Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Merced County Super. Ct. No. 145429. Frank Dougherty, Judge.
Bruce B. Sousa for Defendant and Appellant.
McCormick, Barstow, Sheppard, Wayte & Carruth, Stephen E. Carroll and David L. Emerzian for Plaintiff and Respondent.
OPINION
VARTABEDIAN, Acting P. J.
This is an appeal from a judgment granting specific performance of a real estate purchase contract. Causes of action for damages were dismissed by plaintiff prior to trial. Causes of action to establish an easement were resolved in favor of defendant and against plaintiff, as will be described in more detail, and no cross-appeal has been taken by plaintiff. We will conclude there is no substantial evidence to support the trial court’s exercise of its equitable discretion to order specific performance of the real estate contract and, accordingly, the court erred in doing so. We reverse the judgment.
Facts and Procedural History
Plaintiff and respondent Greg Hostetler is a land investor; among other activities, he develops residential real estate projects in western Merced County. Defendant and appellant Labar Enterprises, Inc., is a land investor and is engaged in various aspects of agricultural enterprise in and around Gustine in western Merced County.
In late 2000, appellant faced demand for payment of a $2.2 million loan from its bank. It listed several of its properties for sale, including the 78-acre parcel involved in this case. (We, like the parties, will refer to this parcel as the Silva property.) After an exchange of counteroffers with respondent, appellant agreed to sell the Silva property to respondent for $468,000, $10,000 of which was an earnest money deposit paid into escrow, to be released to appellant as a nonrefundable deposit “on the 22nd day after acceptance” of the counteroffer.
The Silva property did not front onto a public road and the western border of the property was a railroad track that ran northwest to southeast. West of the track, running north to south, was Hunt Road. Hunt Road crossed the railroad track at a diagonal a few hundred feet northwest of the Silva property; at that point, another parcel owned by appellant, known as the Amarante property, had frontage on Hunt Road.
There were three private roads that provided physical access to the Silva property. First, a dirt road in the east-side railroad right-of-way ran along the western edge of the Amarante property from the Amarante property’s frontage on Hunt Road to the northwest corner of the Silva property. Second, a gravel road ran due east from Hunt Road for about 400 feet to a private railroad crossing onto the Silva property at about the midpoint of the western boundary of the property. Finally, a paved road ran east for about 900 feet from Hunt Road to another private rail crossing, then northwest for about 125 feet along the railroad right-of-way to the southwest corner of the Silva property. Of these three means of access, only the latter was established by a written easement in favor of the Silva property; this deeded easement had not been used for years and the portion of the easement east of the railroad track had been planted in fruit trees and was impassable. For many years, the Silva property had been accessed by use of the gravel road and the railroad crossing that connected the Silva property to the gravel road.
The purchase contract provided that respondent, as buyer, had 21 days after acceptance of the counteroffer in which to conduct all inspections, investigations, and review of documents and other applicable information. Buyer was required to notify seller in writing within that period if he “disapproved” of “any items which are unacceptable” to buyer. Appellant, as seller, was required to respond within five days. If seller failed to respond or to cure “any items reasonably disapproved” by buyer, buyer had the right to cancel the agreement in writing.
Within the 21 days for respondent’s inspections and investigations, Fidelity National Title Insurance Company issued its preliminary title report. The preliminary report excluded from coverage the following: “Any lack of a legal right of access across the right of way of the Southern Pacific Railroad Company.” At no time within the designated period for inspections and investigations did respondent notify appellant in writing that he considered the existing access to the property unacceptable, nor did he, then or later, make any written demand for remediation of any perceived problem.
In its tentative decision the trial court made the following findings, describing what happened next:
“In the first part of November 2000, Knestrick of Fidelity contacted George Labar [who, with his son Robert, were the owners of appellant corporation] regarding a meeting to discuss the issue of lack of legal access to the property. Later, in November, George Labar and Knestrick met at the property, toured it and discussed various possible methods of access. George Labar told Knestrick they could work out access to the property via Kniebes Road [which dead-ended at the northeast corner of the Amarate property]. Knestrick admitted to George Labar that he did not know if there was legal access to the [Silva] property. At the conclusion of the meeting, Knestrick told George Labar he would contact the railroad and get back to him. Knestrick did not contact George Labar thereafter. [Although Public Utility Code section 7537 provides for issuance of railroad crossing permits to owners of farmland,] Labar was unwilling to apply for such a license. The issue of legal access was a surprise to the Labars as Fidelity had issued a title policy in 1995, when they bought the property and [it] did not indicate there was a problem with access.
“A day or so after this meeting, George Labar told Robert Labar about his meeting with Knestrick. They decided to wait 7-10 days to see what happened next. Robert Labar told [appellant’s real estate broker] Simvoulakis [that respondent] had better release the $10,000 or he didn’t think the deal was going to go through.
“From November 18 to December 2, Robert Labar called Simvoulakis about every other day and instructed him to call and ask for the $10,000 deposit to be released.…
“The Labars indicated to Simvoulakis they needed to look into the problem of access. Knestrick sent Simvoulakis an application for a railroad crossing permit. Simvoulakis did not complete the form.… Simvoulakis talked with [respondent’s real estate broker] Sloan many times on the phone. They would talk about the access problem, the release of the $10,000, and that the Labars did not think there was a problem with access. Sloan indicated to him there was a problem. Simvoulakis never gave Sloan an ultimatum to release the $10,000 or the deal would be dead. Robert Labar never gave Simvoulakis a date to cut the deal off.
“On December 4, 2000, Robert and George Labar met and decided to cancel the escrow. On December 7, 2000, Robert Labar instructed Simvoulakis to call Sloan … to have Sloan confirm that [respondent’s] sole reason for not releasing the $10,000 was because he was not satisfied with the existing access.” Sloan orally confirmed this state of affairs. Simvoulakis and Sloan exchanged letters confirming this conversation, and Sloan’s letter [again quoting from the trial court’s findings] “said she had spoken to [respondent] the previous day and he instructed her to tell Simvoulakis that he fully intends to purchase the property and release the $10,000 now and give the Labars as much time as they needed to establish legal access.… [When Robert Labar saw this letter, he] viewed it as further confirming the need to cancel the deal.”
On December 13, 2000, appellant sent a letter to Fidelity canceling the escrow. As the trial court found, at this time “Sloan understood there was still work being done on the access problem when she received the notice terminating escrow. Sloan was never advised by Simvoulakis that escrow would be terminated if the $10,000 was not released. Sloan never had a conversation with Simvoulakis that suggested the cancellation of the contract was imminent. Sloan never received an ultimatum or formal deadline for release of the $10,000.” On December 18, 2000, respondent instructed Fidelity to release the $10,000 to appellant and to reinstate the escrow. Appellant refused to reinstate the escrow or accept the deposit.
Respondent sued appellant. The operative (first amended) complaint alleged a cause of action for specific performance of the purchase and sale agreement, a cause of action for monetary damages based on an alleged breach by appellant of the implied covenant of good faith and fair dealing, and two causes of action seeking to establish either an implied easement or an easement of necessity across appellant’s property, the Amarate property, to reach a public road without crossing railroad tracks. The complaint was premised entirely on appellant’s “repudiation of its obligations under the contract and its failure to provide for access to the Property.” This repudiation took the form of a refusal “to provide written confirmation that, in fact, the Property being sold for $468,000 was even accessible” and a refusal to execute a conveyance of the property “as provided for under the terms of the contract.”
After the normal course of pleadings and discovery, the matter was set for jury trial. When the matter was called for trial, respondent voluntarily dismissed all claims for monetary damages and the matter proceeded to trial to the court sitting without a jury. After receiving testimonial and documentary evidence, and after the parties submitted extensive posttrial briefing, the court issued its tentative decision on July 20, 2005.
The court concluded there was legal access to the Silva property across the deeded easement to the south of the Silva property and that, even though this easement crossed the railroad tracks, “[t]he court is satisfied the railroad will grant a license to [respondent] to cross the railroad tracks.” Further, “[t]he court finds it would have been appropriate for [appellant] to terminate escrow, without notice, on the 23rd day [i.e., the day after the $10,000 should have been released to appellant]. Escrow was not terminated and the parties and their agents continued to talk with each other and Knestrick for over two weeks. Neither party communicated to the other that escrow would be terminated on a given date if the other party did not perform an obligation they had under the contract.
“It is clear from Galdjie v. Darwish (2003) 113 [Cal.App.4th] 1331 where a seller continues to deal with the buyer and encourages the continuation of the sale, the seller may be deemed to waive any timeliness provision in an agreement. It is also clear that, in this case, the seller after failing to immediately enforce the deadline and thereafter working with the buyer on the access issue had a duty under the implied covenant of good faith and fair dealing to give notice and a demand for compliance before unilaterally canceling the escrow. (Ninety Nine Investments v. Overseas Courier Service (2003) 113 [Cal.App.4th] 1118.)” (Boldface in original.)
After formalizing these findings in a statement of decision, the court entered judgment ordering appellant to perform the purchase and sale agreement by depositing into escrow within 10 days “an executed and notarized deed in the form attached” to the judgment. The court ordered the parties to take other steps to complete the transaction, the details of which are not relevant to this appeal.
Appellant filed a notice of appeal. The trial court denied appellant’s motion to stay the judgment pending appeal. Appellant did not renew that motion in this court.
Discussion
Much of appellant’s opening brief is devoted to knocking down a straw man: Appellant argues at length that there was a failure of consideration or mutual mistake that permitted it to rescind the purchase and sale contract (the contract). But the court expressly found that appellant was entitled to rescind the contract when respondent failed to release the $10,000 nonrefundable deposit. Accordingly, it is not necessary to dwell on that conclusion by the trial court and we will proceed directly to the determinative issue.
The trial court concluded it would have been appropriate for appellant to “terminate escrow, without notice” the day after release of the deposit was required. Appellant’s letter to the escrow company directed it to cancel the escrow and return to it all documents and money it placed into escrow. Thereafter, appellant refused to accept the deposit when respondent directed the escrow company to release the deposit to appellant. At oral argument, respondent contended this did not constitute “rescission” of the contract but, instead, cancellation or termination of the contract. Counsel suggested that to rescind, appellant would have been required to file a cross-complaint for that relief.
The true issue on appeal is whether appellant lost the right to rescind due to its actions and inaction in the days following respondent’s breach of the contract. We conclude appellant did not lose the right to rescind, through waiver or otherwise, and that the trial court erred in ordering specific performance of the contract.
The law of waiver of the right of rescission is well established, both in the Civil Code and in the cases. (See generally 12 Miller & Starr, Cal. Real Estate (3d ed. 2001) §§ 34:6-34:7, pp. 34-44.) “The party who seeks rescission must give notice to the other party of the rescinding party’s election to rescind, which should be given promptly upon discovery of facts giving the right to rescind.” (Id. at § 34:6, p. 34.) “A party may waive the right to rescind … by any … conduct that indicates an intention to affirm and be bound by the contract after knowledge of the facts that would entitle a rescission.” (Id. at § 34:7, p. 38.)
“A party does not waive the right to rescind unless there is unreasonable delay in giving notice of rescission or he or she affirms the contract by words or conduct after acquiring knowledge of the facts that support the right to rescind.” (12 Miller & Starr, Cal. Real Estate, supra, § 34:7, p. 38.) “[T]he rescinding party is entitled to a reasonable time to investigate the facts that give rise to the right to rescind, and a reasonable delay in giving notice … does not prevent rescission.” (Id. at p. 39.)
“In determining whether the delay is unreasonable, the decisions consider the extent of prejudice caused by the delay. If the delay has caused ‘substantial’ prejudice to the other party a court is likely to find the delay to be unreasonable.” (12 Miller & Starr, Cal. Real Estate, supra, § 34:7, p. 39.) “Whether a party has acted promptly in giving the notice of rescission, or whether there has been a waiver of the right to rescind, is a question of fact and depends on the circumstances of each case, the reasonableness of the rescinding party’s conduct, and the prejudice caused to the other party.” (Id. at p. 44.) However, “[w]hen relief based upon rescission is claimed in an action or proceeding, such relief shall not be denied because of delay in giving notice of rescission unless such delay has been substantially prejudicial to the other party.” (Civ. Code, § 1693.)
The trial court approached the matter differently, however, and in a way not supported by precedent. As set forth in the excerpts from its tentative decision (and incorporated in the court’s formal statement of decision) the trial court reasoned that “where a seller continues to deal with the buyer and encourages the continuation of the sale, the seller may be deemed to waive any timeliness provision in an agreement.” Further, where the seller fails immediately to “enforce the deadline and thereafter work[s] with the buyer on the access issue” the seller “had a duty under the implied covenant of good faith and fair dealing to give notice and a demand for compliance before unilaterally canceling the escrow.”
We fail to see any substantial evidence that supports a finding that appellant “encouraged the continuation of the sale” or “worked with the buyer on the access issue,” in any meaningful use of those terms. The testimony was clear and uniform that appellant, through its owners, the Labars, consistently maintained there was existing legal access to the property and that appellant was not, under any circumstances, going to give respondent an additional easement over the Amarante property. It is true that, even while the Labars conveyed those positions both to the title company and to their own broker, the Labars decided to wait seven to ten days to see if respondent (or the title company) could satisfy himself that the existing access was sufficient. There was, however, no evidence at all that the Labars told respondent or anyone else that they would wait a particular amount of time, or wait at all, for the resolution of the issue.
In Galdjie v. Darwish (2003) 113 Cal.App.4th 1331, relied upon by respondent and the trial court, the buyer was required by the sale contract to provide a preliminary loan commitment letter by February 17 in anticipation of completing the escrow by April 9. (Id. at p. 1334.) Buyer neither provided a timely loan commitment letter nor did he have the necessary financing on April 9. Between April 9 and seller’s unilateral cancellation of the escrow on May 13, buyer and seller were in “‘constant communication’” and buyer told seller of his efforts to obtain a loan. Seller “‘communicated her approval of his efforts’; ‘agreed orally to extend escrow beyond April 9, 1998’; ‘told [buyer] to call the escrow company and have the escrow extended”; [and] as of May 8 … was still cooperating and encouraging [buyer] to go forward with the transaction.’” (Id. at pp. 1336-1337.) “A few days” before seller unilaterally canceled the escrow, buyer told seller that he had received the loan commitment letter. “She said that was fine.” (Id. at p. 1335.) By the time seller notified buyer of her desire to cancel the escrow, buyer “had tendered the loan approval letter” and his failure to actually tender the loan funds was due to seller’s failure to provide a necessary document. (Id. at p. 1342.)
The Galdjie opinion uses the word “appellant” here. The appellant was, in fact, the seller, but it is clear from the context the court was referring to the buyer.
On those facts, the appellate court affirmed a trial court judgment awarding specific performance to the buyer. (Galdjie v. Darwish, supra, 113 Cal.App.4th at pp. 1333-1334.) As is apparent from the foregoing summary, the Galdjie buyer had cured his untimely performance before the seller elected to cancel the escrow and had been told by the seller his performance was “fine.” In the present case, to the contrary, respondent buyer never cured his untimely performance and did not even attempt to cure it before appellant seller canceled the escrow. There is nothing in the present record that permits a conclusion that the seller here “continue[d] to deal with the buyer and encourage[d] the continuation of the sale,” as found by the trial court, in any manner similar to the seller in Galdjie.
By letter of December 8, 2000, respondent’s broker advised appellant’s broker that respondent “would be very happy to release the $10,000 now and give your client as much time as he needs to establish the legal ingress and egress.” Reasonably implied in that letter is a condition that appellant provide the promise of something more (more access, more information) before the deposit would be released. Appellant delivered its notice of cancellation of the escrow on December 13, 2000. By letter of December 18, 2000, respondent purported to unconditionally release the deposit, but that same letter reiterated that he considered appellant in breach of the purchase contract because appellant had “refus[ed] to confirm … the manner of access to the subject property .…”
The trial court cited Ninety Nine Investments, Ltd. v. Overseas Courier Service (Singapore) Private, Ltd. (2003) 113 Cal.App.4th 1118 (Ninety Nine Investments) for the proposition that a seller who fails to “immediately enforce” a deadline and “thereafter work[s] with the buyer on the access issue” has a duty under the implied covenant of good faith and fair dealing “to give notice and a demand for compliance before unilaterally canceling the escrow.” In Ninety Nine Investments, the seller failed to deposit certain documents and inspection reports into escrow. As a result, the buyer’s loan could not fund by the closing date set forth in the purchase contract. On the day following the scheduled closing date, the seller unilaterally canceled the escrow. (Id. at p. 1125.) The buyer sued for specific performance. The trial court granted judgment for the seller on the basis that buyer had not tendered full performance before seller canceled the escrow. (Id. at p. 1126.)
The Court of Appeal reversed and remanded with directions to enter a judgment granting the buyer specific performance of the contract. (Ninety Nine Investments, supra, 113 Cal.App.4th at p. 1136.) The court held that the implied covenant of good faith and fair dealing required that each party to a contract cooperate in successful performance by the other party and not do anything that prevents performance. (Id. at p. 1131.) “Based on the parties’ implied covenant of good faith and fair dealing that neither party would frustrate the other party’s right to receive the benefits of the contract, [seller] was not entitled to unilaterally cancel the escrows when it did.” (Id. at p. 1132.) Ninety Nine Investments does not hold or imply that the seller could have unilaterally canceled the escrow if it had made a demand for performance upon the buyer; the problem in that case was that the seller had affirmatively prevented buyer’s performance by failing to perform its own obligations under the contract. By contrast, there was no evidence in the present case that appellant interfered in any way with respondent’s ability to release the nonrefundable deposit; instead, the uncontradicted evidence was that respondent simply chose not to release the deposit in a timely manner.
Thus neither of the two cases relied upon by the trial court, and asserted by respondent on appeal, supports the contention that a party who simply defers assertion of a right for a reasonable time in order to permit the other party to perform is thereafter required to make a demand for performance before declaring a breach. Civil Code section 1693 implies otherwise: it states that mere delay in asserting a right to rescission cannot bar a later assertion of that right “unless such delay has been substantially prejudicial to the other party.”
In Moresco v. Foppiano (1936) 7 Cal.2d 242 the court held that “delay in rescinding which is the result of indulgence granted to his defaulting adversary by the party entitled to rescind and which indulgence has the effect of momentarily lulling the latter into inactivity, will not be available as a defense to an action for rescission.” (Id. at p. 247.) In that case, the court held that it was not even “necessary to give notice of rescission” (ibid.), much less to make a demand for performance or to give an opportunity to cure the default. If the law were otherwise and any indulgence for a party’s breach must be deemed to continue until a demand for performance, it would create “a sort of license for continued wrongdoing.” (Crofoot Lumber, Inc. v. Thompson (1958) 163 Cal.App.2d 324, 333.) In Crofoot, a delay of almost five years in the assertion of the right to rescind (ibid.) was not considered excessive where the defaulting party had not “changed his position in reliance upon indulgence” and still had not tendered performance at the time of the rescission. (Id. at p. 334.)
Although it is somewhat easy to forget -- and respondent forgets repeatedly in his brief on appeal -- the trial court found that there was at all times legal access to the property. The only issue, from the perspective of the title company, was whether there existed a formal permit from the railroad for crossing at either the gravel access road or the deeded, paved access road.
The following are sample quotations from respondent’s brief: “The Trial Court found that Labar’s continued assertion, that there was legal access to Silva Ranch when in fact there was not, supported the application of Civil Code Section 1511.” (Italics added.) (The court actually found that appellant’s continued assertion of legal access justified application of the code section; respondent added the italicized portion, even though the court expressly found in its tentative decision that “there is legal access to the property.”) “Nor does Labar explain why it failed to acknowledge a lack of access .…” “Labar did not satisfy its contractual duty to notify [respondent] of this lack of access.” “Unlike the instant case on Appeal, there was no evidence of defects in title to, or lack of access, to the property at issue .…” “Labar knew or should have known that no legal access to the Silva Ranch existed.” To a certain extent, we confess, we are confused by respondent’s position in this case. He did not want the property without different or confirmed access, he lost on both causes of action seeking an easement for such access, and the trial court found that there is legal access. Yet on appeal respondent repeatedly asserts there is no legal access to the property; he contends the judgment does not require supervision of complex act by the trial court because “there need be only simple enforcement of the Contract, and a grant of easement to permit access as contemplated under the terms of the sale.” The judgment, which we reverse in any event, clearly awards respondent the Silva property with whatever access easements may exist already; it does not purport to “grant [an] easement to permit access.”
While there was considerable evidence that there was a valid permit, even though changes in ownership of the railroad made it impossible to locate any such permit, the important point is this: An owner of property is entitled by statute to a railway crossing where “reasonably necessary or convenient for ingress to or egress from such lands .…” While such access cannot be conveyed by deed or obtained by prescription (see People v. Lundy (1965) 238 Cal.App.2d 354, 357 [right to cross not compensable in eminent domain proceeding]), and “the place, manner, and conditions under which the crossing shall be constructed and maintained” are to be regulated by the Public Utilities Commission (Pub. Util. Code, § 7537), a property with such statutory right of crossing cannot properly be deemed landlocked, or without legal access, merely because a portion of the access crosses a railroad track.
There was testimony from a railroad official that, because the crossings were posted with crossing signs and registration numbers, the crossings were probably pursuant to permits. That official said that when a crossing permit was revoked, the railroad usually physically removed the crossing, including the number and the signs.
If the title company would not provide a preliminary title report satisfactory to respondent, the contract permitted him to cancel in a timely manner. The contract did not, however, entitle him to demand an additional easement for access where no such easement previously existed, yet that was respondent’s demand. While a party may engage in negotiations to modify a contract if it so chooses (although it is difficult to say in the present context that appellant ever engaged in “negotiations”), the party can terminate such negotiations for any reason or no reason and no obligation to conduct such negotiations in good faith is implied in such circumstances. (See Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1034-1035.) In other words, appellant had no obligation, based on the implied covenant of good faith and fair dealing or otherwise, to grant respondent a new easement across Amarante when the contract only called for sale of Silva and its existing easements.
Appellant also contends, among other arguments, that specific performance is not a permissible remedy, that respondent failed to join necessary parties in the underlying action, and the award of costs to respondent is erroneous. Our reversal of the judgment for specific performance and the remand for entry of judgment for appellant moots these issues. In a related appeal, F051445, Labar Enterprises, Inc. appeals from the award of attorney fees and denial of its motion to tax costs. That appeal has been coordinated with the present case, but the court denied a motion to consolidate the two cases. The result in the present case requires summary reversal in that case, which will be issued separately.
Disposition
The judgment is reversed. This matter is remanded with directions to enter judgment in favor of defendant Labar Enterprises, Inc., and against plaintiff Greg Hostetler. The trial court shall enter a new order on costs consistent with the judgment. Appellant is awarded costs of appeal and attorney fees on appeal in an amount to be determined by the trial court.
WE CONCUR:
WISEMAN, J., LEVY, J.
As this court recently explained, rescission is accomplished by the action of a party to the contract; the cause of action to obtain rescission was abolished in 1961. (See NMSBPCSLDHB v. County of Fresno (2007) 152 Cal.App.4th 954, 961-963.) Rescission occurs when, as in the present case, the rescinding party restores or offers to restore all consideration to the other party. Termination and cancellation, on the other hand, reaffirm the existence of the contract but claim no further acts are due from the cancelling party because of, for example, a breach by the other party. Termination and cancellation are thus considered forward-looking, while rescission seeks restoration to a previous state of affairs. (Id. at p. 959.) Even though appellant’s letter to the escrow company instructed it to “cancel the excrow,” it is clear that the letter constituted a rescission. The parties’ use of the term “cancellation” or “rescission” is not controlling. (Pico Citizens Bank v. Tafco Inc. (1962) 201 Cal.App.2d 131, 136.)