Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County No. GIC812566, John S. Meyer, Judge.
McINTYRE, J.
350 W.A., LLC (350 W.A.) appeals from a judgment in favor of Jacqueline Helleis, doing business as Flagship Research (together Flagship) arising out of its termination of Flagship's lease based on 350 W.A.'s decision that the building Flagship occupied was untenantable. 350 W.A. argues that the lease agreement allowed it to terminate the lease based on its subjective determination of untenantability. Accordingly, it contends the trial court erred by concluding that the termination, even if unreasonable, violated the implied covenant of good faith and fair dealing (the implied covenant). Finally, it contends that certain lease provisions bar this action and substantial evidence does not support the liability findings or the damage award. We reject 350 W.A.'s contentions and affirm the judgment.
FACTUAL BACKGROUND
Flagship is a data collection service that conducts marketing research for its clients, including qualitative research (focus groups at its offices), quantitative research (telephone surveys) and intercept research (interviews at off-site locations). In 1998, it entered into a five-year commercial lease agreement with Hokojitsugyo, Ltd. (Hoko) for offices in a building located in downtown San Diego. The original lease term expired in February 2004, but Flagship had the option to extend the lease for an additional three years.
During Hoko's ownership, the building was involved in construction defect litigation concerning its exterior finish that settled for $3 million. The defects did not impact the tenants and Hoko decided to sell the building and give the purchaser a credit on the price so that the buyer could repair the defects as it saw fit. David Blackburn, an individual experienced in buying and renovating distressed buildings, knew that the building had been the subject of construction defect litigation and that the majority of repairs had not been done. Blackburn hired a real estate consulting firm to advise him regarding the redevelopment potential of the building, including his desire to covert it to residential use. Blackburn also asked his attorney, Michael Vivoli, to perform a legal analysis of his rights in regard to the tenants in the building. Vivoli opined that Blackburn could terminate the tenants' leases to repair the construction defects in the building.
Blackburn offered to purchase the building from Hoko for $10.1 million and escrow opened on October 3, 2002. In November and December 2002, the building suffered four flooding incidents, damaging the building and Flagship's offices. The floods were caused by stuck valves, a bursting water pipe and an overflowing water chiller tank, all unrelated to the construction defects. Hoko immediately hired Servicemaster to extract the water and contacted Chubb, its property insurer.
Blackburn hired ATC Associates, Inc. (ATC) to do a mold analysis at the building. In November 2002, Robert Timmons, an industrial hygienist working for ATC prepared a report noting a high moisture content in portions of the building, the presence of mold on the eleventh floor and elevated levels of some types of bacteria. Timmons stated that the building needed to be thoroughly dried within 24 to 72 hours to prevent additional mold growth. Blackburn also hired Lightening Inspection & Consulting Services to evaluate the condition of the building after the floods. Blackburn specifically asked the building inspector, Stephen Olsen, about the condition of the gypsum wallboard and suggested that it be tested in a laboratory.
Olsen hired Dr. Heinz Poppendiek, a research engineer and applied physicist to test the strength and combustibility of the wallboard. Dr. Poppendiek tested water-exposed wallboard from the building and new board for strength and combustibility. He concluded that the water-exposed samples were slightly weaker than the unexposed samples, but did not know whether the wallboard at issue was structural or whether the water-exposed samples could properly perform in the building. He also concluded that the water-exposed samples had become flammable, but did not analyze what chemicals had wet the samples and admitted basing his determination on the test results of a single sample from a location in the building that had been exposed to a lot of water. Olsen conducted no tests to determine whether a chemical in the cooling tank caused the wallboard to become combustible.
Olsen agreed with the ATC report that all the affected wallboard needed to be replaced and recommended that the building be evacuated because the wallboard had become flammable and the openings cut into the walls allowed fire to penetrate the building in less time than its original design permitted. Blackburn also hired Taylor Frager, a contractor, to evaluate the necessary repairs to the building. In a written proposal dated December 16, 2002, Taylor Frager estimated it would cost $2.8 million dollars to repair the building.
The purchase and sale agreement for the building included a provision that allowed Blackburn to terminate the agreement or proceed with the transaction and receive an assignment of Hoko's right to any insurance proceeds if the property suffered damage exceeding $250,000 to repair before closing. Blackburn believed the damage to the building did not exceed this amount and on December 18, 2002, sued Hoko to enforce the agreement.
Meanwhile, Hoko obtained written estimates from Servicemaster and Trepte Construction Company (Trepte) to repair the water damage. The repair proposal from Servicemaster addressed "water damage" to floors 6 to 9, the stairwell and elevator shafts and included repairing the wallboard in the common areas for a total of approximately $102,000. The Trepte proposal of about $127,000 included reconstructing all fire rated assemblies and repairing areas of active mold growth in compliance with "the New York standard," meaning removing wallboard at least two feet beyond the active mold growth.
Hoko also hired a company called Panacea to assess the building for microbial contamination. After Panacea indicated that the repair work could begin, Hoko elected to repair all the water-related damage to the tenants' suites and the common areas.
In early March 2003, Hoko and Blackburn executed an amendment to the purchase and sale agreement authorizing Hoko to immediately repair the tenant suites, but indicating Hoko could not make any repairs to the common areas of the building without Blackburn's written consent. By mid-March, almost all of the repair work on the tenants' suites had been completed; however, Blackburn refused to let Hoko repair the common areas.
Ultimately, escrow closed on May 15, 2003 and Blackburn transferred the building to 350 W.A. That same day, 350 W.A. notified all tenants that the building was untenantable and their leases would terminate in 30 days because "successive flooding [had] compromised the effectiveness of fire-rated assemblies" rendering the building "unsafe" and "life threatening" in the event of a fire. Helleis was shocked by the termination notice as she had planned to exercise the option to extend the lease agreement through the end of February 2007. She knew her business could not survive a move on short notice and that she needed seven to eight months to locate a new space, build it to accommodate her business, and physically relocate.
Thereafter, 350 W.A. did not fix the holes in the wallboard, cut back on security and janitorial services, and started demolishing the interior of the building. William Bradley, the second principal of 350 W.A., came up with the idea of posting signs at the building. The large orange signs, posted in mid-August 2003, warned people that they were entering at their own risk because the building was "dangerous," had been "structurally damaged," and the fire walls would "not provide a safe means of exit in the event of a fire." At some point, Blackburn stopped collecting rent because it was past what he considered a reasonable amount of time for the remaining tenants to relocate and filed unlawful detainer actions against the tenants who remained. Flagship ultimately moved out of the building in February 2004.
PROCEDURAL BACKGROUND
On June 12, 2003, Flagship filed this action against Blackburn and 350 W.A. (together Defendants) alleging they failed to maintain the building as required by the lease. In October 2004, it filed a first amended and supplemental complaint alleging causes of action against 350 W.A. for breach of contract, breach of the implied covenant, breach of the covenant of quiet enjoyment, constructive eviction, nuisance and declaratory relief. Flagship also sued Blackburn individually for constructive eviction and nuisance.
Flagship's claims for breach of contract, the covenant of quiet enjoyment and the implied covenant alleged that 350 W.A. engaged in harassing tactics in an effort to drive it out of the building and improperly invoked section 14.4(a) of the lease agreement, which allowed the landlord to terminate the lease based on untenantability. (All undesignated section references are to the lease agreement.) As a result of these breaches, Flagship suffered damages, including: interference with its business, resulting in lost business revenue; loss of the subject lease; loss of the value of the tenant improvements in the premises; the cost of securing a new lease; increased lease expenses; and the cost of designing, building out and moving into a new lease space.
Flagship also alleged that Defendants willfully and wrongfully intended to cause injury and deprive it of the beneficial use and enjoyment of the premises. Flagship sought compensatory damages of $2.5 million and a declaration that the termination notice was untimely or invalid.
The parties tried the matter to the court, presenting 22 witnesses and numerous exhibits. After hearing the arguments of counsel, the court issued an oral statement of intended decision from which counsel prepared the written statement of decision.
Briefly, the trial court found that Blackburn used the flooding incidents as a pretext to deconstruct the building and get rid of the tenants. It found that: (1) the building was tenantable and should have been repaired; (2) the repair estimates were reasonable; and (3) the tenants could have remained in the building during the repairs and insurance would have paid for the necessary work. It also found that Blackburn prevented Hoko from making the repairs and that 350 W.A. acted unreasonably, both on a subjective and objective basis, in numerous respects and that the fire safety issues provided no basis "in fact or reason" to immediately evict the tenants. The court also stated that when the cost to remedy the water damage exceeded $250,000, Blackburn could have cancelled the purchase and had his deposit money returned, but he did not pursue this option because he did not intend to repair the damage. Rather, Blackburn wanted a determination that the building was untenantable so he could get rid of the tenants.
The trial court concluded that 350 W.A. constructively evicted Flagship and breached the implied covenant when it determined that the building was untenantable. The court rejected the testimony of Defendants' experts (Timmons, Dr. Poppendiek and Olsen), stating these individuals were looking for the result that Blackburn wanted – a determination that the building was untenantable. The court found that the constructive eviction and breaches of contract, implied covenant and covenant of quiet enjoyment "caused a significant drop in Flagship's qualitative revenues," resulting in damages of $500,038.77.
The court also found that Flagship would have opted to extend the lease and was excused from having to give written notice of its intent to exercise its lease extension option. Accordingly, it found that 350 W.A.'s wrongful conduct forced Flagship to relocate three years early, resulting in additional damages of $4,787.67. Finally, it rejected Defendants' contract defenses, found that Blackburn was not individually liable and that the termination notice was timely.
The court entered a judgment in Flagship's favor, awarding it damages in the total amount of $504,823.44. (The trial court made an arithmetic error in calculating the judgment; the correct damage total is $504,826.44.) Thereafter, it awarded Flagship attorney fees in the amount of $295,902. 350 W.A. timely appealed.
DISCUSSION
I. Standards of Review
350 W.A.'s challenges to the trial court's factual findings and conclusions are reviewed under the substantial evidence standard of review. Under this standard we review the entire record to determine whether there is substantial evidence supporting the trial court's factual determinations (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874), viewing the evidence and resolving all evidentiary conflicts in favor of the prevailing party, and indulging all reasonable inferences to uphold the judgment. (Jordan v. City of Santa Barbara (1996) 46 Cal.App.4th 1245, 1254-1255.) The issue is not whether there is other evidence in the record to support a different finding, but whether there is some evidence that, if believed, would support the findings of the trial court. (Rupf v. Yan (2000) 85 Cal.App.4th 411, 429-430, fn. 5.)
Credibility is an issue of fact for the trial court to resolve (Johnson v. Pratt & Whitney Canada, Inc. (1994) 28 Cal.App.4th 613, 622) and the testimony of a single witness, even that of a party, is sufficient to provide substantial evidence to support a trial court's finding of fact. (In re Marriage of Mix (1975) 14 Cal.3d 604, 614.) Evidence accepted by the trial court as true may not be rejected by us unless it is physically impossible or its falsity is obvious without resort to inference or deduction. (In re Moore's Estate (1956) 143 Cal.App.2d 64, 72.) Finally, the doctrine of implied findings applies where a statement of decision contains ambiguities or omissions unless such defects were brought to the trial court's attention. (Code Civ. Proc., § 634; see SFPP, L.P. v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 462.)
The rules governing contract interpretation also apply to this action and are well established. The goal of contract interpretation is to ascertain the parties' mutual intent at the time of contracting. (Civ. Code, § 1636.) The mutual intent of the parties is determined by the words used in the agreement, which are to be understood in their ordinary and popular sense. (Civ. Code, § 1644.) To assist in ascertaining the meaning of disputed words used in a contract, the trial court will provisionally receive extrinsic evidence that is relevant to show whether the contract is reasonably susceptible to a particular meaning. (Morey v. Vannucci (1998) 64 Cal.App.4th 904, 912.) The trial court should consider such extrinsic evidence even if the language of the contract could be considered unambiguous on its face. (Ibid.) A trial court's ruling on the threshold question of ambiguity presents a question of law subject to our independent review (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165) and the interpretation of a contract presents a legal question when the competent extrinsic evidence is not conflicting. (Id. at pp. 1165-1166.)
II. Analysis
A. Liability
1. Tenantability Finding
In the event of untenantability, the lease agreement allowed 350 W.A. to terminate Flagship's lease under various situations by giving written notice within 180 days of the event. Specifically, section 14.4 allowed it to terminate the lease: (a) if in its "sole judgment," the building is rendered untenantable by fire or other casualty; or (b) repair or restoration of the building required the expenditure of more than 20 percent of the full insurable value of the building immediately prior to the casualty. We examine these provisions in turn.
a. Section 14.4(a)
This section allowed 350 W.A. to terminate the lease "upon written notice to Tenant if: (a) the Building or Premises are substantially or totally destroyed or, in Landlord's sole judgment, rendered untenantable by fire or other casualty or any other cause[.]" After hearing all the evidence, the trial court concluded that the building was not untenantable and found 350 W.A.'s determination of untenantability to be unreasonable. The trial court also concluded that 350 W.A. acted unreasonably in: (1) not finding out what specific chemicals were in the tank water or the concentration of the chemicals to test the hypothesis that chemicals in the water caused the wallboard to become flammable; (2) ignoring holes in the wallboard of the common areas because these holes posed more of a fire hazard than the allegedly flammable wallboard; (3) not testing more wallboard; and (4) jumping to the conclusion that the entire building was a fire hazard on the basis of a "very insignificant technical test of one relatively tiny sample of wallboard performed by Dr. Poppendiek."
The trial court rejected the testimony of 350 W.A.'s experts and found that 350 W.A. intentionally did not conduct any further reasonable inquiry on the fire safety issue and thus had no basis to immediately evict the tenants. The court also noted that Blackburn's assistant, Tracy Parsons, continued to work out of the building after escrow closed and after 350 W.A. had posted the fire hazard warning signs.
350 W.A. contends that section 14.4(a) allowed it to subjectively determine the untenantability of the building and terminate the lease. It contends the trial court's tenantability finding is irrelevant and that the implied covenant cannot be used to prohibit a party from doing what a lease expressly allows. Flagship asserts that the "sole judgment" language is ambiguous and can reasonably be interpreted as limiting the identity of the decision maker, not arming the landlord with arbitrary power. We agree with Flagship.
By expressly finding the building tenantable, the trial court necessarily rejected 350 W.A.'s suggestion that the "sole judgment" language allowed it to subjectively determine the tenantability of the building without regard to any reasonableness requirement. Rather, as argued by Flagship, this language is susceptible to alternative meanings and the trial court properly considered Helleis's testimony that she discussed this termination provision with her attorney when she signed the lease and understood the language to mean "what a reasonable person would do" and not that her business could be "tossed out at any time for any reason." (Guntert v. City of Stockton (1974) 43 Cal.App.3d 203, 213 [contract term granting sole discretion "does not necessarily imply arbitrary power, unfettered by the demand for reasonableness"].) Accordingly, even though the lease agreement allowed 350 W.A. to act as the sole decision maker regarding termination of the lease, 350 W.A. was required to act reasonably in making its decision. (Ibid.) As discussed below, substantial evidence supported the trial court's conclusion that 350 W.A.'s experts were not credible and its untenantability determination was objectively unreasonable.
Shortly after escrow opened in early October, Hoko's attorney, William Halama, received a telephone call from Vivoli, expressing "shock" that the leases were for multi-year terms and did not allow the landlord to evict the tenants at will. Thus, in order to achieve his goal of converting the building into a residential structure, Blackburn needed to find a way of removing the existing tenants. He first relied on the earlier construction defect litigation, telling prospective lenders, through his attorney, that the construction defects gave him "a reasonable basis" to trigger an early termination of the leases. Blackburn, however, presented no evidence at trial showing that the construction defects rendered the building untenantable. Rather, the construction defects involved holes in the pseudo stucco on the outside of the building that could have been easily repaired while the tenants remained in the building.
350 W.A. ultimately terminated the leases on the ground the floods had compromised the effectiveness of the fire-rated assemblies and rendered the building untenantable. However, the evidence presented at trial supported the trial court's conclusion that the building could have been repaired.
William Gabrielson, a general contractor working for Trepte, testified that it was "relatively inexpensive" to replace wallboard and the main cost was for labor, not the amount of wallboard replaced. Had the common areas been repaired per Trepte's recommendations, all the allegedly flammable wallboard would have been removed and all fire rated assemblies reconstructed according to code requirements. Blackburn, however, prevented Hoko from making these repairs and then ignored Olsen's recommendation that the wallboard holes be fixed immediately.
After hearing Dr. Poppendiek and Olsen testify, the trial court concluded that they were looking for the result that Blackburn wanted. A series of e-mails between Vivoli and Olsen supported the trial court's conclusion. Olsen explained to Vivoli that wallboard could remain fire safe despite repeated water soakings if dried correctly, but that it should be replaced if soaked by "wastewater" due to the possibility of future bacterial contamination and he would have a laboratory test samples from the most damaged areas. Vivoli replied: "I guess we've gotten the conclusion we were looking for, it's just a matter of the support for the conclusion."
This evidence amply supported the trial court's conclusion that 350 W.A.'s termination of Flagship's lease based on untenantability was objectively unreasonable, thereby rendering 350 W.A.'s attempt to terminate the lease under section 14.4(a) ineffectual.
b. Section 14.4(b)
This section provided that: "Landlord may terminate this Lease upon written notice to Tenant if: . . . the Building is damaged or rendered untenantable (whether or not the Premises are damaged or destroyed or rendered untenantable) so that its repair or restoration requires the expenditure (as estimated by a reputable contractor or architect designated by [the] Landlord) of more than twenty percent (20%) of the full insurable value of the Building immediately prior to the casualty[.]"
350 W.A. contends its termination of Flagship's lease under this provision was proper based on the $2.8 million Taylor Frager repair estimate and the $10.1 million sales price of the building. Since, based on this estimate, the cost to restore the building exceeded 20 percent of its insurable value, 350 W.A. asserts the termination was proper regardless of the tenantability determination.
Flagship does not dispute that the Taylor Frager estimate exceeded 20 percent of the building's insurable value; rather, it argues 350 W.A. could not rely on this termination provision because the written termination notice only referenced section 14.4(a). Alternatively, it contends that the trial court could have rejected the estimate as inaccurate because Taylor Frager prepared it months before 350 W.A. became the landlord and the estimate could not have taken into consideration the hundreds of thousands of dollars in repairs that Hoko later undertook.
As a threshold matter, Flagship has not pointed out, and we have not found, anything in the lease requiring that the landlord specify in the termination notice the basis upon which a termination election is made. Hence, 350 W.A. can rely on section 14.4(b) as grounds for terminating Flagship's lease even though it did not cite this section in its termination letter.
Although 350 W.A. argued that section 14.4(b) applied, the trial court did not expressly address this contract provision in its written statement of decision. Nonetheless, the trial court made other findings suggesting it rejected the Taylor Frager estimate as not credible; specifically, the trial court noted that Chubb would have paid for either Servicemaster or Trepte to repair the common areas, found Trepte's scope of work and cost estimate reasonable and found that the tenants could have remained in the building during the repairs. The court also found that the Trepte proposal covered potential mold at the building and there was no indication that Chubb would not have paid for those repairs.
The evidence presented at trial supported these findings. The Servicemaster proposal addressed "water damage" to floors 6 to 9, the stairwell and elevator shafts and included repairing the wallboard in the common areas for approximately $102,000. The Trepte proposal included reconstructing all fire rated assemblies and repairing areas of active mold growth by removing wallboard at least two feet beyond the growth. Gabrielson did not expect extensive mold growth because the flooding incidents had been fairly recent, but recommended hiring a certified industrial hygienist to test for mold and stated Trepte would have deferred to any mold consultant regarding the expansiveness of any repair.
In contrast, the Taylor Frager estimate dated December 16, 2002 proposed to repair "water damage" at the building for about $2.8 million. The estimate included generic items such as carpeting, ceiling tile, painting and wall coverings, but did not specify whether these items were located in common areas, tenant suites or both. The Taylor Frager estimate included replacing all hollow metal door frames, light and plumbing fixtures and the entire air distribution system, but did not explain why these items needed to be replaced. The estimate also listed $5,000 for photographs, $3,425 for telephone expenses, $11,124 for office supplies, $25,000 for traffic control, and $16,500 for temporary pedestrian protection. Without any testimony explaining these costs, the trial court could have reasonably rejected the entire estimate as lacking credibility.
Although the Trepte repair estimate did not address the stairwells and elevator shaft, the Taylor Frager estimate listed the cost to repair the elevator shaft as $90,000 and the cost for the gypsum wallboard systems, which presumably incorporated the stairwells, as $205,825. Even if these costs were added to the Trepte proposal, the total cost to repair would have been well under 20 percent of the insurable value of the building. Accordingly, there was sufficient evidence to support the trial court's implied rejection of section 14.4(b) as a valid basis for terminating Flagship's lease.
2. Defendants' Contract Defenses
350 W.A. points out that the lease contained a modified version of the covenant of quiet enjoyment, providing that Flagship "shall quietly enjoy the Premises . . . subject to the terms of this Lease[.]" Accordingly, it contends that certain lease terms bar Flagship's claims. The trial court rejected this assertion, finding in Flagship's favor on the following contract defenses raised by 350 W.A.: sections 14.1(b), 14.6, 13.1, 13.3, 12.1, and 22.3.
350 W.A. did not argue section 12.1 on appeal and has waived any challenge to this defense. (Wurzl v. Holloway (1996) 46 Cal.App.4th 1740, 1754, fn. 1.) We review the remaining contractual defenses to determine whether substantial evidence supported the trial court's findings.
a. Section 22.3
Section 22, entitled "Indemnification and Exculpation," defines "liabilities" as: "all losses, costs, damages, expenses, claims, injuries, liabilities and judgments, including, but not limited to, attorneys' fees and costs (whether or not suit is commenced or judgment entered)[.]" Section 22.2, entitled "Indemnification," is a third-party indemnity clause requiring that the tenant indemnify the landlord for all liabilities arising from tenant's use of the premises and conduct of its business. Section 22.3 entitled "Damage to Persons or Property" provides:
"Tenant assumes the risk of all Liabilities it may incur, including, but not limited to, damage or injury to persons, property and the conduct of Tenant's business (and any loss of revenue therefrom), the loss of use or occupancy of the Premises, and the items enumerated below in this Section, and waives all claims against Landlord and Landlord's Affiliates in connection therewith. Landlord and Landlord's Affiliates shall not be liable for any Liabilities incurred by Tenant or Tenants Affiliates (including, but not limited to, the Liabilities described above in this Section) arising from or in connection with . . . water, . . . defects of plumbing, . . . any work, maintenance, repair, rebuilding or improvement performed by or at the request of Landlord or Landlord's Affiliates for the Premises, the Building or the Land; . . . and any other acts, omissions or causes. Nothing in this Section exempts [the] Landlord for liability caused solely by its gross negligence or willful misconduct, but Landlord shall not be liable under any circumstances for consequential or punitive damages (including, but not limited to, damage or injury to persons, property and the conduct of Tenant's business [and any loss of revenue therefrom])." (Italics added.)
Flagship contends section 22.3 pertains to liabilities that either the tenant or landlord might incur to third parties, not to damages the tenant might suffer. In support of its interpretation, Flagship notes that the section uses the word "incur," arguing that the damages it suffered were not something it had incurred. We disagree. Flagship erroneously focuses on a single word to support its interpretation that section 22.3 is an indemnity provision and not an exculpation provision. This interpretation ignores one of the seminal rules of contract interpretation requiring the whole of the contract to be taken together with each clause helping to interpret the other. (Civ. Code, § 1641.)
Section 22.3 follows a provision addressing indemnification and appears in a section labeled indemnification and exculpation. When the whole of section 22.3 is read in this context and in connection with the definition of "liabilities," it plainly provides that the tenant assumes the risk of all losses, damages or claims it may incur to its business and waives all claims against the landlord. We read the word "incur" as synonymous with "suffer," "sustain" or "experience" and conclude that section 22.3 is a valid exculpation clause whereby the parties to this commercial lease agreed to shift the risk of loss to the tenant. (Tunkl v. Regents of University of California (1963) 60 Cal.2d 92, 101 [public policy does not oppose "private, voluntary transactions in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party"].)
Our conclusion that section 22.3 is a valid exculpatory clause insulating 350 W.A. from liability for ordinary negligence does not end our analysis as this section also provides that the landlord remains liable for its "gross negligence or willful misconduct." "Gross negligence involves a failure to act under circumstances that indicate a passive and indifferent attitude toward the welfare of others. Negative in nature, it implies an absence of care. [Citations.] Willful misconduct, on the other hand, requires an intentional act or an intentional failure to act, either with knowledge that serious injury is a probable result, or with a positive and active disregard for the consequences. [Citations.]" (Johns-Manville Sales Corp. v. Workers' Comp. Appeals Bd. (1979) 96 Cal.App.3d 923, 930-931.)
After Flagship rested its case, 350 W.A. moved for nonsuit based, in part, on section 22.3 and followed its oral motion with a written motion for partial judgment. In response to the oral motion, the trial court noted that, if Flagship prevailed, it would be on a theory of intentional conduct and Flagship later asserted during closing argument that the evidence supported such a finding.
The trial court ultimately concluded that some of 350 W.A.'s actions were unreasonable and that 350 W.A. acted wrongfully by: (1) failing to repair the wallboard holes or the parking gate; (2) placing warning signs around the building; (3) deconstructing the building while Flagship operated its business; (4) reducing the building maintenance; (5) failing to address problems with transients; and (6) failing to protest the fire marshal's order to vacate the building. Although the trial court did not expressly find that 350 W.A.'s acts amounted to gross negligence or willful misconduct, we may imply such a finding if substantial evidence supports it. (SFPP, L.P. v. Burlington Northern & Santa Fe Ry. Co., supra, 121 Cal.App.4th at p. 462.)
Our review of the record reveals that substantial evidence supports the trial court's implied conclusion that 350 W.A. intentionally failed to act with active disregard for the consequences to Flagship. The evidence shows that Blackburn purchased the building intending to convert it into condominiums and evict the tenants and use the construction defects at the building as a pretext for the evictions although the construction defects did not impact the tenantability of the building. The evidence also shows that, after the floods, Hoko quickly repaired the tenant suites and planned to repair the common areas, but Blackburn prevented the repairs and 350 W.A. attempted to evict the remaining tenants as soon as it obtained title to the property.
As discussed above in section II.A.1.a, 350 W.A. acted unreasonably when it terminated Flagship's lease based on untenantability and ample evidence supported the trial court's conclusion that the building was repairable and not untenantable. The evidence also revealed that the holes in the wallboard of the common areas posed more of a fire hazard than the allegedly flammable wallboard and that the flammability determination was made based on a single sample that had been exposed to a lot of water.
After determining that the building was untenantable, 350 W.A. cut back on janitorial services resulting in Flagship employees undertaking duties such as sweeping the entryway, elevators and elevator areas, cleaning the glass doors, vacuuming the common area and washing away urine stains left by transients. Flagship's clients complained about the condition of the building and Helleis testified that the holes in the wallboard and dirty carpeting leading to Flagship's suite reflected poorly on her business. 350 W.A. also started demolishing the interior of the building while Flagship tried to continue to do business.
350 W.A. then posted large warning signs that listed various code regulations because it wanted everyone entering to believe that the building was unsafe. The signs worked, as Flagship's clients expressed concern about the safety of the building, causing Flagship to station an employee in the lobby to assure people that they could safely enter the building.
From this evidence the trial court could have reasonably concluded that 350 W.A. intended to interfere with Flagship's use of its suite and that it sought to drive Flagship out of the building. Accordingly, section 22.3 did not bar Flagship's claims.
b. Section 13
Sections 13.1 and 13.2 required that Flagship obtain casualty insurance covering tenant alterations, leasehold improvements and damages to its property and maintain commercial general liability insurance with respect to "ownership, maintenance, use, operation and condition of the Premises and the business conducted therein." Section 13.3(c) provided, in part, that the "Landlord and Tenant each waive any rights of recovery against the other for injury or loss due to hazards covered by its own insurance, to the extent of the injury or loss covered thereby." As a threshold matter, we note that Hoko repaired Flagship's suite and Flagship could not have made a claim for these damages. In its oral statement of decision, the trial court expressly found that the insurance proceeds Flagship sought from its own insurer did not "cover the loss that [it found] in this case." 350 W.A. asserts the trial court erred, relying on three pieces of evidence to support its contention: (1) a claim Flagship submitted to its insurer; (2) Flagship's lawsuit against its insurer; and (3) Flagship's insurance policy. We reject this assertion.
Flagship's claim and complaint show that Flagship believed its own insurance policy covered its claims for relocation expenses and lost profits and that it intended to seek these damages from its insurer. These documents, however, do not show that Flagship's insurance actually covered these damages. 350 W.A.'s general citation to Flagship's lengthy insurance policy similarly fails to prove coverage.
We reviewed the policy and found no indication that it covers relocation costs. Although the policy does cover lost business income, the loss must be "sustain[ed] due to the necessary suspension of your 'operations' during the 'period of restoration.'" The evidence Flagship presented at trial, however, reveals that Flagship continued its operations during the time period in question. Accordingly, 350 W.A. has not shown that the policy covered Flagship's claims and the trial court properly concluded that section 13.3 did not apply.
c. Section 14.1
In part, section 14.1 states that if the building is partially destroyed by fire or other casualty, and if the lease is not terminated as provided in this section, the landlord shall repair the building "after landlord receives substantially all of the insurance proceeds receivable on account of the casualty." 350 W.A. contends that even if its termination of Flagship's lease was not valid, it was excused from repairing the building because it had not received substantially all of the insurance proceeds therefor. The evidence presented at trial, however, does not support application of this defense.
Chubb paid for the dry-out of the building and approved the $102,000 Servicemaster estimate for repairs to the stairwell, elevator shafts and the wallboard in the common areas. Hoko informed Chubb that the Servicemaster estimate was a "draft" and Hoko knew that acceptance of the check would not compromise any further claims for insurance proceeds if the damage proved to be more extensive. In November 2002, Hoko informed Vivioli that it could not settle any insurance claim without Blackburn's written consent and that "skimp[ing]" on the repairs was not in its best interest. Despite these assurances, Blackburn refused to consent to the common area repairs and 350 W.A. later wrongfully terminated the leases. Accordingly, Defendants' own actions made it impossible to ascertain whether the $102,000 payment constituted substantially all the insurance proceeds and 350 W.A. cannot take advantage of its own wrong. (Civ. Code, § 3517.)
d. Section 14.6
Section 14.6 entitled "Business Interruption" provides: "Landlord shall not incur any Liabilities of any type to Tenant or Tenant's Affiliates arising from or in connection with any damage or destruction of the Premises, the Building or the Land, or any taking or appropriation thereof, or any repairs or restoration in connection therewith, nor shall Tenant have any right to terminate this Lease as a result thereof. However, in such event, Monthly Rent shall be abated if and to the extent that abatement is allowed pursuant to this Article."
350 W.A. contends the judgment must be reversed under this section because all of Flagship's damage claims arose from or were connected to the flood damage and attempted repairs. We disagree. Section 14.1 imposed a duty on 350 W.A. to repair the building and section 10.2 required it to repair and maintain the common areas. Notably, the trial court specifically found that 350 W.A. could have and should have repaired the building. As discussed in section II.A.2.a, Flagship's damage claims arose from 350 W.A.'s outrageous refusal to repair, restore and maintain the building and its wrongful termination of Flagship's lease. Accordingly, this section does not bar Flagship's damage claims.
3. Covenant of Quiet Enjoyment
Every lease contains an implied covenant of quiet enjoyment, insulating the tenant against any act or omission on the part of the landlord that interferes with the tenant's right to use and enjoy the premises for the purposes contemplated by the tenancy. (Petroleum Collections Inc. v. Swords (1975) 48 Cal.App.3d 841, 846.) Flagship's lease also contained an express quiet enjoyment provision, stating it "shall quietly enjoy the Premises without hindrance or molestation by the landlord" subject to the terms of the lease so long as it paid rent. Substantial interference is required to establish a breach of the covenant and the existence of a breach presents a factual question for the trier of fact. (Andrews v. Mobile Aire Estates (2005) 125 Cal.App.4th 578, 583, 589 (Andrews).)
An arbitrary and unreasonable termination of the lease violates a landlord's obligation to abstain from interfering with the tenant's use and enjoyment of the premises. (Guntert v. City of Stockton (1976) 55 Cal.App.3d 131, 139.) Under such circumstances, the tenant may remain in possession and bring a damage action against the landlord for interfering with its tenancy. (Id. at p. 141.) The tenant is entitled to recover all monetary losses proximately resulting from the landlord's breach (Civ. Code, § 3300; Guntert v. City of Stockton, supra, 55 Cal.App.3d at p. 142), including moving expenses and lost business profits. (Andrews, supra, 125 Cal.App.4th at p. 591.)
Here, 350 W.A. does not challenge the sufficiency of the evidence to support a conclusion that it breached the covenant of quiet enjoyment; rather, it contends that the quiet enjoyment provision of the lease was subject to section 14 and the termination clauses contained therein. However, as discussed, these contractual defenses are without merit (supra, section II.A.2) and we reject its contention that these contractual defenses insulate it from liability for violation of the covenant of quiet enjoyment.
4. Constructive Eviction
Any interference by a landlord depriving the tenant of the beneficial enjoyment of the premises amounts to a constructive eviction if the tenant so elects and vacates the premises within a reasonable time. (Kulawitz v. Pacific Woodenware & Paper Co. (1944) 25 Cal.2d 664, 670; Cunningham v. Universal Underwriters (2002) 98 Cal.App.4th 1141, 1152.) Although Flagship acknowledges that a constructive eviction claim does not arise until the tenant actually vacates the property, it claims that 350 W.A.'s wrongful conduct forced it to vacate the property in February 2004, three years prior to the extended term of its lease and that 350 W.A.'s wrongful deprivation of the lease extension option resulted in a constructive eviction. The trial court agreed, finding that: (1) Flagship would have opted to extend the lease, and was excused from having to give written notice of its exercise of the option to extend the lease; (2) 350 W.A.'s wrongful conduct amounted to a constructive eviction that forced Flagship to relocate three years early; and (3) the eviction resulted in additional out-of-pocket costs to Flagship of $67,337 and Flagship was damaged by the loss of those funds from March 1, 2004 to March 1, 2007 in the amount of $4,787.67.
Substantial evidence supported the trial court's findings. Flagship's lease provided that the original term expired on February 28, 2004 and an option existed to extend the lease for an additional three-year term. Helleis testified that she would have exercised the renewal option within the option period, but did not because 350 W.A. sent the termination notice. Helleis indicated that Flagship incurred about $60,000 of out-of-pocket expenses for the cost of tenant improvements in its new building. Counsel discussed this claim with the court during closing argument and Flagship admitted seeking the out-of-pocket costs it incurred in the amount of $67,337. The trial court, however, did not award Flagship these out-of-pocket expenses; rather, it awarded interest on the loss of use of these funds for three years in the amount of $4,787.67.
Although 350 W.A. generally claims Flagship cannot recover these damages, it presented no authority showing a landlord cannot be liable for constructive eviction where its wrongful actions prevented a tenant from exercising a contractual option to extend a lease term. Under the facts of this case, we cannot say the trial court erred in awarding Flagship interest for the early loss of use of these funds.
5. Implied Covenant
All contracts contain a covenant of good faith and fair dealing in their performance and enforcement. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371 (Carma).) The implied covenant is read into contracts "'to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose.'" (Id. at p. 373, quoting Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 690.) Stated differently, the implied covenant cannot be invoked to prohibit a party from doing what the agreement expressly permits. (Carma, supra, 2 Cal.4th at p. 374.) The implied covenant must be examined on a case-by-case basis and a party can violate the covenant "if it subjectively lacks belief in the validity of its act or if its conduct is objectively unreasonable. [Citation.]" (Id. at p. 372.)
Here, the trial court found that 350 W.A.'s untenantability determination was unreasonable and breached the implied covenant. 350 W.A. contends the trial court erred because section 14.4(a) allowed it to terminate the lease when, "in [its] sole judgment," the building is rendered untenantable. Accordingly, 350 W.A. asserts that the lease agreement allowed it to subjectively determine whether the building was untenantable and the implied covenant cannot be used to change what the lease expressly allowed. We disagree.
As discussed above, 350 W.A. was required to act reasonably when terminating the lease (Guntert v. City of Stockton, supra, 43 Cal.App.3d at p. 213) and substantial evidence supported the trial court's conclusion that 350 W.A.'s tenantablity determination was objectively unreasonable. (Supra, section II.A.1.a.) 350 W.A.'s objectively unreasonable conduct is sufficient to support the trial court's finding that 350 W.A. violated the implied covenant. (Carma, supra, 2 Cal.4th at p. 372.)
B. Causation
350 W.A. contends the judgment must be reversed because there is no substantial evidence showing its conduct caused Flagship's claimed damages. We disagree. Helleis testified that Flagship lost specific clients based on the condition of the building and the trial court cited this testimony in its statement of decision. In fact, the trial court noted it found Helleis's testimony "pretty compelling" that she lost business as a result of Defendants' conduct. We similarly believe that Helleis's testimony sufficiently shows that 350 W.A.'s conduct caused Flagship to lose some of its qualitative research business.
C. Damages
1. Facts
Helleis testified that the qualitative and quantitative research markets were different and that Flagship had a lot more variability with its quantitative research business and more predictability with its qualitative research business. She claimed that Flagship lost potential new clients including, Hospital Research and David Binder, based on the condition of the building. Helleis was also aware of two missed opportunities with another client, Innovative Research. She looked at the set of clients that had used Flagship before and after the floods and found that 20 had returned every 4.4 months, but after the floods, only 10 clients came back and the interval between the visits increased to 13 months.
Flagship's expert witness, Rodger Britt, projected revenues for Flagship based on its historical data, i.e., its past performance as a predictor of future performance. He had Flagship separate its data regarding the three components of its business because the floods affected the qualitative research portion of the business. Britt looked at fixed and variable expenses and determined that, for every dollar of qualitative revenue Flagship generated, it had spent 24.5 cents in costs. He then came up with a projection of gross revenues at a 12.4 percent quarterly growth rate and reduced this number by the costs the business would have incurred to obtain that amount of revenue per CACI No. 352. Subtracting the costs from the projected gross revenue and looking at the first quarter of 2003 until the first quarter of 2007, Britt calculated Flagship's "lost net revenue" as $2,480,700.
350 W.A.'s expert, Robert Wallace, challenged Britt's methodology. Wallace noted that Flagship's revenue per quarter varied and concluded that the business did not show a trend. Accordingly, Wallace believed that Britt improperly used regression analysis to predict Flagship's future revenues. Wallace also believed that Britt improperly calculated damages from January 2003, when Defendants did not own the building, to the first quarter of 2007, well after Flagship's move.
Wallace used his judgment to predict Flagship's future revenues, stating that a statistical analysis created invalid conclusions. After making several adjustments based on Flagship's quantitative revenue and acquisition of another business in July 2003, Wallace concluded that Flagship did not perform below his projections, had not lost any revenue and thus lost no profits. Assuming a regression analysis was used, Wallace believed as much data as possible should be included, meaning the start date for the analysis should have been the first quarter of 2000. Using regression analysis with this start date, Wallace calculated a 3.75 percent quarterly growth rate for Flagship's business and Wallace and came up with $730,000 as the corrected number through the first quarter of 2007.
After hearing this evidence, the trial court concluded that the constructive eviction and breaches of the contract and implied covenant "caused a significant drop in Flagship's qualitative revenues." Specifically, the trial court found that there was a steady increase in Flagship's repeat business up until the 2002 flooding incidents and a steep decline in repeat business after the incidents, noting that before the floods 20 of Flagship's clients returned every 4.5 months and after escrow closed only 10 returned every 13 months. It concluded that 350 W.A.'s conduct caused Flagship to suffer damages "from the loss of qualitative revenue" in the amount of $500,038.77 and based this figure on a projected growth rate of 3.75 percent per quarter through the fourth quarter of 2004.
2. Analysis
The measure of damages for breach of a lease is an amount that will compensate the aggrieved party for all the detriment caused by the breach. (Civ. Code, § 3300; Guntert v. City of Stockton, supra, 55 Cal.App.3d at p. 142.) In injury to business cases, lost profits are the appropriate legal standard for damage awards (Electronic Funds Solutions v. Murphy (2005) 134 Cal.App.4th 1161, 1180) and may be recovered if the evidence shows with reasonable certainty both their occurrence and extent. (S.C. Anderson, Inc. v. Bank of America (1994) 24 Cal.App.4th 529, 535.) "The law requires only that some reasonable basis of computation of damages be used, and the damages may be computed even if the result reached is an approximation. [Citation.]" (GHK Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 873-874.)
350 W.A. argues that the damage award is not supported by any credible evidence, claiming no one testified that a quarterly growth rate of 3.75 percent was proper. However, although Wallace claimed that regression analysis should not be used because Flagship's business did not show a trend, the trial court could have reasonably rejected this testimony and accepted Wallace's alternative testimony that a 3.75 percent quarterly growth rate was appropriate for Flagship's business. (Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 632 [expert testimony may be rejected by the trier of fact if the rejection is not arbitrary].)
During closing argument, the trial court asked Flagship's counsel to determine damages using the 3.75 percent growth rate and the incremental cost of 24.5 percent. Counsel's calculation of damages from the first quarter of 2003 to the fourth quarter of 2004, resulted in the precise figure that the trial court ultimately awarded – $500,038.77.
Even though 350 W.A. did not own the building until the second quarter of May 2003, the amended purchase and sale agreement gave Blackburn control over repairs to the common areas during escrow. Blackburn prevented Hoko from repairing the common areas during the escrow period, making it entirely reasonable for the trial court to calculate lost profits starting in the first quarter of 2003.
Finally, 350 W.A. contends the trial court erroneously awarded Flagship lost "revenue" instead of lost profits. In its oral statement of decision, the trial court indicated it would award Flagship $500,038.77 as lost "revenue" and Flagship's counsel used this term when she prepared the written statement of decision. Nonetheless, the forgoing discussion suggests the trial court simply misspoke when it used the term "revenue" instead of "profits" or that it meant to say "lost net revenue," which is equivalent to lost profits. (Guntert v. City of Stockton, supra, 55 Cal.App.3d at p. 148 [profits "are the excess, the net, of revenue over costs" and are synonymous with net earnings].) Accordingly, we find no basis for disturbing the damage award.
DISPOSITION
The judgment is affirmed. Respondent is awarded its attorney fees and costs on appeal. On remand, the trial court shall determine the reasonable attorney fees and costs.
WE CONCUR: McCONNELL, P. J. NARES, J.