Judge Daniel M. Crowley, Case Number: 20STCV48455, Date: 2023-07-20 Tentative Ruling

Department 71: Attorneys who elect to submit on these published tentative rulings, without making an appearance at the hearing, may so notify the Court by communicating this to the Department's staff via the Department's email: SMCdept71@lacourt.org before the set hearing time. See, e.g., CRC Rule 324(b). All parties are otherwise encouraged to appear by LACourtConnect for all matters.

The Court determines all of the items in the Special Assessment which were levied and charged on a variable basis fall under the heading of “paint” and the eight percent cap on charges for Unit 103 was improperly applied.

On September 1, 2023, Plaintiff and Cross-Defendant 108 W. 2nd Street, LLC (the “LLC”) and Defendants Higgins Loft and John Agnew (collectively, “Defendants”) stipulated that the Court should bifurcate the trial of this matter and that the scope of the First phase of the bifurcated trial be as follows: "The issue to be determined in the first phase of this bifurcated proceeding is whether the challenged Special Assessment was issued and levied in accordance with the terms of the CC&Rs." The Court now rules on that issue.

Plaintiff’s 9/21/23 request for judicial notice of (1) Declaration of Covenants, Conditions, Restrictions and Reservation of Easements for Higgins Loft – Tract No. 53327 which was recorded on December 3, 2004 in the Official Records of Los Angeles County as Instrument No. 04-3130413, encumbering the real property located at 108 W. 2nd Street, Unit 103, Los Angeles CA 90012 and 108 W. 2nd Street, Unit 106, Los Angeles CA 90012 (the “Properties”) (P-RJN, Exh. A); (2) First Amendment to the Declaration of Covenants, Conditions, Restrictions and Reservation of Easements For Higgins Loft – Tract No. 53327, recorded on December 28, 2004 in the Official Records of Los Angeles County as Instrument No. 04-3360616, encumbering the “Properties” (P-RJN, Exh. B); and (3) LASC Docket for Higgins Loft Homeowners Association v. LADT LLC et al. (Case No. BC394703) (P-RJN, Exh. C), is granted.

Defendants’ 10/4/23 request for judicial notice of (1) California Department of Real Estate - Operating Cost Manual for Homeowner Associations - February 2000 (D-RJN, Exh. A); and (2) California Department of Real Estate - Reserve Study Guidelines for Homeowner Association Budgets - June 1990 (D-RJN, Exh. B), is granted, however, the Court does not consider the truth of the matters asserted.

Defendants’ 10/5/23 evidentiary objection[1] to the Declaration of Andrew Meieran (“Meieran”) is overruled as to Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 27, 28, 29, 30, 31, 32, 33, 34, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, and 56.[2]

Plaintiff’s 10/18/23 evidentiary objection to the Declaration of Daniel A. Nordberg (“Nordberg”) is overruled as to Nos. 1, 2, 15, 16, 18, 19.1, 19.2, 19.3, 20, 20.1, 21.2, 21.3, and 21.4.[3]

Plaintiff’s 10/18/23 evidentiary objection to the Declaration of Alec Mitchell (“Mitchell”) is overruled as to Nos. 1, 2, 3, 4, 5, 6, and 7.

Plaintiff’s 10/18/23 evidentiary objection to the Declaration of John Agnew (“Agnew”) is overruled as to Nos. 1, 2, 3, 4, 5, 6, and 7.

On August 3, 2017, the Association membership authorized the Board to obtain a construction loan and levy a $3,790,000 special assessment to fund the repayment of a fifteen-year loan to pay for the façade restoration. (Decl. of Agnew ¶15; Decl. of Mitchell ¶15; D-COE Exh. 5.) The voting materials reflected that this assessment was being levied to repay a “loan for repair and reconstruction costs described in Exhibit A,” a $4,852,138 construction estimate. (Decl. of Agnew ¶15; Decl. of Mitchell ¶15; D-COE Exh. 4.) This cost estimate included the following scope of work:

10. Miscellaneous Repairs (e.g., penetration sealant, vent cover replacement, and cut back ends of existing fence away from wall surface, re-secure, and touch up paint) - $33,937;

15. Project Direct Costs (e.g., dumpsters, container, parking lot rental for staging, and scaffold staging, and site toilets) - $288,884.

Based on advice of counsel, the Board determined that some, but not all, of the proposed façade should be allocated on a variable basis. (Decl. of Agnew ¶¶10-13; Decl. of Mitchell ¶¶10-13; D-COE Exhs. 1-2.) The special assessment allocated the proportionate costs for items 1 through 6 and 11 through 15 on the variable square footage basis. Conversely, items 7 through 10 were allocated on an equal uniform basis. (Decl. of Agnew ¶12; Decl. of Mitchell ¶12; P-COE Exh. G.)

CC&Rs are interpreted as contracts. (Fourth La Costa Condominium Owners Assn. v. Seith (2008) 159 Cal.App.4th 563, 575.) “[T]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other [citations omitted].” (Bear Creek Planning Committee v. Ferwenda (2011) 193 Cal.App.4th 1178, 1183.). “The primary object in construing restrictive covenants, as in construing all contracts, should be to effectuate the legitimate desire of the covenanting parties.” (Hannula v. Hacienda Homes, Inc. (1949) 34 Cal.2d 442, 444-445.) CC&Rs “shall be liberally construed to facilitate the operation of the common interest development . . ..” (Civ. Code §4215.)

Upon obtaining title to a commercial unit within the Higgins Loft common interest development, Plaintiff agreed to and became bound by the provisions in the recorded CC&Rs. (See Civ. Code §5975(a); Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 375, 379.)

Pursuant to the CC&Rs (Article I and VI), the Association is charged with maintaining and repairing Higgins Loft’s common areas. Section 2.05(a) of the CC&Rs states:

Except as otherwise specifically states, the Association . . . is responsible for maintaining, repairing, modifying and altering Common Areas (not including Exclusive Use Common Areas), including bearing walls (except for the finished surfaces thereof), plumbing and pipes in Common Area walls, window frames, balcony door frames, patio door frames, finished surfaces and structural components of balconies, balcony railings, patios, roof and exterior paint (stucco) of the building.

“Assessments may be levied by the Association for improvement and maintenance of the Common Area(s), administration of the Property, and to promote the recreation, safety, and welfare for the common good of all the Owners.” (P-RJN, Exh. A at pg. VII-1 §7.01(a).) “[T]he Association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this act.” (Civ. Code §5600(a).)

Section 7.03(a) of the CC&Rs provides that “[a]ll Assessments, both Regular and Special shall be variable and charged and divided among the Condominiums as set forth in attached Exhibit ‘B’ except where stated herein.” (P-RJN, Exh. A at pg. VII-1 §7.03(a).) Exhibit “B” states:

All Assessments shall be charged to each Condominium as follows, except where stated herein:

A. Variable Costs items shall be the following budget items only; insurance, domestic water and gas (if common), hot water heater (if common), paint, and roof.

C. Monthly Base Assessment shall equal the Total Monthly Equal Costs divided by the one-hundred forty-two (142) number of Units in the project.

(P-RJN, Exh. A at pg. 056 ¶A, emphasis added.). Variable assessments are allocated based on a formula set forth in Exhibit B of the CC&Rs pursuant to each unit’s proportionate square footage of the total square footage of the building.

The Board, after consultation with its experts, concluded that the term “paint” as used in Exhibit B to the CC&Rs means “all exterior surface work.” (Decl. of Agnew ¶11; Decl. of Mitchell ¶11; D-COE Exhs. 1-2.) This interpretation is consistent with the plain language of the CC&Rs.

Here, the term “paint” as used in Exhibit B to the CC&Rs must be interpreted in the context of how the term is used throughout the document, i.e., stucco is encompassed within the term “paint.” (P-RJN, Exh. A at pg. II-3 §2.05(a).) Assessments for “exterior paint (stucco),” therefore, must be assessed on a variable (i.e., unit square footage) basis. (P-RJN, Exh. A at pg. VII-1 §7.03(a); P-RJN, Exh. A pg. 056 ¶A; Decl. of Nordberg ¶¶15, 19.2, 21.1.) The Court finds that the Board properly assessed the costs for items 1 through 6 and 11 through 15 on the variable square footage basis. All the items included in these costs concerned maintenance/reapplication of the building’s paint/stucco exterior.

According to §7.03(c) of the CC&Rs, Unit 103 “which has no gas, water, or sewer, shall be assessed only eight (8) percent of the total budget for commercial units.” (P-RJN, Exh. A at pg. VII-1 §7.03(a).)

By its own terms, the eight percent cap in §7.03(c) of the CC&Rs applies only to items that are part of the “budget” for commercial units. However, the only budget the Association prepares is an annual operating budget. (Civ. Code §5300(b)(l).) As the name suggests, the Association’s “annual operating budget” consists of expenses the Association must cover as part of its normal operations. Additionally, Article I of the CC&Rs defines “Regular Assessments” as those assessments “used to meet the Association’s normal operating expenses and to establish necessary reserves.” Conversely, Article I defines “Special Assessments” as “Assessments levied on an as-needed basis to meet expenses of an extraordinary or capital nature.”

Taken together, the “budget for commercial units” mentioned in §7.03(c) of the CC&Rs simply refers to the portion of the Association’s operating expenses allocable to the commercial units (which are to be paid for by regular assessments). The budget is “used to meet the Association’s normal operating expenses and to establish necessary reserves.” This interpretation is entirely consistent with the language of §7.03(c), as it explicitly ties the existence of the 8% cap to the fact that unit 103 does not use gas, water, or sewer (all of which are by definition normal operating expenses).

Conversely, attempting to construe a Special Assessment as a commercial budget expense is not consistent with industry custom and practice. (Decl. of Nordberg ¶21.4.) The expense of maintenance and repair of the exterior surfaces of the building are not the same as the maintenance expenses for the Commercial Units. Exterior building maintenance expenses are completely different from Commercial Unit expenses. Therefore, the eight percent cap described in §7.03(c) does not apply to the Special Assessment.

“[I]n interpreting a contract, courts may properly consider the acts and conduct of the parties following the contract’s execution. [Citation.] As Witkin explains, ‘[t]he conduct of the parties may be, in effect, a practical construction thereof, for they are probably least likely to be mistaken as to the intent.’” (Jones v. P.S. Development Co. (2008) 166 Cal.App.4th 707, 720, disapproved of on other grounds by Reid v. Google, Inc. (2010) 50 Cal. 4th 512; see also Cedars-Sinai Medical Center v. Shewry (2006) 137 Cal.App.4th 964, 983.)

Here, Plaintiff’s past conduct corroborates the interpretation that the eight percent cap does not apply to the Special Assessment. Plaintiff challenged the assessment allocation prior to its approval by the members on December 9, 2016, and shortly after it was levied on February 22, 2019. (Decl. of Agnew ¶¶14, 18; Decl. of Mitchell ¶¶14, 18; D-COE Exhs. 3, 7.) While Plaintiff challenged the fixed/variable assessment allocation used, in implied recognition that §7.03(c) did not apply to the Special Assessment, Plaintiff did not raise Unit 103’s eight percent cap in either challenge.

Accordingly, the eight percent cap on charges for Unit 103 was improperly applied.

All of the items in the Special Assessment which were levied and charged on a variable basis fall under the heading of “paint” and the eight percent cap on charges for Unit 103 was improperly applied.

Hon. Daniel M. Crowley

Judge of the Superior Court

[1] The Court notes Defendants fail to identify the document they are objecting to. The Court assumes the document objected to is the Declaration of Meieran because its paragraphs correspond with the excerpts in Defendants’ list of objections.

[2] The Court notes Defendants omitted objections Nos. 21-26, and 35. To avoid confusion, the Court ruled on the numbered objections as presented in Defendants’ filing.

[3] The Court notes Plaintiff numbered its objections to coordinate with the paragraph numbers in the corresponding declaration. To avoid confusion, the Court ruled on the objections as presented in Plaintiff’s filing.