Kennedy Family Partnership v. HCP Chamber

Filed 6/29/06 Kennedy Family Partnership v. HCP Chamber CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, William R. Nevitt, Judge. Affirmed.

This case involves the interpretation and enforceability of a so-called "fee subordination" provision, i.e., a device in which in this case the lessor pledges his fee interest in the leased property as collateral for loans made to the lessee in a 99-year commercial ground lease.^[1] The appeal arises from a bench trial on consolidated cross-actions for declaratory relief brought by plaintiffs and respondents the Ona M. Kennedy Family Partnership et al. (Kennedy Partnership), the lessor, and defendants and appellants HCP Chamber, LLC (HCP), the current lessee. The trial court found generally in favor of the Kennedy Partnership, concluding the subordination provision of the lease applied only to initial construction loans or later loans sought for improvements to the property. More fundamentally, the court concluded the subordination provision was unenforceable under Civil Code^[2] section 3390, subdivision (5), as insufficiently definite and under section 3391, subdivision (2), because it was not just and reasonable to the Kennedy Partnership. HCP appeals.

BACKGROUND

A. The Lease

James Kennedy, Sr. (James), owned real property located at 110 West C Street in downtown San Diego. In 1959 James entered into a 99-year ground lease for the property with developer Irving Kahn and others. Both parties were represented by counsel. The lessees constructed a high-rise office building, i.e., the Chamber Building, at the location. The lease contains a fee subordination provision (paragraph 19). The first subparagraph of that provision provides: "It is understood and agreed that Lessee, his heirs, successors or assigns may at any time, subsequent to the exercise of his option pursuant to paragraph 18 [the lease was for two years with an option by the lessee to extend it for an additional 97 years], borrow money for the erection of building/s and for any and all other improvements to be erected, installed or maintained in or upon the demised premises."

The second subparagraph provides: "Further, it is understood and agreed that Lessee shall have the right from time to time to borrow money on the security of the leased premises and in order to enable Lessee to obtain such financing Lessor agrees to convey title to the leased premises to Title Insurance and Trust Company, hereinafter called Trustee, under a holding form trust, and said Trustee is hereby empowered to execute trust deeds on the leased premises to secure the payment of any loan or loans that Lessee my desire to obtain. It is expressly understood and agreed by and between Lessor and Lessee that there are no restrictions on the number of loans that Lessee may obtain nor upon the amounts, rates of interest, or terms of repayment of such loans. Lessee agrees to execute the necessary promissory notes in connection with said loans and to pay the same when due and in the manner therein provided." The provision then limited the obligation of the Trustee to pay the loan.

The third subparagraph of the provision provides: "The foregoing provisions of this paragraph 19 are subject, however, to the understanding and agreement that lessee, his heirs, successors or assigns shall assume, pay, and in any and all manner hold lessor free and harmless from the obligation/s of lessor due and owing at the date of the recording of said improvement loan or loans which obligations is more particularly described in paragraph 15 hereof. It is understood and agreed that Lessor shall execute and deliver without charge to Lessee, or to any lending institution, any and all deed/s of trust, reconveyance/s, releases or other instrument which may become necessary to effectuate said improvements loan/s and the terms of this paragraph. The Lessor further covenants and warrants that should the consent of or execution by any person other than a party hereto be required to effectuate said improvement loan/s, that Lessor will immediately secure such consent and execution upon written demand of Lessee."

Subparagraph four of the provision places conditions on the right of the lessee to encumber the property. The total principal of all loans at any one time cannot exceed 75 percent of the total actual market value of the real property and improvements. That limit, however, can be increased if the aggregate minimum rentals of all tenants are sufficient to provide for the amortization of not less than 75 percent of the principal amount of the loan or loans during the terms of the subleases and for payment of interest and insurance premiums reasonably expected to be due during the period of the loan or loans.

However, if the lessee proposes to encumber the property in an amount in excess of the higher of the limits noted above, the lessee could do so by depositing $200,000 in lessor's savings account. The deposit is to remain in that account until the total principal of the loan or loans is reduced to one of the limits noted above. In the event that foreclosure proceeding are commenced on any of the loans, the $200,000 deposit is to be paid to the lessor.

The provision ends by requiring all loan documents contain a requirement that owners of the encumbrances notify lessor of any default of lessee, allow lessee to cure any default and that any failure of lessee to cure a default constitutes a default under the lease.

B. History of the Lease

1. Construction

In 1961 lessee First and C Corporation deposited $200,000 (as provided in paragraph 19) so it could obtain two construction loans, one for $2.7 million from Fidelity Bank and another from Pacific Finance for $1.1 million. The holding trust executed trust deeds to secure the debts.

The building was completed in April 1963. In September 1963 the holding trust executed a trust deed securing a loan from Prudential Insurance Company for $4 million. This loan paid off the Fidelity Bank and Pacific Finance loans.

2. Great Universal Development Loan

In 1964 lessee received a $350,000 loan from the Great Universal Development Company. The holding trust executed a second trust deed securing the loan. A substantial portion of the proceeds of that loan was not used for the construction of buildings or improvements on the property.

In 1967 the Great Universal loan went into default and foreclosure was commenced against the leasehold and the lessor's fee interest. James's widow Ona M. Kennedy objected, noting she had no knowledge of, had not consented to, the trust deed and that the loan was not used to construct improvements. Soon after, the foreclosure proceedings were withdrawn and the notice of default was rescinded.

After the Great Universal loan in 1964, the fee was not again encumbered. There was, however, a variety of encumbrances affecting the leasehold.

3. New Lessee

In 1975 lessee First and C Corporation assigned its rights to Charter Building Limited (Charter) for $4.3 million. Charter financed this transaction by assuming the $2 million balance remaining on the Prudential first mortgage, obtaining a $750,000 loan from Sumitomo Bank, having the seller carry back $1.2 million and paying cash. Lenders did not demand a mortgage on the fee estate to secure their loans.

4. HCP

In January 2003 Ona M. Kennedy was deceased and the property was owned by the Kennedy Partnership. In that year HCP purchased the Chamber Building and took an assignment of the ground lease from Charter for $21,150,000.

To finance the transaction, HCP applied to Travelers Insurance (Travelers) for a loan of $15.5 million. HCP intended to use $1.3 million for improvements to the building and the remaining amount to acquire Charter's rights under the ground lease. Travelers approved the loan but its approval was subject to obtaining a fee mortgage or a "recognition agreement" from the Kennedy Partnership. A recognition agreement is a device in which the lender receives a deed of trust securing not only the lessee's interest but also receives certain covenants from the ground lessor, e.g., the right to cure any default by the lessee and the right to a new lease. Under a recognition agreement, the ground lessor's fee is not subordinated.

Michael Barker, acting for HCP, met with James Kennedy, Jr., acting for the Kennedy Partnership. Barker explained that the loan sought would not exceed the 75 percent loan-to-value ratio stated in paragraph 19 of the ground lease. Barker also stated that while he believed the Kennedy Partnership was required by the ground lease to subordinate its fee to allow HCP to acquire the Travelers loan, he was requesting instead that the Kennedy Partnership enter into a recognition agreement with HCP and Travelers. The Kennedy Partnership did not believe the ground lease required it subordinate its fee interest and declined to enter into the requested recognition agreement.

HCP, nonetheless, continued with the purchase from Charter. Charter agreed to take back a promissory note for the $15 million Travelers would have financed. HCP believed this was only a temporary solution because without either a fee mortgage or recognition agreement, it would, in HCP's opinion, be extremely difficult to replace the seller's note.

C. Actions for Declaratory Relief

In March 2003 the Kennedy Partnership filed a complaint for declaratory relief, noting a controversy between it and HCP concerning its subordination obligations under the ground lease. It was the Kennedy Partnership's position that the lease did not require it to affect any subordinations.

In July 2003 HCP filed a complaint for declaratory relief, stating its position that the ground lease allowed the lessee to encumber the fee interest with purchase money and other financing.

The actions were consolidated.

A bench trial was held. The original parties to the ground lease and their counsel are deceased. The litigants, therefore, sought to prove the original parties' intent by the words of the lease, testimony from lawyers concerning the custom and practice in drafting such leases in the 1950's and 1960's and the conduct of the parties in dealing with the subordination provision of the lease.

At the conclusion of trial, the court filed a detailed statement of decision. The court found the terms of the lease required the lessor only to provide its fee as security for a loan obtained by the lessee for construction and improvements of the leased premises. The court found that the first subparagraph of section 19 concerning the right of the lessee to borrow money for the erection of buildings and other improvement on the demised premises was a statement of purpose that controlled the subsequent general references to loans. The court stated any other interpretation would render the first paragraph of the section surplusage and would ignore later language in the section where the loans are referred to as "improvement loan or loans."

The court also concluded its interpretation of the lease was supported by the conduct of the parties with regard to the Universal Development loan.

The court noted the parties required a declaration concerning whether HCP could compel the Kennedy Partnership to subordination of its fee interest for any loan HCP might seek. Looking to legal principles developed in the area of trust deeds, the court concluded the subordination provision of the subject ground lease was not so enforceable.

The court noted the subordination provision of the lease allowed a lessee to make a deposit of $200,000 after which there was no contractual limit to the amount of loan the lessee could obtain using the lessor's fee interest as security. The court noted there was testimony that such a deposit was insufficient to protect the lessor's interest. The court also noted the lease did not provide limits on the term of the loan, interest rates, mode of repayment or the nature of the lender. The court concluded the lease was insufficiently specific and was unfair to the lessor. The court, citing risks to the Kennedy Partnership inherent in the subordination provisions of the lease, concluded it did not meet the "just and reasonable" requirement for specific enforcement under section 3391, subdivision (2).

DISCUSSION

HCP argues the trial court erred in interpreting the ground lease subordination provision to apply only to construction loans and in concluding that the subordination provision was, in any case, unenforceable.

A. Interpretation of the Subordination Provision

HCP argues the trial court misinterpreted the subordination provision of the ground lease when it found the provision was limited to construction loans.

1. Contract Interpretation

The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract. If contractual language is clear and explicit, it governs. If the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265.)

A contract provision is ambiguous when it is capable of two or more constructions, both of which are reasonable. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.)

In interpreting an ambiguous provision a court may look to such extrinsic evidence as the surrounding circumstances under which the parties entered the contract, the object and subject matter of the contract and the subsequent acts and conduct of the parties. We look to the whole contract in interpreting its parts and, if possible, give effect to each of its parts. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473-474.)

2. Analysis

a. Standard of Review

With regard to the issue of interpretation, the parties differ on the appropriate standard of review.

The law's general approach to appellate review with regard to contract interpretation is relatively clear and easily stated. The question of whether an ambiguity exists is a question of law subject to independent review on appeal. Parol or extrinsic evidence is admissible to resolve an ambiguity. When no parol evidence is admitted or when the parol evidence is not in conflict, the resolution of an ambiguity is also a question of law subject to de novo resolution by the court. When competent parol evidence is in conflict and credibility issues must be resolved, any reasonable construction of the ambiguous provision made by the trial court will be upheld if supported by substantial evidence. (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165-1166.)

The Kennedy Partnership notes that conflicting expert testimony was offered by the parties concerning, e.g., the custom and practice in drafting ground subordination provision in ground leases in 1959. The Kennedy Partnership also notes that while the trial court did not discuss or mention such testimony in the statement of decision, the court impliedly relied on its expert since it generally found in its favor. The Kennedy Partnership, therefore, invokes the rule that when parol evidence is in conflict and credibility issues must be resolved, any reasonable construction of the ambiguous provision made by the trial court will be upheld if supported by substantial evidence.

HCP argues that while there was conflicting expert testimony offered by the parties, it is clear the trial court did not rely on that evidence in interpreting the contract. This lack of reliance is clear HCP contends because, while the trial court specifically cited in some detail to the wording of the contract and to the subsequent conduct and acts of the lessor, it did not refer at all to the expert opinion supporting its interpretation of the subordination clause. HCP argues, therefore, this court should interpret the contract de novo.

We understand a reviewing court is not limited to considering the evidence actually cited by the trial court in the lower court's statement of decision. Rather, we are required to accept as true all evidence tending to establish the correctness of the trial court's decision and to resolve all conflicts in favor of the prevailing party and indulge all legitimate and reasonable inferences to uphold the judgment. Our review is not limited to only those facts the trial court mentions in its statement of decision but extends to the entire record. This is apparent from the fact a statement of decision "'need do no more than state the grounds upon which the judgment rests, without necessarily specifying the particular evidence considered by the trial court in reaching its decision.'" (In re Marriage of Schmir (2005) 134 Cal.App.4th 43, 50, fn. omitted.)

However, it is clear in this case both in the abstract and in the decision reached by the trial court that the expert testimony, while relevant, was not determinative. The experts attempted to look back 46 years to illuminate custom and practice that may or may not have affected the parties' intent with regard to this particular ground lease. The experts could not agree on what those customs and practices were. The crucial task for the trial court was to review the words of the agreement and the nonconflicting evidence concerning the lessor's subsequent acts and conduct and on that basis interpret the contract. That being the case it is appropriate for this court to review the issue de novo. Ultimately, the issue of the proper standard of care is academic, however, since we conclude after a de novo review that the trial court's interpretation of the subordination agreement was correct.

b. Interpretation

The interpretive task here is to decide whether it was the parties' intent to allow the lessee to encumber the lessor's fee interest only to secure loans for the construction or improvement of the property or to allow the lessee to secure loans for any purpose. Central to resolving this issue is the meaning of the first subparagraph in the subordination provision of the lease. That paragraph states: "It is understood and agreed that Lessee, his heirs, successors or assigns may at any time, subsequent to the exercise of his option pursuant to paragraph 18 [the lease was for two years with a option by the lessee to extend it for an additional 97 years], borrow money for the erection of a building/s and for all other improvements to be erected, installed or maintained in or upon said demised premises."

The Kennedy Partnership argues reference in this first paragraph to the borrowing of money for the erection of buildings, etc., is meant to limit the purposes for which its fee interest can be encumbered. HCP reads the paragraph differently. It focuses on that part of the first paragraph stating that money may only be borrowed by the lessee after it had exercised its option to extend the lease. It concludes the first paragraph is not a limitation on the purposes to which the lessee's loans may be put but rather defines the time, i.e., after exercising its option to extend the lease, when fee encumbering construction loans may be sought. It argues such a limitation is important to the lessor because it would not want its fee securing a construction loan when the lessee still had the power not to exercise its option.

While neither reading of the subordination provision is unreasonable, we agree with the trial court that all things considered the provision provides a limitation not just on the timing of fee secured loans but the purposes to which a loan so secured may be put. There is certainly a timing restriction in the first paragraph of the subordination provision and it undoubtedly exists for the reason HCP describes. Still, the first paragraph also refers specifically to loans for erection of buildings or improvements on the leased property. As a matter of literary structure (and this lease is a formal document evidencing care in drafting), an opening subparagraph usually defines the general purpose of the section it introduces and the matters to which the succeeding and more detailed subparagraphs refer. That being the case the succeeding subparagraphs here merely refer to the manner in which loans for the construction of improvement to the leased property are to be secured. Those paragraphs, therefore, do not grant to the lessee the right to secure any loans for any purposes it desires using the lessor's fee interest as security.

We agree with the trial court that this interpretation of the first subparagraph of the subordination provision finds support in language in the third subparagraph of the provision. The third subparagraph states: "The foregoing provisions of this paragraph 19 are subject, however, to the understanding and agreement that Lessee, his heirs, successors or assigns shall assume, pay, and in any and all manner hold Lessor free and harmless from the obligation/s of Lessor due and owing at the date of the recording of said improvement loan or loans which obligations is more particularly described in paragraph 15 hereof. It is understood and agreed that Lessor shall execute and deliver without charge to Lessee, or to any lending institution, any and all deed/s of trust, reconveyance/s, releases or other instrument which may become necessary to effectuate said improvements loan/s and the terms of this paragraph. The Lessor further covenants and warrants that should the consent of or execution by any person other than a party hereto be required to effectuate said improvement loan/s, that Lessor will immediately secure such consent and execution upon written demand of Lessee." (Italics added.)

The repeated reference in this third subparagraph to "said improvement loan/s" clearly refers back to the loans described in the first subparagraph and strongly suggests that paragraph 19 was meant to allow the lessee to secure with the lessor's fee interest loans for the construction of building and improvements on the leased property and not to allow lessee to so secure loans for any other purpose.

HCP's expansive reading of paragraph 19 relies heavily on a portion of subparagraph two which states in relevant part: "Further, it is understood and agreed that Lessee shall have the right from time to time to borrow money on the security of the leased premises and in order to enable Lessee to obtain such financing Lessor agrees to convey title to the leased premises to Title Insurance and Trust Company, hereinafter called Trustee, under a holding form trust, and said Trustee is hereby empowered to execute trust deeds on the leased premises to secure the payment of any loan or loans that Lessee my desire to obtain. It is expressly understood and agreed by and between Lessor and Lessee that there are no restrictions on the number of loans that Lessee may obtain nor upon the amounts, rates of interest, or terms of repayment of such loans." (Italics added.)

HCP states the word "further" means "in addition to," that "from time to time" evidences the contemplation that borrowing might occur numerous times during the life of the lease. HCP notes the use of the word "any" in the phrase "any loan or loans that lessee may desire to obtain" is unqualified. Based on this, HCP argues the second subparagraph of paragraph 19 is the actual "purpose" clause and allows the lessee to secure with the lessor's fee interest loans for any purpose.

The word "further" does mean "in addition to." It also means "furthermore." (The American Heritage Dictionary of the English Language, New College Edition, p. 534.) It is not impossible the use of the word "further" in this context could mean that loans for purposes other than construction and improvement were contemplated but it easily could have been used for introducing a further provision concerning the securing of construction and improvement loans.

The fact the parties contemplated the need for borrowing over time does not mean the paragraph allowed such borrowing for purposes other than construction and improvement to the leased property.

Taken out of context, the phrase "any loans or loans that Lessee may desire to obtain" is expansive. But a single line in a complex provision does not an interpretation make. While "any" might mean that lessor was willing for its fee interest to secure loans for expensive cars and luxurious trips, it could as easily in context simply mean any loans that the lessee might seek to improve the property.

We also agree with the trial court that the conduct of the parties since the inception of the lease supports to some degree the conclusion that the subordination provision of the lease was meant to apply only to loans for the construction on, and improvement to, the leased premises. Lessor's reaction in 1967 to the use of its fee interest certainly evidences its long-standing position that the provision was so limited. That the foreclosure proceeding associated with that loan was withdrawn may or may not suggest lessee's understanding of the position. Likewise, the fact the fee interest was not used to secure loans until the present case is of only slight significance. While we understand that none of this extrinsic evidence is weighty or determinative, it does support the Kennedy Partnership's reading of the subordination provision of the lease.

We conclude the proper interpretation of the subordination provision contained in paragraph 19 of the lease is that it applied only to loans sought for the construction of or improvements to the leased premises.

B. Enforceability

Appellant argues the trial court erred in concluding that the subordination provision of the lease was not specifically enforceable.

1. Background

HCP's action for declaratory relief was undertaken with the ultimate purpose of specifically enforcing its claimed right to secure loans with the Kennedy Partnership's fee interest. That being the case it was necessary the trial court determine whether the subordination provision of the lease was specifically enforceable.

In its trial brief the Kennedy Partnership argued the subordination provision of the lease, however interpreted, was unenforceable. The partnership argued the law has developed a policy of protecting subordinated parties applicable to both sale and ground lease situations. This policy was manifested, first, by a requirement that before the subordination provision could be enforced both the right to subordination and the details of the subordinating loan contain a high level of specificity. Second, a subordination agreement would not be enforced if it was not fair and just, in this context, to the subordinating lessor. the Kennedy Partnership argued the subordinating provision in this case failed in both respects.

At trial expert testimony was offered by both parties concerning the danger to the Kennedy Partnership's fee interest if the subordination agreement was enforceable and to HCP's leasehold interest if it was not.

The trial court concluded the subordination provision was unenforceable. First, the court concluded the provision was insufficiently specific to allow its enforcement. The court noted the provision allowed the lessee to secure a loan of any amount with the lessor's fee interest merely by depositing $200,000 to the lessor's account. The court noted even HCP's expert agreed this amount was insufficient to protect the lessor. The court additionally noted there were no limits on the terms of the loan, the interest rate, the mode of repayment or the type of lender. This lack of specificity would allow for loans that could put the lessor's interest at great risk.

The trial court also concluded the subordination provision was unenforceable because it was not "just and reasonable" to the lessor within the meaning of section 3391, subdivision (2). The trial court concluded it was necessary it balance the risks the provision required the Kennedy Partnership assume against the benefits it provided for HCP.

The court noted the risks to the lessor were great. Default on the lessee's loan secured by the fee could result in loss of the lessor's interest in the property. Given the lack of specificity in the provisions concerning the nature of the loan, the lessor could be placed in a position where protecting its interest could be very difficult. The court noted the lessee could secure any loan for any amount merely by depositing $200,000 to lessor's account. The court stated that it could not revise the lease to place restrictions on this condition.

The trial court further concluded that for HCP to receive meaningful benefit from the lease, it was not necessary the subordination provision be enforceable. It first noted the building had been successfully run by other lessees without the use of loans to which the lessor's fee interest was subordinated. The court concluded HCP had at least constructive notice there were no fee mortgages on the property for over 30 years and HCP purchased the leasehold with knowledge of the Kennedy Partnership's position on the nonenforceability of the subordination provision. The court concluded that the use of the lessor's fee interest to secure loans for the lessee by which most of the equity would be provided the lessee was not a benefit HCP had a right to assume the Kennedy Partnership would provide. The court further noted that if such financing was an element in HCP's decision to purchase the leasehold, expert testimony indicated such loans were available without the necessity of securing them with the lessor's fee interest.

The trial court concluded the subordination provision of the lease was unenforceable.

2. Discussion

HCP argues the trial court erred in concluding the subordination provision of the lease was nonenforceable. Important to the resolution of that issue is the applicability to this case of the decision in Handy v. Gordon (1967) 65 Cal.2d 578.

a. Handy v. Gordon

Handy involved an action for specific performance of a contract to sell land. The case involved the sale of 320 acres for what the buyer described in his complaint as a "fair and reasonable" price. Essentially, the buyer made a down payment of $100 on a sale price of $1.2 million. Repayment was to begin three years after the close of escrow. Buyer executed a note secured by a deed of trust. The sales contract included a subordination agreement in which seller agreed to subordinate his trust deed to other trust deeds securing loans for construction and permanent financing. (65 Cal.2d at pp. 579-580.)

The subordination clause specified that the maximum loan was $10,000 per lot for construction loans and $52,000 per lot for financing loans. The contract did not specify the number of lots that would be created and the decision was left to the buyer's discretion. The maximum allowable interest rate on the construction loans was set at 7 percent and the maximum for financing loans was set at 6.6 percent. The loans were to mature in not more than 6 and 35 years respectively. (Handy v. Gordon, supra, 65 Cal.2d at pp. 579-580.)

In Handy the trial court concluded, apparently pursuant to section 3390, subdivision (5), that the contract was too indefinite to enforce. (Handy v. Gordon, supra, 65 Cal.2d at pp. 579-580.) The Supreme Court also found the contract unenforceable but on the basis that as to the seller it was not "'just and reasonable,'" citing section 3391, subdivision (2). (Id. at pp. 580-581.)

The court noted that it was proper for parties to a contract containing a subordination clause to delegate to the buyer the power to determine the details of subordinating loans. The court also noted, however, that an enforceable subordination clause must contain "terms that will define and minimize the risk that the subordinating lien will impair or destroy the seller's security." (Handy v. Gordon, supra, 65 Cal.2d at p. 581.) The court stated: "Such terms may include limits on the use to which the proceeds may be put to insure that their use will improve the value of the land, maximum amounts so that the loans will not exceed the contemplated value of the improvements they finance, requirements that the loans do not exceed some specified percentage of the construction cost or value of the property as improved, specified amounts per square foot of construction, or other limits designed to protect the security." (Ibid.)

The court noted: "Without some such terms, however, the seller is forced to rely entirely on the buyer's good faith and ability as a developer to insure that he will not lose his land and the purchase price." (Handy v. Gordon, supra, 65 Cal.2d at p. 581.)

The court concluded the subordination clause in Handy was unenforceable under the just and reasonable provision of section 3391, subdivision (2). The court noted that while the proceeds of the construction loans were primarily to be used to improve the property, funds not needed for that purpose could be distributed to the buyer. The court observed that because the loan limits were expressed as absolutes, they provided no assurance that the loans would not exceed the value of the improvements. The court noted in any case that the limits are maximums per lot and the number of lots created was solely within the discretion of the buyer. Given these factors the court stated seller was not assured that the subordinating loans would be kept low enough to enable the seller to protect himself by bidding on the property if the senior liens were foreclosed. The court also noted that the seller did not receive a down payment that would cushion its position and that repayment of the principal was deferred for three years. (Handy v. Gordon, supra, 65 Cal.2d at p. 582.)

b. Handy and Ground Lease Based Subordination Provisions

HCP argues that Handy's application of Code of Civil Procedure sections 3391, subdivision (2), should be limited to purchase-money sales transactions. We see no reason why that should be the case. At their core, the issues here revolve not around the decision in Handy but around concepts of equity requiring that before an agreement may be specifically enforced it must be sufficiently definite to allow fair enforcement (§ 3390, subd. (5)) and be sufficiently fair and reasonable to the party whose interest is placed at risk (§ 3391, subd. (2)).

Subordination agreements are very risky for both sellers and lessors and raise the possibility of the loss of the fee interest. (See Miller, Star & Regalia, Subordination Agreements in California (1966) 13 U.C.L.A., L. Rev. 1298, 1299.) Both sellers and lessors share similar risks in the subordination context. It may be that the general circumstances of sellers differ from those of lessors with regard to subordination provisions. It may be that the definiteness of a subordination clause in one sales contract or one lease and the fairness of such a provision in a given clause differ. Still, each must be tested to determine if it is enforceable and Handy is a useful guide in doing so.

C. This Case

We agree with the trial court that the subordination provision of the ground lease was unenforceable. An important factor in Handy was that the provision allowed the seller's fee interest to be encumbered to secure loans for buyer that did not increase the value of the property. That is not a factor here since we have interpreted the ground lease not to allow such loans.

Nonetheless, the subordination provision in this case was not just and reasonable within the meaning of section 3391, subdivision (2). While the provision nominally limits subordination loans to 75 percent of the property value, that limit can be exceeded if the lessee deposits $200,000 to lessor's account. This amount is clearly inadequate to protect the lessor's interest.

At trial HCP stated that it was willing to unilaterally amend the lease by waiving this provision. However, a party may unilaterally waive a provision only when it exists for that party's sole benefit. (WYDA Associcates v. Merner (1996) 42 Cal.App.4th 1702, 1714; Reeder v. Longo (1982) 131 Cal.App.3d 291, 297.) The subject provision in this case, however, was for both parties' benefit and it could not be unilaterally waived.

Further, as the trial court noted, there are no limits on the terms of the subordination loan and no limits on the type of lender, e.g., institutional or private. The lack of such specific provisions made the subordination provision insufficiently definite and allows the Kennedy Partnership fee interest to be encumbered by loans that place that interest at great risk. We also agree with the trial court that the benefits the subordination provision provided to HCP were outweighed by the risks of the provisions, particularly in light of the fact that HCP would be able to secure needed improvement financing without encumbering the Kennedy Partnership fee interest.

The judgment is affirmed.

BENKE, Acting P. J.

WE CONCUR:

HALLER, J.

O'ROURKE, J.

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^[1] The parties understand that technically such a device does not involve subordination. The term has traditionally been used to describe the financing device at issue, however, and we will follow that practice.

^[2] All further statutory references are to the Civil Code unless otherwise specified.