300 Deharo Street Investors v. Housing, Dev.

• Decision Date: 10 April 2008
• Docket Number: No. C053033.,C053033.
• Citation: 75 Cal.Rptr.3d 98,161 Cal.App.4th 1240
• Parties: 300 DeHARO STREET INVESTORS, Plaintiff and Appellant, v. DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

75 Cal.Rptr.3d 98

161 Cal.App.4th 1240

300 DeHARO STREET INVESTORS, Plaintiff and Appellant, v. DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT, Defendant and Respondent.

No. C053033.

Court of Appeal, Third District.

April 10, 2008.

Jay-Allen Eisen Law Corporation, Jay-Allen Eisen and C. Athena Roussos, Sacramento, for Plaintiff and Appellant.

Edmund G. Brown Jr., Attorney General, Tom Greene, Mary E. Hackenbracht, Assistant Attorneys General, Teri H. Ashby and Kenneth J. Pogue, Deputy Attorneys General, for Defendant and Respondent.

SIMS, Acting P.J.

Following the trial court's sustaining of a demurrer without leave to amend, plaintiff 300 DeHaro Street Investors appeals from a dismissal of its third amended complaint alleging that defendant Department of Housing and Community Development (the Department) breached a contract (Regulatory Agreement) by denying plaintiffs request to increase rents in an apartment building for which plaintiff received a low-interest loan in exchange for renting units to low-income households under a statutory and regulatory scheme (Health & Saf.Code, § 50660 et seq.; Cal. Code Regs., tit. 25, § 7670 et seq.). The Regulatory Agreement, as well as the underlying statutory/regulatory scheme, called for the Department to approve specified rent increases if plaintiff proved specified matters to the Department's satisfaction. Plaintiff challenges the trial court's conclusions that dismissal was warranted because (1) plaintiffs complaint was uncertain as to whether it alleged the rent increase was mandatory or discretionary, and (2) plaintiffs sole avenue for relief for a discretionary increase was a petition for writ of mandate (Code Civ. Proc, § 1094.5.¹) rather than a breach of contract and declaratory relief action.² We shall conclude plaintiffs complaint pled a viable cause of action for breach of contract and that plaintiff may also pursue his claim for declaratory relief. We shall therefore reverse the judgment.³

BACKGROUND

Health and Safety Code section 50670 authorizes the Department to establish a Special User Housing Rehabilitation Program (the Program) under which it may make deferred-payment loans to sponsors⁴ for the rehabilitation or the acquisition and rehabilitation of rental housing developments to be occupied by eligible households of very low and low income. The statute provides: "Prior to disbursement of any funds pursuant to this section, the department shall enter into a regulatory agreement with the sponsor which provides for the limitation on profits in the operation of the rental housing development. ... Upon recordation of the agreement in the office of the county recorder in the county in which the real property subject to such agreement is located, the agreement shall be binding upon the sponsor [for the loan term up to 30 years]." (Health & Saf.Code, § 50670, subd. (d).) As pertinent to this case, "[t]he department shall fix and alter, from time to time, a schedule of rents on each development as may be necessary to provide residents of the rental housing development with affordable rents, to the extent consistent with the financial integrity of such development. No sponsor shall increase the rent on any unit without the prior permission of the department which shall be given only if the sponsor affirmatively demonstrates that such increase is required to defray necessary operating costs or to avoid jeopardizing the fiscal integrity of the housing development." (Health & Saf. Code, § 50670, subd. (e).) A Department regulation for the program states in part that the sponsor may request a rent increase if it can demonstrate, to the department's satisfaction, that the increase is necessary due to unforeseeable cost increases and to preserve fiscal integrity. (Cal.Code Regs., tit. 25, § 7683, subd. (c).)

Plaintiff filed a series of complaints alleging the Department, by denying plaintiffs request for a rent increase, breached the Regulatory Agreement executed by plaintiff and the Department pursuant to the Program. The original complaint (which, according to the Department, was never served) is not part of the record on appeal (appellant's appendix in lieu of clerk's transcript).

The first amended complaint was a declaratory relief action to interpret the Regulatory Agreement. The Department moved for judgment on the pleadings, arguing in part that, to the extent plaintiff alleged denial of a discretionary rent increase, it had to proceed by petition for writ of (administrative) mandamus under section 1094.5. The Department argued a declaratory relief action is appropriate to enforce mandatory obligations but is not appropriate for review of administrative discretion, for which section 1094.5 is the only proper avenue for relief.⁵

The trial court granted the motion with leave to amend, stating the court was unable to determine from the current pleading whether plaintiff was alleging failure to perform a mandatory or a discretionary act.

The second amended complaint alleged claims for breach of contract and declaratory relief. The Department demurred, arguing the pleading failed to identify whether plaintiff was claiming breach of a mandatory or discretionary nature, and administrative mandamus was plaintiffs sole remedy. The trial court sustained the demurrer, stating the pleading was still uncertain, and if plaintiff was claiming the Department inappropriately exercised its discretionary authority, plaintiffs sole remedy was a section 1094.5 petition. Although the demurrer was sustained without leave to amend, the court later granted plaintiff leave to file a third amended complaint.⁶

The third amended complaint (the operative pleading) raised counts for breach of contract and declaratory relief. The pleading alleged plaintiff, a "for profit" developer/contractor bought Castle Garden Apartments (Apartments) in Sacramento County in 1989. In November 1990, plaintiff entered an agreement with the Department pursuant to the Program, whereby plaintiff obtained a low-interest loan to rehabilitate the housing for low-income households. The parties executed a number of documents, including a Regulatory Agreement.

The third amended complaint alleged:

The Regulatory Agreement states it reflects a loan pursuant to the program under Health and Safety Code section 50660 et seq. Health and Safety Code section 50670, subdivision (e), says the Department "shall fix" rents "as may be necessary to provide residents of the rental housing development with affordable rents, to the extent consistent with the financial integrity of such development. No sponsor shall increase the rent on any unit without the prior permission of the department which shall be given only if the sponsor affirmatively demonstrates that such increase is required to defray necessary operating costs or to avoid jeopardizing the fiscal integrity of the housing development." (Health & Saf.Code, § 50670, subd. (e).)

The Regulatory Agreement defines fiscal integrity to mean "that the total of operating income plus funds released pursuant to the Regulatory Agreement from the operating reserve account is sufficient to (1) pay all current operating expenses, (2) pay all current debt service, (3) fully fund for at least twelve consecutive months all reserves established pursuant to the Regulatory Agreement, (4) maintain a debt service coverage ratio as specified in the Regulatory Agreement, and (5) pay other extraordinary costs permitted by the Regulatory Agreement."

The complaint quoted paragraph 10(f) of the Regulatory Agreement, which provides: "Borrower may apply to the Department for a greater rent increase than allowed by paragraph e. above.[⁷] The Department shall grant such increase if the Borrower can demonstrate, to the Department's satisfaction, that the increase is necessary to pay for unanticipated increases in costs related to the assisted units and to preserve fiscal integrity. The Borrower may not receive a greater rent increase, however, on the grounds that fiscal integrity is threatened by a shortfall in nonresidential income, unanticipated expenses attributable to nonresidential spaces or other financial problems attributable to nonresidential space or nonassisted units." (Italics added.)

Plaintiff alleged it asked the Department, and the Department unreasonably denied, requested rent adjustments, even though the adjustments were supported by unanticipated increases in plaintiffs costs to the assisted units, were necessary to preserve fiscal integrity, and were at or below rental levels allowed by the Regulatory Agreement.

The pleading alleged: "Given that this case involves the Disputed Contract Terms, a paradigm of mandatory rental adjustments versus discretionary rental adjustments is inapplicable, i.e., the requested rent adjustments, and the ensuing dispute, are governed by the parties' intentions, the Contract, and the enabling statutes and regulations. Given the myriad rules of contractual construction, [the Department] has breached the parties' Contract by unreasonably withholding approval of plaintiffs requested rent adjustments."

Plaintiff alleged the parties "construe the Disputed Contract Terms differently. In plaintiffs view, [the Department] breaches the Disputed Contract Terms when it unreasonably withholds approval of requested rent adjustments that would provide for appropriate rental rates for low income and very low income households, and as well, provide revenue sufficient to cover amortized principal, interest, and distributions. In [the Department's] view, the Disputed Contract Terms need not provide for revenue sufficient to cover amortized principal, interest, and distributions even when rental rates generating such revenue would be at or below permissible rates for low income and very low income households. The Disputed Contract Terms should be construed in accordance with the parties' intentions, the Contract provisions, the enabling legislation,...