Martin v.
Forest
Products
Filed 1/16/13
Martin v. Hambro Forest Products CA1/1
OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits
courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
LOUIS A. MARTIN et al.,
Plaintiffs and
Appellants,
v.
HAMBRO FOREST PRODUCTS, INC., et al.,
Defendants and
Respondents.
A133084
(Humboldt County
Super. Ct. No.
DR100987)
Plaintiffs own a parcel of real
property subject to a 96-year lease. The
lease contains a provision requiring the lessee to keep the premises free and
clear of encumbrances resulting from the lessee’s activities. Plaintiffs sued the current lessee,
defendants Hambro Forest Products, Inc. and/or Humboldt Flakeboard Panels,
Inc., a subsidiary (jointly Hambro), when Hambro executed two deeds
transferring its leasehold interest in trust, contending the deeds of trust
breached the lease by encumbering the property.
The trial court sustained a
demurrer without leave to amend, reasoning a transfer of the leasehold interest
did not constitute an encumbrance of plaintiffs’ interest in the property. We affirm.
Plaintiffs, six individuals, are the
successors in interest to Frank Martin as the owners of real property in Arcata
(the property). In May 2010, plaintiffs
filed an action for breach of contract and
declaratory relief against Hambro and Robert and Katheryn Figas. The complaint alleged Frank Martin executed a
96-year lease of the property in 1950 (the lease). Hambro is the current lessee, while the Figases
are subtenants. The lease contains a
provision requiring the lessee to “keep said premises free and clear of all
liens and encumbrances of every kind and character created or resulting from
the Lessee’s acts or operations . . . .†In 2009, Hambro caused to be recorded two
deeds of trust with respect to its interest in the lease. The complaint contended the recording of
these deeds of trust constituted a breach of the lease and sought a declaration
to that effect and forfeiture of the lease.
Hambro filed a demurrer, arguing the
deeds of trust did not constitute an encumbrance of the “premises†because they
reached only Hambro’s interest in the lease.
The demurrer was accompanied by a request for judicial notice of the two
deeds of trust. Both deeds of trust
stated that Hambro “grants, transfers and assigns to Trustee in trust, with
power of sale, for the benefit of Lender as Beneficiary, all of Trustor’s
right, title, and interest in, to and under the Lease . . . together
with all existing or subsequently erected or affixed buildings, improvements
and fixtures; all easements, rights of way, and appurtenances; all water, water
rights and ditch rights (including stock in utilities with ditch or irrigation
rights); and all other rights, royalties, and profits relating to the real
property, including without limitation any rights Trustor later acquires in the
fee simple title to the land, subject to the Lease, and all minerals, oil, gas,
geothermal and similar matters . . . .†Opposing the demurrer, plaintiffs contended a
lease for a term of years creates an interest in real property and argued the
broad terms of the lease should be interpreted to preclude an encumbrance of
this real property interest. The trial
court took judicial notice of the two deeds of trust and sustained the demurrer
with leave to amend, reasoning “the complaint alleges an encumbrance of
defendants’ leasehold rights and not an encumbrance of the plaintiffs’
underlying real property ownership.â€
Plaintiffs filed a first amended
complaint quoting language from the deeds of trust. In opposing a renewed demurrer, plaintiffs
argued grant of the deeds of trust breached the lease because the deeds of
trust pledged as security various property interests Hambro did not actually
own, such as water and mineral rights in the property. The trial court sustained the demurrer
without leave to amend, holding: “The
Deeds of Trust encumber only defendants’ leasehold interests under the Lease
Agreement. By accepting defendants’
leasehold interest as collateral, the lender/trustee takes subject to all the
terms of the lease.â€
Plaintiffs contend the trial court
erred in sustaining the demurrer because execution and recordation of the deeds
of trust could constitute a breach of the lease.
“On review
from an order sustaining a demurrer, ‘we examine the
complaint de novo to determine whether it alleges facts sufficient to state a
cause of action under any legal theory, such facts being assumed true for this
purpose. [Citations.]’ [Citation.]
We may also consider matters that have been judicially noticed.†(Committee
for Green Foothills v.
Here,
the existence of a cause of action depends on the interpretation of the lease
and deeds of trust. “Interpretation of a
lease presents a question of law which we independently review using principles
of contract law.†(Principal Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman
(1998) 65 Cal.App.4th 1469, 1477–1478.)
“ ‘The fundamental rule is that interpretation of . . . any contract
. . . is governed by the mutual intent of the parties at the time
they form the contract. [Citation.] The parties’ intent is found, if possible,
solely in the contract’s written provisions.
[Citation.] “The ‘clear and
explicit’ meaning of these provisions, interpreted in their ‘ordinary and
popular sense,’ unless ‘used by the parties in a technical sense or a special
meaning is given to them by usage’ [citation], controls judicial interpretation.†[Citation.]
If a layperson would give the contract language
an unambiguous meaning, we apply that meaning.’ †(Nelsen
v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 1129.)
The provision of the lease that is
the subject of this dispute is contained within a paragraph stating, in
full: “It is further understood and
agreed that the Lessee shall pay and keep from becoming delinquent all taxes
that may be imposed upon said premises because of the erection thereon of any
sawmill or other manufacturing plant or equipment or machinery or ponds by the
Lessee and shall pay all such taxes promptly; and that the Lessee will keep said premises free and clear of all liens and
encumbrances of every kind and character created or resulting from the Lessee’s
acts or operations; and that all dikes and ditches that may be constructed
on said premises shall be inside the boundary of the above described premises;
and that said premises shall not be used by the Lessee for any illegal or
unlawful purposes.†(Italics added.) The “premises†referred to in this sentence
is not defined in the lease, but the term appears to be used interchangeably
with the terms “property†and “land hereinabove described†to refer to the
property being leased.
name="_ftnref1" title="">[1] In other words, the lease requires the lessee
to keep the leased property free of encumbrances resulting from its own
activities.
With that understanding, we find no
breach of the lease in Hambro’s execution of the deeds of trust. The deeds of trust do not purport to encumber
the property itself. Rather, both are a
transfer of “all of [Hambro’s] right, title, and interest in, to and under the
A lease for a term of years constitutes an interest in real property,
but it is not itself the real property that is the subject of the lease. As the Supreme Court has explained: “A freehold estate is distinguished from
other forms of estates in that it is of indeterminate duration [citations] and
carries with it title to land [citation].
But an
estate for years—in this case, a nonperiodic tenancy under a lease—is not a
freehold estate. [Citation.] Indeed, under California law an estate for
years is not real property at all but rather a chattel real—a form of
personalty—even though the substance of the estate, being land, is real
property. [Citations.]
[¶] Notwithstanding the fact that a lease is a present possessory interest
in land, there is no question that as a nonfreehold estate it is a different
species of interest from a freehold estate in fee simple. . . . A
leasehold is not an ownership interest, unlike the possession of land in fee
simple even when encumbered by a mortgage, for in the latter situation the
mortgagor acquires equity over time through periodic payments. It is for that reason that common parlance
refers to the ‘owner’ of a freehold estate, encumbered or unencumbered, but to
the ‘holder’ of a lease; the freeholder is seised of land, whereas the
leaseholder is not.†(
Los Angeles (1991) 1 Cal.4th 155, 162–163.)
Consideration of the nature of the
encumbrance created by the deed of trust demonstrates that it does not, as a
practical matter, encumber plaintiffs’ property. Should Hambro fail to pay the debt for which
the lease provides security, the trustee, and thereby the lender, would succeed
to ownership of the lease. They would
not succeed to ownership of the property, since the deed transfers only
Hambro’s interest in the lease. (See
collateral takes subject to all the terms of the lease].) Accordingly, the deed of trust is, in effect,
a conditional assignment of the lease to the trustee. Because the lease does not limit assignments,
this would not constitute a breach.
(Civ. Code, §§ 1995.210, subd. (b), 1995.220.) Just as an ordinary assignment of the lease
would not impair or otherwise interfere with plaintiffs’ interest in the
property, a seizure of the leasehold, which would have the same legal effect as
an assignment, would not impair plaintiff’s interest, either.
The context of the clause
prohibiting encumbrances suggests its purpose was to ensure that the lessee’s
activities did not result in an impairment of the lessor’s ownership
interest. The clause follows immediately
after a clause requiring the lessee to pay all taxes resulting from its
erection of improvements on the property.
Unpaid property taxes assessed against improvements constructed by the
lessee could, under certain circumstances, become a lien against the real
property itself. (See
(1951); Rev. & Tax. Code, § 2188.1.)
Further, while the lease may have been concerned primarily with tax
liens, it is possible to envision other liens impairing the lessor’s ownership
interest that might result from the lessee’s activities. Because the parties anticipated the lessee
would build on the property and conduct an active business, there was the risk
of a mechanic’s lien. (See
Superior Court (2003) 106 Cal.App.4th 314, 321 [explaining when a
mechanic’s lien filed in connection with work for a lessee can attach to the
underlying property].) A lis pendens
growing out of a dispute over the lease was also a possibility. (E.g., Parker
v. Superior Court (1970) 9 Cal.App.3d 397, 399–400.)
Plaintiffs argue a provision
prohibiting the lessee from encumbering the property would be “superfluousâ€
since a lessee would lack the “power or necessary interest [in the property] to
create such an encumbrance in favor of a third party.†We recognize Hambro, because it had no
ownership interest in the property, could not have mortgaged it or otherwise
encumbered the property for its own benefit.
As demonstrated above, however, a lien could have been filed against the
property by a tax or other creditor of the lessee in certain
circumstances. Because of the risk of
this type of involuntary encumbrance, the provision was not superfluous.
Plaintiffs also argue the lease
“covers every encumbrance regardless of its kind or character,†focusing on the
lease language, “all liens and encumbrances of every kind and
character.†The immediately
preceding language, however, limits the application of this language to
encumbrances against the “premises.†For
the reasons explained above, a deed of trust to Hambro’s leasehold rights is
not an encumbrance of the premises.
Finally, as they did before the
trial court, plaintiffs claim the language of the deeds of trust covers certain
rights that they retain as owners, thereby encumbering their ownership. The language in question states that Hambro
grants “all of Trustor’s right, title, and interest in, to and under the Lease
. . . of the following described real property, together with all
existing or subsequently erected or affixed buildings, improvements and
fixtures; all easements, rights of way, and appurtenances; all water, water
rights and ditch rights . . . ; and all other rights, royalties, and
profits relating to the real property, including without limitation any rights
Trustor later acquires in the fee simple title to the land, subject to the
Lease, and all minerals, oil, gas, geothermal and similar matters
. . . .†Plaintiffs
contend the language relating to water rights, royalties and profits, and
mineral rights purports to transfer to the trustee their own property rights.
This argument is inconsistent with
plaintiffs’ earlier argument that a prohibition of encumbrances of their
property would be superfluous because Hambro lacked the “power or necessary
interest†to create such an encumbrance.
As that argument correctly recognized, Hambro lacks the legal authority
to deed property interests that it does not own. As a result, any clause in the deeds of trust
purporting to convey a property interest not actually owned by Hambro would be
legally ineffective. In order to avoid
such a finding, we construe the phrase “all of Trustor’s right, title, and
interest in, to and under the Lease†to apply not only to the possessory interest
but also to the other property interests subsequently listed. In other words, the deeds of trust apply to
the other rights and interests only if they are possessed by Hambro under the
Lease. It would be an absurd
construction to hold that the deeds of trust were intended to transfer to the
trustee property rights Hambro had no legal right to transfer. (Cf. Glendale
Fed. Bank v. Hadden, supra, 73
Cal.App.4th at p. 1153 [lender succeeds to rights of leaseholder];
(2005) 133 Cal.App.4th 1257, 1269 [“Interpretation of a contract ‘must be fair
and reasonable, not leading to absurd
conclusions’ â€].)
Because plaintiffs’ complaint fails
to state a claim on the facts pleaded and plaintiffs do not suggest any other
facts that could be pleaded to cure the deficiency, the trial court did not
abuse its discretion in sustaining the demurrer without leave to amend. (E.g., Vieira
Enterprises, Inc. v. City of
The judgment of the trial court is
affirmed.
_________________________
Margulies,
J.
We concur:
_________________________
Marchiano, P.J.
_________________________
Dondero, J.
name="_ftn1" title="">[1] The lease appears to concern raw land, since it anticipates that
the lessee “may make, erect and place thereon such buildings, equipment,
machinery, roads, spur tracks, [etc.] . . . as the Lessee may desire
and that upon the end or other termination of this lease that the Lessee will
remove all such buildings . . . .†Plaintiffs contend the term “premises†does
not refer solely to the real property, but they do not propose an alternative
meaning. We see no plausible
alternative.
