Judge: Michael Shultz, Case: 23CMCV01624, Date: 2024-02-22 Tentative Ruling

Case Number: 23CMCV01624    Hearing Date: February 22, 2024    Dept: A

23CMCV01624 Plenitude Holdings, LLC v. County of Los Angeles

Thursday, February 22, 2024, at 8:30 a.m.

[TENTATIVE] ORDER SUSTAINING IN PART AND OVERRULING IN PART DEMURRER TO PLAINTIFF’S COMPLAINT

I.        BACKGROUND

       This action arises from the County of Los Angeles’ alleged breach of a 2021 Ground Lease agreement (“Ground Lease”) and a 2022 Amendment, wherein Plaintiff agreed to redevelop real property into a multi-use, multi-tenant, sports, and entertainment complex. Plaintiff alleges that the County breached its obligation to consider in good faith Plaintiff’s second request for a six-month extension to commence construction of the Redevelopment Plan (“Plan”) and Plaintiff’s proposal to approach the redevelopment in phases. Plaintiff alleges claims for breach of two separate provisions of the ground lease and breach of the implied covenant of good faith and fair dealing.

II.      ARGUMENTS

       The County argues all claims fail to state a cause of action because as a matter of law, the clear language of the Ground Lease authorized the County to deny Plaintiff’s request for an additional extension; the County did not owe a duty to consider Plaintiff’s request in good faith, and its denial of both requests was not unreasonable.

       Plaintiff argues that the County’s preferred interpretation of the contract is not the only reasonable one. Plaintiff has alleged County’s unreasonable conduct in denying Plaintiff’s reasonable requests resulting in a breach of the implied covenant.

       In reply, the County argues that the 2022 Amendment did not require it to grant Plaintiff’s request for a second extension, as the lease language is permissive, not mandatory. Moreover, Plentitude attempted to modify the Redevelopment Plan, which the County had no contractual duty to consider.

III.    LEGAL STANDARDS

       A demurrer tests the sufficiency of a complaint as a matter of law and raises only questions of law. (Schmidt v. Foundation Health (1995) 35 Cal.App.4th 1702, 1706.) In testing the complaint’s sufficiency, the court must assume the truth of the properly pleaded factual allegations as well as facts that can be reasonably inferred from those expressly pleaded facts. The court may also consider matters properly subject to judicial notice. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

       The court may not consider contentions, deductions, or conclusions of fact or law. (Moore v. Conliffe (1994) 7 Cal.4th 634, 638.) Plaintiff is required to allege facts sufficient to establish every element of each cause of action. (Rakestraw v. California Physicians Service (2000) 81 Cal.App.4th 39, 43.) Where the complaint fails to state facts sufficient to constitute a cause of action, courts should sustain the demurrer. (Code Civ. Proc., § 430.10(e); Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)

       Sufficient facts are the essential facts of the case "with reasonable precision and with particularity that is sufficiently specific to acquaint the defendant with the nature, source, and extent of his cause of action.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 643-644.)  Whether the Plaintiff will be able to prove the pleaded facts is irrelevant. (Stevens v. Superior Court (1986) 180 Cal.App.3d 605, 609–610.)

IV.    DISCUSSION

A.      Demurrer to the first cause of action for breach of contract is SUSTAINED.

       A claim for breach of contract is well stated if "the alleged agreement is ‘reasonably susceptible’ to the meaning ascribed to it in the complaint.” (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1384.) The court accepts the construction of the contract as alleged by Plaintiff if it is a “reasonable interpretation” of the contract. (Id.) Where the contract is clear and explicit, the parties’ intent is determined solely by reference to the language of the agreement, and the words are to be understood in its ordinary and popular sense. (Civ. Code, §§  1638, 1639.)

       Plaintiff alleges that it entered into a contract with the County on September 14, 2021, granting Plaintiff the right to redevelop the south parcel of the real property at issue. (Complaint, ¶ 44.) Pursuant to a written amendment in 2022, the County agreed to give Plaintiff six months to begin redevelopment and authorized the Director of the Department of Parks and Recreation (“Director”) to grant an additional six-month extension for a $100,000 fee. (Complaint, ¶ 48.) The 2022 Amendment provided that the additional extension “may be approved” by the Director in writing. (Complaint, ¶ 49; Ground Lease, § 5.1.5.2.)

       Plaintiff sought an additional extension pursuant to that section, which the County subsequently denied citing Plaintiff’s “unequivocal statements that it is impossible for Plenitude to proceed with the development and construction of the Project pursuant to the lease agreement.” (Complaint, ¶ 51.) Plaintiff alleges that the County breached section 5.1.5.2. of the September 2022 Amendment, by denying Plaintiff’s timely request for an additional extension with the agreement to pay the required amount. (Complaint, ¶ 57, Ex. B, pdf p. 38.)

       Plaintiff contends that section 5.1.5.2 delegated approval of an additional extension to the Director. Plaintiff contends it was entitled to the additional time so long as it made the request in writing 45 days before the date to commence construction. (Opp. 9:15-18.) The County acted in bad faith in rejecting Plaintiff’s proposal for a “phased construction.”

       Plaintiff’s interpretation of the provision is not supported by the provision’s plain language, which states the preconditions to an additional extension: the Director’s approval at the Director’s discretion alone (without resort to the Board of Supervisors) and if approved, payment of the extension fee within 10 days. Nothing in the clear language of the provision suggests that the Director was required to approve Plaintiff’s request so long as it was made in writing and 45 days before commencement of construction. (Complaint, ¶ 49.)

B.      Demurrer to the third cause of action for breach of the implied covenant of good faith is OVERRULED.

       This claim is based on the County’s alleged refusal to allow Plaintiff to develop and construct the project in phases, instead of at one time, as contemplated by the Ground Lease given the effects of the COVID-19 pandemic on market conditions. (Complaint, ¶ 66.) Plaintiff alleges that the County became “unreasonably inflexible” and rejected the requested phased construction, which justified County’s conduct in prematurely triggering a default. (Complaint, ¶ 68.)

       The County argues it did not owe a duty to renegotiate and amend the scheduled construction as a matter of law in the first instance; therefore, an implied obligation to act in good faith, based on an express provision that does not exist, is fatal to the claim. (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1032 ["There is no obligation to deal fairly or in good faith absent an existing contract.”].)

       The implied covenant is read into the agreement to protect “express covenants or promises of the contract.” (Id. at 1031.) In Racine, a concessionaire occupying premises pursuant to a written contract with the California Department of Parks and Recreation, negotiated with the Department to permit expanded operations. (Id. at 1028). The agreement provided that the parties may by mutual consent, agree to modifications thereof or additions in writing.[1] (Id. at 1030-31.) The parties thereafter entered into lengthy negotiations regarding the terms of the concessionaire’s expansion proposal, which the Department subsequently denied. (Id. at 1030.)  The plaintiff argued that the denial breached the implied covenant. (Id.) The court held that the contract did not include an express provision requiring the Department to modify the contract, and that commencing negotiations did not impose a duty to act in good faith. (Id. at 1034.)

       Here, Plaintiff argues that it never alleged that the County had a duty to renegotiate the lease. (Opp. 14:28.) Rather, as Plaintiff observes, the issue is whether the County was obligated to consider in good faith, Plaintiff’s proposal to complete construction in phases. The Ground Lease required Plaintiff to complete construction pursuant to a schedule. (Defendant’s RJN, Ex. A, Lease, § 5.4.6.) Plaintiff was required to achieve “substantial completion of a significant portion of the redevelopment work not later than the third anniversary of the effective date.” (Id. at 5.1.5.)  The Redevelopment Plan included the demolition of existing improvements and construction of a sports complex, recreational experience, golfing range, and club house among other improvements. (Id. at p. 43, ¶ 5.1.1.)

       The complaint alleges that Plaintiff was “evaluating alternatives for phasing of the project to facilitate a “smaller capitalization of the initial phase of development.” (Complaint, ¶ Ex. C.) The “initial phase” would provide recreational and community benefits and create the master infrastructure, which would support subsequent phases of development. (Id.)  

       Plaintiff argues that the Ground Lease precludes the Director from unreasonably withholding, conditioning, or delaying, its approval of any “alterations” which the lessee “may be required or desire to make.” (Ex. A, p. 46: ¶¶ 5.2, 5.3.) “Alterations” are defined as “any material alterations or modifications to the improvements” or “the construction of any new improvements. The Redevelopment Work shall be considered to be alterations.” (RJN, Ex. A, p. 46, ¶ 5.2.) Therefore, contrary to Racine, Plaintiff alleges an express provision of the contract imposing a duty on the County to act in good faith in considering Plaintiff’s proposed alteration as defined by the Ground Lease in ¶¶ 5.2 and 5.3.

       Defendant contends in reply that “Alterations” was directed to the Director’s authority to prove schematic plans for each improvement included in the Redevelopment Work and did not require the Director to consider a proposal to move, remove, or delay construction of the project. (Reply, 9:19 – 10:1.) Defendant argues that Plaintiff is alleging an amendment of the lease agreement as opposed to considering a change over which the County had discretion to consider.

       The County’s distinction between “lease amendment” and a “change” is not evident. The proposed phased construction would necessarily amend the terms of the Ground Lease as it would modify the schedule and scope of the work as well as the contemplated dates for completion of certain milestones.

       Additionally, the County narrowly construes the meaning of “alterations.” A condition precedent to the construction of alterations requiring consent also required the Lessee to submit to the Director the plans, specifications, and other materials described elsewhere for those alterations. (RJN Ex. A, p. 46, ¶ 5.3.) Submission of “schematics” was a condition precedent to construction. (Id.) “Alterations” are broadly defined as “The Redevelopment Work,” and “all of the terms and provisions” that follow “shall also be applicable to the Redevelopment Work and Subsequent Renovations.” (Id. ¶ 5.2.) The express contractual provisions precluded the County from unreasonably withholding approval of these “alterations.” (Id.at 5.3.)

C.      Demurrer to the second cause of action for breach of the contractual duty of reasonableness, good faith, and fair dealing under Section 17.6 of the Ground Lease is OVERRULED.

       This claim arises from the County’s alleged unreasonable refusal to grant Plaintiff an additional six-month extension and termination of the lease on grounds Plaintiff failed to commence construction within the required time period. (Complaint, ¶ 61.). Section 17.6 of the Ground Lease provides for a general reasonableness standard:

“Except where a different standard or an express response period is specifically provided herein, whenever the consent or approval of County or Lessee is required under this Lease, such consent or approval shall not be unreasonably withheld, conditioned or delayed, and whenever this Lease grants County or Lessee the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations, County and Lessee shall act reasonably and in good faith. These provisions shall only apply to County acting in its proprietary capacity.” (Defendant’s RJN, Ex. A, p. 111.)

       The 2022 Amendment to the Ground Lease permitted Plaintiff to request an additional extension to the project completion which “may be approved by the Director in writing.” (Complaint, Ex. B, ¶2.) Read as a whole, these provisions support Plaintiff’s construction that because approval of an additional extension was required, Defendant had a duty to exercise its discretion in good faith.

V.      CONCLUSION

       Based on the foregoing, demurrer to the first cause of action for breach of contract is SUSTAINED. Demurrer to the second and third causes of action are OVERRULED. Plaintiff is permitted 10 days leave to amend the first cause of action.