Summary
finding force majeure provision that expressly excluded monetary obligations did not excuse payment obligation to city
Summary of this case from In re CEC Entm't, Inc.Opinion
No. 52241-8-I.
Filed: March 8, 2004. UNPUBLISHED OPINION
Appeal from Superior Court of King County. Docket No: 02-2-03943-0. Judgment or order under review. Date filed: 03/25/2003. Judge signing: Hon. Douglas D McBroom.
Counsel for Appellant(s), Lucy R Clifthorne, Attorney at Law, 1201 Pacific Ave Ste 1900, Tacoma, WA 98402-4315.
James A. Krueger, Attorney at Law, 1201 Pacific Ave Ste 1900, Tacoma, WA 98402-4315.
Counsel for Respondent(s), Rebecca Cochran Earnest, Seattle City Attorneys Office, 600 4th Ave Fl 4, PO Box 94769, Seattle, WA 98124-4769.
William Howard Patton, Seattle City Attorneys Office, PO Box 94769, Seattle, WA 98124-4769.
Washington courts use the context rule when interpreting contracts. Under this rule, the courts look at extrinsic evidence to determine the intent of the parties. Summary judgment is appropriate only when extrinsic evidence is not used or when the extrinsic evidence leads to only one reasonable interpretation. Here, in a lease dispute between the Inn at the Center, LLC and the City of Seattle, partial summary judgment quieting title in favor of the City was appropriate because it is clear that the parties' objective intent was for the lease to terminate automatically if the option fee was not paid. Additionally, it is clear that the force majeure provisions of the lease do not apply to this situation because the lease expressly precluded monetary obligations from the protection of the provision. We hold that the trial court did not err in quieting title in favor of the City.
Facts
In November 1999, the Inn at the Center, LLC signed a long-term ground lease with the City of Seattle. The Inn planned to open a small hotel on the property located near the Seattle Center. Under the lease, construction was required to begin 60 days after the Inn received all necessary permits or by December 31, 2000, at which time the lease would automatically terminate if construction had not commenced. The permit application process took substantially longer than the parties anticipated, and by the December 31, 2000, deadline the Inn had not obtained the necessary permits. On January 25, 2001, Coy Wood and his associates met with the City to negotiate an amended lease. After the meeting, Wood sent a letter to Virginia Anderson of the Seattle Center, proposing an agreement where the Inn was 'willing to discuss the concept of additional compensation/security for the Seattle Center due to the delay in starting the project. However, this issue should also be connected to the City of Seattle's timely issuance of all building permits.' Wood then suggested a payment schedule. In response, the City stated that it could not accept the Inn's proposal because it would appear that the Inn was 'buying' the permits. The City then suggested an alternative arrangement, where the Inn would make $15,000 per month 'option' payments beginning once the Master Use Permit (MUP) was issued and continuing until construction began. If construction did not commence by December 31, 2001, however, the lease would automatically terminate. Additionally, the lease would terminate automatically, without further notice, if an option payment was not timely made. The City explained that the Inn had a free option on the property since the letter of intent was signed in February 1998 and that the City could no longer tie up the land without an option payment agreement. Wood, for the Inn, responded: 'The terms extending the commencement of construction to December 31, 2001 and the option payments of $15,000 per month upon issuance of the Master Use Permit are acceptable.' Additionally, Wood requested that a five-day cure period be added to the agreement. The City confirmed the agreement, including the cure period, by letter dated February 21, 2001.
The Inn was formed by Coy Wood for the purpose of this hotel project.
These three letters (dated February 12, 14, and 21) will be referred to collectively as the 'February 2001 letters.'
The City and the Inn planned to execute a formal amendment to the lease incorporating the terms of the February 2001 letters. The City sent a draft formal amendment to the Inn in March 2001 and a final document in July 2001. The Inn never signed the formal amendment.
The MUP was issued on May 31, 2001. Pursuant to the February 2001 letters, the City sent the Inn a notice that its first $15,000 option payment would be due on June 10, 2001, and that payments for subsequent months would be due on the first of each month. On June 11, 2001, the City sent a notice to the Inn stating that if payment was not received by June 15, 2001, the lease would automatically terminate. The Inn paid $15,000 on June 15, 2001.
The July and August payments were not made on the first day of the month, and the City sent notices stating that the lease would automatically terminate if payment was not received by the sixth day of the month. Payments were made on July 6, 2001, and August 6, 2001. On September 1, 2001, the City received payment without sending a reminder notice.
On October 1, 2001, the City sent the Inn a notice stating that the lease would automatically terminate if payment was not received by October 6, 2001. On October 5, 2001, Wood wrote the City:
As you know, the attacks of September 11th on the World Trade Center and Pentagon have had a material adverse effect on the business community in general and on the travel and hospitality businesses in particular. A number of insurance companies are rethinking their willingness and ability to lend given losses which they have suffered, and other lenders are also reevaluating their positions. Because of this and the obvious hotel industry occupancy problems, hotel financing has become extremely difficult and uncertain and will remain so until the impact of these unforeseen events is better understood. Without construction financing, hotel construction necessarily is affected as well.
Based upon these circumstances and the terms of our ground lease, we believe that our $15,000 per month penalty should be abated and the deadlines contained in our ground lease should be delayed. We want to assure you that we remain committed to this project despite these unforeseen circumstances, but would appreciate it if you would give us a call at your earliest convenience so that we can arrange a meeting to discuss how to resolve the issues created by these events in a mutually acceptable manner.
In its response, the City declined the Inn's request for abatement: The terms of my February 12, 2001, letter, to which you agreed, included the provision that, 'if an option payment for a month is late or unpaid, then this agreement and the Ground Lease will automatically terminate, without further notice and Seattle Center will, in addition, retain the $187,000 good faith deposit.' You have failed to meet your obligation and thus the lease has terminated.
On October 19, 2001, Wood, as the managing member of INNSC, LLC, sent a letter to the City stating, 'Based upon the attacks of September 11th and their aftermath, we are invoking the provisions of Section 47 of the lease and do not need, nor have we sought, the City's consent to do so.' Section 47 of the lease refers to the force majeure clause. Wood also argued that the lease requires disputes to be settled by mediation.
INNSC, Inc. is an entity formed by Wood to take over the ground lease with the City. The ground lease, however, was not actually assigned.
The Seattle City Attorney's office responded to the Inn's letter, agreeing to mediation, but asserting that the original lease was no longer in effect and, as such, the force majeure clause did not apply. No issues were resolved at mediation.
The Inn sued the City, seeking specific performance of the lease or, in the alternative, damages. The Inn alleged that the lease, as amended by the February 2001 letters, required monthly extension payments of $15,000. The City counterclaimed to quiet title and subsequently filed a motion for partial summary judgment to quiet title, with the issue of damages remaining for trial. The trial court found that the original lease terminated on December 31, 2000, that the February 2001 letters constituted an amendment reinstating the original lease, and that the lease finally terminated on December 31, 2001. The trial court found that the City had superior title to the property and quieted title in its favor. The trial court did not address the issue of damages.
The City twice amended its answer and counterclaim to quiet title and added Jensen Fey Architects and D'Amato Conversano, Inc., which had filed liens against the interest of Wood or the Inn in the property. Neither Jensen Fey Architects or D'Amato Conversano, Inc. participated in this appeal.
The Inn moved to clarify and amend the order of partial summary judgment. The trial court issued an amended order, changing the date of the final termination of the amended lease from December 31, 2001, to October 6, 2001.
The Inn filed a motion for reconsideration, which was denied on February 3, 2003. In its order denying reconsideration, the trial court made additional, handwritten findings:
1. The 'first order' mistakenly stated that the ground lease finally terminated as of December 31, 2001. The holding was and is that the lease terminated on October 6, 2001. The second order merely corrected that mistake.
2. There is no substantial controversy that:
(a) The plain language of the letters between the parties from Jan. 2001 through August 2001, and performance on those letters constituted a complete agreement that the Inn would make $15,000 monthly Option payments to the City after the master use permit was issued to keep the lease active;
(b) that the events of September 11, 2001, did not constitute a force majeure event to relieve the Inn from this agreement, and
(c) the City was not obligated to deduct the unpaid option payments from the security deposit to keep the lease active.
Final judgment was entered by stipulation and the Inn filed a timely notice of appeal.
Discussion
Summary judgment is appropriate when there are no issues of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c). This court reviews issues of summary judgment de novo, taking all inferences in the light most favorable to the nonmoving party. Graff v. Allstate Ins. Co., 113 Wn. App. 799, 802, 54 P.3d 1266 (2002), review denied, 149 Wn.2d 1013 (2003). If the moving party makes the initial showing that no factual issues remain, the burden shifts to the nonmoving party to show the presence of disputed material facts. Seven Gables Corp. v. MGM/UA Entertainment Co., 106 Wn.2d 1, 13, 721 P.2d 1 (1986). Washington courts use the context rule for contract interpretation. Under this rule, the intent of the parties is discerned by "viewing the contract as a whole, the subject matter and objective of the contract, all the circumstances surrounding the making of the contract, the subsequent acts and conduct of the parties to the contract, and the reasonableness of respective interpretations advocated by the parties." Go2Net, Inc. v. C I Host, Inc., 115 Wn. App. 73, 84, 60 P.3d 1245 (2003) (quoting Scott Galvanizing, Inc. v. N.W. EnviroServices, Inc., 120 Wn.2d 573, 580, 844 P.2d 428 (1993)). While extrinsic evidence is allowed, it can be used only to illuminate 'what was written, not what was intended to be written.' Hollis v. Garwall, Inc., 137 Wn.2d 683, 695, 974 P.2d 836 (1999). Extrinsic evidence is not admissible, however, to show:
'Evidence of a party's unilateral or subjective intent as to the meaning of a contract word or term;
Evidence that would show an intention independent of the instrument; or
Evidence that would vary, contradict or modify the written word.' Hollis, 137 Wn.2d at 695. "Interpretation of a contract provision is a question of law only when (1) the interpretation does not depend on the use of extrinsic evidence, or (2) only one reasonable inference can be drawn from the extrinsic evidence." Go2Net, 115 Wn.2d at 85 (quoting Tanner Elec. Coop. v. Puget Sound Power Light Co., 128 Wn.2d 656, 674, 911 P.2d 1301 (1996)).
The first issue we address is whether the Inn and the City amended the lease by their letters of February 2001 and their course of conduct. When determining whether informal letters constitute a formal written agreement, courts consider 'whether (1) the subject matter has been agreed upon, (2) the terms are all stated in the informal writings, and (3) the parties intended a binding agreement prior to the time of the signing and delivery of a formal contract.' Morris v. Maks, 69 Wn. App. 865, 869, 850 P.2d 1357 (1993).
The Inn argues that neither party intended the February 2001 letters to be a final agreement that would supercede the lease. The Inn states that the City specifically confirmed in its February 12, 2001 letter that the terms of the original lease would remain in effect during the amendment negotiation process. The text that the Inn relies upon, however, states: 'Except as otherwise stated in this letter, all other elements of the Ground Lease will remain in effect, including the responsibility to provide verification of financing addressed in Section 4.' (Emphasis added.) The Inn expressly accepted the terms of this letter. Thus, it is clear that the amended provisions outlined in the February 2001 letters were meant to supercede contrary provisions in the original lease.
Additionally, the Inn alleged in its verified complaint that, 'the LEASE (as amended) required monthly 'extension' payments of $15,000 from and after March of 2001 to extend the construction start date from December 31, 2000 to December 31, 2001.' In its answer, the City agreed: 'The City admits that the Lease as Amended required that Inn pay the City $15,000 monthly beginning on the date the master use permit was issued and ending on the date construction commenced and that the Lease as Amended extended the deadline for the start of construction through December 31, 2001.' Thus, in their pleadings, the parties agree that the February 2001 letters constituted an amendment to the original lease.
The conduct of the parties also supports the finding that the February 2001 letters constituted an amendment to the lease. After the MUP was issued, the City sent the Inn a letter reminding it that the issuance of the permit triggered its obligation to pay the $15,000 monthly extension fee. When payment was not promptly received, the City sent a notice stating that if payment was not received within the five-day cure period, the lease would automatically terminate without additional notice. The Inn then paid $15,000 for June. Similar notices were sent and payments received in July and August. The Inn promptly made the option payment in September. Thus, the conduct of the parties confirmed that there was an agreement to pay $15,000 per month, due on the first of the month, with a five-day cure period. Also, the Inn never contested the City's several statements that the lease would terminate automatically if payment was not received.
The Inn also argues that it understood the payments outlined in the February 2001 letters to be penalty payments for delays in construction and not 'option' payments. Both the City and the Inn, however, used the term 'option payment' in their letters offering and accepting the terms of the amendment (the letters dated February 12, 2001, and February 14, 2001, respectively). The Inn asserted to the trial court that Wood is not a lawyer and cannot be presumed to know the technical meaning of the term 'option.' Wood, however, is experienced in the hotel and real estate industry and can be presumed to know the meaning of an 'option' payment. The City also clearly explained the reason for requiring an option payment arrangement. The February 2001 letters clearly express the parties' objective intent. Under these circumstances, it was proper for the trial court to determine, as a matter of law, that the February 2001 letters formed an enforceable contract.
In its February 12, 2001 letter, the City set out this explanation: 'Under the terms of our existing agreements, which anticipated the commencement of construction of the hotel by December 31, 2000, The Inn at the Center, LLC, herein referred to as 'The Inn', has essentially had a free option on the Seattle Center Lot #4 property since the Letter of Intent was signed in February 1998. Seattle Center cannot continue to provide a free option period. We want to recognize, though, that a delay in the issuance of a Master Use Permit (MUP) for the project impacted your ability to commence construction in a timely manner. Thus, Seattle Center proposes to forbear from declaring the ground lease in default provided The Inn agrees to pay an option fee of $15,000 per month beginning on the date the MUP is issued.'
The trial court found that the original ground lease terminated on December 31, 2000. Because we conclude that the ground lease was amended and reinstated by the February 2001 letters, it is not necessary for us to determine whether the trial court's finding was appropriate. Additionally, the Inn argues that the City should be estopped from claiming that the original ground lease terminated on December 31, 2000. Whether the lease terminated on December 31, 2000, is not relevant to the ultimate issues in this case, and we will not address it.
The next issue we address is whether the events of September 11, 2001, constituted a force majeure event that excused the Inn from making the $15,000 option payment in October 2001. The City argues that the original lease terminated on December 31, 2000, and therefore, the force majeure provisions were no longer in effect on September 11, 2001. Because the lease was reinstated by the February 2001 letters, it is necessary to determine if the force majeure provisions were applicable in this situation. Under the lease, a force majeure is 'any circumstance or act beyond the control of a party, that such party could not have reasonably anticipated or prevented and that has, or may reasonably be expected to have, a material adverse effect on the rights or obligations of such party under this Ground Lease.' The Inn argues that at the very least, it is an issue of fact whether the terrorist attacks of September 11, 2001, fell within this definition. The Inn's argument, however, misses the mark. The full analysis must include a reading of the effect of such an event: Effect of Force Majeure Event. If either party is rendered wholly or partly unable to perform its material obligations (excluding, however, any monetary obligations) under this Ground Lease within three (3) years from the first occurrence of a Force Majeure Event, then the party whose performance is not so effected may elect to terminate this Ground Lease and such termination shall take effect ninety (90) days following notice thereof. . . . If either party is rendered wholly or partly unable to perform its material obligations hereunder or to meet any deadline or milestone dates set forth in this Ground Lease because of a Force Majeure Event for a period of less than three (3) years from the first occurrence of a Force Majeure Event, such party's time to perform any obligation hereunder (excluding, however, any monetary obligations) affected by such Force Majeure Event, shall be equitably adjusted and the applicable deadline or milestone dates shall be revised accordingly.
(Emphasis added.) The only reasonable reading of this provision is that the obligation to make monetary payments is not affected by a force majeure event. Therefore, the issue is whether the Inn had a monetary obligation to the City. The Inn argues that it believed that it was only required to make the payments for delays that were caused by the Inn and that it believed that it was not obligated to pay $15,000 in October because of the devastation to the travel industry. This argument, however, does not address whether there was an underlying monetary obligation, which is the critical question. Whether the Inn believed that it would be equitable for the City to enforce the contract does not affect this analysis. The Inn expressly agreed to make the monthly payments:
The terms extending the commencement of construction to December 31, 2001 and the option payments of $15,000 per month upon issuance of the Master Use Permit are acceptable.
I understand and accept the additional terms and conditions as proposed in your letter of February 12, 2001.
The only reasonable interpretation of this acceptance is that a monetary obligation was created. The Inn argues that Wood never intended to unconditionally bind the Inn for delays that were beyond its control. This intention, however, is not evidenced anywhere in the parties' dealings. As such, it is not proper to consider Wood's declaration of his subjective, unilateral intention. See Hollis, 137 Wn.2d at 695. Thus, the $15,000 per month option payment was a monetary obligation and expressly outside the scope of the force majeure clause.
Even if the payments did not create a monetary obligation, the force majeure provision of the ground lease no longer applied because it was superceded by the terms of the February 2001 agreement. As discussed above, the parties intended the February 2001 agreement to amend the lease and the terms of the new agreement to supercede any contrary terms in the original lease. The Inn and the City entered into a very specific agreement whereby the only way the lease would remain in effect was for the Inn to make the monthly payments. Because the force majeure clause and the unconditional obligation to make the monthly payments are contrary provisions, the payment obligation superceded the provision of the original lease and the force majeure provision was no longer in effect.
The Inn next argues that the City was required to give an additional opportunity to cure before terminating the lease for failure to make a timely option payment. The Inn points to Section 22.1 of the original lease which deals with cure:
If the Inn materially violates or breaches or fails to keep or perform any covenant, term or condition of this Ground Lease, the Inn shall be deemed in default hereunder (a 'Default'). If a Default continues for or is not remedied within ten (10) days or such longer period as may be reasonably required to cure the default, provided the Inn commences the cure within said ten (10) days after the City's written notice of default[.]
The City argues that the five-day cure period and the automatic termination provision contained in the February 2001 letters supercedes the cure provisions of the original lease. The provisions in the February 2001 letters clearly set forth new notice and cure terms. Because the February 2001 letters were intended to replace contrary terms in the original lease, the cure provision of the original lease was no longer in effect and the City was not required to give additional notice or an additional opportunity to cure.
The Inn also argues that the City was required to follow the dispute resolution procedures in Section 36 and the extension procedures in Section 47. These provisions, however, were also superceded by the automatic termination provision of the amendment.
The next issue we address is whether the City breached the implied duty of good faith and fair dealing by not considering, in good faith, the Inn's request for abatement before declaring the lease terminated. All contracts have an implied duty of good faith and fair dealing. Badgett v. Sec. State Bank, 116 Wn.2d 563, 570, 807 P.2d 356 (1991). This duty requires all parties to cooperate with each other so that they may obtain the full benefit of performance. Badgett, 116 Wn.2d at 570. 'The duty to cooperate exists only in relation to performance of a specific contract term. As a matter of law, there cannot be a breach of the duty of good faith when a party simply stands on its rights to require performance of a contract according to its terms.' Badgett, 116 Wn.2d at 569-70 (citations omitted). The court in Badgett held that the implied duty of good faith and fair dealing does not require one party to consider another party's proposal to modify the contract. Here, the Inn's October 5, 2001 letter was a proposal to change the existing contract. The City, therefore, was under no obligation to consider the Inn's proposal. As the City was standing 'on its right to require performance of a contract according to its terms,' we do not address whether the City acted in good faith.
The Inn also argues that the lease should be reinstated to avoid a forfeiture. '[F]orfeitures are not favored in law and are never enforced in equity.' Dill v. Zielke, 26 Wn.2d 246, 252, 173 P.2d 977 (1946). The court in Dill refused to strictly enforce a forfeiture clause in a real estate sales contract. The court stated:
Recognizing the hardship that often attends a strict enforcement of a forfeiture provision, and confronted with a situation where such enforcement would do violence to the principle of substantial justice between the parties concerned, under the particular facts of a case, the courts of this state have frequently relieved a party from default of payment on an executory contract involving real estate by extending to such person a 'period of grace' within which to make such payments.
Dill, 26 Wn.2d at 252. The situation with the Inn, however, does not support a decision based on equitable grounds. In Dill, the court pointed out that the entire amount owed under the contract was paid three days after the cure period ended. Here, the Inn never made the October 2001 payment. Additionally, the Mulberrys, against whom forfeiture was sought, were in the process of selling the property to another person and that sale was nearly complete, at which time, Dill would be paid in full. There is no equivalent consideration with the Inn. Also in Dill, if the forfeiture were allowed, the seller would be able to retain the monies already paid and regain possession of the property. The court believed that this would be an inequitable result under the circumstances. The City was able to retain the monies already paid, but those payments were made to keep the option to build on the property open. Here, the trial court did not err in failing to find equitable grounds to deny the City's motion to quiet title.
The Inn also argues that there are genuine issues of fact as to whether the City could dispossess it of its leasehold interest, and thus, the trial court's decision quieting title in favor of the City was improper. As discussed above, however, the lease terminated according to its terms, and therefore, the trial court's decision to quiet title was proper.
Affirmed.
ELLINGTON and AGID, JJ., concur.