Opinion
D049468
4-18-2008
ALLISON-ZONGKER, LP, Plaintiff and Respondent, v. CHLN, INC., Defendant and Appellant.
NOT TO BE PUBLISHED
This is a commercial lease dispute arising out of Allison-Zongker, LPs (Allisons) lease of restaurant space (the restaurant) to CHLN, Inc. (CHLN). CHLN closed the restaurant, stopped paying rent, and claimed the lease was terminated. Allison filed suit, claiming rent and other monies were due under the lease. CHLN cross-complained for rescission, damages and other relief. The court entered judgment for Allison on the complaint and cross-complaint.
On appeal, CHLN asserts the court erred in awarding Allison rent under the lease because it was entitled to terminate the lease as (1) Allison gave CHLN an estoppel certificate stating there were no defaults and no conditions that could become defaults with the passage of time (estoppel certificate); (2) the restaurant was operating illegally because conditions imposed by the California Coastal Commission (Coastal Commission) had not been satisfied; and (3) the property could therefore not be used. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Because CHLN does not assert that substantial evidence does not support the facts found by the court in its statement of decision, but rather attacks the courts interpretation of the estoppel certificate, we take the statement of facts largely from the courts statement of decision.
A. Allison leases Property to Chart House Restaurant
In 1992, Allison acquired the subject property, situated at 1270 and 1268 ½ Prospect Street, La Jolla, California (the property). Before that acquisition, Chart House, Inc. (Chart House) had operated the restaurant from the property for many years.
On July 1, 1996, Allison and Chart House entered into a lease, for a term commencing July 1, 1996 and expiring on June 30, 2016 (the lease). The lease did not provide for or require that Allison provide Chart House with parking spaces for its employees or its patrons. A rider to the lease contemplated that Chart House would renovate, remodel and expand the restaurant. Section 12.2 of the lease obligated Chart House to obtain, at its expense, all governmental permits required for Chart Houses use and occupancy of the property and, at its expense, to comply promptly with all laws, ordinances, rules, regulations, orders, requirements and recorded covenants and restrictions applicable to the property.
B. Chart Houses Proposal to Remodel
In the late 1990s, Chart House decided to remodel as agreed in the lease, thereby increasing the size of the restaurant by approximately 2,700 square feet. Chart House submitted plans to the City of San Diego (City) and in June 2000 the City approved the proposed project. A citizens group filed an appeal to the Coastal Commission. The Coastal Commission determined that Chart House had not complied with the conditions of a permit issued in 1981, which Chart House had obtained after a fire at the restaurant. The Coastal Commission contended that the 1981 repairs and an accompanying expansion were unpermitted and advised Chart House that it would have to obtain after-the-fact approval of the work performed in 1981 or face a possible enforcement action. In August 2000 the Coastal Commission refused to allow the permit to issue.
Chart House retained attorney Steven Kaufmann (Kaufmann), who specialized in representing parties before the Coastal Commission. Allison advised Chart House and Kaufmann that it would provide whatever reasonable assistance it could to help Chart House obtain after-the-fact approval of the 1981 work and permission to expand the Property.
Chart House and Allison believed the Coastal Commission would require offsite parking to be provided as a condition to issuing permits. Allison advised Chart House and Kaufmann that it leased a nearby parking lot on Cave Street (the Cave Street lot) from a church that had reserved to itself the exclusive right to use 90 percent of the lot at night and on weekends. However, because the church had not used and did not use a substantial amount of the Cave Street lot, Chart House, Kaufmann, and Allison hoped the church would allow Chart House to use the Cave Street lot.
At an August 2001 meeting, the Coastal Commission refused to approve the project. On September 7, 2001, the Coastal Commission sent a notice of violation to Allison and Kaufmann advising them that the 1981 additions were unpermitted and enforcement actions might be taken if the violation was not remedied. Allison sent a copy of the notice to Kenneth Posner, the president of Chart House, and informed him that section 12.2 of the lease required that Chart House obtain, at its expense, all governmental permits required for its use and occupancy of the Property.
Kaufmann negotiated an agreement with the Coastal Commission to file two amendments to the 1981 permit, one for after-the-fact approval of the renovation and expansion performed in 1981, and a second for the proposed additional expansion. Those amendments were designated A-1 and A-2. Kaufmann informed Allison that Chart House would have to supply nine offsite parking spaces for use by its patrons for the after-the-fact approval, and 14 spaces for the proposed additional expansion. Allison renewed its offer to lease spaces in the Cave Street lot to Chart House in order to attempt to provide the required 23 offsite spaces.
Kaufmann drafted a first amendment to the lease adding a new paragraph 25 entitled "Parking," that proposed adding 23 spaces in the Cave Street lot to the property (first amendment). Kaufmann sent the draft to Allison for review and approval in early December 2001. The draft first amendment mistakenly stated that Allison owned the Cave Street lot. Upon receipt of the draft first amendment, Allison noticed the error, made handwritten corrections setting forth that Allison leased rather than owned the Cave Street lot, and faxed the revised first amendment back to Kaufmann. Kaufmann inputted the changes requested by Allison, and generated a new version of the draft first amendment that correctly stated Allison leased the Cave Street lot. On December 18, 2001, Allison faxed a recorded memorandum of its lease on the Cave Street lot to Kaufmann, which stated that Allisons lease was with the church and the church reserved to itself the right to use 90 percent of the parking spaces on weekday nights and all day on Saturdays and Sundays.
In a January 4, 2002 letter, Allison advised Kaufmann that the first amendment had to provide that it was conditioned on Chart Houses completing construction of the expansion within two years of issuance of the Coastal Commission permit. Kaufmann did not generate any further drafts of the first amendment. Chart House and Allison never signed the draft amendment to the lease.
C. CHLN Succeeds Chart Houses Interest in Property
On May 17, 2002, Chart House Enterprises, Inc. (Enterprises), the parent company of Chart House, Chart House, Landrys Restaurants, Inc. (Landrys), and Landrys subsidiary, LCH Acquisition, Inc. (LCH), executed an asset purchase agreement (purchase agreement) whereby Landrys agreed to acquire 39 restaurants from Chart House for $45,500,000. CHLN did not exist at the time. Allison was not aware of the pending sale until it received a letter from Chart House on June 17, 2002.
The purchase agreement contemplated that Chart House would sell all of its assets, including all leases, to LCH, and LCH would assume all leases. Instead of a direct lease assignment it was decided Enterprises could form a new subsidiary and assign the leases to the subsidiary; then, at closing, LCH would buy the stock of the new subsidiary. Landrys and Enterprises decided to consummate the transfer of the restaurant chain by the alternative stock sale. On May 21, 2002, Chart House formed CHLN, as a wholly owned subsidiary. Chart House and Enterprises assigned the assets, including the lease, to CHLN, which assumed all related obligations. At closing, LCH acquired all the shares of CHLN.
D. Chart Houses Misrepresentations/Omissions to Landrys
Before Allison was made aware of the transactions contemplated by the purchase agreement, Chart House made a number of misrepresentations to Landrys about the matters pending before the Coastal Commission and about its relationship with Allison. Allison was unaware of the misrepresentations until they were revealed in discovery.
In late May 2002 Coastal Commission staff issued its report on project amendments A-1 and A-2, and recommended that both amendments be approved subject to certain conditions. Both A-1 and A-2 required that the owners of the restaurant and parking lot properties enter into shared parking agreements, a condition which had been expected. However, for the first time the Coastal Commission also required that the owners of each property record deed restrictions regarding the use of the parking spaces. Both staff reports incorrectly stated that Allison owned the Cave Street lot. Although Kaufmann testified that he read every sentence of each staff report in preparation for the Coastal Commission hearing scheduled for June 10, 2002, and despite knowing Allison held only a lease, he did not inform anyone of the error about ownership of the Cave Street lot.
On June 12, 2002 Kaufmann sent a letter to counsel for Landrys regarding the Coastal Commission issues and stated: "We have already arranged for parking spaces in a surface lot owned by the Chart House Landlord, [Allison] on Cave Street, which is around the corner from the Chart House." Kaufmann knew at that time that Allison did not own the Cave Street lot, and also knew the amendment he had drafted regarding provision of the parking spaces had not been signed, so there was no "arrangement" with Allison. Kaufmann failed to disclose to Landrys that Allison only leased the parking lot. Allison had no knowledge of these misrepresentations by Kaufmann.
Kaufmann did, however, advise Allison that the Coastal Commission had added the new deed restriction requirement. On June 18, 2002, Allison advised Kaufmann by fax that it would attempt to persuade the owner of the Cave Street lot to execute the necessary agreements. Despite being reminded that Allison did not own the Cave Street lot less than a week after his June 12, 2002 letter to Landrys, Kaufmann did not advise Landrys or the Coastal Commission that Allison did not own the Cave Street lot or that the owner of the Cave Street lot had not yet been approached about granting a deed restriction.
E. Estoppel Certificate
In a June 17, 2002 letter, Chart House asked Allison to sign the estoppel certificate on a form required by Landrys. Before executing the estoppel certificate, Allison sought and received assurances from both Chart House and Landrys that Landrys would perform as required under A-1 and A-2, and would complete the contemplated expansion of the Restaurant.
On July 29, 2002 Allison executed the estoppel certificate. It stated, among other things, "As of the date hereof, to the best of Lessors knowledge and belief, Lessee is not in default under the Lease and there exists no condition which, upon notice, or the passage of time, or both, would constitute a default by Lessee under the Lease." Allison further acknowledged "Landrys, LCH and [CHLN] are relying on this Estoppel Certificate and Consent as a condition to the assumption by [CHLN] of the Lease from Lessee."
In exchange, Chart House agreed, pursuant to terms of the lease, to reimburse Allison $30,223 for Coastal Commission proceeding expenses, and $1,500 in transaction expenses and attorney fees. Chart House also agreed to deposit $60,277 as security for performance of the Coastal Commissions conditions to the permit for the expansion.
F. Landrys Plans for Restaurant Space
Before closing under the purchase agreement, Landrys decided it would remodel and expand the leased structures and convert the restaurant into one of its concepts, Joes Crab Shack. This plan did not change after the transaction closed. Landrys knew the restaurant performed far below its benchmarks. Its gross sales of approximately $1,500,000 meant that the rent due under the lease was approximately 20 percent of gross revenue, whereas Landrys company-wide average rent was only 3.5 percent of gross revenues. Before closing, Landrys projected that the cost of its conversion plan for the restaurant would be approximately $1.8 million, based on an estimate provided to it by Chart House. The low sales of the existing restaurant were compounded by the fact that under the pending Coastal Commission permits it could not be open for lunch.
G. Closing of Transaction
The Landrys transaction closed on July 30, 2002. LCH acquired all the stock of CHLN, which had assumed Chart Houses obligations under the lease. Before closing, Landrys knew there were Coastal Commission permit violations at the restaurant. Landrys had retained Kaufmann in advance, effective at closing, to assist its newly acquired subsidiary, CHLN, in satisfying the Coastal Commission permit conditions. Landrys and CHLN wanted the benefit of Kaufmanns knowledge and experience with the restaurant.
H. Landrys Abandons Lease
After Landrys acquired CHLN, it delayed looking critically at expansion of the restaurant, focusing instead on a Chart House restaurant located on San Diego Bay so that it could benefit from its location next to the planned NFL Experience for Super Bowl XXXVII. Landrys and CHLN displayed no sense of urgency in dealing with the challenges involved in the expansion project. By the time it did look critically at the renovation, remodel, expansion and conversion of the restaurant, it determined the cost of conversion would be $ 3.7 million. Accordingly, even if the expanded and converted restaurant generated gross sales of $4 million, which would make it one of the highest grossing Joes Crab Shack restaurants, the rent due under the lease would still represent approximately 7.5 percent of sales — double Landrys company average.
After Landrys acquired CHLN, it could have learned more about the parking issues, particularly at Cave Street, but made little effort to do so. When Landrys employee Sean Rea met with Allison in August 2002, Allison explained to him the church had to be a party to the shared parking agreement. Rea did not ask why the church would have to be a party. Landrys in-house attorney Barney Stagner made no effort to get the memorandum of the parking lease after reviewing a preliminary title report on the Cave Street lot, which specifically referenced that memorandum. Stagner did not ever ask to see a copy of Allisons lease with the church.
The parking condition imposed by the Coastal Commission was a continuing problem. Although Allison made considerable efforts to convince the church to allow CHLN to use the Cave Street lot, in May 2003 the church refused to record a deed restriction against the Cave Street lot. As an alternative, Allison proposed that parking located within an office building at 1299 Prospect, which Allison acquired in August 2003, be utilized to satisfy the parking condition. In November 2003, CHLN prepared a full estimate for its conversion project, resulting in a total cost of $3.7 million, more than double the original estimate. CHLN determined it would not move forward unless it could negotiate financial concessions from Allison.
Negotiations between Allison and CHLN about amending the lease and a contribution by Allison to the construction cost continued for many months and were strained. CHLN requested that Allison contribute $1 million towards the cost of expansion, which Allison refused. CHLN raised termination of the lease as an alternative to Allisons offer to contribute $500,000. Although a basic agreement in principle to amend the lease appears to have been reached in March 2004, both parties understood that there would be no binding amendment until a writing was drafted and fully executed by the parties. CHLN delayed forwarding a draft amendment to Allison for two months. When CHLN did provide draft amendments to Allison, they did not accurately reflect the agreement reached in principle, adding provisions favorable to CHLN, and deleting provisions favorable to Allison.
Although problems with the City regarding the parking at 1299 Prospect arose in June 2004, Allison solved those problems and Allison and the City executed the required shared parking agreement. However, negotiations between Allison and CHLN broke down when CHLN balked at signing a license agreement that would have required CHLN to pay for parking at prevailing rates.
On November 2, 2004, CHLN refused to negotiate further and sent a letter to Allison unilaterally declaring the lease was terminated. Allison could have provided the required parking, and the Coastal Commission should then have approved a permit to remodel and expand the Restaurant.
Allison never gave CHLN a notice of default or three-day-notice to quit. It never took any other step to terminate the lease or CHLNs possession.
I. Courts Findings
The court found that after receiving notice of the permit violations, Chart House commenced active and diligent efforts to cure the violations and to obtain all required governmental permits. The court also found not credible Kaufmanns testimony that the first time he recalled seeing the memorandum of the parking lease was when he produced his files in this litigation.
The court found that Allisons representation in the estoppel certificate was accurate. Under Paragraph 25(b) of the lease, Chart House would not be in default if it commenced to cure any default after receipt of notice and thereafter diligently prosecuted the cure to completion. The court found that after receiving the notice of violation from the Coastal Commission, and Allisons letter reminding it of its obligation under section 12.2 of the lease to comply with all laws and obtain all governmental permits, Chart House diligently pursued all necessary steps to cure the Coastal Commission violation. Further, Chart House had obtained the Coastal Commissions approval of plans A-l and A-2. Therefore, Chart House was not in default when Allison executed the estoppel certificate and could not become in default simply by notice, the passage of time, or both.
The court found that Landrys and CHLN, at the time the deal closed for the restaurant, had constructive knowledge of everything Kaufmann knew or should have known. It imputed to CHLN, LCH, and Landrys all information given to Kaufmann by Allison. The court found it would be manifestly unfair to blame Allison for any inaccurate information possessed by CHLN, Landrys or LCH when Allison duly disclosed accurate information to their agent, Kaufmann.
The court found that when Allison objected to the proposed lease amendments in late May of 2004, Landrys and CHLN decided to stop paying rent to put financial pressure on Allison. Landrys and CHLN also decided to close the restaurant as a calculated risk that the parking issue would be resolved and they could negotiate an acceptable financial arrangement with Allison. Landrys was not induced to close the restaurant by any misstatement, failure to disclose or promise on the part of Allison. Nor was Landrys induced to close the restaurant because of any act or statement by the Coastal Commission.
The court further found the assertions against Allison in the termination letter were pretextual, and other reasons contributed to Landrys decision: (1) Landrys was unhappy with the financial concessions that Allison was willing to make; (2) Landrys did not want to pay for parking at 1299 Prospect Street; and (3) there was no assurance the restaurant could ever be open for lunch.
DISCUSSION
I. STANDARD OF REVIEW
The interpretation of a contract, including a lease and lease amendments, generally presents a question of law for this court to determine anew unless the interpretation turns on the credibility of conflicting extrinsic evidence. (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 527; ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th 1257, 1266 (ASP Properties); City of El Cajon v. El Cajon Police Officers Assn. (1996) 49 Cal.App.4th 64, 70-71 (City of El Cajon).) When a contract is reasonably susceptible to different interpretations based upon conflicting extrinsic evidence requiring the resolution of credibility issues, its interpretation evolves into a question of fact to which the reviewing court applies the substantial evidence standard of review. (ASP Properties, supra, 133 Cal.App.4th at pp. 1266-1267.) Where the evidence is undisputed and the parties draw conflicting inferences, the reviewing court will independently draw inferences and interpret the contract. (Id. at p. 1267.) We endeavor to effectuate the mutual intentions of the parties as it existed at the time of contracting insofar as it is ascertainable and lawful. (Civ. Code, § 1636; City of El Cajon, supra, 49 Cal.App.4th at p. 71.)
II. APPLICABLE LAW
"An estoppel certificate is a signed certification of various matters with respect to a lease. It reveals the present intent and understanding of the parties to a commercial lease agreement, thereby preventing any unwelcome post-transaction surprises. [Citations.]" (Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2006) § 7:292, p. 7-73.) "An estoppel certificate is a written instrument triggering the [Evidence Code section] 622 conclusive presumption that the facts recited are true as between the parties thereto, or their successors in interest. [Citation.] [Citation.] [¶] Thus, an estoppel certificate binds the signatories (and their successors in interest) to the statements made and estops them from claiming to the contrary at a later time. [¶] . . . [¶] Moreover, the facts contained in an estoppel certificate are conclusively presumed to be true, and thus binding on the signatories, even if the certificate erroneously recites the lease terms." (Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions, supra, § 7:292.2, p. 7-74.)
Evidence Code section 622 provides: "The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration."
"Estoppel certificates are almost always used in commercial real estate transactions. They inform lenders and buyers of commercial property of the tenants understanding of the lease agreement. Lenders and buyers rely upon the certificates in finalizing loans and purchases." (Plaza Freeway Limited Partnership v. First Mountain Bank (2000) 81 Cal.App.4th 61, 628-629.) Estoppel certificates are also important to landlords because they affect the landlords ability to sell commercial property and to secure financing. (Robert T. Miner, M.D., Inc. v. Tustin Ave. Investors (2004) 116 Cal.App.4th 264, 273.)
The general purpose of an estoppel certificate is to "assure one or both parties to an agreement that there are no facts known to one and not the other that might affect the desirability of entering into the agreement, and to prevent the assertion of different facts at a later date." (Lawyers Title Ins. Corp. v. Honolulu Federal Sav. & Loan Assn., (9th Cir. 1990) 900 F.2d 159, 163, citations omitted.)
III. ANALYSIS
CHLN provides no authority for the proposition (and we have been unable to locate any) that the estoppel certificate would entitle it to declare the lease terminated and be relieved of the duty to pay rent because of the permit situation with the Coastal Commission. The plain meaning of the estoppel certificates statement that, "Lessee is not in default under the Lease and there exists no condition which, upon notice, or the passage of time, or both, would constitute a default by Lessee under the lease," was that Allison, by signing that document, was estopped from asserting against CHLN any default that existed at the time it was signed, or that arose thereafter by mere notice or the passage of time. Thus, because of the estoppel certificate, Allison could not legally pursue CHLN for a purported default that existed as of the time the estoppel certificate was signed, or that arose thereafter by notice or passage of time, based upon the situation presented by the lack of Coastal Commission permits. However, Allison never asserted that because of the permit situation with the Coastal Commission Chart House was in default, never gave notice of any default, and did not sue CHLN based upon it not being in compliance with Coastal Commission permit requirements.
Further, even if CHLN could refuse to pay rent if the lease was in default because of the permit situation with the Coastal Commission, substantial evidence supports the courts finding that there was no default, either at the time the estoppel certificate was signed, or at any time thereafter.
Paragraph 25(b) of the lease provides the rights and duties of Allison and Chart House where there is a nonmonetary default. Allison is required to give notice of what conditions constitute a default. Thereafter, Chart House must resolve the condition within 20 days, or, if it cannot do so, commence the process to cure the default and diligently pursue it to its completion. As the court found, after Chart House received notice from the Coastal Commission of the violation of the permit conditions, and Allisons letter stating it needed to comply with all laws and obtain all governmental permits, Chart House diligently pursued all steps necessary to cure the violation. Chart House received the Coastal Commissions approval of plans A-1 and A-2. Allison would have breached the lease if it declared a default while Chart House pursued curing permit violations. Chart House never abandoned its attempts to cure the defaults.
Further, CHLN cannot assert that it relied on the representations in the estoppel certificate as representing the lease was in compliance with Coastal Commission permit requirements. As the court found, before assuming the lease CHLN knew there were Coastal Commission permit violations. Because CHLN was a wholly owned subsidiary of Chart House, it was charged with everything Chart House knew about the permit situation. Based upon such knowledge, it could not allege it believed the estoppel certificate was representing there were no Coastal Commission permit violations when it assumed the lease. Rather, as the court found, CHLN stopped paying rent and abandoned the premises to put financial pressure on Allison, and for its own business reasons. Substantial evidence supports this finding.
DISPOSITION
The judgment is affirmed. Respondent shall recover its costs on appeal.
We Concur:
McCONNELL, P. J.
AARON, J.