311 South Spring Street Company v. Department of General Services, B195245 (Cal. App. 5/29/2008)

• Decision Date: 29 May 2008
• Docket Number: B195245.
• Court: California Court of Appeals
• Parties: 311 SOUTH SPRING STREET COMPANY, LP, Plaintiff, Cross-defendant and Appellant, v. DEPARTMENT OF GENERAL SERVICES, Defendant, Cross-complainant and Appellant.

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311 SOUTH SPRING STREET COMPANY, LP, Plaintiff, Cross-defendant and Appellant, v. DEPARTMENT OF GENERAL SERVICES, Defendant, Cross-complainant and Appellant.

B195245.

Court of Appeals of California, Second Appellate District, Division One.

May 29, 2008.

NOT TO BE PUBLISHED

Appeals from a judgment of the Superior Court of Los Angeles County, No. BC326681. Kenneth R. Freeman, Judge. Affirmed.

Gilchrist & Rutter, Frank Gooch III; Gilbert Dreyfuss, Inc., and Gilbert Dreyfuss for Plaintiff, Cross-defendant and Appellant.

Edmund G. Brown, Jr., Attorney General, James M. Schiavenza, Assistant Attorney General, Joel A. Davis and Donna M. Dean, Deputy Attorneys General, for Defendant, Cross-complainant and Appellant.

VOGEL, J.

This is a dispute between a commercial landlord and its tenant in which the landlord obtained a judgment for about $5.5 million. The tenant appeals, claiming it did not breach the lease and that, even if it did, the damage award is flawed. The landlord cross-appeals, claiming it was entitled to specific performance and other similar relief. We reject all the claims of error and affirm the judgment in its entirety.

FACTS

A.

The 13-story Washington Building on the southwest corner of Third Street and Spring Street, constructed in 1913 in the then-thriving financial district of downtown Los Angeles, was purchased at auction in 1964 for about $500,000 by the 311 South Spring Street Company, LP (311). 311 refurbished the property and opened it to new tenants in 1968. In the 1990's, the Real Estate Services Division of the California Department of General Services — as part of its efforts to consolidate the State's offices — initiated negotiations with 311 to lease the Washington Building in its entirety.¹ At the State's request, 311 (using the services of the structural engineering firm of John A. Martin & Associates) prepared design plans that included retrofitting the building to comply with the State's seismic criteria for leased properties.² In January 1999, 311 and the State signed three 20-year leases, pursuant to which the State was to occupy all 13 floors of the Washington Building.

Under one lease, the Department of Health Services was to occupy floors 1 through 9 at a beginning monthly rent of $117,229.50 (increasing over a three-year period to $145,408 per month). This lease is still in effect and is not at issue in this case.

Under another lease, the Office of Statewide Health Planning and Development (OSHPD) was to occupy floors 10 and 11 at a beginning monthly rental of $27,070.06 (increasing over a three-year period to $33,399.04 per month). Under the third lease, the Division of the State Architect was to occupy floors 12 and 13 at a beginning monthly rent of $26,251.38 (increasing over a three-year period to $32,587.92 per month). It is these two substantively identical leases that are the subject of this litigation.

B.

Paragraph 6 of the leases obligated 311, at its "sole cost and expense," to complete all required construction, improvements, and alterations, and to make the Washington Building otherwise ready for the State's occupancy by January 2000. As do the parties, we refer to this work as the "first retrofit." With regard to earthquake safety, Division 1.02(D) of the specifications for the first retrofit provided:

"Premises when completed shall conform to applicable codes, ordinances, and zoning laws and shall be constructed in accordance with sound engineering practices. The [State] will consider only those facilities that can demonstrate the ability to meet a seismic performance objective of substantial life safety as outlined in any of the following codes: [¶] 1. 1973 Uniform Building Code (UBC). [¶] 2. Applied Technology Council (ATC) Reports 14 & 22. [¶] 3. 75% of the seismic force levels in the [1994 Uniform Building Code] as adopted by the State Building Standards Commission." The third criteria was selected.

C.

After the leases were signed, 311 borrowed $13 million to finance the cost of the first retrofit and entered a construction contract with a general contractor. Floors 1 through 9 were completed in July 2000, and the Department of Health Services moved into the building the following month.

At about that time, a group of the State's engineers employed by the OSHPD raised objections to the State's plan to house them in the Washington Building.³ Initially, the dissident engineers — pointing to the fact that they are required to provide emergency services to the same extent as the hospitals they oversee — claimed they should work in a building capable of withstanding 150 percent of the UBC's seismic force levels (the standard applicable to hospitals) rather than the 75 percent standard required by the State's lease with 311. Later, the dissident engineers accepted the State's standards for leased buildings and, instead, challenged the safety of the Washington Building and the adequacy of the first retrofit. Ultimately, the State and the dissident engineers agreed to subject the structural safety issue to a peer review board of structural engineers.

Following a hearing held on August 7, 2000, the peer review board concluded that the design basis used and the resulting seismic retrofit design that was implemented provided a level of protection or occupant life safety that was consistent with the lease requirements. Shortly thereafter, OSHPD started to move into the Washington Building.

D.

Although the peer review hearing resolved the issue about the State's safety standards, there remained an issue about whether the building might present a "drift" risk — meaning that, during an earthquake, the back-and-forth movement of the upper floors might cause the masonry on the upper exterior levels to fall to the ground and injure pedestrians. In response to these concerns, the State and 311 negotiated additional retrofit work and in April 2001 executed an amendment to the lease of the 12th and 13th floors occupied by the Division of the State Architect (but not to the other two leases). This amendment obligated 311 to design and complete additional retrofit work (the second retrofit), and increased the State's rent for these floors to $33,540.01 per month beginning in March 2002 and increasing to $35,764.47 per month in August 2003.

Martin prepared design plans for the second retrofit and the State retained Alan Porush, a structural engineer employed by URS Corporation, to review and approve those plans, which he did. 311 completed the second retrofit during the summer of 2001 at a cost of about $1.6 million, and the Division of the State Architect then moved into the 12th and 13th floors.

E.

The dissident engineers were not satisfied, and in August 2001 their union, the Professional Engineers in California Government (PECG) sued the State in the Sacramento County Superior Court, seeking an injunction restraining the State from housing the OSHPD engineers in the Washington Building. 311 was not a party to that action and had no input at all until the State contacted it after it settled the Sacramento action in February 2002. The State and PECG nevertheless stipulated as follows:

"1. The [State] agrees to hire and compensate an Independent Structural Engineer to perform an independent evaluation to determine whether the Washington Building is in full compliance with one of the following criteria as outlined in the 1994 State Seismic Safety Compliance Policy Statement for Leased Buildings [pursuant to which every leased] building must demonstrate the ability to meet a seismic performance objective of substantial life safety as outlined in any of the following codes: [¶] a. 1973 Uniform Building Code (UBC). [¶] b. Applied Technology Council (ATC) reports 14 & 22. [¶] c. 75% of the seismic force levels in the current UBC (1994) as adopted by the State Building Standards Commission.

"2. Both parties agree to be bound by the findings and conclusions of the Independent Engineer hired to evaluate the seismic safety of the Washington Building. If the Independent Engineer determines that the Washington Building meets one of the requirements set forth in paragraph 1, PECG agrees to dismiss this litigation.

"3. PECG members have agreed to move to the Washington Building as scheduled by the State.

"4. The parties request that the court retain jurisdiction over this case.

"5. "The Independent Engineer will conduct an entirely independent evaluation of the Washington Building without reviewing or referring to any previously prepared peer review evaluations or certifications on the building. The Independent Engineer will prepare his . . . report using his . . . own calculations.

"6. The Independent Engineer's review shall be completed by the target date of May 15, 2002.

"7. The Independent Engineer shall provide copies of his . . . report to both parties simultaneously. . . .

"8. (a) If the Independent Engineer determines the building does not meet the applicable criteria, then the State, at its sole option, agrees to either undertake repairs/retrofitting to the extent necessary to meet such criteria or relocate employees to a facility that meets State criteria. If the State elects to repair/retrofit the building, all decisions concerning the repair/retrofit process and the method(s) employed for the repair(s)/retrofit are solely the decisions of the State, its engineers and contractors. Any dispute arising from such relocation is not covered by this agreement. In the event of any such dispute, PECG or [its] members would have recourse as otherwise authorized by the laws of this state.

"(b) At such time as the State deems such repairs/retrofitting to be complete, the Independent Engineer shall conduct a subsequent review, and it shall be his . . . sole determination whether the building is in compliance with the applicable criteria. In the event that further repairs/retrofitting [are] necessary, the State may exercise its options, consistent with ...