D.S.O. Leasing v. Eco-Air Products

Filed 4/6/06 D.S.O. Leasing v. Eco-Air Products 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 977.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, Jeffrey B. Barton, Judge. Affirmed.

In this lease dispute, the court reformed a lease between the landlord D.S.O. Leasing (DSO) and the tenant Eco-Air Products, Inc. (Eco-Air) based upon a mutual mistake that had specified that the landlord was responsible for paying the property taxes on the property that Eco-Air leased. Flanders Corporation (Flanders) purchased the shares of Eco-Air at a time when Eco-Air was paying property taxes on the property, but the lease specified that DSO was responsible for such payments. Subsequently, Flanders informed DSO that it would no longer pay the property taxes because the lease specified that obligation belonged to DSO. Flanders also demanded money that Eco-Air had paid in past property taxes after the purchase but before Flanders allegedly discovered that the lease required DSO to make such payments.

DSO brought an action for reformation of the lease, alleging that the lease term obligating it to pay property taxes was a mutual mistake between it and Eco-Air at the time they entered into the lease. Following a court trial the court agreed with DSO's position and reformed the lease to specify that Eco-Air was responsible for paying the property taxes on the leased premises.

Flanders and Eco-Air appeal, asserting that the court erred in reforming the lease because (1) DSO was equitably estopped from asserting the remedy of reformation; (2) there was no clear and convincing evidence of a mutual mistake; (3) DSO's "gross negligence" precluded reformation; and (4) under Civil Code section 3399 reformation was unavailable because it would prejudice the rights acquired by Flanders in good faith and for value. We affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

A. Background of Parties and Dispute

Eco-Air was incorporated in 1971 in California. It was formed to manufacture, sell and service air filters. DSO is a partnership that was formed to lease equipment to Eco-Air. William O'Brien and Valerie Halvorson (formerly Valerie Deilgat) were the partners in DSO. They also were the majority shareholders of Eco-Air.

In the early 1980's DSO purchased property in Phoenix, Arizona. In 1985 DSO built an industrial building on that property to be leased to Eco-Air. In 1985 Eco-Air and DSO entered into a "triple net lease" for the property.^[1]

Paragraph 4.03 of the 1985 lease required the "Lessee" to pay the property taxes on the Phoenix property:

"Real property taxes and assessments as currently levied and assessed against said premises by any governmental entity, shall be the responsibility of Lessee. Lessee shall conduct no activity on said premises nor place any articles on said premises that will increase the real property taxes levied or assessed against said premises without the written consent of Lessor first had and obtained."

Carl Deilgat and Halvorson signed the 1985 lease on behalf of Eco-Air, and O'Brien signed on behalf of DSO. Eco-Air paid the property taxes for each year of this five-year lease. The monthly rent was $6,600.

In 1990 the lease needed to be renewed. A renewal lease was prepared. According to DSO, it was intended that the 1990 lease be identical to the 1985 lease for another five-year term, the only difference being that the monthly rent was to increase to $6,697. However, paragraph 4.03 of the renewal lease set forth "Lessor" instead of "Lessee" as the party obligated to pay the property taxes:

"All real property taxes and assessments levied or assessed against said premises by any governmental entity, including any special assessments shall be the responsibility of Lessor. Provided, however, Lessee shall conduct no activity on said premises nor place any articles on said premises that will increase the real property taxes levied or assessed against said premises without the written consent of Lessor first had and obtained." (Italics added.)

The lease was executed in 1990 by the same persons, Deilgat and Halverson on behalf of Eco-Air and O'Brien on behalf of DSO. Despite the language of the lease, however, the lessee Eco-Air paid the property taxes for each year of the renewal lease.

In 1995 the 1990 renewal lease was extended. According to DSO and Eco-Air, the parties' intent was that this renewal lease be the same as the 1985 lease but for a 10-year term. The monthly rent remained at $6,697. However, the 1995 lease again provided that the lessor rather than the lessee would pay property taxes. This time Leonard Fetcho, then-president of Eco-Air, and Halvorson signed on behalf of Eco-Air. O'Brien again signed on behalf of DSO. However, despite the language to the contrary, Eco-Air continued to pay the property taxes for the property.

In May of 1998, after conducting a due diligence of Eco-Air's records, Flanders Corporation (Flanders) purchased the shares of Eco-Air for $15 million, plus an additional "earn out" of $5 million, contingent upon Eco-Air meeting various sales goals. After Flanders purchased the shares of Eco-Air, Eco-Air continued to pay the property taxes under the lease through 2002 and part of 2003. However, in November 2003, Eco-Air and its new owners Flanders alleged that they had discovered that the 1990 and 1995 leases provided that DSO was obligated to pay property taxes under those leases. Eco-Air advised DSO that it would no longer pay the property taxes. Eco-Air also demanded payment of $267,861.34 for past property taxes paid by it, plus interest, by November 28, 2003. Eco-Air also advised DSO that it would not be paying future property tax payments absent a formal lease amendment.

On November 26, 2003, DSO filed a complaint against Eco-Air for reformation and declaratory relief. Flanders and Eco-Air filed a cross-complaint against DSO and O'Brien.

B. Relevant Trial Testimony and Exhibits Concerning Mistake in Lease

The matter came on for a bench trial in October 2004, where the parties agreed to first try the threshold issue of whether reformation of the lease was proper. Because much of the appeal centers on the sufficiency of the evidence to show that reformation was proper on the grounds of mutual mistake, we state the following relevant trial testimony and exhibits in the light most favorable to the judgment. (Washington v. Farlice (1991) 1 Cal.App.4th 766, 771-772 (Washington).)

1. Steven Clark's testimony

Steven Clark, an officer of Flanders, as well as the president and a director of Eco-Air after it purchased the company, testified that after Flanders purchased Eco-Air's shares, the subject lease rights still belonged to Eco-Air and had not been transferred to Flanders.

Clark testified that he negotiated the purchase of Eco-Air's shares with Fetcho, the then-president of Eco-Air, over a five- or six-month period. Fetcho, as president of Eco-Air, was representing the shareholders of Eco-Air. Clark did not negotiate with DSO. Fetcho and Clark agreed upon the price of $15 million for Eco-Air's shares. $2 million of the $15 million was paid to Fetcho as part of the transaction.

Clark testified that he was concerned about certain terms in Eco-Air's lease. According to Clark, the 1995 lease was the very first document reviewed in one meeting he had with Fetcho. Clark testified that Fetcho, on behalf of Eco-Air, stated that the lessor DSO was responsible for paying the property taxes under the 1995 lease. However, Clark agreed it was out of the ordinary for the lessor to pay the property taxes under a triple net lease. Mr. Clark acknowledged that under a triple net lease, the tenant generally pays the property taxes.

Flanders hired a team to conduct a due diligence on Eco-Air. The team consisted of the law firm of Snell & Wilmer from Salt Lake City, Utah, and the accounting firm of McGladrey & Pullen from North Carolina, the home state of Flanders. Clark declared that prior to the purchase of Eco-Air's shares, Flanders engaged in "significant due diligence." Snell & Wilmer was paid approximately $300,000 for its investigation.

In Clark's opinion, Flanders overpaid Eco-Air's shareholders by $500,000 or more because Eco-Air had been paying the property taxes.

According to Clark, Flanders did not become aware that Eco-Air had been paying the property taxes until about November of 2003. Clark testified that the November 14, 2003 letter to DSO was sent under his supervision. In this letter, Clark's position was that Eco-Air should not have paid the property taxes given the language of the 1995 lease, and DSO needed to pay Eco-Air $267,861.34 within the next two weeks.

However, in Flanders's Form 10-K filed with the United States Securities and Exchange Commission (SEC, Flanders acknowledged that the "monthly payment" for the Phoenix property for the year 2002 was $8,742, not $6,697 as set forth in the subject lease. $8,742 was almost exactly the same as the monthly rent, plus the monthly accrual of the property taxes for the year 2002.

Clark testified that the monthly payment of $8,742 in the 10-K form was not tied to the Eco-Air lease. However, Clark then testified that he did not know what the $8,742 number in the 10-K form represented.

2. Fetcho's testimony

Fetcho, president of Eco-Air from June 1993 to March 2003, testified that he signed the 1995 lease as president of Eco-Air and at that time it was Eco-Air's intent that it was required to pay the property taxes.

Fetcho testified that Robert Amerson, chairman of the board and president of Flanders, telephoned him in January of 1997 about buying Eco-Air. One year later, Fetcho and O'Brien met Amerson and Clark in San Francisco, where Clark almost immediately advised that Eco-Air had a value "north of [$]10,000,000 and south of [$]20,000,000."

According to Fetcho, he never told Clark that the lessor DSO was responsible for paying the property taxes under the lease. The subject never even came up in his discussions with Clark. Fetcho knew that Eco-Air was paying the property taxes. At that time, Eco-Air had five other property leases, all of which were triple net leases in which Eco-Air was paying the property taxes.

After a price was agreed to, Flanders's due diligence team commenced its work and Flanders's attorneys and accountants arrived and all requested information was provided to them.

3. Diane Deilgat's testimony

In about 1990 Dianne Deilgat became the controller of Eco-Air. She never worked for DSO. Dianne Deilgat paid the property taxes for Eco-Air on the Phoenix property because Eco-Air was supposed to do so. Eco-Air paid all expenses associated with the subject property. The property tax was reflected as a monthly accrual amount which in 2002 was $2,051 As discussed above, she testified that when the monthly accrual for property taxes of $2,051 is added to the monthly rent of $6,697, the sum is virtually the same as the amount of the Eco-Air building monthly payment set forth in Flanders's Form 10-K. Eco-Air's financial records reflected the accrual of the subject property taxes as a "liability," and it was reflected as paid. Eco-Air's financial statements reflected the net profits which were necessarily reduced by the property tax payments. Eco-Air's records were made available to the due diligence team hired by Flanders. These records included a property tax file evidencing payment by Eco-Air of the property taxes for the subject property. It was Dianne Deilgat's standard practice, regarding Eco-Air's balance sheets, to include a copy of the bill with the calculation of the balance, and these balance sheets would have been reviewed by Flanders's due diligence team.

After Flanders purchased Eco-Air's shares, Dianne Deilgat sent by fax or e-mail Eco-Air's monthly trial balances to Flanders, and the trial balances evidenced the property tax obligations. After the stock purchase, Flanders selected its own accountants for Eco-Air's yearly audits and to prepare its financial statements. Backup items such as the property tax bills were provided to these accountants. After Flanders purchased the shares of Eco-Air, Eco-Air's daily check registers were faxed to Flanders. Some of those check registers were faxed to Clark. The financial effects of Eco-Air's property tax obligations and payments were reflected in Eco-Air's financial statements both before and after the stock purchase.

Dianne Deilgat was instructed by Eco-Air to pay the property taxes for the Phoenix property for Eco-Air.

Dianne Deilgat testified that the tax liability was reflected in many financial records, but one might not know the exact meaning of a particular line item in Eco-Air's trial balances. Regarding Eco-Air's balance sheets, it was Dianne Deilgat's standard practice to include a copy of the bill along with the calculation of the balance which would have been reviewed by Flanders's due diligence team.

4. Halvorson's testimony

Halvorson, a past officer of Eco-Air, who signed each of the three leases on behalf of Eco-Air, testified that it was Eco-Air's intent to pay the property taxes under the 1985 lease. This intent did not change when the 1985 lease was renewed and when the 1990 lease was signed. Eco-Air's intent also did not change when the 1990 lease expired, needed to be renewed, and the 1995 lease was signed. While she was an officer of Eco-Air, it was always Eco-Air's intent to pay the property taxes, which it did.

Halvorson testified she was not aware that paragraph 4.03 of the 1990 lease called for the lessor to pay the property taxes. This was a mistake, which she would have corrected had she known. Halverson recalled learning of the mistake in about November of 2003. Halvorson believed that attorney James Waldorf had been involved in the preparation of the 1985 lease, but not the 1990 lease.

5. Deilgat's testimony

Carl Deilgat, Halvorson's former husband, testified that he was the president of Eco-Air from about 1971 to 1993. Under the 1985 lease, which he signed, Eco-Air was to pay the property taxes. The 1990 lease, which he signed, was a renewal lease and Eco-Air was still to pay the property taxes. While he was president of Eco-Air, it was Eco-Air's intent to pay the subject property taxes, and Eco-Air did so.

Carl Deilgat testified that separate books and separate records were kept for the separate entities, DSO and Eco-Air. DSO, a leasing partnership, was formed to lease equipment to Eco-Air.

6. O'Brien's testimony

O'Brien testified it was DSO's intent that the tenant, Eco-Air, would be obligated to pay the property taxes and all other expenses for the building and property. Having Eco-Air pay all the expenses was consistent with the other leases DSO had with Eco-Air. DSO understood that Eco-Air paid the subject property taxes from 1985 to 1990. The 1990 lease was a renewal lease. O'Brien did not notice that provision 4.03 in the 1990 lease designated the lessor as responsible for the property taxes. If he had noticed the mistake, he would have corrected it. The 1995 lease was meant to be a triple net lease, with the tenant responsible for all expenses, including the property taxes. From 1985 to the trial, it was always DSO's intent that Eco-Air pay the property taxes on the Phoenix property. O'Brien first learned of the mistake in November 2003. From 1985 to 2003, Eco-Air paid the property taxes under each lease.

7. Williams's testimony

George Williams testified he oversaw the preparation of the leases. Williams's recollection was that he would have contacted attorney James Waldorf for a triple net lease in 1985. The 1985 lease accurately represented the intent of the parties. In 1990 Williams oversaw the preparation of the renewal lease. The 1990 and 1995 renewal leases contained an error by designating the lessor responsible for paying the property taxes, and Williams was responsible for not catching that mistake. According to Williams, the parties' intent was that Eco-Air was to pay the property taxes on all the leases.

Williams originally testified that he received a form lease in 1985 on a computer floppy disk from James Waldorf, Eco-Air's corporate counsel. In 1990, when the lease was renewed, he received a renewal lease on a disk from Waldorf.

However, after Waldorf testified that did not prepare any of Eco-Air's leases (discussed, ante), Williams testified that he had no explanation for the mistake.

8. James Waldorf's testimony

James Waldorf is an attorney who has represented Eco-Air in the past. Waldorf did not prepare the 1985 lease, the 1990 lease or the 1995 lease.

The concept of a triple net lease is inconsistent with the lessor paying the property taxes. Mr. Waldorf would not have prepared a triple net lease with the lessor instead of the lessee responsible for the property taxes. In all leases between DSO and Eco-Air in which Mr. Waldorf was involved, Eco-Air paid all the expenses, including property taxes.

9. John Hodson's testimony

John Hodson is the chief financial officer for all subsidiaries of Flanders, including Eco-Air. Hodson is a CPA and was a public accountant for 15 years before joining Flanders. However, Hodson testified that it was unclear to him what Eco-Air's trial balances reflected. He could and did call Dianne Deilgat if he had any questions. Hodson also received check registers from Dianne Deilgat, but did not recall one for Eco-Air's Phoenix property. Dianne Deilgat was faxing him Eco-Air's trial balances by the year 2000.

C. Court's Ruling

After a three-day bench trial on the reformation issue, the court issued a statement of decision on December 3, 2004, finding that the lease should be reformed. The court found that there was clear and convincing evidence of a mutual mistake by DSO and Eco-Air with regard to the language in the 1990 and 1995 leases that the landlord was responsible for payment of property taxes. The court cited the testimony of the principals of DSO and Eco-Air, "all of whom testified that it was their intention that Eco-Air pay all expenses of the building operation, including property taxes." The court pointed to additional evidence of the parties' intention, "including the original terms of the 1985 lease" and the fact that the rental amount in the leases "was just enough to cover the loan obligations of DSO" on the Phoenix property.

The court also found that the course of conduct of the parties was consistent with their testimony as to their subjective intent. The court noted that until 2003, even after Flanders purchased Eco-Air's shares, Eco-Air paid the property taxes, despite the contrary language in the 1990 and 1995 leases.

The court also rejected Flanders and Eco-Air's argument that the negligence of DSO barred the remedy of reformation. The court found that negligence does not bar this remedy, unless it rises to the level of "gross negligence or preposterous or irrational conduct." The court did note the negligence of the parties in failing to review the leases and correct the mistakes, and the "problematic" testimony as to how the leases were prepared. However, the court found that the parties' conduct only rose to the level of simple negligence.

The court then addressed Flanders and Eco-Air's argument that they were third party purchasers in good faith and for value whose rights would be prejudiced by a reformation of the lease. The court rejected this defense because (1) Flanders was not a third party that could object as it only purchased the shares of Eco-Air, not the lease itself; (2) Flanders was not prejudiced by the reformation as the materials available during the due diligence showed Eco-Air to be paying the property taxes on the Phoenix property; and (3) Flanders had, through its due diligence, actual or constructive knowledge that Eco-Air was paying the property taxes on the Phoenix property.

Based on the trial court's decision, judgment against Eco-Air was entered for the unpaid property taxes.

STANDARD OF REVIEW

When a challenge is made to the sufficiency of the evidence, we must view all factual matters in the light most favorable to the prevailing party and the judgment. (Washington, supra, 1 Cal.App.4th at pp. 771-772.) "'"[W]e have no power to judge of the effect or value of the evidence, to weigh the evidence, to consider the credibility of the witnesses, or to resolve conflicts in the evidence or in the reasonable inferences that may be drawn therefrom."'" (White v. Inbound Aviation (1999) 69 Cal.App.4th 910, 927.) "'All of the evidence most favorable to the respondent must be accepted as true, and that unfavorable discarded as not having sufficient verity, to be accepted by the trier of fact.'" (Buehler v. Sbardellati (1995) 34 Cal.App.4th 1527, 1542, italics omitted.) When the record contains substantial evidence, "no matter how slight it may appear in comparison with the contradictory evidence, the judgment must be upheld." (Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 631.)

DISCUSSION

A. Equitable Estoppel

Flanders asserts that the court erred in reforming the contract to make Eco-Air responsible for the property taxes for the Phoenix property because it was equitably estopped from seeking this relief. This contention is unavailing.

"[T]he theory of estoppel is invoked as a defensive matter to prevent the party estopped from alleging or relying upon some fact or theory that would otherwise permit him to recover something from the party asserting estoppel. [Citation.] Or as frequently stated: 'The doctrine acts defensively only. It operates to prevent one from taking an unfair advantage of another but not to give an unfair advantage to one seeking to invoke the doctrine.' [Citations.]" (Green v. Travelers Indemnity Co. (1986) 185 Cal.App.3d 544, 555 (Green).)

The doctrine of estoppel by conduct is embodied in Evidence Code section 623 which states: "Whenever a party has, by his own statement or conduct, intentionally and deliberately led another to believe a particular thing true and to act upon such belief, he is not, in any litigation arising out of such statement or conduct, permitted to contradict it."

The elements of the defense of equitable estoppel are "(1) the party to be estopped must be apprised of the facts; (2) he must intend that his conduct be acted upon, or must so act that the party asserting the estoppel had a right to believe it was so intended; (3) the other party must be ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury. [Citations.] There can be no estoppel where one of these elements is missing. [Citation.]" (Green, supra, 185 Cal.App.3d at p. 556.)

Further, "[r]eliance by the party asserting the estoppel on the conduct of the party to be estopped must have been reasonable under the circumstances. '"To warrant reliance, a representation must be such as would induce a reasonable man to act upon it."' [Citations.]" (Mills v. Forestex Co. (2003) 108 Cal.App.4th 625, 655.)

"Moreover, estoppel, an equitable doctrine, rests upon the totality of circumstances, not upon an inflexible rule of law, although equitable rubrics occasionally give a contrary impression, and we must look to all of the circumstances surrounding the making of the order, and to the ultimate effect if it is enforced." (Bierl v. McMahon (1969) 270 Cal.App.2d 97, 104.) "The doctrine of estoppel must be applied strictly and established in every particular." (Transport Clearings-Bay Area v. Simmonds (1964) 226 Cal.App.2d 405, 428)

Flanders bases its equitable estoppel argument upon a warranty provision in the stock purchase agreement that provides:

"Leases. Eco-Air and Sub-Mex enjoy exclusive, peaceful and undisturbed possession under all equipment, real property, personal property, or other leases to which they are a party. All such leases are identified in the books and schedules of Eco-Air, are valid and enforceable against Eco-Air and Sub-Mex in accordance with their terms, and no party thereto is in default thereunder." (Italics added.)

Based upon this clause that warranted that the lease was valid and enforceable according to its terms, Flanders asserts that DSO is equitably estopped from attempting to change the terms of the 1990 and 1995 leases. There are several problems with this argument, however.

First, Flanders's agreement was with the stockholders of Eco-Air, not DSO. DSO did not make any representations or warranties to Flanders.

Second, there is no evidence that anyone at DSO knew of the mistake in the 1990 and 1995 leases. Therefore, the first element of equitable estoppel has not been met.

Third, to be able to raise the equitable estoppel defense, a party must be ignorant of the true state of facts. (Green, supra, 185 Cal.App.3d at p. 556.) The court found, and substantial evidence supports that finding, that Flanders, because of its due diligence and the records of Eco-Air that were available to it, had actual or constructive notice that Eco-Air was responsible for the property taxes on the Phoenix property and had indeed always paid them.

Flanders asserts that mere constructive notice is insufficient to defeat their estoppel defense when there has been a contrary affirmative representation that a party has relied upon, citing Bank of America Nat. Trust & Savings Ass'n v. Greenbach (1950) 98 Cal.App.2d 220, 234. However, the evidence was sufficient to find that Flanders had actual notice of the fact that Eco-Air was paying the property taxes on the Phoenix property. Moreover, the Bank of America case is inapposite as it was a case of intentional fraud, not equitable estoppel. The defense of equitable estoppel is "an equitable doctrine, [which] rests upon the totality of circumstances, not upon an inflexible rule of law . . . ." (Bierl v. McMahon, supra, 270 Cal.App.2d at p. 104.) Constructive notice is sufficient to defeat an estoppel defense. (Chaplis v. County of Monterey (1979) 97 Cal.App.3d 249, 261-262.)

Finally, there is no evidence that Flanders relied to its detriment on the lease term that provided that DSO was responsible for the property taxes. In Eco-Air's financial documents, its profits would be reduced by the amount it paid in property taxes. Flanders conducted a substantial due diligence before purchasing the shares of Eco-Air, which would have revealed its net profits after payment of property taxes. The purchase price of the shares was therefore based upon the assumption (or actual knowledge) that Eco-Air was responsible for the property taxes on the Phoenix property. Therefore, Flanders cannot assert that it relied upon the fact that Eco-Air was not paying property taxes and was damaged by the fact that it was.

In sum, the court did not err in rejecting Flanders's equitable estoppel defense.

B. Evidence of Mutual Mistake

Flanders next asserts that there is no clear and convincing evidence of a mutual mistake between DSO and Eco-Air that could support a reformation of the 1990 and 1995 leases. We reject this contention.

"When, through . . . mistake . . . , a written contract fails to express the real intention of the parties, such intention is to be regarded, and the erroneous parts of the writing disregarded." (Civ. Code, § 1640.) If there is "a mutual mistake of the parties, . . . a written contract . . . may be revised, on the application of a party aggrieved, so as to express that intention, so far as it can be done without prejudice to rights acquired by third persons, in good faith and for value." (Civ. Code, § 3399.) "In reforming the written agreement, a court may 'transpose[ ], reject[ ], or suppl[y]' words." (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524 (Hess).)

"In determining whether a mutual mistake has occurred, a court may consider parol evidence. [Citation.] Such evidence is admissible to show mutual mistake even if the contracting parties intended the writing to be a complete statement of their agreement. [Citation.] 'It is the rule that, where the writing itself, through mistake, does not express the intention of the parties who entered into it . . . and the writing does not therefore contain the real contract between the parties, the objection as to parol evidence is without merit.' [Citation.] Extrinsic evidence is necessary because the court must divine the true intentions of the contracting parties and determine whether the written agreement accurately represents those intentions." (Hess, supra, 27 Cal.4th at p. 525.)

In order to reform a contract "a party must present clear and convincing evidence that the agreement as written does not express the true intention of the parties and that there was a mutual mistake." (Dictor v. David & Simon, Inc. (2003) 106 Cal.App.4th 238, 253.)

Here, the witnesses who testified on behalf of DSO and Eco-Air were unanimous in their testimony that it was the intention of both parties that Eco-Air was responsible for the property taxes. The parties also uniformly testified that the 1990 and 1995 leases' provisions calling for DSO to pay the property taxes were mistakes that would have been corrected if either party discovered it.

Moreover, the parties' actions; that is, Eco-Air paying the property taxes both before and after the sale to Flanders, were consistent with this intention. It was also the parties' intention that the lease be a triple net lease. Under such leases, the tenant usually pays all expenses for the building, including property taxes. (Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions, supra, ¶ 7:35, pp. 7-8 to 7-9. )

Finally, the parties' intention that Eco-Air pay the property taxes for the property was consistent with the fact that the amount of rent was tied to the mortgage on the Phoenix property. There was no additional amount in the lease payment that could be used by DSO to offset property tax obligations. Clear and convincing evidence was presented to the court that the provisions in the 1990 and 1995 leases calling for the landlord (DSO) to be responsible for the payment of property taxes were mutual mistakes between DSO and Eco-Air that did not reflect the intention of the parties.

C. Negligence of DSO

Flanders asserts that the court erred in finding that DSO's conduct did not amount to gross negligence that would have precluded it from reforming the lease. This contention is unavailing.

"[A] contracting party's negligence does not necessarily preclude equitable relief, such as reformation. [Citation.] Indeed, we have long held that ordinary negligence will not bar a claim of mutual mistake because '[t]here is an element of carelessness in nearly every case of mistake . . . .' [Citation.] Only gross negligence or 'preposterous or irrational' conduct will preclude a finding of mutual mistake." (Hess, supra, 27 Cal.4th at p. 529, italics added.)

The court did not err in finding that DSO's actions in failing to discover the errors in the 1990 and 1995 leases did not amount to gross negligence or preposterous or irrational conduct. DSO's representatives testified that both leases were renewal leases that were intended to be under the same terms and conditions as the expiring leases. The first lease in 1985 was correct, and DSO mistakenly believed that the latter leases contained the same language. We cannot condone the failure to read an important term of a lease. However, we also cannot characterize such conduct as gross negligence or preposterous or irrational conduct.

D. Civil Code Section 3399

Flanders asserts that the court erred in allowing reformation of the lease because that act prejudiced the rights it acquired in good faith and for value. We reject this contention.

In support of this argument Flanders relies on Civil Code section 3399 which provides:

"When, through fraud or a mutual mistake of the parties, or a mistake of one party, which the other at the time knew or suspected, a written contract does not truly express the intention of the parties, it may be revised on the application of a party aggrieved, so as to express that intention, so far as it can be done without prejudice to rights acquired by third persons, in good faith and for value." (Italics added.)

However, a third party cannot be considered to have acquired rights in good faith if the party had actual or constructive notice of the rights of the party whose interests have been described defectively in the written instrument. (Saxon v. DuBois (1962) 209 Cal.App.2d 713, 717-719.) As described above, substantial evidence supports the court's finding that Flanders did have constructive notice that Eco-Air was responsible for paying the property taxes on the Phoenix property.

Additionally, as detailed above, Flanders was not prejudiced by the reformation. The value of the shares purchased would have been based upon Eco-Air's actual revenues and expenditures. One of those expenditures, reflected in Eco-Air's financial records, was the payment of property taxes on the Phoenix property. The court did not err in rejecting Flanders's defense based upon Civil Code section 3399.

E. Attorney Fees

DSO has requested in the conclusion section of its respondent's brief, pursuant to a clause in its lease with Eco-Air, that this court award it attorney fees incurred on appeal, with the amount to be determined by the trial court. Eco-Air opposes the request, arguing that it would be unjust to require it to pay attorney fees that were only incurred because of DSO's efforts to reform the lease because of its own mistake.

However, this issue was only raised briefly in the parties' briefs, with no citation to authority and no evidence submitted of the amount incurred. Accordingly, we will direct the trial court, on remand, to determine both entitlement and the amount of fees, if any, to be awarded. (Huntingdon Life Sciences, Inc. v. Stop Huntingdon Animal Cruelty USA, Inc. (2005) 129 Cal.App.4th 1228, 1267.)

DISPOSITION

The judgment is affirmed. Upon remand the trial court is directed to determine DSO's entitlement to attorney fees incurred on appeal, as well as the amount of fees, if any, to be awarded.

NARES, J.

WE CONCUR:

McCONNELL, P. J.

BENKE, J.

Publication courtesy of California pro bono legal advice.

Analysis and review provided by La Mesa Apartment Manager Attorneys.

^[1] Under a triple net lease, generally all operating costs, including property taxes, are the tenant's obligation. (Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2005) ¶ 7:35, pp. 7-8 to 7-9.)