation process, as extended as it was, did not take the entire transaction outside section 7026.

However, although the terms of the sublease brought the transaction within the broad scope of section 7026, the sublease, along with the master lease from the county, also brought La Jolla Investment within the exemption provided by section 7044, subdivision (b). First, we note that at all material times La Jolla Investment was the master lessee under the county's master lease. We also note that under the terms of the sublease the premises were not delivered to the Charleses and no rent was due from them until the hangar was complete. Thus from the time La Jolla Investment signed the sublease with the Charleses until it completed the hangar and delivered it to the Charleses, it had exclusive possession of the land upon which the hangar was built. This interest in the land was sufficient to make it an owner within the meaning of section 7044.

Paragraph 4.2 of the sublease states: "Rent Start Date. That date upon which Sublessor substantially completes the Building and delivers possession thereto to Sublessee, and when Sublessor shall have substantially completed the common area improvements which shall be defined as finish grading and completed taxiway sufficient for use for ingress, egress and access to the Premises."

Contrary to the Charleses' argument on appeal, the exemption provided by section 7044 is not limited to the holder of the underlying fee. "The term 'owner' is generic and being of general application is therefore frequently applied to one having an interest in or claim upon property less than the absolute and unqualified title. [Citation.] The term frequently depends for its signification upon the connection in which it is used and may concededly include one not holding the legal title. [Citation.] . . . . [T]he precise meaning of the world 'own' or 'owner,' when not modified by other words indicating either qualified or absolute ownership, depends upon the subject-matter and the circumstances surrounding the subject-matter and the parties." (Pacific Coast etc. Bank v. Roberts (1940) 16 Cal.2d 800, 805-806.)

Here, section 7044 exempts owners from licensing requirements on the apparent theory their interest in preserving the value of their property will be motivate them to insure improvements are completed in a workman-like manner. (See Communications Relay Corp. v. County of Los Angeles, supra, 130 Cal.App.4th at p. 169.) This prophylactic self-interest exists both in the holder of fee title and the holder of a long-term ground lease, such as La Jolla Investment. In this regard we note that until the hangar was complete and accepted by the Charleses, all the risks of construction were borne by La Jolla Investment. The Charleses were not at risk in the event the contractor La Jolla Investment retained failed to perform or failed to pay a subcontractor or materialman; rather, only La Jolla Investment ran the risk that it would have an incomplete building on its property or have its property subjected to mechanics' liens. This allocation of risk as between the Charleses and La Jolla Investment would exist whether La Jolla Investment held the fee title or as a master lessee.

Our application of section 7044 is consistent with the apparent practices of the Contractors' State Licensing Board and the opinions of the Attorney General, of which we have taken judicial notice. (Evid. Code, §§ 452, 459.)

Contrary to the Charleses' argument, this case is not governed by our holding in Ranchwood Communities Limited Partnership v. Jim Beat Construction Co. (1996) 49 Cal.App.4th 1397, 1415. In that case we held that the developers of two large residential tracts were not exempt under section 7044, subdivision (b), which in the case of residential developers limits the exemption to four or fewer single family residences. This limitation on the exemption has no application to La Jolla Investment's construction of an airplane hangar.

As the Charleses point out, the exemption provided by section 7044, subdivision (b), requires that the work be performed by a licensed contractor. Here, the record contains ample evidence Hunter was licensed and in fact built the hangar. Indeed, we note that although the records of the Contractors' State Licensing Board are readily available and the principals of Hunter were subject to deposition, at no point either before or after trial, did the Charleses attempt to show either that Hunter was not licensed or that it did not build the hangar. Thus, in this context the trial court did not err in determining La Jolla Investment's agreement with Hunter satisfied the requirements of section 7044, subdivision (b).

Judgment affirmed. Respondent to recover its costs of appeal.

WE CONCUR: McINTYRE, J., O'ROURKE, J.

"(b) Except as provided in subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

"(c) A security interest taken to secure any payment for the performance of any act or contract for which a license is required by this chapter is unenforceable if the person performing the act or contract was not a duly licensed contractor at all times during the performance of the act or contract.

"(d) If licensure or proper licensure is controverted, then proof of licensure pursuant to this section shall be made by production of a verified certificate of licensure from the Contractors' State License Board which establishes that the individual or entity bringing the action was duly licensed in the proper classification of contractors at all times during the performance of any act or contract covered by the action. Nothing in this subdivision shall require any person or entity controverting licensure or proper licensure to produce a verified certificate. When licensure or proper licensure is controverted, the burden of proof to establish licensure or proper licensure shall be on the licensee.

"(e) The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid.

"(f) The exceptions to the prohibition against the application of the judicial doctrine of substantial compliance found in subdivision (e) shall apply to all contracts entered into on or after January 1, 1992, and to all actions or arbitrations arising therefrom, except that the amendments to subdivisions (e) and (f) enacted during the 1994 portion of the 1993-94 Regular Session of the Legislature shall not apply to either of the following:

"(1) Any legal action or arbitration commenced prior to January 1, 1995, regardless of the date on which the parties entered into the contract.

"(2) Any legal action or arbitration commenced on or after January 1, 1995, if the legal action or arbitration was commenced prior to January 1, 1995, and was subsequently dismissed."


Summaries of

DRE #5 v. La Jolla Investment Co. Inc.

California Court of Appeals, Fourth District, First Division
Jul 31, 2008
No. D050268 (Cal. Ct. App. Jul. 31, 2008)
Case details for

DRE #5 v. La Jolla Investment Co. Inc.

Case Details

Full title:DRE #5 et al. Plaintiffs and Appellants, v. LA JOLLA INVESTMENT COMPANY…

Court:California Court of Appeals, Fourth District, First Division

Date published: Jul 31, 2008

Citations

No. D050268 (Cal. Ct. App. Jul. 31, 2008)