California Cases April 13, 2022: Bus. Props. #6 v. Russell

Case Description

NOT TO BE PUBLISHED

Appeal from a judgment of the Superior Court of Orange County, No. 30-2017-00938523 Frederick P. Horn, Judge (Retired judge of the Orange Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.). Affirmed.

Niddrie Addams Fuller Singh, John S. Addams; Dillon Miller & Ahuja and Timothy P. Dillon for Defendants and Appellants.

The Duringer Law Group, Stephen C. Duringer, Edward Laird and C. Tyler Greer for Plaintiff and Respondent.

OPINION

MOORE, J.

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Defendants Braden and Stephanie Russell (the Russells) were guarantors on a lease between plaintiff Business Properties #6 (Business Properties) and defendant Umana Academy of Fine Arts, Inc. (Umana). Umana went out of business and defaulted on the lease. Business Properties sued Umana and four guarantors for unpaid rent. The jury returned a verdict in favor of Business Properties against all five defendants in the amount of $543, 979. Only the Russells appealed.

The Russells contend Business Properties did not have standing to pursue this litigation. Their standing argument turns on a myopic reading of a sale agreement between Business Properties and a buyer of the shopping center that encompassed the leased premises. In the sale agreement, Business Properties transferred various intangible properties to the buyer, including guarantees associated with the shopping center. The Russells argue that because this case involves guarantees, Business Properties thus sold the right to pursue this litigation. However, the sales agreement contains the following reservation of rights: "All rights and obligations respecting [the present] litigation shall remain with [Business Properties], including without limitation all rights to any award for remaining term rents." This broad reservation of rights plainly included Business Properties' claims on the guarantees in this case, and thus Business Properties has standing.

The Russells also contend the damages award must be reversed as a matter of law because Umana's default eventually led Business Properties to find a tenant who paid a higher lease amount. Normally in cases of this ilk, the argument would be that the higher lease payments offset Umana's obligations. But that is not the argument here, as Business Properties' requested damages already included that offset to the extent applicable. Instead, the Russells argue that due to the higher payments required of the new lessee, the value of the shopping center was increased by an amount that exceeds the

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amount of damages, and, they assert, the increased equity must offset the damages. Any increase in equity, however, cannot be attributed to Umana, who had no interest in the equity of the property and played no role in increasing its value.

Finally, the Russells claim the court failed to issue a statement of decision on their cross-complaint. However, they never requested one and thus the argument has been waived. Accordingly, we affirm.

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FACTS

In March of 2012, Umana entered into a commercial lease with Business Properties' predecessor-in-interest Lester Smull. The Lease was for a term of approximately eight years for 5, 040 square feet of space within a retail shopping center located in the City of Mission Viejo (the shopping center). Defendants Justin Boatman, Maureen Boatman (now Maureen Boone), Braden Russell and Stephanie Russell executed a Guaranty Agreement whereby they unconditionally guaranteed Umana's performance of all provisions of the Lease.

Umana operated a fine arts program for children that included music and academics.

In June 2015, Umana notified the property manager that it was having financial difficulties. It failed to pay its rent that month. By letter, Umana outlined various steps it was taking in an attempt to increase revenue and make up the missed rental payment.

The property manager issued a 3-day notice to pay rent or quit as a result of the missed lease payment. However, the property manager did not act on the notice and

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instead met with Umana to discuss the steps Umana had outlined with the aim of "giving them the opportunity to rebuild based on these projections." Although there was some discussion about possible amendments to the lease to provide Umana some relief, nothing was ever agreed upon. Based on the property manager's understanding, Umana still intended to comply with its original lease obligations. Umana continued paying rent, but less than what it was obligated to pay under the lease.

Umana's recovery plan did not pan out, however, and in June 2016, it stopped paying rent altogether. The property manager issued another 3-day notice to quit or pay rent.

The property manager did not act on that notice either; Umana told her that it had a prospective buyer for the business and that it hoped to finalize the details in the following few days. Umana informed the property manager that it intended to use the proceeds of the sale to pay the arrearages in lease payments. A broker involved in the prospective sale contacted the property manager, and in the ensuing discussions, the property manager made clear that the prospective buyer would have to assume the existing lease with Umana. The broker eventually made an offer, which led to specific negotiations, but the negotiations did not lead to an agreement and the negotiations fizzled out.

Around the same time, in August 2016, the property manager was informed Umana had a second potential buyer, a company named Nobis. Nobis proposed paying $70, 000 to purchase the business. It proposed taking over the lease at reduced payments. Whereas Umana was obligated to pay $10, 483 per month in August 2016, Nobis proposed paying $6, 300 per month ($1.25 per square foot), with that amount increasing over time. The lease term would be for five years, with two optional additional five-year

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terms. The Nobis offer was subject to obtaining a conditional use permit to operate a preschool.

While those negotiations were ongoing, Umana received a second offer in October 2016 (which we refer to as the Algama offer). In the Algama offer, the buyer offered $105, 000 to purchase the Umana business, and offered to take over the rent at reduced rates. The buyer proposed six months of free rent, followed by monthly payments of $6, 048 ($1.20 per square foot), which would increase over time. The Algama offer was likewise subject to obtaining a conditional use permit to operate a preschool, which proved to be a problem, as the City of Mission Viejo took the position that a preschool was not a permitted use. The Algama buyers never obtained a conditional use permit.

In December 2016, before any deal was reached, the landlord passed away. Merlone Geier Management (Merlone Geier), which owned 69 percent of the shopping center but had let the prior landlord operate the shopping center, took over operation of the shopping center. At that point in time, Umana was still in possession of the premises. Merlone Geier did not obtain access to the premises until May 2017.

Between January and April of 2017, prior to actually taking possession, Merlone Geier did not attempt to market the Umana premises. When Merlone Geier resumed talks pertaining to the Algama offer, it took the position that any buyer would have to assume the obligations of the Umana lease. That position seems to have scuttled the Algama offer negotiations.

In May 2017, Merlone Geier took the same position in regards to the Nobis offer. Nobis proposed leasing only 3, 500 square feet at a rate of $1.25 per square foot (compared to $2.08 that Umana was obligated to pay), which Merlone Geier found unacceptable. In July 2017, Nobis eventually sweetened the deal to $1.83 per square foot

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and leasing the entire space, a deal they claimed was worth about $549, 000 over the course of five years. Although Merlone Geier did not agree to that proposal, negotiations continued through September 2017. Nobis sweetened the deal further, but the parties never found a package of rent and lease terms that was mutually acceptable.

When Merlone Geier took over management, the shopping center was looking "pretty tired." It had been built in the 1960's and its anchor tenant had declared bankruptcy and vacated. Additionally, leasing the Umana premises presented certain unique challenges. As the new property manager testified, "You know, it's a relatively large size. It's not an anchor. It's not 30 or 40, 000 [square feet] but it's still a big space. The configuration of the space was irregular. . . . The location was at the far end, so the furthest space away from the anchor and the furthest space away from Crown Valley Parkway. [¶] But just the size itself, you were limited to certain . . . tenants that needed that size. Someone who needed 2500 feet or 1200 square feet, they weren't a candidate because it was too big." For that reason, Merlone Geier incurred the expense of demolishing the interior walls, hoping they could divide the space into multiple units and market the space that way.

One of Merlone Geier's highest priorities was to find an anchor tenant for the shopping center, which they were successful in doing, bringing in a Target store. However, as a condition of Target moving in, Merlone Geier had to perform extensive renovations to the shopping center, including new facades, repainting, new landscaping, and new signage. These extensive renovations took approximately six months to complete between March and October 2018.

Between January 2017 and September 2019, Merlone Geier entertained 14 proposals for tenants in the Umana space. In September 2019, Merlone Geier signed a letter of intent with an automobile club, and that lease was executed in November 2019,

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seven months before the expiration of Umana's lease. We are told the new lease was for a term of 15 years at a starting rate of $2.75 per square foot, though the trial exhibit containing the lease was not made part of our record.

At trial, Business Properties claimed the total amount of unpaid rent under the Umana lease was $738, 679.84. However, there was some uncertainty in that number. Trial took place in March 2020. The nominal end date of the Umana lease was June 30, 2020, and it was apparently unclear in the new lease exactly when the new tenant would be required to begin making lease payments. In the event the new tenant began making immediate lease payments, the damages would be offset to approximately $707, 000.

In August 2017, Business Properties filed the underlying suit for breach of contract and common counts against Umana and the four guarantors on the lease. Defendants filed a cross-complaint for breach of oral contract, fraud, promissory estoppel, and breach of the implied covenant of good faith and fair dealing.

On the day before trial was scheduled to start, which was March 3, 2020, Business Properties' counsel notified defense counsel that Business Properties had sold the shopping center in January 2020. Defense counsel raised the specter that Business Properties lacked standing as a result of the sale but declined the court's offer to continue the trial. The court indicated that the standing issue would be decided by the court and that defense counsel should raise the issue by motion or other appropriate procedural vehicle. However, that apparently never occurred and thus the court never ruled on the standing issue.

At trial, the jury returned a verdict in favor of Business Properties for breach of contract and awarded $543, 979 in damages against Umana and the four guarantors. Subsequently, the court entered judgment in that amount and further decreed

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that defendants take nothing by way of their cross-complaint. The Russells timely appealed.

II

DISCUSSION

The Russells argue three issues on appeal. First, they contend Business Properties lacked standing, or, at minimum, that the court erred by excluding evidence on that issue. Second, they contend substantial evidence does not support the damages award. Finally, they contend the court erred in failing to issue a statement of decision.

1. Standing

Standing is a purely legal issue which may be raised for the first time on appeal. (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1345.) Because standing is a purely legal issue, and because it turns on the interpretation of a contract for which there was no disputed extrinsic evidence, we review the issue de novo. (Gilkyson v. Disney Enterprises, Inc. (2021) 66 Cal.App.5th 900, 915 ["Absent any conflict in extrinsic evidence, we review de novo issues regarding the proper interpretation of a contract"]; People for Ethical Operation of Prosecutors and Law Enforcement v. Spitzer (2020) 53 Cal.App.5th 391, 408 ["standing is typically a question reviewed de novo"].)

The entirety of the record as it pertains to standing is exhibit 174, which is an excerpt from the purchase and sale agreement related to the shopping center. Pursuant to that agreement, Business Properties conveyed to the buyer, inter alia, "all intangible personal property . . . owned by [Business Properties] and used exclusively in the ownership, use and operation of the [shopping center] . . ., including, without limitation,

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. . . all . . . guaranties . . . ." Because Business Properties' claim against the Russells arises from guarantees, the Russells contend Business Properties sold their rights and no longer have standing to pursue a claim against them. Business Properties contends otherwise, relying on the following provision that makes a specific exception for the current litigation: "There is pending litigation against a former tenant at [the shopping center], Umana Academy, which litigation is currently scheduled to go to trial on February 3, 2020. All rights and obligations respecting said litigation shall remain with [Business Properties], including without limitation all rights to any award for remaining term rents."

It is quite clear that this exception includes the guarantees that are the subject of this litigation. The reservation of rights includes "all rights and obligations respecting said litigation ," and "all rights to any award for remaining term rents." (Italics added.) This broad language was plainly intended to encompass the entirety of the present litigation, which includes the guarantees. Accordingly, Business Properties had standing to pursue its claims against the Russells.

Barring acceptance of their standing argument, the Russells fall back on the argument that we should, at minimum, remand the case for a new trial because the court prohibited defendants from questioning fact witnesses about the sale, and also because the court only admitted excerpts from the sales agreement, rather than the entire 300-page agreement. However, defendants were given an opportunity to continue the trial to gather more evidence on the sale, and they were invited to raise this purely legal issue by motion. They did neither. Moreover, the record indicates defense counsel had possession of the entire sales agreement (albeit, possibly missing certain attachments), and at no point did defense counsel attempt to introduce any other portions of the agreement, either at trial or by motion. On the whole, defendants had an adequate

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opportunity to litigate standing but simply chose not to take advantage of that opportunity.

2. Damages

The Russells' primary argument is that substantial evidence did not support the damages award. To follow that argument, some background is necessary.

At trial, Business Properties called an expert witness, a real estate broker, on the reasonableness of its efforts to lease the Umana space after Umana defaulted. One of the expert's opinions was that Business Properties acted reasonably in refusing the various offers from Algama and Nobis that entailed substantially lower lease payments than Umana was obligated to pay. One reason for that opinion was that lowering the revenue stream lowers the overall value of the shopping center for purposes of selling or refinancing the shopping center. Specifically, the expert opined that "for every 10 cents a foot under market that I may take a lease at, I'm diminishing my value for that space by $120, 000."

On cross-examination, defense counsel seized on that calculation and sought to apply it to the new tenant's rent: "Q. So under the math you told the jury earlier, for every 10 cents of increased rent, that equates to $120, 000 of value to the shopping center. With this being a 50 cent higher rent, the landlord has added $600, 000 of value to the center; right? [¶] A. Based on the calculation I was using, yes." Defense counsel went on to ask the expert if he had determined whether the actual sale of the shopping center reflected that $600, 000 increase, to which the expert replied, "In order to do that, I'd have to talk to the buyer of the property to see how they assessed the values. [T]hat wasn't part of my assignment." On redirect, the expert testified that renovations generally add value to a shopping center.

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On appeal, the Russells contend, essentially, that Business Properties suffered zero damages because any lost rent was more than offset by the increase in equity in the shopping center. "We review the jury's damages award for substantial evidence, giving due deference to the jury's verdict." ( Bigler-Engler v. Breg, Inc. (2017) 7 Cal.App.5th 276, 300.) We conclude substantial evidence supports the verdict.

The Russells' argument relies on an unspoken premise that, but for Umana's breach, the shopping center would not have gone up in value. That premise is plainly unfounded. The property increased in value due to the owners' hard work and investment of capital. The shopping center underwent major renovations and attracted a popular anchor tenant. Umana's breach had nothing to do with that. To be sure, the increased rent paid by the new tenant reflects the increased value of the property. But in our view, the Russells have the chain of causation backward: the property is not more valuable because a tenant pays more rent; a new tenant pays more rent because the property is more valuable. Umana does not get to reap the benefit of Business Properties' investment.

Lu v. Grewal (2005) 130 Cal.App.4th 841 ( Lu ), is on point. There, a lessee abandoned a gas station during the lease period, leaving it in poor condition. ( Id. at pp. 845-846.) The lessor invested time and money to restore the gas station, and, unable to find another lessee, personally ran the gas station at a profit. ( Id. at p. 846.) When the lessor sued, the lessee claimed any damages should be offset by the profits the lessor made in running the gas station. ( Id. at p. 847.) The trial court agreed ( id. at p. 848), but the court of appeal reversed. It reasoned, "Respondents are not entitled to the benefit of appellant's hard work and capital in making the property productive . . . . A tenant has an interest neither in the value of the land, nor in the value of the landowner's business ventures." ( Id. at p. 851.)

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Pertinent to this appeal, the appellant in Lu argued "an increase in value [of the gas station] proved no damage resulted from the breach." ( Lu v. Grewal , supra , 130 Cal.App.4th, at p. 851 . ) The court rejected that position as well, stating, "Even if a sale had been completed, however, any profit on that sale would not reduce the damages attributable to the breach. A breaching tenant cannot claim an interest in the value of the property itself - a value its lease never entitled it to profit from - to avoid the consequences of its own breach." ( Id. at p. 851, italics added.)

The principles enunciated in Lu apply forcefully here, where the Russells are likewise attempting to benefit from an increased value of the property. For the reasons explained above and in Lu , the increase in equity in the shopping center did not preclude the jury from awarding damages.

3 . Statement of Decision

Finally, the Russells contend the court erred in failing to issue a statement of decision on estoppel and standing. As the Russells admit, however, defendants never requested a statement of decision. Thus they have waived the claim: "No statement of decision is required if the parties fail to request one. [Citations.] [¶] A party's failure to request a statement of decision when one is available has two consequences. First, the party waives any objection to the trial court's failure to make all findings necessary to support its decision. Second, the appellate court applies the doctrine of implied findings and presumes the trial court made all necessary findings supported by substantial evidence. [Citations.] This doctrine 'is a natural and logical corollary to three fundamental principles of appellate review: (1) a judgment is presumed correct; (2) all intendments and presumptions are indulged in favor of correctness; and (3) the appellant

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bears the burden of providing an adequate record affirmatively proving error.'" ( Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 970.)

The Russells principal response to this argument is to claim that Business Properties "suggested" that the trial court issue a statement of decision. (See Code Civ. Proc., § 632 [court obligated to issue a statement of decision "upon the request of any party"].) That supposed suggestion is found in Business Properties' response to defendants' objections to a proposed judgment and consists of the following: "To the extent the court may want to provide a tentative ruling and/or order Plaintiff to provide a statement of decision in support of the Proposed Judgment, as discussed herein, the facts and law fully support the Proposed Judgment and the denial of Defendants' claims of estoppel and lack of standing. As the court deems proper, this Response may serve as the court's tentative decision and Plaintiff can prepare a statement of decision. As the [court] deems necessary, a revised proposed judgment can be submitted."

This plainly did not amount to a request for a statement of decision. To the contrary, it only serves to highlight defendants' failure to request a statement of decision notwithstanding the fact that Business Properties had raised it as a possibility. Accordingly, it did not relieve the Russells of their waiver.

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III

DISPOSITION

The judgment is affirmed. Business Properties shall recover its costs on this appeal.

WE CONCUR: BEDSWORTH, ACTING P. J., GOETHALS, J.

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