Thomas Ctr. Owners Ass'n v. Robert E. Thomas Tr.

• Decision Date: 12 October 2020
• Docket Number: No. 80086-8-I,80086-8-I
• Court: Washington Court of Appeals
• Parties: THOMAS CENTER OWNERS ASSOCIATION, Appellant, v. THE ROBERT E. THOMAS TRUST, and MICHAEL HYTOPOULOS, Trustee, Respondents.

THOMAS CENTER OWNERS ASSOCIATION, Appellant, v. THE ROBERT E. THOMAS TRUST,and MICHAEL HYTOPOULOS, Trustee, Respondents.

No. 80086-8-I

COURT OF APPEALS FOR THE STATE OF WASHINGTON DIVISION ONE

October 12, 2020

UNPUBLISHED OPINION

LEACH, J. — Thomas Center Owners Association appeals an order granting partial summary judgment in favor of its landlord, the Robert E. Thomas Trust, and denying its motion to vacate an appraisal used to establish rent amounts for a ground lease. The Association claims the trial court should have decided as a matter of law that the appraisers proceeded on a fundamentally wrong basis by excluding the impact of soil contamination from their valuation.

Because the appraisers did not act arbitrarily and capriciously, they did not make their evaluation on a fundamentally wrong basis. We affirm.

FACTS

Robert E. Thomas owned commercial real estate (Thomas Center Property) on Mercer Island. In August 1963, Charles and Vicenta Sparling and George and Jean Donnally, entered into a 99-year ground lease with Thomas for the property and purchased the improvements Thomas had built on it. Thomas created the Robert E. Thomas Trust in his will. It became the owner of the Thomas Center Property after Thomas passed away in 1976.

In July 1975, Sparling and Donnally assigned the ground lease to the John's Company. It created the Thomas Center Condominiums in 1976.

In 1985, John's Company assigned the ground lease to the condominium owners' association (Association). It is the current ground lease tenant. The ground lease provides for a rent adjustment every 10 years using an appraisal process:

The amount of monthly rental payable by Lessees under paragraph 3.A above shall be adjusted on the 1^st day of September 1973, 1983, 1993, 2003, 2013, 2023, 2033, 2043; and 2053, to an amount equal to six (6%) per cent per annum of the appraised fair market value of said leased premises, excluding buildings, and shall, for the 120 months next succeeding the commencement of each such [10-year] period, be the amount so determined by an appraisal; provided, however, that in no event will the monthly rental be less than $800.00 per month. At least sixty (60) days before the end of each said ten year period, the Lessor and Lessees shall jointly appoint one appraiser, and said appraiser shall appraise the leased premises at its fair market value, as of the date on which each such ten year period commences.

. . .

In the event that the parties are unable to agree on one appraiser, or in the event the valuation established by the one appraiser is unsatisfactory to either party, then the parties shall each appoint one appraiser and the two appraisers so selected shall appoint a third appraiser, and the appraised fair market value as determined by the three appraisers shall then be binding upon the parties hereto retroactively to the beginning of that ten year period.

In 2013, the Association and the Trust agreed to have Peter Shorett appraise the land to determine the new rent effective September 1, 2013. Shorett appraised the land at $5.5 million. He included in his appraisal report a limiting condition stating, "It is assumed that there are no hidden or unapparent conditions of the property, subsoil, orstructures (including asbestos, soil contamination, or unknown environmental factors) that render it more or less valuable." In a letter dated September 20, 2013, Shorett told the parties that after he finished his appraisal he learned about a feasibility study that caused him to increase his valuation to $6.6 million. The Association did not accept the $5.5 million or the $6.6 million valuations.

In 2014, the Trust learned the Hadley Property, a property across the street from the Thomas Center Property, was contaminated by Tetrachloroethylene (PCE). A 2011 report prepared for a previous owner of the Hadley Property stated that a drycleaner and coin-operated laundry on the Thomas Property in the late 1960s and 70s was a recognized environmental condition. A recognized environmental condition "is the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release or the material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, groundwater or surface water of the property."

In late 2014, the Trust had investigative testing done at the Thomas Center Property. It confirmed the presence of PCE and other degradient contaminants on the property. Hadley sued the Association, the Trust, and other parties for offsite contamination.

After learning about the contamination, the Association asserted the appraisement process could not go forward until the contamination issue was fully and finally resolved. In January 2015, the Association sued the Trust, seeking declaratory judgment that "it has no liability related to the contamination of the Thomas Center Property," and for aninjunction "enjoining the re-evaluation of Ground Lease rent until the nature and extent of the contamination and remediation liability has been determined."

In 2015, the trial court granted partial summary judgment forcing the Association to participate in the appraisement process:

The plaintiff says a reliable appraisal simply can't be done when there is so much uncertainty about the amount of, and responsibility for, outstanding remediation costs. The defense doesn't necessarily disagree but says this is a question with which the appraisers, and not the court, should wrestle. If the appraisers determine the task is impossible, so be it. The Court would agree that the process should run its course - whether it leads somewhere or not - and the plaintiff should be participating in the process.

To comply with the court order, the Association appointed Ken Barnes as its appraiser, and the Trust appointed Anthony Gibbons as its appraiser. Barnes and Gibbons mutually appointed Murray Brackett as the third appraiser.

In January 2017, Brackett told counsel the appraisers were close to completing the work "without additional information about the contamination issue," and asked if the appraisers would be receiving further guidance or information on "this issue."

The Trust's counsel responded to Brackett suggesting the appraisers:

1. Complete the appraisal analysis of the Thomas Center Property, as unimpaired as of the required appraisal date. Just so that task is done.

2. Place an interim hold on the appraisal valuation of the property, as impaired, as of the appraisal date, pending completion of further studies and information which are now commencing...

3. When your group is ready to prepare a final report, we request thatthe report be prepared in "DRAFT" form and that we and our clients have a reasonable opportunity to review, comment, question the report before your group prepares a final report.

NOTE: For the sake of caution, I want to reiterate my position that as of the appraisal date, the contamination which has been there [for] decades was not known to the parties and [therefore] is not a relevant factor in valuation. I understand that Chris disagrees and that your group may disagree. I just want to make clear that I have not waived or conceded that point.

On November 12, 2018, the Association told the appraisers it did not know when the appraisers would receive additional information because of upcoming litigation dates. The Trust responded noting that "no new material information about the contamination itself is expected for the foreseeable future."

On December 31, 2018, the appraisal panel concluded the fair market value was $5.5 million as "clean." The panel noted this valuation was made with "ongoing litigation with respect to onsite environmental contamination" and that "[t]he best available information indicates that the issue of contamination became known after the revaluation date." The appraisal also noted:

With regard to the retrospective receipt of information related to contamination, it is noted that the highest and best use of the property would call for a full investigation of the contamination, and ultimate clean-up. It is standard practice to appraise a property as clean, and then address contamination liability as a separate matter. Typically, when development property such as this sells in the market place, the price of the property is differentiated from the cost of clean-up. The price paid for the property, as clean, is then used to help fund clean-up, presuming the owner is responsible for the cost of clean-up. Typically, relevant funds would be escrowed pending development of the project, and the money used to clean up the site during the development process. In this manner other sourcesof clean-up funds can be obtained from potentially liable parties, and insurance proceeds, if any.

We reiterate that issues of liability and related impacts to fair market rent will be dealt with in the ongoing litigation, outside of the market rent determination process.

The Association's appraiser dissented. He agreed with the "clean" valuation but stated the panel did not have enough information to provide an "as is" valuation.

From September 1, 2013, through June of 2017, the Association paid $27,500 per month in rent based on Shorett's original 2013 appraisal. On July 1, 2017, the Association reduced its monthly rent payment to $10,000 per month. This resulted in a rent reduction of $385,000 for the period from July 1, 2017, to April 2019.

On March 4, 2019, the Association asked the court to vacate the appraisal decision. In response, the Trust asked the court to enforce the lease adjustment provision using the appraisal and to award the Trust back rent and interest.

The trial court granted the Trust's request on summary judgment. The trial court found that the process as completed was not fundamentally wrong and also found that the appraisal panel did not fail to follow...