Opinion
D071071
05-08-2017
TEDDY RAWSON et al., Cross-complainants and Respondents, v. YD ENTERPRISES, LLC, Cross-defendant and Appellant.
Degani & Galson and Orly Degani; Miller Starr Regalia and Matthew C. Henderson for Cross-defendant and Appellant. Ritchie, Klinkert & Gutierrez, Thomas B. Ritchie, James E. Klinkert and Paul J. Gutierrez for Cross-complainants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. CIVRS1202478) APPEAL from a judgment of the Superior Court of San Bernardino, Gilbert G. Ochoa, Judge. Affirmed and remanded with direction. Degani & Galson and Orly Degani; Miller Starr Regalia and Matthew C. Henderson for Cross-defendant and Appellant. Ritchie, Klinkert & Gutierrez, Thomas B. Ritchie, James E. Klinkert and Paul J. Gutierrez for Cross-complainants and Respondents.
INTRODUCTION
YD Enterprises, LLC (YD) appeals a judgment after a court trial in which the court determined YD breached a warranty in an agreement for the sale of residential income property to Teddy and Tamala Rawson (the Rawsons) providing the property was "legally approved as [two] units." The court determined the remedy of rescission of the agreement was appropriate based upon mutual mistake of fact because one unit was not actually permitted or habitable. The court awarded consequential damages incurred by the Rawsons related to the purchase of the property, which the court offset by the net income the Rawsons received during the time they possessed the property. YD contends on appeal (1) the court erred in interpreting the purchase agreement because the property was legally approved to have two units, whether or not those units were permitted or habitable; (2) the court erred in rescinding the sale and awarding consequential damages; and (3) the court erred in awarding attorney fees to the Rawsons as the prevailing parties. We disagree with the first and third contentions. With respect to the second contention, we disagree the court erred in rescinding the sale and awarding consequential damages. However, we will reduce the award of consequential damages by $37,000, which is the amount the Rawsons paid on a family loan they obtained to purchase the property. In all other respects, we affirm the judgment.
BACKGROUND
A
YD obtained the property located in the City of Upland (City) at a trustee sale for approximately $172,000. The property had two apparently livable houses and it appeared the back unit was recently occupied. YD refurbished the property by installing additional cabinets, granite countertops, carpet, bathroom tiles and an upgraded shower door. They painted the interior and exterior and updated the landscaping.
YD purchases properties to renovate and resell or to hold as rental properties.
YD's real estate agent listed the property for sale in the multiple listing service as an income property. The listing included an inaccurate statement indicating there were two electric and gas meters. YD had no knowledge prior to the close of escrow that the property did not have two habitable single family residences.
The Rawsons, who owned a rental property across the street, noticed the property was for sale. The Rawsons thought the property looked freshly redone, livable, and ready to be rented. The Rawsons were interested in obtaining the property because it had two units. Before making an offer, the Rawsons' agent asked YD's agent if the back unit was permitted.
Because this property was listed as a residential income property with two units, the Rawsons' real estate agent presented an offer using a residential income property purchase agreement (RIPPA). This offer asked the seller to warrant the property was "legally approved" as two units. The Rawsons' agent testified this meant the seller was warranting the two units had permits. When assessing the value of income property, real estate agents look at the expected return on the investment. Generally, the more units a property has, the more it is worth.
YD accepted the Rawson's offer and returned a fully executed copy of the RIPPA, signed by YD and its agent. There was a short escrow period of 10 days or less. YD signed a real estate transfer disclosure statement stating it was unaware of any room additions, structural modification, repairs or other alterations made without necessary permits or not in compliance with the building codes. YD believed it was selling two legally approved units to the Rawsons.
The Rawsons conducted a home inspection, but did not check building permits during the escrow period. The Rawsons' agent indicated the property looked newly refurbished and appeared to be a suitable dwelling.
After the transaction closed, the Rawsons wanted to place a tenant in the back unit quickly. Mrs. Rawson called the electric company to turn on the lights and learned there was one electric meter for both houses. When the Rawsons took steps to obtain a separate meter, they discovered the City was unaware of the existence of the back unit and there were no building permits for that unit.
YD's agent hired an inspector certified with the City to inspect the property. The inspector prepared a report, which was sent to the City. The report identified numerous problems with the back unit including lack of permits for room additions and foundation problems.
During a meeting with the Rawsons and YD's agent, City officials expressed safety concerns raised in the inspection report and said they did not want anyone living in the unit. YD's agent and the Rawsons reviewed the list the inspector prepared to discuss what would be acceptable to the City to allow the property to be occupied.
B
YD initiated litigation against the Rawsons, the City, and other entities for declaratory relief regarding the rights and responsibilities of the parties. YD amended its complaint several times. The court sustained the Rawsons' demurrer to YD's action without leave to amend and dismissed YD's action against them. YD dismissed its action without prejudice as to the remaining parties.
The Rawsons filed a cross-complaint against YD for breach of warranty, breach of contract, intentional misrepresentation, and negligent misrepresentation. It sought the remedy of rescission.
At the commencement of the court trial, the Rawsons dismissed the intentional misrepresentation and negligent misrepresentation causes of action. During trial, the court granted an unopposed request to amend the cross-complaint to conform to proof to allege as a further basis for rescission mutual mistake of fact as to whether or not there were two legally approved units on the property when escrow closed.
C
Mark Morton, a former building official for the City, testified at trial. When Mr. Rawson came to the City to apply for a permit for separate electrical services, they discovered the City planning department did not consider the back unit a legal unit.
The City controls the permit process for buildings within the city limit. If the back unit was not permitted, the Rawsons would not be able to obtain a license from the City to rent the property.
Morton looked at the City's building record as well as the building record from the county of San Bernardino. Documents from the San Bernardino County assessor's office included a notation from the 1970's indicating the utilities had been cut off to the back unit, it was condemned, and could be used only for storage.
There was a roofing permit for the back unit, but Morton indicated the inspector would only be looking to see that the roof was put on properly. The City's position was the back unit could only be used for storage, it could not be occupied for human habitation.
When Morton visited the property, it appeared to have been renovated without permits. It appeared to have been a carriage garage or a Model T garage similar to others in the area with wood on the ground. This was allowed because it was not considered habitable. It appeared the garage had been renovated with one or two additions. The garage area did not have a foundation and the wood floor sat directly on the ground. The building code required a floor to be a minimum of 18 inches away from the ground. This floor also had open areas where vermin could crawl in. As such, it was not habitable. The lack of foundation created seismic and wind concerns because a foundation is needed to hold the building to the ground.
The windows in the back unit were newer vinyl windows, not of the period the house was built. Some of the other building materials, such as the siding and drywall, appeared to be from the early 1980's.
Morton explained an existing nonconforming legal structure would be one built with permits under a previous code, which does not conform to current standards. An existing nonconforming use is generally a structure with a zoning violation. The City's planning department determined this structure was existing and nonconforming, but it would allow it to remain if it was brought up to the California building code standards. Morton explained the planning department is generally flexible with zoning violations.
The inspector's correction list showed many safety concerns. The City took the position that an architect and an engineer needed to draw up plans and submit them to the City to "legalize" the back unit.
Building officials in California refer to a legal unit as one that is permitted. According to Morton, if a structure is not habitable, it is not legally approved for occupancy. Additionally, a structure renovated without permits is not a legally approved unit.
Morton stated the back unit was never proven to be safe because it was never permitted, inspected, or plan checked. YD's counsel admitted during trial the building was not permitted and could not be rented.
The Rawsons' expert in general construction investigated the property. He excavated around the exterior of the foundation and opened a hole on the interior of the foundation to inspect the floor joists. He found there was no concrete foundation under the raised floor area. There were rocks approximately 8 to 12 inches in diameter placed around the perimeter of the building in loose soil with the wood framing sitting on top of the rocks without mechanical fasteners. He opined the unit was not a safe structure based upon the foundation problems. There was nothing to resist lateral seismic forces such as sheer walls or mechanical attachment to a foundation. There was no under floor ventilation or under floor access and the floor joists were embedded in soil. The unit appeared to have been recently renovated based upon the newer windows and building materials, but there were no building permits for the renovation work.
The Rawsons presented expert testimony from a real estate attorney who stated the warranty language in paragraph 14.A. is applicable to "residential income property where the issue of income generated by the number of units in a project is significant in determining the return on investment." The expert also stated "as is" language in real estate means "it is the present condition subject to any legal warranties that might have been required by law" or anything else "contained in this document or any other document."
The Rawsons' real estate broker expert testified that in the real estate industry paragraph 14.A. "is very important in a [RIPPA], because it notifies and warrants to the buyer from the seller that the property is so many units." When the seller signs it, the seller is "authenticating that [the seller is] warranting that it has so many units." The real estate broker expert testified the property would be worth approximately $100,000 less if it did not have two legal units.
An employee with the county assessor's office testified records from the assessor's office indicated the property had two residences. The records contained a note on the building record indicating condemnation of the back unit. The employee agreed the assessor's records may not be reliable in terms of data as to the type and characteristics of the property, but represent the assessor's best effort to assign characteristics for property taxation purposes. The county assessor has no role in determining habitability.
D
In a statement of decision, the court found the Rawsons proved breach of warranty, breach of contract, and entitlement to the remedy of rescission based upon mistake of fact and failure of consideration. The court also found YD did not meet its burden to establish the affirmative defenses of estoppel or waiver, failure to mitigate, or merger. The court ordered the Rawsons to return the property to YD and awarded the Rawsons consequential damages in the amount of $295,816.63, which represented return of the purchase price plus interest paid on the escrow deposit along with an offset for the net income the Rawsons obtained from the property while it was in their possession.
DISCUSSION
I
We independently interpret the terms of a contractual agreement where there is no conflict in the evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866.) We review the trial court's factual findings regarding mutual mistake of fact or lack of consideration under the substantial evidence test. (Steiner v. Thexton (2010) 48 Cal.4th 411, 417, fn. 7; see SFPP v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 461 ["appellate courts independently review questions of law[ ] and apply the substantial evidence standard to a superior court's findings of fact"].)
II
YD contends the court erred in interpreting the terms of the RIPPA and concluding it contained an express warranty requiring YD to convey two "legally approved units." YD contends the warranty language only warrants the number of units which may legally exist on the property, not that the units themselves are legally approved or habitable. We disagree.
A
"We must interpret a contract so as to give effect to the mutual intent of the parties at the time the contract was formed. (Civ. Code, § 1636.) 'The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.' (Civ. Code, § 1638.) Courts must also endeavor to give effect to every part of a contract, 'if reasonably practicable, each clause helping to interpret the other[s].' (Civ. Code, § 1641.)" (Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC (2010) 185 Cal.App.4th 1050, 1060.)
"A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties." (Civ. Code, § 1643.) "A contract must receive such interpretation as will make it reasonable." (Beverly Hills Oil Co. v. Beverly Hills Unified School Dist. (1968) 264 Cal. App. 2d 603, 609.) "[W]here one construction would make a contract unusual and extraordinary and another construction, equally consistent with the language employed, would make it reasonable, fair, and just, the latter construction must prevail." (Sayble v. Feinman (1978) 76 Cal. App. 3d 509, 513.) "The court must avoid an interpretation which will make a contract extraordinary, harsh, unjust, or inequitable." (Strong v. Theis (1986) 187 Cal. App. 3d 913, 920.)
B
1
The contract in this case was for the sale of residential income property. Everyone involved in the transaction understood and intended the sale to constitute the conveyance of two residential units the Rawsons could rent out for income. The Rawsons would not have purchased the property if they knew they could not legally rent both units.
Paragraph 14.A. of the RIPPA stated, "Seller warrants that the Property is legally approved as two (2) units." This constituted an express warranty. " 'Any affirmation of fact or any promise by the seller relating to the goods is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the goods, and if the buyer purchases the goods relying thereon. No affirmation of the value of the goods, nor any statement purporting to be a statement of the seller's opinion only shall be construed as a warranty.' " (Stott v. Johnston (1951) 36 Cal.2d 864, 869-870.) "The obligation of a warranty is absolute, and is imposed as a matter of law irrespective of whether the seller knew or should have known of the falsity of his [or her] representations." (Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 520.)
"In the normal sale of land and buildings, courts have traditionally applied the doctrine of caveat emptor, with the buyer assuming the risk on quality--absent express warranty, fraud, or misrepresentation." (Pollard v. Saxe & Yolles Dev. Co. (1974) 12 Cal.3d 374, 377.) The law of real property has developed over time to adopt many of the principles governing the sales of commercial goods and to recognize implied warranties. (Id. at pp. 377-378.) --------
The trial court concluded the warranty language of paragraph 14.A was unambiguous and constituted an express and unconditional warranty YD would convey to the Rawsons two "legally approved" units, meaning two units approved by the City "that could be rented and occupied by tenants." The trial court's interpretation is reasonable and consistent with the ordinary and usual meaning of the phrase.
This interpretation is also consistent with trial testimony from both sides regarding the custom and practice for use of this phrase in residential income property transactions. YD's agent agreed the fact that the back unit was a legal unit was material to the decision to purchase and YD's agent understood the Rawsons intended to rent out both units. YD's agent agreed a legally approved unit generally means a building in which people can live, gather, and meet. YD's expert testified the phrase used in paragraph 14.A. is customarily used to indicate "how many legal units there are on the property." Similarly, the Rawsons' expert testified the warranty language in paragraph 14.A. is applicable to "residential income property where the issue of income generated by the number of units in a project is significant in determining the return on investment."
The "as is" language in paragraph 14 and in additional form documents signed in relation to the sale were not clear disclaimers of the express warranty. "Because a disclaimer or modification is inconsistent with an express warranty, words of disclaimer or modification give way to words of warranty unless some clear agreement between the parties dictates the contrary relationship." (Hauter v. Zogarts (1975) 14 Cal.3d 104, 119; see Shapiro v. Hu (1986) 188 Cal.App.3d 324, 333 [express warranties are not discharged by an "as is" clause].)
The introductory phrase for paragraph 14 stated, "[u]nless otherwise agreed ... the property is sold ... in its present physical ('as-is') condition." (Some capitalization omitted.) This is not clear disclaimer of the express warranty of paragraph 14.A., which immediately followed this phrase. Rather, the express warranty is an exception to the "as is" language.
The buyer's inspection advisory form stated the physical condition of the land and improvements is not guaranteed and advises a buyer to investigate the property. The statewide buyer and seller advisory form advised a buyer to investigate and inspect the property and advised both buyer and seller structures on the property "may have been built without permits, not according to building codes, or in violation of zoning laws." The trial court noted these documents were not incorporated into the RIPPA since the box in paragraph 16 mentioning the buyer's inspection advisory was not checked and the advisories were not identified as addenda, which are incorporated into the contract. Even if these documents can be construed as part of the contract, they do not clearly disclaim or negate the express warranty.
We are not persuaded by YD's contention the phrase "legally approved" modifies only the number of structures allowed on the property, not the legality of the units themselves. Such an interpretation of the warranty language is unreasonable in light of the entire agreement for the purchase of a residential income property. The clear intention of the parties was to convey two legal units so the Rawsons could produce income from the property by renting both units. YD's interpretation would undermine the entire purpose of the agreement.
2
The court found a breach of the express warranty because the property was not "legally approved" as two units. Substantial evidence supported this finding.
"We defer to the trial court's factual findings so long as they are supported by substantial evidence, and determine whether, under those facts, the court abused its discretion." (Tire Distributors, Inc. v. Cobrae (2005) 132 Cal.App.4th 538, 544; Bowers v. Bernards (1984) 150 Cal. App. 3d 870, 873-874 ["the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination"].) We indulge all reasonable inferences that may be deduced from the facts in support of the party who prevailed below. (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1632-1633.) "If the evidence gives rise to conflicting inferences, one of which supports the trial court's findings, we must affirm." (Milton v. Perceptual Development Corp. (1997) 53 Cal.App.4th 861, 867.)
Although there was some evidence the county had records referring to two residences on the property, the City is responsible for issuing permits. Morton testified a legal unit is one with permits issued by the City. A structure renovated without permits is not a legally approved unit. The back unit in this case was never proven to be safe because it was never permitted, inspected, or plan checked. YD's counsel admitted the back unit was not permitted and could not be rented.
Inspections of the back unit revealed it was apparently built as a carriage house or garage with no concrete foundation. It was built directly upon rocks placed upon loose soil, which was a concern for stability against wind or seismic events. Even though building permits may not have been necessary at the time the structure was originally built, additions were made over the years to convert the back unit to a living space without obtaining permits. There was also evidence utilities had been cut off in the 1970's and the back unit was condemned to be used only for storage. The City took the position the back unit could not be legally rented for human occupancy due to safety concerns.
Contrary to YD's contention, the City did not consider the back unit a legal existing nonconforming use. The City's planning division advised the building division it would allow an existing nonconforming use for purposes of zoning, but only "if it comes up to the California building code standards." There was substantial evidence the back unit was not a legal unit at the time of purchase.
III
The court found the remedy of rescission was appropriate based upon mutual mistake of fact, which is available whether a misrepresentation is innocent or fraudulent. (Civ. Code § 1689, subd. (b)(1); Crocker-Anglo Nat'l Bank v. Kuchman (1964) 224 Cal.App.2d 490, 496-497 (Crocker-Anglo Nat'l Bank).) "When both parties understand the facts other than they are, the mistake necessarily is mutual and thus becomes a basis for rescission." (Crocker-Anglo Nat'l Bank, supra, at p. 496.) Substantial evidence supported the finding of mutual mistake of fact. Both YD and the Rawsons believed the property was a residential income property with two legal units, which the Rawsons could rent to others. Neither investigated the permits nor knew the back unit was not a legal unit and could not be safely rented to tenants.
The cases cited by YD are inapposite. The case of Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 278 (Donovan) addressed the grounds for a defendant asserting mistake as a defense to establish rescission based upon unilateral mistake: "(1) the defendant made a mistake regarding a basic assumption upon which the defendant made the contract; (2) the mistake has a material effect upon the agreed exchange of performances that is adverse to the defendant; (3) the defendant does not bear the risk of the mistake; and (4) the effect of the mistake is such that enforcement of the contract would be unconscionable." (Id. at p. 282.) Amin v. Superior Court (2015) 237 Cal.App.4th 1392, 1402 followed Donovan's analysis with respect to a claim of a unilateral mistake by a defendant who entered into a plea bargain. In that case, the court determined even though the risk of mistake was not allocated to the defendant, the defendant proceeded with the bargain knowing she had limited information about the scope of the offer. The court stated "rescission is warranted only when 'the subject of uncertainty has not been a concern of the parties, i.e. where the post-contract discovery comes out of left field." (Amin, supra, at p. 1403.)
In this case, the court found mutual mistake supporting rescission. Section 152 of the Restatement Second of Contracts provides "[w]here a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake ...." The RIPPA allocated the risk of uncertainty on the issue of whether the property had two legal units not to the Rawsons, but to YD as the seller. The Rawsons did not proceed at their peril on the issue of legal units, they sought and obtained a warranty from the seller to resolve any uncertainty on this issue. Therefore, the Rawsons were entitled to rescission based upon mutual mistake of fact.
Because we conclude substantial evidence supports the court's finding of mutual mistake of fact supporting rescission, we need not address the finding of failure of consideration.
IV
"Civil Code section 1692 provides in relevant part: 'A claim for damages is not inconsistent with a claim for relief based upon rescission. The aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled; but such relief shall not include duplicate or inconsistent items of recovery. [¶] If in an action or proceeding a party seeks relief based upon rescission, the court may require the party to whom such relief is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.' " (Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1144 (Sharabianlou).) "Rescission is intended to restore the parties as nearly as possible to their former positions and ' "to bring about substantial justice by adjusting the equities between the parties' despite the fact that "the status quo cannot be exactly reproduced." ' [Citations.] To achieve this objective, Civil Code section 1692 provides that '[a] claim for damages is not inconsistent with a claim for relief based upon rescission.' It further provides that the aggrieved party shall be awarded 'complete relief,' including restitution and 'consequential damages.' " (Ibid.)
The Sharabianlou court noted "damages available to parties in cases in which rescission is based upon mistake are more limited than those available in cases in which rescission is based upon fault." (Sharabianlou, supra, 181 Cal.App.4th at p. 1145, citing Runyan v. Pac. Air Indus. (1970) 2 Cal.3d 304, 317-318.) However, it did not preclude an award of consequential damages for such cases. Rather, the court noted in "cases involving the rescission of agreements to purchase real property, California courts have held that the seller must refund all payments received in connection with the sale. [Citation.] If the buyer has taken possession of the property, the buyer must restore possession to the seller. [Citation.] Such recovery of the consideration exchanged is part of restitution. [Citations.] As consequential damages, rescinding buyers or sellers may recover such items as real estate commissions paid in connection with the sale [citation], escrow expenses [citation], interest on specific sums of money paid to the other party [citation], and attorney fees in appropriate cases [citation]." (Sharabianlou, at pp. 1145-1146.) In Sharabianlou, the court disallowed the benefit of the bargain damages, but indicated certain out of pocket expenses are permissible if supported by substantial evidence. (Id. at pp. 1148-1149.)
In this case, the court adjusted the equities in awarding consequential damages to the Rawsons. It ordered the Rawsons to return the title to the property to YD. It ordered YD to return the purchase price of $277,000 to the Rawsons as well as interest in the amount of $22,419.54 on the escrow deposit of $100,087.78 at the rate of 7 percent per annum. The court reduced this amount owed by net income the Rawsons obtained from the property in the amount of $3,602.91. The net income was calculated based upon the rental income received during the time they owned the property less expenses incurred for the unit.
Among these offsets considered for net income, the court included payments made by the Rawsons to their grandparents in the amount of $1,000, which was represented to the trial court as "debt service." Mrs. Rawson testified she borrowed money from her grandparents for the purchase price, which she agreed to repay with interest. She further testified the amount of the monthly payment to the grandparents of approximately $1,000 to repay the sum of $178,577. There was no evidence regarding how much of the monthly payments included interest charged as opposed to payment of the principal.
YD contends this amount should be deducted from the expenses used to calculate the net income offset to prevent double recovery of both the purchase price and the principle repaid to the grandparents. The Rawsons did not substantively respond to this argument in their brief other than to say the payment must be all interest. There is no evidence to support the Rawsons' argument on this point. Therefore, we reduce the consequential damages award by $37,000 and direct the court to amend the judgment accordingly.
V
The trial court awarded attorney fees after determining the Rawsons were the prevailing parties. (Civ. Code, § 1717, subd. (b)(1).) Given our decision herein, we conclude the court properly exercised its discretion in this regard. (Hunt v. Fahnestock (1990) 220 Cal.App.3d 628, 633.)
DISPOSITION
The matter is remanded with direction to amend the judgment to reduce the consequential damages awarded to the Rawsons to $258,816.63. In all other respects, the judgment is affirmed. The Rawsons are entitled to recover their costs on appeal.
McCONNELL, P. J. WE CONCUR: BENKE, J. DATO, J.