Filed 6/23/17 Excelsior Academy v. San Diego Unified School Dist. CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA



EXCELSIOR ACADEMY,

Plaintiff and Appellant,

v.

SAN DIEGO UNIFIED SCHOOL DISTRICT,

Defendant and Appellant.
D069591



(Super. Ct. No.
37-2015-00011046-CU-CO-CTL)


APPEAL from a judgment of the Superior Court of San Diego County, Katherine A. Bacal, Judge. Reversed.
Alan S. Yockelson; Ponist Law Group and Sean Eric Ponist for Plaintiff and Appellant.
Richard R. Leuthold for Defendant and Appellant.
Urban school districts sometimes find themselves in the role of landlord with regard to school sites that no longer match the demographics of the school-age population. In this case, defendant San Diego Unified School District (District) and plaintiff Excelsior Academy, a state-certified nonpublic school for special needs students, negotiated for the lease of one of the District's former elementary school facilities. In 2013 the parties settled on a lease term of five years; Excelsior sought and was granted an option to extend the lease for an additional five-year period. The District insisted and the parties agreed on a mutual right to cancel the lease on three years' notice.
Roughly a year after commencement of the lease, the District notified Excelsior that the property was for sale. Excelsior was unable to make a purchase offer. Instead, before the District completed a public auction, Excelsior gave notice that it was exercising its option to extend the lease. Following the auction and at the request of the successful bidder, in March 2015 the District notified Excelsior that the lease would terminate in three years.
This case presents the question of the effect of Excelsior's exercise of its extension option before the District's exercise of its right to terminate. The foundational facts are not in dispute, so resolution of this question is an issue of law that turns on the proper interpretation of the parties' written lease. We conclude the most logical and reasonable construction of the lease agreement is that Excelsior's option to extend and the parties' mutual right to terminate are separate and independent provisions of the contract such that any extension is subject to the same right to terminate on three years' notice as the lease itself. Thus, the District's termination notification in 2015 means the lease will terminate in 2018.
Accordingly, we reverse.
FACTUAL AND PROCEDURAL BACKGROUND
Between 2002 and 2012, Excelsior leased a former elementary school site from the District pursuant to a 10-year lease agreement. At the end of the term, Excelsior attempted to exercise an option to extend the lease for another 10 years. The lease provided that if the option was exercised, rent would be calculated based on an appraisal procedure. When the appraisal was completed, Excelsior balked at the resulting rent increase and further negotiations ensued.
While the District was willing to consider taking less than the appraised rent, the parties disagreed on other terms. Excelsior wanted a 10-year lease, but the District was concerned about tying itself to a below-market rent for that long. The District proposed a five-year lease with a five-year option and a mutual right to terminate on one year's notice, but Excelsior objected to the short notice on termination. Ultimately the parties agreed on three years' notice to terminate.
Those became the basic terms of a new lease the parties called a "First Amendment Lease" (New Lease). The parties used the original lease as the model for the New Lease; indeed, the topic headings for the 33 paragraphs are virtually identical, as is most of the language. It appears they contemplated largely the same deal with certain modifications.
Paragraph 3.2 of the New Lease defined the lease "term" as July 1, 2013, through June 30, 2018. New language provided "that the district and Lessee shall have the right to terminate this Agreement by giving three (3) [years'] written notice to the other party." The next sentence gave Excelsior the right "to exercise (1) additional five (5) year option to extend the Lease term as set forth in Paragraph 32, subject to earlier termination of this Lease or extension of the term as provided herein." Paragraph 32 detailed the procedures for extending the lease, including a method for increasing the rent through an appraisal process.
Less than a year after the New Lease began, the District decided to offer the Excelsior school property for sale. The District was willing to sell the property to Excelsior, but Excelsior was not in a position to buy. At that point the District conducted an auction and sold the property to another buyer.
A few weeks before the auction and knowing the property was about to be sold, Excelsior notified the District it was exercising its option to extend the lease for an additional five years. On March 11, 2015, following the sale and at the request of the new buyer, the District notified Excelsior it was exercising its rights under Paragraph 3.2 to terminate the New Lease with three years' notice.
Excelsior ultimately filed this declaratory relief action, arguing that its earlier exercise of the option to extend the lease under Paragraph 32 cancelled the District's ability to terminate the lease under Paragraph 3.2. The District, on the other hand, claimed that the two provisions—the extension option and early termination provision—operated independently. Each could be exercised and the lease would terminate three years after the District gave notice of termination.
Following a two-day bench trial, the superior court reached a conclusion that satisfied neither side. It decided that Excelsior's exercise of the option to extend deferred but did not eliminate the District's right to terminate the lease. According to the court, the lease would terminate in 2021, three years into the option period.
DISCUSSION
The interpretation of a written instrument such as a lease is generally a question of law for the court unless the foundational extrinsic evidence is in conflict. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866; Medical Operations Management, Inc. v. National Health Laboratories, Inc. (1986) 176 Cal.App.3d 886, 891.) Here, although the parties "dispute the inferences to be drawn from [the] extrinsic evidence, the evidentiary facts themselves are not in conflict." (Medical Operations Management, at p. 892, fn. omitted.) With no conflict in the foundational extrinsic evidence, it is left to the court to decide the question of law by determining the most reasonable interpretation of the parties' agreement in light of the undisputed evidence. (See Millsap v. Spilman (1969) 270 Cal.App.2d 444, 446; see also Aozora Bank, Ltd. v. 1333 North California Boulevard (2004) 119 Cal.App.4th 1291, 1296.)
There is nothing in the literal language of Paragraph 3.2 that conditions either party's ability to exercise the early termination clause on Excelsior's failure to have already exercised its option to extend. Excelsior contends that Paragraph 32, which addresses the exercise of the option to extend, specifies "two, and only two," means by which the option, once exercised, can be terminated. But Paragraph 32.1(g) does not say "only." And the problem with Excelsior's interpretation that "only" should be implied is that the language of Paragraph 32 was taken virtually unchanged from the original 2002 lease, which did not include the early termination language. This likely explains why the paragraph in the 2013 New Lease might not reference a "third way" the option could be affected.
Moreover, exercise of the early termination provision does not, as Excelsior suggests, necessarily cancel or invalidate the option. The effect depends on timing. If the District had elected to terminate the lease sometime during Years Three to Five but after exercise of the option, the option would be effective for some portion of the second five-year period until at least three years after notice was given.
There is nothing conceptually inconsistent about the two provisions—early termination and extension option—being exercised independently. Excelsior sought to remain on the property as long as it was financially feasible. The District was willing to work with Excelsior, a long-time tenant, but wanted flexibility. It made perfect sense for the District to agree to a five-year lease with a five-year option (tied to a rent adjustment) as long as it could terminate the lease relationship on reasonable notice in the event circumstances changed. The District's need for flexibility had nothing to do with whether Excelsior had exercised the option.
The email communications that evidence the parties' negotiations regarding the early termination provision in Paragraph 3.2 reflect the very different motivations of the parties but reveal that the District was driving the bus. When the District initially proposed the early termination provision as a change to the original lease, Excelsior treasurer Julie Gillis immediately objected: "There is a new statement that either party has the right with a 1 year notice to break this lease. I would like to ask that this paragraph be removed and continue to read the same as our current lease . . . ." When pressed for an explanation for Excelsior's position, Gillis responded that "we don't want to be in a position where we feel 'up in the air' that the [D]istrict could terminate our lease with such short notice. As you can imagine, it's important that we know we will have our facility for the next 5 years and that we can then have the facility for another 5 if we desire as per the wording in the lease." The District responded by suggesting a three-year termination provision. Gillis on behalf of Excelsior was still not agreeable: "If we could please leave it the way it is now with no clause for early termination, that would be great."
The final word was provided by Randy White, the District's real estate director, in an email four days later to Gillis: "I understand . . . that you are hesitant to add the early termination language to the lease; however, I have been instructed by the [D]istrict's legal department that there must be some early termination language in each lease. How about if we write in 3 years written notice instead of 1 year? The early termination may not [be] further out than 3 years. The [D]istrict does not have any intention at this time to terminate the lease early, but we need to have the language in case something changes in the next 5-10 years. I understand your concern and the [D]istrict would work with you at the time should the need arise to execute the early termination language." (Italics added.) The final version of the New Lease included the language insisted on by White.
White's email makes clear that the District was insisting on the ability to terminate the lease on three-years' notice, period. None of Gillis's communications on behalf of Excelsior suggest that Excelsior could negate the District's ability to terminate the lease by exercising the option. Indeed, based on White's email, Excelsior necessarily understood the District wanted flexibility "in case something changes in the next 5-10 years"—the precise timeframe that Excelsior asserts it could lock in by exercising the option.
Excelsior argues that an option is in the nature of an irrevocable offer or unilateral contract that bound the District. (See Palo Alto Town & Country Village, Inc. v. BBTC Company (1974) 11 Cal.3d 494, 502.) It suggests that if the District could terminate the lease at any time, the termination provision effectively nullified the option, rendering it meaningless. To the contrary, however, the object here, as in any question of contract interpretation, is to ascertain the objectively expressed intent of the parties. (See, e.g., Vaillette v. Fireman's Fund Ins. Co. (1993) 18 Cal.App.4th 680, 686; see also Wolf v. Walt Disney Pictures and Television (2008) 162 Cal.App.4th 1107, 1126.) The short answer is that after it exercised the option, Excelsior had whatever rights the lease gave it.
By its very nature, an early termination provision always limits obligations and takes away rights that would otherwise exist. Both the early termination provision and the extension option are expressly referred to in Paragraph 3.2, making clear the parties understood they are not inconsistent. Rather, each provision placed reasonable constraints on the parties' ability to act. The District could terminate the lease, but it had to give Excelsior a minimum of three years' notice. Excelsior could exercise the option and obtain the leased premises for a total of 10 years, subject to the parties' mutual right to terminate what would then be effectively a 10-year lease on three years' notice. At the same time, if Excelsior exercised the option it would be obligating itself to pay fair market rent for the last five years (or whatever portion of that five-year extension it did not terminate). There is nothing inherently unreasonable about the bargain struck by the parties.
Consider if the New Lease was for 10 years, rather than five years with a five-year option, but also included the same early termination provision. Certainly Excelsior could not argue that the District's exercise of its right to early termination with three years' notice was somehow unfair or invalid merely because it deprived Excelsior of a full 10-year tenancy. On the facts of this case, Excelsior's exercise of its option did no more than change a five-year lease to a 10-year lease. Either or both were subject to the same early termination rights, which could be exercised by either party.
DISPOSITION
The judgment is reversed with directions to enter a declaratory judgment in favor of the District specifying that the existing lease with Excelsior shall terminate on March 11, 2018, or at the conclusion of the 2018 school year, as the parties may agree or the court may determine. The District is entitled to its costs on appeal.



DATO, J.

WE CONCUR:




HALLER, Acting P. J.




AARON, J.