Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
Superior Court County of Ventura Vincent J. O'Neill, Judge, Super. Ct. No. CIV 234706.
Law Office of K.M. Neiswender and Kate M. Neiswender for Plaintiffs and Appellants.
Cappello & Noel, Leila J. Noel, Troy A. Thielemann and Matthew M. Clarke for Defendant and Respondent.
COFFEE, J.
Appellants Gary Goldberg and Deborah Carstens and respondent Lynne Beavers (aka Lynne Beavers Pricket) are real estate professionals. Respondent owned a leasehold interest in a beachfront development. She owned her home but leased the underlying land.
Debrah Carstens is a real estate agent who is only peripherally involved in this appeal.
Respondent listed her property with appellant Goldberg and also agreed to sell him her leasehold interest. The sale was contingent upon a tax-deferred section 1031 exchange, which failed. While escrow was pending, respondent participated in litigation which resulted in her obtaining a fee simple interest in the property. Respondent tried to cancel escrow, but appellant refused, claiming he was entitled to specific performance of the sale of the leasehold interest.
Internal Revenue Code section 1031 (26 U.S.C.A. § 1031), hereafter referred to as a 1031 exchange.
The trial court denied specific performance, ruling that respondent did not breach the contract and could rescind it, and appellant was entitled to the return of his escrow deposit. We affirm.
FACTS
Respondent is a licensed real estate broker who practices in Los Angeles. She owned a leasehold interest in a beachfront house located at 5504 Rincon Beach Park Drive in Ventura County. Her house is a part of a gated seaside community, known as Seacliff Beach Colony which consists of 49 parcels. Respondent and her neighbors owned their houses, but leased the underlying land from Seacliff Land Company (landlord). Her lease originated in 1974, was modified several times and was due to terminate in December 2030. She paid rent of approximately $950 per month.
In January 2002, respondent entered into a listing agreement with appellant Goldberg, a broker with Coastal Getaways Realty. He specializes in the sale of beach properties in the Santa Barbara and Ventura areas and has conducted multiple transactions in Seacliff Beach Colony. Appellant is also a lawyer.
Respondent intended to purchase a leasehold interest in another Seacliff property (the Bidgood property) in a 1031 exchange. Respondent listed her property with appellant at $599,000. Using a standard California Association of Realtors residential listing agreement, she added the term that the sale was to be made concurrently with a 1031 exchange and that "[b]uyer to participate at no [charge] in a 1031 exchange."
Appellant received an offer of $525,000 from a Robert and Suzanne McCullough. He faxed the offer to respondent and indicated on the cover sheet that he was "going to go in with these buyers," to purchase and remodel the property. In March 2002, respondent accepted the McCullough's counteroffer of $570,000. The residential purchase agreement between respondent, as seller, and the McCulloughs, as buyers, made no reference to the 1031 exchange.
Several days later, at appellant Goldberg's request, the escrow company amended the instructions to substitute as buyers both appellant and Deborah Carstens. Title was to be vested in appellant and Carstens as tenants in common.
On June 6, 2002, the landlord notified respondent that her rent would be raised to $3,500 per month beginning January 2003, due to an increase in property values. Pursuant to the original leases, the tenants and landlord met every four years to determine the rent for the next four-year period. The previous rent increases reflected the increased cost of living. The lease provided that, if the landlord and Seacliff residents could not reach an agreement, they were to enter into arbitration.
When appellant learned of the rent increase, he asked respondent to delay the close of escrow until the lease dispute could be resolved. On June 11, 2002, the escrow instructions were amended to extend close of escrow "for an unlimited time frame until the Seacliff Lease payment schedule is resolved." Shortly thereafter, respondent agreed to a termination of the escrow in the Bidgood property due to a family emergency involving the seller of the property. Respondent informed appellant that she had lost the opportunity for her planned 1031 exchange.
The Seacliff tenants initiated a binding arbitration that was overseen by the Ventura County Superior Court. As a result of the arbitration, the rental increases were adjusted for the next four-year period, 2003-2006. For the first year, respondent was to pay monthly rent of $1,023. The arbitration award was issued in April 2003 and confirmed by the court in June. The parties refer to the arbitration award as the "Hadden" decision because one of the three arbitrators was retired Judge Joe D. Hadden.
On June 5, 2003, respondent sought to cancel escrow. She did not provide a reason for cancellation, nor did she notify appellant of the Hadden decision. Appellant refused her request.
While the arbitration was pending, the Seacliff tenants initiated a fraud action against the landlord. The litigation lasted two years and culminated in a global settlement in which all the tenants agreed to purchase their lots for approximately $1 million. Respondent purchased her parcel, and the grant deed and deed of trust were recorded on June 2, 2005.
On June 30, 2005, appellant filed an action against respondent for specific performance and breach of contract. He alleged that, because the dispute concerning the lease payments had been resolved, the property should be conveyed to him. Appellant contended that he was entitled to the "fair and reasonable" value of the leasehold interest, as of the time the parties entered into the purchase agreement in 2002. Appellant requested specific performance of the contract, or damages in excess of $50,000, to be proven at trial.
Respondent answered with a general denial and alleged recission as an affirmative defense. She argued that the purported agreement and escrow instructions were "terminated, rescinded, cancelled and extinguished" and cross-complained for intentional and negligent misrepresentation and recission. In her trial brief, respondent asserted, in part, that specific performance was unavailable because the fundamental nature of the contract had changed. The effect of enforcing the contract would result in a windfall to appellant--the purchase of a fee simple interest for $570,000.
On September 16, 2008, we granted respondent' request for dismissal of her cross-appeal. We now deny appellant's letter request that we decide the appeal on his opening brief alone.
Bench Trial
The trial court heard the matter in two phases, addressing first specific performance, followed by damages and recission. In the first phase, it denied appellant's request for specific performance and "decline[d] to declare recission." It stated that "a chain of unforeseeable events" began a few days before escrow was schedule to close, culminating three years later in respondent's ownership of a different and significantly more valuable property interest. The court reasoned that this change of circumstances, under which respondent had little control, made specific performance a windfall to appellant and rendered respondent's performance impossible.
In the second phase, the court addressed damages and recission. It construed the listing agreement, sales agreement and escrow instructions together as comprising the contract for the sale of respondent's leasehold interest. The court determined that respondent had not breached the contract and was entitled to rescind it. The court found that, although the rent increase had been resolved in favor of the tenants, the situation remained in flux because of the expectation that the litigation would continue for a lengthy period of time. It reasoned that the amendment of the escrow instructions extending it for an "unlimited" amount of time, must be construed as a reasonable period of time.
The court ruled that respondent was entitled to rescind the contract in light of the uncertainty, expense and outcome of the fraud litigation against the landlord. None of these factors was contemplated or provided for in the listing or purchase agreement. Moreover, the continuing litigation raised the unforeseeable possibility of a fee interest. Appellant had not shown that he offered to negotiate the terms to reflect the sale of a fee interest. The court also concluded that appellant's fiduciary duty to his principal--respondent--required him to accept her request to terminate escrow due to her loss of the opportunity for a 1031 exchange.
The trial court issued a judgment reflecting that (1) appellant was not entitled to specific performance; (2) respondent did not breach the contract and was entitled to rescind it in June 2003; and (3) appellant was entitled to the return of his escrow deposit without interest. Respondent, as the prevailing party, was awarded costs in the amount of $20,775.23 and no attorney's fees.
DISCUSSION
Standard of Review
Contracts are to be interpreted to give effect to the mutual intention of the parties. (Civ. Code, § 1636; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.) We look first to the language of the contract to ascertain its plain meaning. (Civ. Code, § 1638.) If the contractual language is clear and explicit, it governs. (Ibid.) "The interpretation of a contract is a question of law unless the interpretation turns on the credibility of extrinsic evidence." (Sierra Vista Regional Medical Center v. Bonta (2003) 107 Cal.App.4th 237, 245; Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.)
On appeal, the parties recite extensive evidence concerning the other's motivation for executing various documents, and their behavior during the transactions. This evidence is irrelevant to the issue before us--construing the listing agreement, purchase agreement and escrow instructions comprising the contract for the sale of respondent's leasehold interest in Seacliff Beach Colony. Because this is a purely legal issue, we review the trial court's ruling de novo.
Specific Performance and Damages
Appellant argues that respondent had a duty to inform him of the Hadden decision, and her failure to do so constituted a material breach of the purchase agreement, entitling him to specific performance or damages. He contends that we should enforce the contract under the terms that existed in April 2003, when the Hadden decision was issued. He ignores the fact that respondent's leasehold interest has merged into a fee simple and the contract cannot now be performed.
"Whenever a greater estate and a lesser estate in the same parcel of real property are held by the same person, without an intermediate interest or estate, the lesser estate generally merges into the greater estate and is extinguished." (4 Miller & Starr, Cal. Real Est. (3d ed.) § 10:41, p. 138; Sheldon v. La Brea Materials Co. (1932) 216 Cal. 686, 689; Marion Drive, LLC v. Saladino (2006) 136 Cal.App.4th 1432, 1439, fn. 5.) "Where a contract requires the transfer of a specific thing, the destruction or nonexistence of that thing makes the performance impossible . . . and performance is excused." (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 841, page 927.) We cannot turn back the clock to 2003 and freeze the transaction at that point in time. The subject matter for which the parties bargained--a leasehold interest--no longer exists.
Moreover, the failure of the 1031 exchange frustrated the purpose of the contract. "Where the parties assume that a certain object or effect will be attained, and this becomes impossible, performance by the injured party is excused." (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 843, page 929.) Respondent's requirement of a 1031 exchange was a material term of the contract. It was specified in the listing agreement between respondent and appellant. He contends, however, that he is not bound by this condition because it was not also included in the residential purchase agreement, between respondent as seller and himself as buyer. Appellant's argument is specious.
In his dual capacity as respondent's broker and the buyer, appellant knew that respondent required a 1031 exchange. When respondent lost her opportunity to purchase the Bidgood property, the purpose of the contract was frustrated and her performance excused. In the absence of a contract, there could be no breach, and no basis for a grant of specific performance. We therefore need not reach the issue of recission.
Appellant's Fiduciary Duty
Appellant owed respondent a fiduciary duty in his capacity as her broker. (Civ. Code, § 2079, subd. (b).) This included an obligation to allow her to cancel escrow when her 1031 exchange failed. In June 2002, respondent agreed to extend escrow until the rent dispute was resolved. Although appellant was aware that arbitration was pending, he did not contact respondent for a full year, until she requested cancellation of escrow in June 2003. In response, appellant filed an action against her. Although respondent did not disclose to appellant the results of the arbitration or the pending Seacliff litigation, her actions do not relieve him of his fiduciary duty.
The judgment is affirmed. Costs on appeal are awarded to respondent.
We concur: YEGAN, Acting P.J., PERREN, J.