Filed 8/1/16 Harbor Marina v. Golden Hills Pr operties CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or or dered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

HARBOR MARINA, LLC, Plaintiff and Appellant,

v. GOLDEN HILLS PROPERTIES, LLC, Defendant and Respondent. G051955
(Super. Ct. No. 30

- 2014

- 00 7 0 6930)

O P I N I O N

Appeal from a judgment of the Superior Court of Orange County, Randall J. Sherman, Judge. Reversed and remanded with directions

.

Loeb & Loeb, Andrew S. Clare and Robert J. Catalano for Plaintiff and Appellant. Steckbauer Weinhart, William W. Steckbauer and Sean A. Topp for Defendant and Respondent.

* * *2 This dispute arises out of a ground lease of commercial property developed into an office building and marina in Newport Beach. Defendant and respondent Golden Hills Properties, LLC (Defendant) is the ground lessor. Plaintiff and appellant Harbor Marina, LLC (Plaintiff) is the ground lessee.

Defendant exercised an option to purchase Plaintiff’s leasehold interest. The lease provided the purchase price was to equal the fair market value of the leasehold interest, based upon the present value of the projected net operating revenue to be generated during the remaining lease ter m.

Defendant refused to pay the purchase price unless it received an offset for the amount of net operating revenue Plaintiff earned after the purchase option was exercised but before the purchase and sale transaction closed. Litigation ensued.

The co urt found the valuation provision of the lease was ambiguous , and while nothing in the lease required it, the court ordered Plaintiff to pay Defendant the
amount of net operating revenue it earned before the purchase and sale transaction closed

.

Plaint iff appealed, arguing the valuation provision of the lease is not ambiguous and the court erred by ordering Plaintiff to pay that amount to Defendant

. We
agree, reverse the judgment , and remand with directions to correct the error.

FACTS AND PROCEDURAL HI STORY The parties ’ predecessors in interest, County of Orange as lessor and Thomas A. Cox as lessee, entered into the ground lease (Lease) in 1964

. Later , Plaintiff exercised an option (Extension Option) which extended the Lease term through 2018.

A n a mendment (Amendment) to the Lease gave the lessor an option ( Purchase Option) to purchase the lessee ’ s leasehold interest during the last five years of
the extended Lease term. P aragraph 11 (c) (Paragraph 11(c)) of the Amendment state d :

“ During the last five years of the [Extension] Option period, [ Defendant ] shall have the option to purchase [ Plaintiff ’ s] leasehold estate and improvements at the fair market value existing on the date such [Purchase O ption ] is exercised. ”3 The f air market value was to b e determined by an appraisal. Paragraph 11(c) provide d : “ Fair market value for this purpose means the cash price a willing purchaser would pay and a willing seller would accept for the leasehold estate and improvements in an arms

- length transaction in wh ich the parties have comparable bargaining positions, calculated on the basis of the then present value of all net operating revenues (before debt service) projected to be realized by [ Plaintiff ] from the date the [Purchase O ption ] is exercised to the expi ration date of the [Extension O ption ] period. ”

The purchase and sale transaction was to close o n the later to occur of : (a) 90 days after the Purchase Option was exercised , or (b) 30 days after the Purchase Option
was exercised and the fair market value was determined.

Defendant exercised the Purchase Option in 2013. Eventually, t he apprais ers determined the f air market value was $5,065,000 (Purchase Price)

.

P laintiff then asked Defendant to pay the P urchase P rice and deliver any security dep osits Defendant held under the Lease . Plaintiff offered to deliver any security deposits Plaintiff held as landlord under various subleases

.

D efendant s aid it w ould pa y the Purchase P rice , only if Plaintiff would pay all “ appropriate operating revenues (before debt service) as determined by the appraisers in accordance with the Lease which were collected by ” Plaintiff from the date Defendant exercised the Purchase Option until the transaction closing date “ and which were utilized by the appraisers in det ermining the fair market value ” (Interim Operating Revenue)

. Defendant stated , that is “ precisely the result that any reasonable person would agree to pay and to receive under the Lease. ” Defendant demanded Interim Operating Revenue in
the amount of $1,1 65,672 , plus rent collected for July and August 2014.

Plaintiff sued Defendant for breach of c ontract for failure to pay the
Purchase P rice. Plaintiff sought specific performance or, alternatively, damages. Defendant’s cross

- complaint for breach of contract and declaratory relief sought a declaration Plaintiff was required to pay Defendant the Interim Operating Revenue

.4 After a bench trial the court ruled in favor of Defendant . The court said
there was only one issue, i.e., should there be an off set against the Purchase Price for the Interim Operating Revenue . The court ruled the Amendment governed but found it was ambiguous “ and the reason for that is that the clause provides that [ Defendant ] shall have the option to purchase [ Plaintiff ’ s] lease hold estate and improvements at the fair market value existing on the date such [Purchase O ption ] is exercised. ”

The court went on, “ Well, if you ’ re buying a leasehold estate and improvements, then you ’ re buying the right to receive rent , and if the purchase price is to include the income stream from [the date the Purchase Option is exercised until the end
of the Lease term ], and that ’ s the amount the buyer is paying, then the buyer should
receive the income stream [for that period of tim e ]. ”

The court further stated, “ Although Paragraph 11(c) doesn ’ t say that the
p laintiff pays the d efendant those collected rent monies, it doesn ’ t say that they don ’ t pay them over; hence, an ambiguity. [¶] So the court looks to what seems to be a logi cal interpretation of this provision, which is that if the price is based on x, y and z being valued, you should get x, y, and z. If you ’ re paying for it, you should get it. That ’ s a pretty straightforward concept, I believe. ”

The court ordered specif

ic performance, and th e j udgment required Plaintiff to pay Defendant the Interim Operating Revenue

. After adjusting the Purchase P rice for that payment and adding prejudgment interest, t he net purchase price was $3,212.815.
DISCUSSION 1. Standard of Rev iew and General Principles of Contract Interpretation

We review a trial court ’ s construction of a lease de novo as long as no conflicting extrinsic evidence was admitted to assist in determining the meaning of the language. (

ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th 1257,
1266

- 1267 , 1268 (

ASP ) .) In so doing we rely on general principles of contract interpretation.5 Our main task is to determine the mutual intent of the parties at the time the

contract was formed . (

ASP , supra , 1 33 Cal.App.4th at p. 1269 ; Civ. Code, § 1636; all further statutory references are to this code unless otherwise stated .) “‘“ Such intent is to be inferred, if possible, solely from the written provisions of the contract. [§ 1639.] The

‘ clear and explici t ’ meaning of these provisions, interpreted in their ‘ ordinary and popular

sense, ’

. . . controls judicial interpretation. [§ 1638.] ” [Citations.]

. . . [L]anguage in a contract must be interpreted as a whole, and in the circumstances of the case, and ca nnot be found to be ambiguous in the abstract. [Citation.] Courts will not strain to create an ambiguity where none exists. [Citation.] ’ [Citation.] Interpretation of a contract ‘ must be fair and reasonable, not leading to absurd conclusions. [Citati on.] ’ [Citation.] ‘ The court must avoid an interpretation which will make a contract extraordinary, harsh, unjust, or inequitable. [Citation.] ’ [Citation.] ” ( ASP at p. 1269 .) Although the re was testimony from the parties ’ representatives and experts , neither th at testimony nor other extrinsic evidence was probative regarding the intent of the original lessor or original lessee. For example, the property manager testified that in exercising the Purchase Option , Defendant “ expected ” Plaintiff would pay Defendant all
of the net revenues Plaintiff had collected after the Purchase Option was exercised . But
Defendant ’ s expectations are not evidence of the original parties intent

.

Similarly , Defendant ’ s valuation expert testified the appraiser s c orrectly
determined the P urchase P rice by “ discounting to present value the cash flow that the interest produces , ” and Defendant was “ purchasing the value of the cash flows ” through the remainder of the Lease term, which was the value of the interest. Thi s testimony was no more than the expert ’ s opinion as to how the appraisal should be conducted , and

e xpert opinion as to the meaning of a lease is irrelevant. ( In re Tobacco Cases I (2010) 186 Cal.App.4th 42, 51 [ “ the interpretation of contractual language is a legal matter for
the court

. . . and ‘ [e]xpert opinion on contract interpretation is usually inadmissible ’” ].)

Thus we look only to the provisions of the Lease to determine its meaning.6

2

. Erroneous Interpreta t ion of Paragraph 11 ( c )

Even though both parties argued Paragraph 11(c) was not ambiguous, t he
court found it was ambiguous because it did not mention the Interim Operating Revenue.
The court r eason ed Paragraph 11(c) gave Defendant the option to purchase Plaintiff ’ s leasehold in terest and improvement s , including the right to receive the Interim Operating
Revenue

. Again the court explained, “Well, if you’re buying a leasehold estate and improvements, then you ’ re buying the right to receive rent , and if the purchase price is to
in clude the income stream from [the date the Purchase Option is exercised until the end of the Lease term], and that’s the amount the buyer is paying, then the buyer should receive the income stream [for that period of time].” Thus, t he court concluded if
D efendant was paying for the Interim Operating Revenue, Defendant should receive it.

The court correct ly observed Paragraph 11(c) did not address Interim Operating Revenue , but incorrectly concluded Defendant was purchasing the Interim Operating Revenue

. The plain language b elies this const ruction. Again the fair market value, is “ calculated on the basis of the then present value of all net operating revenues (before debt service) projected to be realized by [ Plaintiff ] from the date the [Purchase
O pti on ] is exercised to the expiration date of the [ Lease under the Extension O] ption. ”

Hence, t he “ present value of all net operating revenues ” was just the method by which t he value of the leasehold was to be calculated , it was not what was being sold

. W hat was being sold was the leasehold interest and the improvements

. (See Howard v. County of Amador (1990) 220 Cal.App.3d 962, 973

- 974 [ “ A leasehold estate
transfers a present interest to the lessee which includes the beneficial use of the property ” ].) I n sum, Defendant was not purchasing the Interim Operating Revenue itself

.

Defendant points out that at the end of the Lease term, the marina and other improvements w ill have no value , because the marina wi ll revert to the City of Newport
Beach and the other improvements will revert to Defendant

. T his is t rue

. But Defendant willingly exercise d the Purchase Option know ing that . It was not forced to do so

.7 Further, t he court erred by concluding the Lease was ambiguous simply
because it said nothing about what was to happen to the Interim Operating Revenue when
the purchase and sale transaction closed. First, the failure to mention something does not necessarily create an ambiguity. (See Cain v. Hunter (1958) 161 Cal.App.2d 808, 812 [wh ere no provision allowing interest on deferred payments in contract, no interest could be charged; no ambiguity in contract due to omission of provision].)

Second, p ursuant to the Lease Plaintiff had the right to collect rent from its
tenants and concessionaires and the duty to pay Defendant a percentage thereof , until the purchase and sale transaction closed

. A seller retains all rights of ownership until the property is actually transferred, unless the purchase and sale contract provides otherwise

. So Plaintiff was entitled to keep the pre

- closing rents it collected

. No special provision in Paragraph 11(c) was necessary to address the Interim Operating Revenue

.

Defendant argues any buyer would “ w ith out a doubt, ” expect to receive all rental income, including the Interim Operating Revenue

. It quote s testimony of one of
the appraiser s that the fair market value of the leasehold was to be calculated using a discounted cash flow analysis, which he st ated was consistent with the appraisal method set out in Paragraph 11(c). He also testified the discounted cash flow analysis projected

“ net income that is reasonably anticipated to be received on a forward looking basis calculating what those cash flows will be going into the future

. ” Nothing in this testimony supports the conclusion the Lease required Plaintiff to pay Defendant the Interim Operating Revenue

.

Likewise, the testimony of Defendant ’ s expert that the value of the leasehold interest is determined by discounting the cash flow to present value does not

mean Defendant is entitled to rec eive the Interim Operating Revenue

. 1

1 The other expert testimony on which defendant relies, that Defendant was “purchasing the value of the cash flows for that specific period,” was stricken by the court.8 In any event, as noted above, no expert testimony as to the meaning of Paragra ph 11(c) is relevant as it is the court ’ s function to determine that meaning

.

Defendant also argues Plaintiff ’ s interpretation of the Lease is not “‘ fair ’” and is unjust. In this regard Defendant seems to erroneously conflate the meaning of

“ fair market value ” as defined in the Lease with what is “fair” in some larger sense.

But the law is clear and well settled that the court has neither the duty nor the authority to rewrite a lease merely because the terms might be unfair

. “ Our task is to

construe t he

. . . lease [] as [it is] , not as [ Defendant ] want[s it] to be. ‘ We do not have the power to create for the parties a contract that they did not make and cannot insert language that one party now wishes were there. ’ [Citation.] ” ( Abers v. Rounsavell (2010) 189 Cal.App.4th 348, 361

- 3 62 .) “ [C]ourts assume that each party to a contract is alert to, and able to protect, his or her own best interests. [Citations.] Therefore, courts will not rewrite contracts to relieve parties from bad deals nor make b etter deals for parties than they negotiated for themselves. [Citation.] ” ( Series AGI West Linn of Appian Group Investors DE , LLC v. Eves (2013) 217 Cal.App.4th 156, 164.) “ In the construction of a statute or instrument, the office of the Judge is simpl y to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted, or to omit what has been inserted

. . . . ” (Code Civ. Proc., § 1858.)

On the other hand , Defendant ’ s interpretation of the Lease would lea d to an unjust result for Plaintiff . The language of Paragraph 11(c) sets out the terms of the deal the parties made. It must be enforced according to those terms.

We reject Defendant ’ s argument Plaintiff failed to prove its request for specific perf

ormance of the terms of the Purchase Option . Citing Boulenger v. Morison (1928) 88 Cal.App. 664, 669 , Defendant contends Plaintiff did not prove an element of specific performance, i.e., that the Lease was “ just and reasonable , and the consideration adequate. ” A s noted above, there is nothing unfair or unreasonable about the terms of Paragraph 11(c). The consideration to be paid was agreed upon. Plaintiff met its burden.9

3. No Gift of Public Funds

Defendant claims Plaintiff ’ s interpretation of the Lease cannot be correct because the original lessor, the County of Orange, would have illegally been gifting the Interim Operating Revenue being purchased, in violation of the prohibition against gifting public funds. (Cal . Const. , art. XVI, § 6.) This argument has no merit. Since
D efendant was not purchasing the Interim Operating Revenue, there was no such gift

. 4. Specific Performance Directions

On remand the court shall enter a judgment in favor of Plaintiff ordering specif ic performance of the purchase and sale

. The court must determine and allocate income and expenses to place the parties in the same position they would have been in if the transaction had closed on date specified in the Lease. ( Stratton v. Tejani (1982) 139 Cal.App.3d 204, 212.) “[B]ecause execution of that judgment will occur at a date substantially after the date of performance provided by the [Lease], financial adjustments must be made to relate their performance back to the [Closing Date].” ( Ibid .)

T he court shall calculate the date on which the t ransaction should have closed (C losing D ate) based upon Paragraph 11(c) [transaction to close by the latter of “90 days after the option to purchase is exercised or

. . . 30 days after the option to purchase is exercised and the purchase price finally determined”].

As provided in Paragraph 11(c), Defendant shall pay the Purchase P rice to
Plaintiff in cash and return to Plaintiff “ all unexpended se curity deposits made under the
L ease, ” and Plaintiff shall deliver to Defendant “ all unexpended security deposits received from subtenants, concessionaires, operators and licensee s

. ” Plaintiff shall also
deliver to Defendant all net operating revenues (before debt service) realized by Plaintiff
af ter the C losin g D ate.

The Purchase Price and the security deposits s hall bear interest from the Closing D ate , and the net operating revenues shall bear interest from the date earned, in each case at the legal rate until the date upon which the judgment is entered.10 DISPOSITION The judgment is reversed and remanded. The trial court is to enter a new judgment in accordance with this opinion. Plaintiff is entitled to costs on appeal.

THOMPSON, J.

WE CONCUR:

BEDSWORTH , ACTING P. J.

IKOLA, J.