Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of San Diego County, Richard E. L. Strauss, Judge, Super. Ct. No. GIC851869
BENKE, Acting P. J.
At the end of a commercial lease, the typical right of first refusal provided to commercial tenants will not prevent a landlord from developing the leased premises in any manner it sees fit. Here, the landlord, respondent the County of San Diego (the county), owned and operated a park made up of seven restored Victorian homes, two of which the county leased to appellants Charles F. Helsper and Nancy Helsper. The Helspers operated the homes as bed and breakfast inns. The Helspers' leases contained a right of first refusal in the event the county decided to continue leasing the houses "for the purposes set out in this lease." The county determined that it could achieve a higher return on the park by offering a master lease of all the homes and all the land in the park to a single developer who would then determine the most appropriate means of exploiting the entire property. Accordingly, the county published a request for proposals (RFP) to develop the property in such a manner, subject to plaintiffs' existing lease which was about to expire.
The appellants sued the county and alleged the county violated the right of first refusal set forth in their leases. At a court trial, the trial court rejected the appellants' claims and entered judgment in favor of the county.
The right of first refusal in appellants' lease did not prevent the county from offering development rights to the entire park to a third party and, contrary to the Helspers' arguments, did not require that the county make a separate offer with respect to the houses the Helspers leased.
Accordingly, we affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
In the late 1960's the county adopted a plan for property it owned near the Old Town area of San Diego. The county decided to develop the property, known as Heritage Park, as a Victorian Village of 15 structures with period shops, restaurants and an identity of its own. Toward that end, in the 1970's the county moved seven Victorian homes to the site. However, the county never completed its plan for the entire park.
In 1992 the Helspers assumed leases on two of the Victorian homes in the park, the Christian House and the Bushyhead House. Both of the leases contained a right of first refusal set forth in paragraph 37 of the respective leases. Paragraph 37 of each of the leases stated: "If, at the end of [the lease], County wishes to re-lease the Premises for the purposes set out in this Lease, Lessee shall have the right of first refusal to re-lease the Premises." Paragraph 37 further provided: "County shall notify Lessee of its intent to re-lease the Premises at least 180 days prior to expiration of the Lease term or extension thereof and shall, at the time, propose the terms and conditions upon which the Premises are to be re-leased.
"Lessee shall have 30 days after such notice in which to accept or reject the offer to re-lease the Premises upon the terms and conditions proposed by County. If the offer is not accepted within said 30-day period, County may lease the property to others upon the same terms and conditions as those offered to Lessee.
"County agrees that until the expiration of this Lease, it will not offer different terms and conditions to other private parties without first offering Lessee the opportunity to lease the Premises upon such other terms and conditions."
The term of the Helspers' leases expired in September 2005.
Because the county believed it was losing substantial amounts of money on the park, in 2004 it retained a real estate marketing firm to advise it with respect to the best means of exploiting the value of the park and the Victorian homes which had been placed there. The marketing firm advised the county that it should offer a master lease of the park to a developer and work with the developer on an overall plan to develop the park as a profitable enterprise. Accordingly, the county published a request for interest (RFI) in a proposal along the lines suggested by the marketing firm. Following receipt of responses to the RFI, in September 2004 the county published a more detailed request for proposals (RFP) for a master lease.
The county received one response to the RFP, from the Pacific Hospitality Group, Inc. (Pacific Hospitality), and began negotiating with Pacific Hospitality over the terms of a master lease. The Helspers did not respond to either the RFI or the RFP. Rather, in August 2005, shortly before their leases were set to expire, the Helspers filed a complaint against the county in which they alleged that in soliciting and negotiating the terms of a master lease the county was expressing its intent to release the leased premises for the same purposes set out in the Helspers' leases and that the county had therefore triggered the Helspers' right of first refusal. The Helspers alleged the county, having triggered the right of first refusal, was obligated to offer them the same terms being offered to Pacific Hospitality. According to the Helspers, the county, having failed to offer them such terms, breached the terms of the lease. In addition to filing their complaint, the Helspers recorded a lis pendens against the property.
The county answered the complaint and the case was eventually tried to the court at a one-day trial. At trial Charles Helsper testified that the right of first refusal was a very important term of the leases because he believed it protected his right to continue in business after the term of the lease expired. In their trial brief, the Helspers asserted the county should be required to "provide Plaintiffs with the pertinent terms of its offer to release Plaintiffs' premises, on a pro-rata basis attributable to the Christian House and Bushyhead House, and allow Plaintiffs their contractual opportunity to match them."
The county presented evidence that it was losing $200,000 year at Heritage Park and that in the five previous years it had spent $800,000 in major repairs. The county also presented evidence from one of the principals of Pacific Hospitality, Frederick Grand. Grand testified that Pacific Hospitality wanted a master lease on the entire property and planned to add four new houses and, importantly, planned to take responsibility for a maintenance and repair of the existing houses. Grand testified that his group anticipated operating the Christian House and the Bushyhead House themselves and that inclusion of the two homes was an essential part of their proposal to the county
The trial court found in favor of the county. The court stated: "[Y]ou can't cherry-pick the two houses, I don't believe. See, that's the thing that I don't think I can do. The commercially reasonable approach that I think the county is trying to take looks at the whole package. Your clients, of course, had the right to bid on the whole package. For the reasons that they testified to, they didn't want to do that. They are not in that business. But the way the county gets out from under this economic burden that they are trying to escape is to deal with the whole thing as a whole package. I don't know how to change that deal." The trial court entered judgment in favor the county and the Helspers filed a timely notice of appeal.
DISCUSSION
I
Because no conflicting extrinsic evidence was offered in the trial court, we review the Helspers' contention with respect to interpretation of the leases de novo. (See Ellis v. Chevron, U.S.A., Inc. (Ellis v. Chevron) (1988) 201 Cal.App.3d 132, 138.)
II
The Helspers' briefs suggest that when the county decided to solicit offers for a master lease for the entire park, the county decided to re-lease the two houses "for the purposes set out" in their respective leases, thereby triggering the right of first refusal in paragraph 37 of the leases. This suggestion is erroneous.
It is true that any new master lessee would likely continue using the Christian House and Bushyhead House as bed and breakfast inns, and in fact Pacific Hospitality apparently planned to do so. However, the county's purpose in offering a master lease was not to continue operation of Christian House and Bushyhead House as individual businesses. Rather, the county's express purpose was to financially integrate the houses and the remainder of the park and thereby make the entire park financially viable. In stripping the houses of their financial independence by way of the master lease, the county was pursuing a purpose which was materially distinct from the purpose of the individual leases under which the Helspers' operated their bed and breakfast inns. Indeed, at trial, the Helspers themselves appeared to recognize the significant difference between the leases under which they operated the two bed and breakfast inns and the county's plans. On direct examination, Charles Helsper explained the reason he and his wife did not respond to the RFI: "This envisioned a request for information of interested people who would undertake management of the entire park, the other buildings, the landscaping, the utilities. It's a property management task. We are not in the property management business. We are innkeepers. We have been innkeepers by choice, and we intended to continue exactly that. We didn't want to be disturbed by having to attend to the maintenance of these other buildings. I didn't want to have to manage somebody else's property."
In short, in light of the fundamental differences between the Helspers' leases and the county's plans, neither the RFI nor the RFP triggered any obligation under paragraph 37 of the leases.
III
Notwithstanding the fact the right of first refusal was never triggered, we also reject the Helspers' argument that we should nonetheless interpret the lease so that it provides them with the right to have Pacific Hospitality's offer ratably allocated to the Christian House and the Bushyhead House. The express terms of the leases do not require that the county permit the Helspers to accept any variation from the offer the county would be willing to accept from a third party. Moreover, no such term can be implied from any other provision of the leases or the context in which the leases were negotiated.
In Ellis v. Chevron this court confronted a somewhat similar argument. Ellis, the lessor of a gas station, had received an offer to convert the gas station into a parts store. The conversion required acquisition of an adjoining parcel. Chevron, the lessee of the gas station, argued that the right of first refusal in its lease was designed to protect its ability to continue its gas station business and therefore prevented the lessor from changing the use to which the property could be devoted. Thus Chevron argued that it was not required to make a proposal which included acquisition of the adjoining parcel. We rejected the lessee's contention. "Chevron's right to continue in business is predicated on its ability to provide Ellis with whatever commercial opportunity he is able to obtain in the marketplace. Cast in the negative, paragraph 7 cannot be interpreted as requiring Ellis to sacrifice his profits in order to protect Chevron's." (Ellis v. Chevron, supra, 201 Cal.App.3d at pp. 138-139.) Thus the holding in Ellis v. Chevron stands for the proposition that the tenant's right to renew pursuant to a right of first refusal is predicated on the tenant's ability to provide the landlord with a commercial opportunity equal to what it could obtain in the market place. (7 Miller & Starr, Cal. Real Estate (3d ed. 2001) § 19:38.)
Plainly, an offer to renew a lease for the Christian House and the Bushyhead House alone is not equal to the commercial opportunity presented by someone willing to lease the entire park and relieve the county of its maintenance and management costs.
The only qualification on the landlord's right to accept a third party's offer is the requirement the third party's offer be commercially reasonable. A court will not enforce "a contract condition by which a lessor could select an alternate use for his property which is inconsistent with the lessees' existing use yet holds no economic advantage for the lessor. Arguably the exercise of such a provision which serves only to oust a lessee could constitute a breach of the covenant of good faith and fair dealing." (Ellis v. Chevron, supra, 201 Cal.App.3d at p 142.) Here, of course, in light of the losses the county was experiencing, the county's effort to find a master lessor who would relieve it of that burden was plainly commercially reasonable.
Judgment affirmed. The county to recover its costs.
WE CONCUR: McDONALD, J., McINTYRE, J.