Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County. Super. Ct. Nos. BC338659, NC037393, Joseph R. Kalin, Judge.
Law Offices of John F. Oakes, John F. Oakes for Defendant and Appellant.
Cox, Castle & Nicholson, Lawrence Teplin, Heather Stern for Plaintiff and Respondent.
BOREN, P.J.
The parties stipulated to the basic, underlying facts of the case. Their dispute is over the application of the law, not the facts.
In 1973, a ground lease agreement (the Lease) created Marina Pacifica, a residential development in Long Beach. The parties to the Lease are Security Pacific National Bank, as trustee for the McGrath Estate (McGrath) and Marina Pacifica, a California limited partnership (the Partnership). McGrath, as owner of the property, leased the land to the Partnership to build a 570-unit condominium project. The Lease expires in 2041.
As consideration, the Lease requires the payment of rent to McGrath, with escalator clauses that attach on October 1, 2006, and October 1, 2021. The duty to pay rent falls upon purchasers of condominium units at Marina Pacifica. The escalator clauses call for a rent of $25 per month per condominium unit, or 1/12 of 6 percent of the property’s fair market value (FMV), whichever is the greater amount. The FMV in 2006 and 2021 must be established “by a properly qualified and experienced real estate appraiser . . . .” under the Lease terms.
The Lease provides a method for selecting a real estate appraiser to determine the FMV of the leasehold. It calls for the lessor, McGrath, and the homeowners’ Board of Governors to each select a real estate appraiser. The two appraisers so selected then designate a third appraiser, who makes the FMV determination, considering “the character of the improvements then on said tract, but exclud[ing] the value of such improvements and appurtenances . . . .” The appraiser’s determination is final and binding.
Apart from the monthly rent, the Lease requires the payment of a monthly “assignment fee,” as a separate contractual obligation. The assignment fee is owed by Marina Pacifica homeowners to the Partnership. Like the rent, the assignment fee increases on October 1, 2006, and October 1, 2021. The increases in the assignment fee are established in the same manner as the rental increase, i.e., the same appraisal that is used to determine the rental increase is also used to determine the increased assignment fee. The assignment fee is payable for the duration of the Lease, until 2041.
Plaintiff William Lansdale was in the Partnership that originally developed Marina Pacifica. After the condominium construction was completed, the Partnership dissolved and its assets were distributed to its partners, including Lansdale. Lansdale now possesses the sole right to receive the assignment fee under the Lease. He is not a signatory to the Lease: his interest in the Lease arises from his status in the now-dissolved Partnership.
In 1999, McGrath sold its rights and interest in the property for $22 million to the Marina Pacifica Homeowners Association (the HOA), defendant in the main action. As a result of McGrath’s sale to the HOA, the parties to the Lease changed: the “lessor” and landowner became the HOA, in place of McGrath. Each homeowner now owns an undivided interest in the land and an undivided interest in the Lease. It is stipulated that the HOA “acts on behalf of its members,” the condominium owners, and may litigate this lawsuit without joining individual homeowners.
The parties agree that Lansdale is entitled to a monthly assignment fee under the Lease. That fee “is the amount, if any, by which 1/12th of 10% of the fair market value of the leasehold premises on October 1, 2006 exceeds the rent[ ] payable” under the rental provisions of the Lease. The only disagreement is how the real estate appraiser will be selected to determine the FMV of the property.
In August 2005, Lansdale filed suit against the HOA, seeking declaratory relief. Lansdale identified a dispute between the parties regarding their rights, duties and obligations under the Lease. He asserted a right to participate in the appraisal process by nominating one appraiser, for the HOA to nominate one appraiser, and for these two appraisers to select a third, neutral appraiser to ascertain the FMV of the property.
The HOA, in its turn, filed a cross-complaint for declaratory relief against Lansdale. The HOA asserted that an actual controversy has arisen between it and Lansdale regarding the Lease since, “[e]ffectively, there has been a merger of the interests of the Lessor and Lessee under the Lease due to the purchase of the land from McGrath” by the HOA. The position of the HOA is that it has “the sole right to appoint an independent appraiser” to establish the FMV of the property. The parties stipulate that the Lease provision regarding the appointment of the appraiser requires that the “lessor” and the HOA Board of Governors each appoint one appraiser, and the two then appoint an independent appraiser who actually performs the FMV determination. Because the “lessor” is now the HOA, the HOA controls the appointment of the appraiser, under the terms of the Lease.
The HOA also filed an independent action for declaratory relief against Lansdale. The trial court determined that the two actions were related, and assigned them to one judge. The lawsuits were tried simultaneously.
The parties’ dispute was tried by the court. The president of the HOA testified that the HOA wants to select the appraiser itself in order to “instruct” the appraiser to consider any limitations or environmental conditions of the property. An attorney who participated in the 1973 negotiation of the Lease testified that the original parties sought to find a valuation procedure that would ensure that “each would be represented fairly” when the Marina Pacifica property was appraised in 2006 and 2021. In 1973, McGrath and the assignment fee holders “had a unanimity of interest” such that it was unnecessary to afford the assignment fee holder a right to appoint an appraiser. No document gives Lansdale the right to participate in the appraisal process. When the Lease was negotiated, no one considered that McGrath might sell its interest in the land to the condominium homeowners.
The trial court issued a statement of decision following the trial. It identified the conflict between the parties as stemming from the appraisal issue: Lansdale desires a high value appraisal in order to receive a higher assignment fee, and the HOA wants a low appraisal to reduce the assignment fee. The court rejected Lansdale’s request to be afforded the right to select his own appraiser, because doing so would require that the court rewrite the Lease, which (as written) does not give Lansdale any such right. It found that the original parties to the Lease intended that the FMV be determined by an appraiser, not in court proceedings, and the successors of the original parties are bound by this agreement.
The court’s main concern was whether the appointment of an appraiser by only one party “will satisfy [the] fairness and the integrity of the appraisal process, considering that the decision of the solely appointed appraiser would be final and binding on the parties . . . .” The court found it “probable” that the appraiser’s determination “could be influenced by the appointing party and/or the information given to him or her to arrive at an appraisal.” The court concluded that allowing only the HOA to appoint an appraiser “does not have the appearance of fairness” because the appraiser “may not be truly neutral . . .” in a situation which requires that the appraisal “be totally independent.”
Allowing one party to appoint the appraiser would be “unconscionable,” the trial court concluded, particularly in light of evidence presented at trial showing that the HOA intends to “instruct” the appraiser. Because of the merger of the lessor and the HOA, “the leasehold interest has been annihilated . . . .” The Lease provisions for appointing an independent appraiser fail and cannot be followed. The court authorized both parties to petition for a court-appointed appraiser under the California arbitration statutes, and to nominate appraisers for selection by the court.
The court entered judgment in the two related cases on May 10, 2006. The HOA’s motion to set aside the judgment was denied on June 19, 2006. This timely appeal followed.
DISCUSSION
1. Appeal And Review
Appeal is taken from a final judgment in the parties’ lawsuits for declaratory relief. (Code Civ. Proc., § 904.1, subd. (a)(1).) The HOA disputes the trial court’s interpretation of the law. “This court independently reviews whether a trial court has correctly construed the relevant statutes.” (Michael v. Aetna Life & Casualty Ins. Co. (2001) 88 Cal.App.4th 925, 933.) Factual findings, by contrast, are reviewed under the substantial evidence rule. (Ibid.)
All further statutory references are to the Code of Civil Procedure.
2. Contractual Clauses Requiring An Appraisal Are Governed By The California Arbitration Law (§ 1280 et seq.)
The HOA contends the trial court had no authority to order arbitration because there is no arbitration contract. The Lease requires an appraisal to determine the FMV, and specifies the manner in which the appraiser is to be selected. There is no clause in the Lease entitled “arbitration.”
State law provides that “valuations, appraisals and similar proceedings . . .” constitute an “agreement” to arbitrate. (§§ 1280, subd. (a), 1281.) An “appraisal term creates an arbitration agreement subject to the statutory contractual arbitration law.” (Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92 Cal.App.4th 886, 893; Michael v. Aetna Life & Casualty Ins. Co., supra, 88 Cal.App.4th at p. 934.) In one case, for example, a 99-year lease contained rent escalation clauses that depended on a reappraisal of the value of the property; one party to the lease brought a complaint for declaratory relief seeking a judicial interpretation of the appraisal provision, and the matter was ultimately ordered into arbitration to determine the value of the land. (Mid-Wilshire Associates v. O’Leary (1992) 7 Cal.App.4th 1450, 1453.)
The HOA observes that there is no agreement to arbitrate between itself and Lansdale. It is true that Lansdale is not a signatory to the Lease, which contains the appraisal/arbitration clause. It is equally true that the HOA is not a signatory to the Lease, the terms of which the HOA is seeking to enforce. Both Lansdale and the HOA are successors in interest or assignees of the original signatories to the Lease: Lansdale replaced the Partnership, and the HOA replaced McGrath. The parties have stipulated that Lansdale is entitled to an assignment fee under the Lease. There is no doubt that these parties are bound by the Lease, and the appraisal/arbitration clause it contains.
3. The Arbitration Provision Cannot Be Performed As Written
As written, the Lease requires (a) the original Lessor (McGrath) to choose an appraiser, (b) the HOA Board of Governors to choose an appraiser, and (c) the two appraisers selected by McGrath and the HOA to choose a third, independent appraiser to perform the actual determination of the FMV. The parties to the Lease would not directly select or control the person who performed the appraisal.
State law allows the court to appoint an arbitrator if the contractual method for appointing an arbitrator “fails or for any reason cannot be followed . . . .” This is a proper case for judicial intervention. The original parties to the Lease intended to create an appraiser appointment process that would not favor any interested party. An attorney who participated in the negotiation of the Lease in 1973 testified that the parties sought fair representation in the valuation procedure. That was achieved by having an appraiser appointed by the HOA on one side, and an appraiser appointed by the lessor on the other side. Neither the HOA nor the lessor could influence the decision of the impartial, third appraiser selected by the first two appraisers. Once the HOA purchased McGrath’s rights under the Lease in 1999, the “lessor” and the HOA merged, and there was no longer a balance of competing interests in the appraiser selection process.
The statute reads, “If the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed. . . . In the absence of an agreed method, or if the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails to act and his or her successor has not been appointed, the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator.” (§ 1281.6.)
The HOA points to no evidence supporting the notion that the contracting parties intended to allow one side to control the appraisal process. The uncontradicted evidence shows exactly the opposite intent. The trial court correctly discerned that the method specified by the contracting parties failed or could not be followed, within the meaning of section 1281.6. In this instance, the only adequate means of protecting and carrying out the intent of the contracting parties is to have the court appoint a neutral appraiser.
4. The HOA’s Discussion Of Appraiser Bias Is Not Germane
The HOA maintains that the trial court acted precipitously by presuming bias in the appraiser that the HOA wishes to appoint. The HOA argues that “bias is a question of fact, and the presumption of bias without any evidence violates due process.” In support of its argument, the HOA cites cases addressing whether an arbitration award should be vacated due to arbitrator bias, corruption or misconduct: Guseinov v. Burns (2006) 145 Cal.App.4th 944, 947; Michael v. Aetna Life & Casualty Ins. Co., supra, 88 Cal.App.4th at p. 931; and Ceriale v. AMCO Ins. Co. (1996) 48 Cal.App.4th 500, 504.
The present appeal does not involve an already-arbitrated controversy. The question is not whether an arbitrator issued an award that was infected by bias, corruption or misconduct. What concerns us here is the likelihood that the contracting parties’ intentions can be carried out absent a lessor and a lessee to each nominate an appraiser. At the time of trial, no appraisal had actually been carried out; therefore, there was no need for the trial court to conduct a hearing to review claims of arbitrator corruption, misconduct or bias under section 1286.2. The relevant statute, for our purposes, is section 1281.6 regarding a failure of the contractual method for selecting an arbitrator.
Section 1286.2 requires that the court vacate an arbitration award that was procured by corruption, fraud, or misconduct, or because the arbitrators exceeded their powers.
5. Homeowner Rights
The HOA contends that all 570 condominium unit homeowners are now the “lessors” under the Lease and must be afforded the right to choose an appraiser to determine the FMV. By contrast, in its lawsuit for declaratory relief, the HOA asserted that it has the sole right and the authority to appoint a single appraiser to make the FMV determination. Before trial, the HOA stipulated that it “acts on behalf of its members” and has the right to litigate this dispute without joining individual homeowners. The stipulation negates any need for the trial court to join the homeowners to the appraiser selection process. The HOA prosecuted and defended these two declaratory relief actions, all the way to judgment, by claiming it has authority to represent the homeowners and the right to select an appraiser unilaterally.
In fact, there is not longer a “lessor” at all: no rent is being paid under the Lease.
The HOA’s argument underscores the wisdom and necessity of having the trial court select an appraiser. Even if we were to credit the HOA’s argument in favor of having 570 people each select an appraiser, this prospect alone supports the conclusion that the Lease provisions regarding appraisal fail or cannot be followed, under section 1281.6.
6. Appraisal Process
The HOA complains that the trial court erred because it refused to “allow the parties [to] contact the appraiser and conduct a hearing.” The only matter that the trial court decided in this declaratory relief action is that (a) it would be unconscionable to allow only one party to appoint an appraiser, (b) the contractual method of selecting multiple appraisers fails or cannot be followed, and (c) both parties are allowed to file a petition to have a judge appoint an appraiser.
With respect to the actual appraisal process itself, including what instructions (if any) should be given to the appraiser, the court declined to rule, stating that “this is an issue to be determined within the context of any petition . . . to appoint an appraiser.” Thus, the HOA’s arguments regarding instructions to the appraiser and the appraisal process must be addressed to the judge who rules upon the petition seeking the appointment of an appraiser.
Rulings made subsequent to the judgment are outside the scope of this appeal. Our jurisdiction is limited to the judgment on the two declaratory relief actions.
DISPOSITION
The judgment is affirmed.
We concur: ASHMANN-GERST, J., CHAVEZ, J.