Berg v. Hudesman

• Decision Date: 06 December 1990
• Docket Number: No. 56656-9,56656-9
• Citation: 801 P.2d 222,115 Wn.2d 657
• Parties: Orville L. and Helen L. BERG, husband and wife, individually and as trustees for the Orville and Helen Berg Trust, Petitioners, v. David HUDESMAN and Linda Hudesman, husband and wife, Respondents. En Banc
• Court: Washington Supreme Court

Page 657

115 Wn.2d 657

801 P.2d 222

Orville L. and Helen L. BERG, husband and wife, individually and as trustees for the Orville and Helen Berg Trust, Petitioners, v. David HUDESMAN and Linda Hudesman, husband and wife, Respondents.

No. 56656-9.

Supreme Court of Washington,

En Banc.

Dec. 6, 1990.

Bannister, Clark, Taylor & Wallace, Jack R. Wallace, Mount Vernon, for petitioners.

Short, Cressman & Burgess, Paul R. Cressman, Sr., Michael R. Garner, Smith, Smart, Hancock, Tabler & Middlebrooks, David Hancock, Seattle, for respondents.

BRACHTENBACH, Justice.

This suit concerns a 99-year ground lease. The main issue is the meaning of the rent payment clause. The trial court granted summary judgment to the landlord, held that the lease was not ambiguous, determined the meaning of the rental clause, and awarded back rent to the landlord based upon the trial court's interpretation of the rental clause. By unpublished opinion, the Court of Appeals affirmed in the main but remanded for determination of certain facts which existed at the inception of the lease. We reverse the trial court, modify the Court of Appeals opinion, and remand for trial.

The ground lease, executed in 1959, terminates in 2058. The ground tenant, defendant, removed a residence from the property, as allowed by the lease agreement, and constructed a commercial building on the land. This commercial building was originally leased to Safeway Stores for 15 years. Upon Safeway's removal, the tenant converted the building to a small shopping center which was subleased to a number of tenants during the period at issue.

In August 1987, the landlord brought the present suit, contending that for several years the defendant incorrectly calculated the rent due the landlord under the ground lease.

As will be seen, the rent due the landlord under the ground lease is calculated with respect to what constitutes "gross rentals" from the subtenants and what may be deducted therefrom to ascertain "net rentals." "Net rentals" is the amount to which a formula set out in the ground lease applies for division of income between the landlord and the tenant, the parties in this suit.

The lease contains the following provision:

(3) Rental. The rental shall be Five Thousand and No/100 Dollars ($5,000.00) per year, payable in advance on or before the 19th day of October, 1959, of each year during the term of this lease. Receipt of Five Thousand and No/100 Dollars ($5,000.00) paid as rental for the first year of said term is hereby acknowledged.

It is expressly provided that on the first of the month in which the annual rent falls due, Lessee, prior to paying the annual rental of $5,000.00, each year during the term hereof, commencing with the fifteenth (15) year, shall refer to the then current United States Consumer Price Index (all items) as compiled by the Bureau of Labor Statistics of the United States Department of Labor (1947-1949 = 100). If such index reading at date hereof reflects an increase or decrease in the purchasing power of the United States Dollar equal to five percent (5%) or more, the minimum rent payment hereunder shall be proportionately increased or decreased to the end that rent payments are annually adjusted to maintain the same purchasing power they represented at date hereof, provided that the total increase or decrease above or below the original rental of $5,000.00 per year shall in no event exceed three percent (3%) multiplied by the number of years of said term which shall have expired. In the event the said Consumer Price Index is modified or replaced, the comparable effective cost of living index published by the United States Department of Labor or other Federal agency shall be employed using reasonable and accepted conversion factors as necessary.

In addition to the above mentioned rental, Lessee shall pay ten (10%) per cent of net rentals received after the third year of said term from tenants of any buildings constructed on said property. If Lessee uses or enters into any agreement for the use of said property or any portion thereof for parking or thoroughfare purposes for the benefit of any business conducted in a building or buildings on other property, a portion of any such building or buildings shall be assumed to be on the above described property for the purpose of computing rental hereto. Said portion shall be in the same proportion as the area of the above described property used for such purposes bears to the total area used for building, parking and thoroughfare purposes for the benefit of such business. Net rentals shall be defined as gross rentals from the actual tenants, less payments made for taxes and assessments, insurance on said premises, management fees not to exceed five (5%) per cent of gross rentals and real estate commissions not to exceed five (5%) per cent of the gross rentals for the first ten (10) years and two-and-a-half (2 1/2%) per cent of the gross rentals thereafter, and depreciation actually taken for income tax purposes.

Commencing with the sixteenth (16) year after completion of the first building constructed on said property, the rental shall be as computed above, or it shall be fifty (50%) per cent of net rentals, whichever is greater.

Lessor shall have the right each year for a period of ten (10) consecutive working days selected by them to audit those books of Lessee pertaining to rentals received by Lessee from such tenants.

Clerk's Papers (July 5, 1988), at 8-9.

Plaintiff-landlord moved for partial summary judgment, asking the court to declare that the same formula for calculating the percentage rent due the landlord applied throughout the term of the lease, that all receipts from subtenants be included in "gross rentals," and that only those expenses listed as deductible in the formula are deductible in calculating rent due. The landlord relied solely on the written lease. The landlord's motion for partial summary judgment was filed before any responsive pleading was filed.

The trial court granted the motion for partial summary judgment, and held that the rental provisions are clear and unambiguous. Defendant then moved to vacate the order granting partial summary judgment or, alternatively, to modify that order to provide that any reimbursements from the subtenants be excluded from the definition of "gross rentals" unless the expenses for which the reimbursements were made can be deducted to determine "net rentals." In support of the motion to vacate or modify, defendant submitted affidavits of intent and the circumstances surrounding the making of the lease.

In the meantime, the landlord filed a final summary judgment motion for a judgment against defendant for past rent due plus interest. The trial court denied defendant's motion and granted the second summary judgment motion. In denying defendant's motion, the trial court (different from the one which granted partial summary judgment) specifically found that "the affidavits submitted by defendant in support of the motion to vacate are not subject to being considered, and, even if considered, do not alter or modify the clear and unambiguous language of Section 3 of the Lease." Clerk's Papers (July 5, 1988), at 129.

Defendant-tenant appealed, contending that summary judgment was improperly granted. The tenant advanced two theories, either of which would raise factual issues: First, whether the lease is only a partially integrated contract, i.e., whether the writing is a final expression of those terms which it contains, but not a complete expression of all terms agreed upon, Emrich v. Connell, 105 Wash.2d 551, 716 P.2d 863 (1986); and second, whether the rental clause is ambiguous. Speaking generally, either situation would allow extrinsic evidence to prove omitted but not inconsistent terms, or to determine the intent of the parties.

The Court of Appeals reversed in part, and attempted to provide a definition of gross rentals by limiting it to payments of the exact same character as the tenant received from his original subtenants under the first subleases. The Court of Appeals added another condition, i.e., that even if the payments by subtenants are not of the same character as payments made by the original subtenants, they constitute gross rentals to the extent the tenant would be required to include them as gross income for tax purposes. The Court of Appeals based its definitions of gross rentals upon what it believed to be the intent of the drafter of the lease. ¹

The Court of Appeals then remanded for resolution of factual questions regarding what expenses were paid by original subtenants and whether the amounts deducted by the tenant are of the same character as payments made by the original subtenants for maintenance, repairs, and improvements of the property.

The landlord sought review by this court.

In broad terms, the question posed is the interpretation of the subject lease. Inherent in resolution of that issue are the matters of integration, ambiguity, plain meaning and parol evidence.

Before examining the specific issues raised herein an overview of the problems of interpretation of contracts is necessary. We use the word "interpretation" in the sense described by Corbin and the Restatement and distinguish it from "construction." Corbin states: "Interpretation is the process whereby one person gives a meaning to the symbols of expression used by another person." 3 A. Corbin, Contracts § 532, at 2 (1960). The Restatement definition is: "Interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning." Restatement (Second) of Contracts § 200 (1981).

Construction of a contract determines its legal effect. "Construction ... is a process by which legal consequences are made to follow from the terms of the contract and its more or less immediate context, and from a legal policy or policies that are applicable to the situation." Patterson, The Interpretation and Construction...