Glovis Am., Inc. v. Cnty. of Ventura, 2d Civil No. B286538

• Decision Date: 10 October 2018
• Docket Number: 2d Civil No. B286538
• Citation: 28 Cal.App.5th 62,238 Cal.Rptr.3d 895
• Court: California Court of Appeals Court of Appeals
• Parties: GLOVIS AMERICA, INC., Plaintiff and Appellant, v. COUNTY OF VENTURA, Defendant and Respondent.

28 Cal.App.5th 62

238 Cal.Rptr.3d 895

GLOVIS AMERICA, INC., Plaintiff and Appellant,

v.COUNTY OF VENTURA, Defendant and Respondent.

2d Civil No. B286538

Court of Appeal, Second District, Division 6, California.

Filed October 10, 2018

Croudace & Dietrich, Virginia P. Croudace and Mark A. Nitikman, Newport Beach, for Plaintiff and Appellant.

Leroy Smith, County Counsel, Ronda J. McKaig and Jaclyn Smith, Assistant County Counsel, for Defendant and Respondent.

TANGEMAN, J.

When a lease of federal lands includes an option to extend its term and the tax assessor reasonably concludes that the option will likely be exercised, the value of the leasehold interest is properly based on the extended term. In this case, Glovis America, Inc.,¹ appeals from the judgment of dismissal entered after the trial court sustained without leave to amend the County of Ventura’s (the County) demurrer to Glovis’s complaint for refund of property taxes. Glovis contends the County’s Assessment Appeals Board (the Board) erred when it determined that: (1) Glovis’s lease with the U.S. Navy includes an option to extend its term of possession of Navy lands, and (2) it was reasonable to assume that the option would be exercised, thereby justifying a higher tax valuation. We affirm.

FACTUAL AND PROCEDURAL HISTORY

In 2007, Glovis began to lease land from the Navy to provide vehicle inspection and processing services at the Port of Hueneme. In 2013, Glovis and the Navy signed a five-year lease that is exempt from federal contract term limits. (See 10 U.S.C. § 2667.) Paragraph 2 of the lease states:

TERM . The initial term of this Lease shall be for five-years [sic ] commencing on September 16, 2013 [,] and end [sic ] on September 15, 2018 , with two five-year options at the request of the Lessee and approval of Government, unless sooner terminated under Paragraph [15].

Release Rate. If the LESSEE requests an additional five-year term, LESSEE shall notify LESSOR at least 180 days prior to the ending date noted above to provide sufficient time for completion of an updated Appraisal which is required to estimate the Market Rental Value of the leased lands. The appraisal cost shall be borne by the LESSEE. The appraisal will be ordered and managed by the NAVFAC Southwest Senior Appraiser to ensure that all Federal Appraisal Standards are met.

(Italics added.) Paragraph 3.2 specifies Glovis’s annual rent for the initial lease term. Paragraph 3.1 permits Glovis to perform long-term maintenance of the leased premises in lieu of paying rent. Paragraph 3.3.4 allows for renegotiation of these terms upon any extension of the lease.

The Ventura County Assessor issued a tax bill for the 2014-2015 tax year, and a supplemental tax bill for 2013-2014. The assessor determined that Glovis’s reasonably anticipated term of possession is 15 years. He valued Glovis’s lease based on the 15-year term.

Glovis appealed the assessments to the Board in October 2014. Glovis conceded it had the burden of showing the assessments were incorrect. Citing the lease and a 2011 newspaper article, Glovis claimed Paragraph 2 did not include an extension option because: (1) Glovis lacked the unilateral right to extend the lease term, (2) the contract was subject to competitive bidding every five years, and (3) previous leases did not include options. Even if Paragraph 2 did include an option, it could not be determined whether it would be exercised.

The evidence showed that this was Glovis’s fifth lease with the Navy. All of the prior leases were renewed. While prior leases were subject to competitive bidding, this one was not. And this was the first lease to include an option to extend the lease term.

Additionally, a newspaper article quoted a Glovis representative as saying that the lease was "a critical part of [its] plan to offer ... customers long-term stability at a port strategically located just north of the Los Angeles market." Relocating from Port Hueneme would be a challenge. Glovis "look[ed] forward to a long business relationship" with the Navy.

The Board determined that Glovis did not meet its burden of showing the assessments were incorrect. Glovis presented no evidence of the parties' intent when they included the option language in Paragraph 2. It presented no evidence that the Navy did not intend to approve any lease extension. To the contrary, Glovis’s previous relationship with the Navy, the parties' desire for long-term stability, Paragraph 2’s rental renegotiation term, and Paragraphs 2 and 3.3.4’s implied exemption from federal competitive bidding requirements showed that the parties contemplated a 15-year term of possession.

Glovis challenged the Board’s determinations in the trial court. After the court granted the County’s motion for judgment on the pleadings with leave to amend, Glovis filed an amended complaint, which included an amendment to the lease executed 12 days after the court’s ruling on the County’s motion. The amendment states that the parties intend that the lease: (1) "provide for a stated term of five years," (2) give Glovis a "right to request" a term extension, and (3) permit the Navy to approve or reject any extension request. It also states that the parties did not intend to convey "any rights in law or in equity in the event a request for extension is rejected by [the Navy]."

The amendment also replaces Paragraph 2 of the lease with the following language:

TERM . The initial term of this Lease shall be for five-years [sic ] commencing on September 16, 2013 [,] and ending on September 15, 2018 , unless sooner terminated under Paragraph 15.

Extension Requests. LESSEE may request that GOVERNMENT extend the term of the lease for an additional five-year period (an "Extension Request"). Any Extension Request may be approved or rejected by GOVERNMENT in its sole discretion for any reason or no reason at all. LESSEE shall have no recourse in law or in equity in the event GOVERNMENT rejects an Extension Request, and no more than two Extension Requests shall be requested or approved.

Release Rate. LESSEE must submit any Extension Request to LESSOR at least 180 days prior to the end of the current term in order to provide sufficient time for completion of an updated Appraisal which is required to estimate the Market Rental Value of the leased lands. The appraisal cost shall be borne by the LESSEE. The appraisal will be ordered and managed by the NAVFAC Southwest Senior Appraiser to ensure that all Federal Appraisal Standards are met.

The trial court concluded it could not consider the amendment. It sustained without leave to amend the County’s demurrer to Glovis’s amended complaint.

DISCUSSION

Standard of review

When the trial court sustains a demurrer, we independently determine whether the complaint states a cause of action. ( Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.) We deem true " ‘all material facts properly pleaded, but not contentions, deductions, or conclusions of fact or law.’ [Citation.]" ( Ibid . ) We reasonably interpret the complaint, "reading it as a whole and its parts in their context." ( Ibid . ) If the court did not grant leave to amend, we decide whether the plaintiff has shown a "reasonable possibility" that the defects in the complaint can be cured by amendment. ( Ibid . )

Legal framework

"Privately held possessory interests in property owned by the federal government ... are subject to taxation." ( Connolly v. County of Orange (1992) 1 Cal.4th 1105, 1118, 4 Cal.Rptr.2d 857, 824 P.2d 663.) A lease of federal property is a possessory interest. ( Cal. Code Regs., tit. 18, § 20, subd. (c)(3).) It may be taxed based on the leaseholder’s "reasonably anticipated term of possession." ( Cal. Code Regs., tit. 18, § 21, subd. (d)(1).) The reasonably anticipated term of possession is the term of possession stated in the lease, unless there is clear and convincing evidence that the lessor and lessee have agreed otherwise. (Ibid .) The stated term of possession as of a specific date is the remaining period of possession specified in the lease, including any option to extend the period of possession "if it is reasonable to assume that the option ... will be exercised." (Id. , subd. (a)(6).)

The option

Glovis contends the assessor miscalculated the lease’s stated term of possession because the lease does not include an option to extend its term. We disagree.

"[A]n option is a contract by which the owner of property invests another with the exclusive right to [lease] said property ... in the future." ( Caras v. Parker (1957) 149 Cal.App.2d 621, 626, 309 P.2d 104.) It is obligatory on the optionor, and cannot be withdrawn or revoked. ( Ibid . ) An option has a "dual nature: on the one hand it is an irrevocable offer, which upon acceptance ripens into a bilateral contract, and on the other hand, it is a unilateral contract [that] binds the optionor to perform an underlying agreement upon the optionee’s performance of a condition precedent." ( Palo Alto Town & Country Village, Inc. v. BBTC Company (1974) 11 Cal.3d 494, 502, 113 Cal.Rptr. 705, 521 P.2d 1097 ( Palo Alto Town & Country Village ).) It is a legal right that must rest on more than a hypothetical probability of extension. ( San Diego Metropolitan Transit Development Bd. v. Handlery Hotel, Inc. (1999) 73 Cal.App.4th 517, 531, 86 Cal.Rptr.2d 473 ( SDMTDB ).)

Whether Glovis’s lease with the Navy includes an option is a question for our independent review. ( Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865, 44 Cal.Rptr. 767, 402 P.2d 839.) We apply familiar rules: We interpret the lease to give effect to the parties' mutual intent at the time of contracting. ( Civ. Code, § 1636.) We ascertain that intent from the lease terms alone if they are clear and explicit. ( Civ. Code, §§ 1638, 1639.) We give the terms their ordinary and popular meaning unless the parties clearly intended to give them technical or special meanings. ( Civ. Code, § 1644.) And we construe the...