Douglas W. SEFTON, Plaintiff and Appellant, v. PASADENA WALDORF SCHOOL,* Defendant and Respondent.
Plaintiff, Douglas W. Sefton (“Sefton”), purchased certain income property from the defendant Pasadena Waldorf School (the “School”). Later, it was determined that rents being charged to tenants of the property were illegal under a local rent control law. Sefton was required to refund to the tenants the excess rents collected by prior owners, including the School. Sefton sued the School to recover such sums and for other damages. Summary judgment was granted in favor of the School on the ground that no representation or warranty as to the legality of the rents had been made by the School to Sefton.
We conclude that the express representations made to Sefton by the School regarding the then-current rents necessarily implied representations as to the legality of such rents. Thus, the trial court erred in determining, as a matter of law, that Sefton could not assert a cause of action for negligent misrepresentation. We therefore reverse the judgment.
On March 19, 1986, the School received record title to the real property located at 1043, 1047 and 1051 4th Street, Santa Monica, California (the “property”). The School had received the deed to the property on March 14, 1986 from Paquita Machris (Machris) as a gift. The property consisted of three lots, on which were rental units subject to the Santa Monica Rent Control Ordinance (“Ordinance”).1 Although the School and Machris did not discuss any requirements of the Ordinance, the School believed that the units were subject to rent control, because “the rents were rather low.” 2 Machris, however, did supply the School with a written schedule of rents, which consisted of notices to the tenants regarding the most recent rent increases. She did not supply the School with any written rental agreements. In fact, with but one exception, there were apparently no written agreements and the tenancies were all month-to-month.
On or about April 10, 1986, the School listed the property for sale and eighteen days later, on April 28, received an offer from one Naim Obeji (“Obeji”). An express condition of the offer was the buyer's “review and approval of all Leases and or Rental Agreements” for the subject units.3
Pursuant to an option agreement, dated May 5, 1986, Obeji had 30 days to determine if he wished to purchase the property. The School was required to provide Obeji with all leases and rental agreements. The School, considering them to be the requisite rental agreements, supplied Obeji with copies of the several rental increase notices submitted to the tenants by Machris, the prior owner of the property.
In a document entitled “Escrow Instructions, Re Rents” the School submitted an additional statement regarding rents. Included in that document are the names of the tenants, a statement as to the amount of rent each was paying and the date through which it had been paid. Paul Livadary (“Livadary”), the School's agent throughout this transaction, conducted no independent investigation to determine the actual rents paid for the units, nor their legality.4 Instead, he obtained the information supplied on that document solely from the aforesaid rental increase notices.5
On or about June 17, 1986, Obeji exercised his option to purchase the property and, at the same time, reserved the right to substitute other purchasers as the buyer instead of himself. The School approved such substitution right and ultimately Sefton became the buyer of all three lots. He purchased one through the escrow, (which closed on July 24, 1986), and he purchased the other two shortly thereafter from Obeji.
Beginning in approximately January 1987, Katherine Abrams, the tenant at the 1051 property and John Crawford, the tenant at the 1047 property, refused to pay rent to Sefton.6 In the unlawful detainer proceedings initiated shortly thereafter by Sefton, those tenants raised the defense that the rents charged were illegal under the Ordinance. At the trial of that action, the court determined that Machris, the prior owner, had failed to comply with the rollback provisions of the Ordinance (requiring rent reductions back to April 1978 levels) and, on at least five separate occasions since 1979, had raised the tenants' rent in violation of the Ordinance.7 Sefton was required to refund to the tenants the excess rent collected since May 1, 1979 by Machris and the School.8
In the present action Sefton seeks to recover (1) the amount of excess rent which he was required to refund to the tenants, (2) damages for lost future rent and (3) damages for delay in the redevelopment of the property. The third amended complaint pleaded three causes of action against the School, namely breach of written contract, fraud and deceit (suppression of fact), and negligent misrepresentation. In sum, Sefton alleged that the School had represented and warranted that the amounts of the rents charged and collected were proper and that contrary to such representation and warranty such amounts were not legally chargeable, which fact the School had failed to disclose.9
On or about November 22, 1988, the School filed a motion for summary judgment or, alternatively, for summary adjudication of issues. In its motion the School took the position, inter alia, that the contract at issue contained no representation or warranty as to the legality of the rents under the Ordinance nor imposed any duty on the School to inquire about the legality of the rents, and that the contract imposed an obligation on the buyer, i.e., Sefton, to examine and approve the rents being charged.
In his supporting declaration, Livadary 10 stated he “never made any representations to anyone regarding the legality of the rents. [He] was never even asked about the legality of the rents. [He] did report during escrow the then-current rents being collected at the property. Those rents were accurately set forth on the [Escrow Instructions Re Rents]․”
Sefton filed a separate statement of disputed facts and opposition to the motion. As evidentiary support, Sefton submitted portions of Livadary's deposition, his own declaration, and the declaration of Obeji.11
Following a hearing on February 15, 1989, the court granted defendant's motion for summary judgment and it was entered two days later. Sefton then prosecuted this timely appeal.
CONTENTIONS ON APPEAL
Sefton essentially contends that the School represented to him that the rents were lawful and that triable issues of material fact exist, at least as to his claim of negligent misrepresentation. The School repeats the same argument which was successful in the trial court and contends that, since no express representations were made regarding rent legality, Sefton has no claim as a matter of law.
A summary judgment is proper if the action has no merit and there is no triable issue of material fact. The issues before the trial court in passing on a motion for summary judgment, and the only issues, are those issues raised by the challenged pleadings, which in this case is the complaint.
“The summary judgment procedure, inasmuch as it denies the right of the adverse party to a trial, is drastic and should be used with caution. [Citation.] Summary judgment is properly granted only when the evidence in support of the moving party establishes that there is no issue of fact to be tried. [Citations.]” (Mann v. Cracchiolo (1985) 38 Cal.3d 18, 35, 210 Cal.Rptr. 762, 694 P.2d 1134.)
“The burden of a party moving for a summary judgment is only to negate the existence of triable issues of fact in a fashion that entitles it to judgment on the issues raised by the pleadings. The moving party need not ‘․ refute liability on some theoretical possibility not included in the pleadings.’ (IT Corp. v. Superior Court (1978) 83 Cal.App.3d 443, 452 [147 Cal.Rptr. 828]․)” (Cochran v. Linn (1984) 159 Cal.App.3d 245, 250, 205 Cal.Rptr. 550.)
The evidence of the moving party is strictly construed and that of the responding party liberally construed, and doubts as to the propriety of granting the motion must be resolved in favor of the party opposing the motion. (Varco–Pruden, Inc. v. Hampshire Constr. Co. (1975) 50 Cal.App.3d 654, 659, 123 Cal.Rptr. 606.) For a defendant to prevail, he must conclusively negate at least one necessary element of plaintiff's case and demonstrate that under no hypothesis is there a material factual issue which requires trial. (Frazier, Dame, Doherty, Parrish & Hanawalt v. Boccardo, Blum, Lull, Niland, Teerlink & Bell (1977) 70 Cal.App.3d 331, 339, 138 Cal.Rptr. 670.)
The thrust of the third amended complaint is that the Escrow Instructions Re Rents constitutes a representation by the School, both express and implied, that the amounts of the rents listed thereon are legally valid under the Ordinance. This premise also formed the basis for Sefton's opposition to the motion for summary judgment as well as his position on appeal.
A review of that escrow document demonstrates that the School did not expressly represent that the amounts of the rents listed were valid under the Ordinance, or otherwise legal. However, that does not dispose of the argument that a representation as to legality of the rents was implied by the express statements which were in fact made. Sefton contends that the School's express representations necessarily implied that the stated rentals were not only those to which the listed tenants had agreed, and had in fact paid through May 31, 1986, but were otherwise rentals which the School was entitled to collect. We agree.
1. Negligent Misrepresentation
The tort of negligent misrepresentation has six elements: (1) a representation was made as to a past or existing material fact; (2) the representation was untrue; (3) the representation was made by a defendant who, regardless of his actual belief, did not have any reasonable ground for believing it to be true; (4) the representation was made with the intent to induce the plaintiff to rely upon it; (5) the plaintiff was unaware of the falsity of the representation and acted in reliance upon its truth and was justified in so doing; and (6) as a result of plaintiff's reliance he sustained damage. (See BAJI No. 12.45 (7th ed. 1986); Walters v. Marler (1978) 83 Cal.App.3d 1, 17, 147 Cal.Rptr. 655 disapproved on another ground in Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 507, 198 Cal.Rptr. 551, 674 P.2d 253.)
We are here only concerned with the question of whether an actionable representation was made to Sefton by the School. This essentially involves only the first of the above elements. With respect to the second, the parties apparently agree that if a representation was made regarding rent legality, it was false. As to the other four elements, there may or may not be issues of material fact remaining to be resolved. In view of the trial court's legal determination regarding the absence of any representation, it never reached or resolved those questions.
By statutory definition, a negligent representation exists where the defendant makes a positive assertion of a false statement, honestly believing it to be true, but without a reasonable ground for such belief. (Civ.Code, §§ 1572, subd. (2),12 1710, subd. (2).) 13 Such a representation, to be actionable must have been made to the plaintiff seeking relief and in the context of a business or professional transaction. (5 Witkin, Summary of Cal.Law (9th ed. 1988) Torts, §§ 721–722, pp. 819–822.)
The record demonstrates a pleading and evidentiary basis for the conclusion that an actionable representation was made to Sefton. As noted above, the School represented to Sefton in a clear business context that the rents for particular units with certain named tenants were in specific amounts and were current through a specific date.14 If such representations necessarily carried with them the implied further assertion that the School was entitled to collect those rents, then there is evidence that the School had no reasonable basis for its belief in the truth of such representations. Although aware that the property was subject to rent control, the School had neither sought nor received any information confirming that the rental increases instituted by Machris were lawful.
Indeed, the School had at least constructive knowledge that the rents exceeded the maximum allowable under the Ordinance. The School's failure to comply with the re-registration provisions of the rent control regulations (1) bars reliance on any claim of ignorance of the illegality of the existing rents and (2) bars any assertion that it was reasonable for the School to rely solely upon the rental increase statements submitted by the original owner, Machris.
That Sefton could have also checked the rent control records will not necessarily relieve the School from liability. The principles of comparative negligence have no place in actions based upon deceit, particularly in transactions, such as this one, which involve the buying and selling of property. (Carroll v. Gava (1979) 98 Cal.App.3d 892, 897, 159 Cal.Rptr. 778.) However, such fact may well be relevant to the issue of justifiable reliance. (See, e.g., Christiansen v. Roddy (1986) 186 Cal.App.3d 780, 788–789, 231 Cal.Rptr. 72.) 15
However, the School argues that since there is no express representation regarding the legality of the rentals, there can be no negligent misrepresentation. We reject that argument. While there is little authority on the point, several California cases have recognized that such a claim may be based upon an implied representation.
In Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 86 P.2d 102, the court held that “․ a person who sells a security impliedly represents that a permit therefore has been secured when one is required by the Corporate Securities Act for such a sale. If this implied representation is false, then it is a negligent misrepresentation which is an actionable fraud ․ unless the seller acted upon information sufficient to justify a reasonable man in concluding that no permit was required.” (Id. at pp. 525–526, 86 P.2d 102; see also, Taormina v. Antelope Mining Corp. (1952) 110 Cal.App.2d 314, 320, 242 Cal.Rptr. 665.)
In Universal By–Products, Inc. v. City of Modesto (1974) 43 Cal.App.3d 145, 117 Cal.Rptr. 525, the court recognized that a cause of action for deceit could be alleged based upon the falsity of an implied representation by the defendant of its existing intent to consider in good faith, bids submitted for a garbage collection contract. “A misrepresentation need not be express but may be implied by or inferred from the circumstances.” (Id. at p. 151, 117 Cal.Rptr. 525; see also, Younan v. Equifax Inc. (1980) 111 Cal.App.3d 498, 513, 169 Cal.Rptr. 478.)
Finally, in Tijsseling v. General Acc. etc. Assur. Corp. (1976) 55 Cal.App.3d 623, 127 Cal.Rptr. 681, the court decided an insurance coverage issue in the context of a claim that a seller of real property had negligently misrepresented the condition of the property to the buyer, although admittedly no express statements had been made. After the sale had closed, the buyer discovered that the house he had purchased encroached onto an adjacent parcel. The court stated: “․ the claims of the buyers against Tijsseling were based on negligent misrepresentation. The implicit misrepresentation, necessarily, must have been that the house on Lot 25 did not encroach upon Lot 26.” (Id. at p. 626, 127 Cal.Rptr. 681.)
Language in two other cases, however, suggests that the viability of the principle of implied representation is not free from dispute. In Huber, Hunt & Nichols, Inc. v. Moore (1977) 67 Cal.App.3d 278, 304, 136 Cal.Rptr. 603, the court stated parenthetically that an implied representation cannot serve as the basis for the positive assertion statutorily required for the tort of negligent misrepresentation. That comment, made without analysis or citation of authority, was simply dictum in a discussion of the proper measure of damages in what was essentially a professional negligence action against a firm of architects whose alleged errors in the preparation of plans and specifications had caused the complaining contractor to submit an unprofitably low bid.
In Yanase v. Automobile Club, of So. Cal. (1989) 212 Cal.App.3d 468, 260 Cal.Rptr. 513, plaintiff's decedent patronized a motel listed in defendant's Tourbook and was shot and killed in the motel parking lot. Plaintiff claimed that defendant's listing implied that the motel was in a safe area and employed adequate security measures. Citing Huber, the court dismissed the claim in one sentence, saying “Since the tort [of negligent misrepresentation] requires a ‘positive assertion,’ the doctrine does not apply to implied representations.” (Id. at p. 473, 260 Cal.Rptr. 513.) This statement was made without analysis or even a recognition that it was based entirely upon the unsupported dictum of Huber.
Neither of these cases is persuasive. In Huber, leaving aside the fact that the court's statement was gratuitous dictum, the parties specifically contemplated the possibility of architectural error. There was no basis for the claim that an implied representation as to the accuracy of the plans existed.
In Yanase, plaintiff's claim rested on an illogical assumption. The mere listing or rating of the motel in a guidebook did not necessarily imply anything about the status of neighborhood safety or security measures. As the court pointed out, the Auto Club's Tourbook simply supplied information about accommodations which were available. “Nothing is said about inspecting for dangerous neighborhoods or determining the presence or absence of personal security measures taken by the owners of the accommodations on behalf of their patrons.” (Id. at p. 476, 260 Cal.Rptr. 513.) The court further explained “․ that [the] Auto Club's listing and rating of motels and hotels in the Tourbook serves essentially the same purpose as an advertisement.” (Id. at pp. 477–478, 260 Cal.Rptr. 513.)
In this case, on the other hand, the express representation as to existing and currently collected rentals simply would make no sense and have no meaning if the entitlement to such rentals did not exist. In the absence of an express disclaimer, it would be both illogical and unjust not to recognize an implied representation that there existed valid, legal and enforceable agreements with the tenants. The right to collect a represented rental is both the point and purpose of any representation as to its amount.
In our view, the conclusionary language in Huber and Yanase is supported by neither reason or cited authority and we refuse to apply it here. Instead, we adopt the principle of implied representation as recognized in Mary Pickford Co. v. Bayly Bros., Inc., supra, 12 Cal.2d at pp. 525–526, 86 P.2d 102, Universal By–Products, Inc. v. City of Modesto, supra, 43 Cal.App.3d at 151, 117 Cal.Rptr. 525, and Tijsseling v. General Acc. etc. Assur. Corp., supra, 55 Cal.App.3d at 626, 127 Cal.Rptr. 681.
Thus, the fact that the School did not make an express representation as to the legality of the rentals does not mean that there was not a positive assertion of such legality. The express statement which was made necessarily included and implied a representation as to the legality of the described rents. This was sufficient to satisfy the statutory requirements. (Civ.Code, §§ 1572, subd. (2) and 1710, subd. (2).)
2. Breach of Warranty
The doctrine of implied warranty has had limited application to the sale of real property and has typically involved a claimed quality defect in construction. As the court in Pollard v. Saxe & Yolles Dev. Co. (1974) 12 Cal.3d 374, 115 Cal.Rptr. 648, 525 P.2d 88 put it: “Historically, the laws governing sales of real property have developed along lines different from those governing sales of commercial goods. In the normal sale of land and buildings, courts have traditionally applied the doctrine of caveat emptor, with the buyer assuming the risk on quality—absent express warranty, fraud, or misrepresentation. (Gustafson v. Dunman, Inc. (1962) 204 Cal.App.2d 10, 13 [22 Cal.Rptr. 161]; Murphy v. Sheftel (1932) 121 Cal.App. 533, 539 [9 P.2d 568].) In contrast, in the sale or furnishing of tangible chattels, warranties of quality and fitness have been implied (Gagne v. Bertran (1954) 43 Cal.2d 481 [275 P.2d 15] ), and in California statutes dealing with such warranties now govern the sale of goods (Cal.U.Com.Code, § 2105).” (Id. at p. 377, 115 Cal.Rptr. 648, 525 P.2d 88.)
Thus, it is the general rule in California that the doctrine of implied warranty has no application in the sale of land and buildings. As the Pollard court noted, an exception exists in the case of some construction contracts as they essentially involve the sale of labor and materials. (Siders v. Schloo (1987) 188 Cal.App.3d 1217, 1220–1221, 233 Cal.Rptr. 906.) Even there, however, the application of the doctrine is limited to new construction. (East Hilton Drive Homeowners' Assn. v. Western Real Estate Exchange, Inc. (1982) 136 Cal.App.3d 630, 632–633, 186 Cal.Rptr. 267.)
We see no compelling reason to extend implied warranty liability to the factual circumstances here presented. “The obligation of a warranty is absolute, and is imposed as a matter of law irrespective of whether the seller knew or should have known of the falsity of his representations.” (Mary Pickford Co. v. Bayly Bros., Inc., supra, 12 Cal.2d at p. 520, 86 P.2d 102; see also, Gagne v. Bertran (1954) 43 Cal.2d 481, 486, 275 P.2d 15.) In our view, there is no justification for imposing such strict liability on the School. Its burden, if any, should be based on Sefton's ability to prove a case of negligent misrepresentation.
There was an implied assertion of rent legality which was necessarily included within the express statements made by the School. Thus, the trial court erred in determining, as a matter of law, that there was no actionable representation. Accordingly, the trial court should not have granted summary judgment in favor of the School. While we have concluded that a representation of rent legality was made by the School, which on this record was apparently false, issues of material fact may well remain to be resolved with respect to the remaining elements of Sefton's claim of negligent misrepresentation.
The judgment is reversed and is remanded for further proceedings consistent with this opinion. Sefton shall recover his costs on appeal.
I respectfully dissent from the opinion and decision of the majority and would affirm the judgment appealed from. I hold that an implied representation is not, and can not be, the basis for an action for negligent misrepresentation. Moreover, assuming arguendo that one could be stated, the record establishes, as a matter of law, that no representation of any kind was made to plaintiff Sefton by the defendant School.
In this dissenting opinion I adopt the terms of reference used by the majority in their opinion, i.e., “Sefton,” “School,” “the property,” “Machris,” “Ordinance,” “Obeji,” and “Livadary.”
The facts set forth in the “Factual Background” of the majority opinion are correct, however, it is necessary to restate some of them in order to place them in their proper sequence and context, and to state some additional facts, in order to determine whether the trial court correctly ruled that there were no triable issues of material fact and properly ordered entry of the judgment appealed from.
I also disagree with the majority's characterization of the property as “income property,” (see first paragraph, page 336, ante, and see footnote 3, page 337, ante ) because that characterization invokes the perception that the property was being purchased for the purpose of producing “income” from the rental units thereon. As will be noted, below, both Obeji and Sefton were interested in buying the property only for the purpose of obtaining a Removal Permit, removing the property from the rental housing market, and redeveloping the land. Thus, I consider the majority's comments in footnote 3 to be irrelevant.
FACTUAL STATEMENT 16
Prior to March 19, 1986, Paquita Machris owned certain real property located at 1043, 1047 and 1051 4th Street, Santa Monica, California. On March 19, Machris donated the property to the School. The property consisted of three parcels, improved with rental units which were subject to the Santa Monica Rent Control Ordinance (Ordinance).
Machris did not discuss any requirements of the Ordinance with the School, nor did the School conduct any independent investigation thereof. Machris did not supply the School with written rental agreements, but she did give the School a written schedule of rents, which consisted of notices to the tenants regarding recent rent increases, each of which was entitled “Notice of Change of Terms of Tenancy.” The School believed that the units were subject to rent control “because the rents were rather low.” 17
The School, a non-profit corporation, never intended to manage or retain ownership of the property since it did not ordinarily engage in real estate business transactions. On or about April 10, 1986, three weeks after receiving title, the School listed the property for sale.
On April 28, the School received an offer to purchase the property from Naim Obeji (Obeji), a real estate developer, who made the purchase contingent on the following conditions, inter alia:
“2. Buyer's review and approval of all Leases and or Rental Agreements within five days upon receipt of same.
“3. Buyer to verify with the Santa Monica Planning Department within 30 days that 24 plus 6 affordable units can be buil[t] on the site.
“4. Buyer to verify with the Santa Monica Rent Control Board within 30 days regarding Removal Permit granted Buyer upon approval of Preliminary Plans approved by the Santa Monica Planning Department.” 18
On the same date the School made a counteroffer in which it deleted conditions 3 and 4 above and added an “as is” provision. In his deposition Paul Livadary, President of the Board of Trustees of the School, and the School's agent throughout this transaction, testified Obeji inserted paragraphs 2, 3, and 4, because he “was interested in rent control problems if there were any․” He further testified that he, Livadary, struck out paragraphs 3 and 4 concerning the Santa Monica Planning Department and the Santa Monica Rent Control Board, because the School wanted to sell the property “as is”; and that the only contingency left in closing the sale was condition # 2, the buyer's review and approval of leases and rental agreements.
Obeji and the School then mutually decided to change the nature of the transaction from a sale into an option-to-buy. In his deposition Livadary testified that “by virtue of this option agreement, [Obeji] was buying the time to investigate all those matters whether it was rent control, whether it was lease amounts, rental agreements or otherwise. It was to convert the sale into an as is sale giving him time to do his due diligence since he didn't want to do it in advance.” Obeji paid a consideration of $10,000 for the option.
Pursuant to the option agreement, dated May 2, 1986, the School supplied Obeji with the various notices to tenants (referred to above and entitled “Notice of Change of Terms of Tenancy”) given it by Machris, the prior owner of the property, regarding increases in rent. The School considered those letters to be the requisite rental agreements. These notices contain an express representation and warranty as to the lawfulness of the amount of rent stated thereon. However, in his third amended complaint Sefton does not plead, nor did Sefton below or on appeal assert that he had ever seen, that he knew of, or that he relied upon these letters, or that these letters constitute the source of the representation as to the legality of the rents collected, which is the basis of his principal cause of action.
In a document entitled “Escrow Instructions, Re Rents,” dated May 16, 1986, the School submitted a statement to the escrow company regarding the rents the School would collect during the escrow period. Livadary testified that this statement was on a form supplied by the escrow company for “an additional statement of rents so that they could properly close the escrow.” The “escrow required a rent statement as part of its papers so that they could prorate rents and other items as of whatever the close of escrow was․”
The document recited: “In order that rents for the property [the School is] conveying may be correctly adjusted through this escrow, I [Livadary] hereby state that the rentals as to amounts and dates to which they are paid, are as follows․” The document further provided that the rental statement was “a basis for rent adjustment through this escrow.”
Above Livadary's signature on that document was the following recital: “Unless prior to date of recording I have notified you in writing of some change in tenancy, you are to consider that I will collect all rents which fall due according to the foregoing statement prior to the close of this escrow, and you [escrow company] will make the adjustments of rents accordingly.”
Livadary obtained the information supplied on that document solely from the “Notice[s] of Change of Terms of Tenancy” written by the prior owner, Machris, to the tenants. Obeji signed that document on June 10, 1986, approving it as the basis for rent adjustment through the escrow.
When Obeji exercised his option to purchase the property, on June 17, 1986, he reserved the right to substitute “at least three individual purchasers” of the property, instead of himself, the substituted purchasers to be named prior to close of escrow. Obeji wanted the grant deeds for the three parcels in the names of three different persons as grantees because he did not want the City of Santa Monica to require that the land be developed as one parcel.
Sefton, a real estate broker and property developer, and a long-time friend of Obeji, first learned of the proposed sale of the property in June, 1986. Obeji brought the sale to his attention, because he thought parcels 1047 and 1051 might be a good property for Sefton to develop. Sefton had no part in the negotiations between the School and Obeji regarding purchase of the property.
On or about July 11, 1986, Livadary signed an escrow instruction expressly accepting the substitution of Sefton as buyer of that portion of the property located at 1043 4th Street, and Robert A. and Elizabeth Balian as to one of the other parcels and Salma Obeji as to the third parcel.
In his deposition Obeji testified, concerning the three substituted purchasers, that Sefton was Obeji's friend and was the grantee on the grant deed for the 1043 4th Street parcel only because Obeji told him to be, i.e., Sefton was simply a “strawman.” Obeji testified that “I told [Sefton] to do that. I told him”; “[h]e was my friend. If I asked him to do something for me, he'll do it the same as Balian. I have known him for 25 years, and my mother—.”
Escrow closed on July 24, 1986. In his deposition Obeji testified that at the close of escrow he, Obeji, was in fact the “true” owner of 1043 4th Street as well as 1047 and 1051 4th Street.19
Obeji further testified that Sefton all along wanted to buy only the 1047 and 1051 4th Street parcels in order to develop them into residential property. Those two parcels had the least number of tenants while 1043 was not “a good thing because there were five monkeys ․ five tenants.” In his deposition Sefton testified that on September 1, 1986, he bought the rental unit properties at 1047 and 1051 4th Street from Obeji for $800,000.00.
Obeji never collected any rent directly from the tenants at 1047 or 1051 4th Street. He only obtained a proration of rents from the School through escrow.
Sefton collected the rent himself from the tenants on one parcel for the months August through December 1986, and for the months September through December 1986, from the tenant on the other parcel.
When he registered the units at 1047 and 1051 4th Street with the Santa Monica Rent Control Board, Sefton discovered “a slight discrepancy” between the amount of rents on the “rent statement,” which said $568, and the maximum allowable amount which the Board informed him was $509, plus some “pass-throughs,” which was “a little short of the 568, but it wasn't enough to bother [him] at that point.”
No one had mentioned anything about excessive rents to Sefton prior to January 1987. Sefton last collected rent in the amount of $568 in December 1986 from the tenants at 1047 and 1051 4th Street. Suddenly, the tenants refused to pay rent.
Abrams, the tenant at the 1051 property and Crawford, the tenant at the 1047 property, refused to pay rent as of January 1, 1987. In the unlawful detainer proceedings initiated by Sefton, those tenants raised the defense that the rents charged were unlawful under the Santa Monica Rent Control Ordinance.
Prior to buying the subject property Sefton did not check with the Board to see if the rents in question were lawful. However, he did check to see if he could obtain a removal permit.20 He stated in his deposition that he had begun to develop the property at 1047 and 1051 4th Street in reliance on the removal permit he had obtained and absent such permit, there “was no way [he] would have bought the property.”
At trial of the unlawful detainer action, the court determined that Machris, the owner of the property prior to the School, was the one who had raised the tenants' rent in violation of the Ordinance. Abrams was found to have been overcharged excess rent over the years, in the amount of $14,310.92; however, the Proposed Statement of Decision dated about March 20, 1987, stated that with a credit of $332.65, excess rent was owed to Abrams in the sum of $13,978.27. Crawford failed to prove up the total of excess rent owed him, and thus, would receive no refund.
As a condition of obtaining the removal permit for 1047 and 1051 4th Street, Sefton was required to repay, as excess rents, the sum of $12,928.00 to Abrams, the tenant at 1051 4th Street; the sums of $8,245.28 and $3,625.80, respectively to Crawford and Abigail Dierkes, tenants at 1047 4th Street; and the sums of $450.00 and $607.40 respectively, to William Colligen and Daniel Hall. The total sum of such excess rent amounted to $25,883.48.21
The thrust of the present action by Sefton is to recover the amount of excess rents which he was required to pay the tenants of the units at 1047 and 1051 4th Street, as a condition of obtaining the removal permit; and recovery of lost rent, i.e., the difference between the rents set forth in the Escrow Instructions, Re Rents and the lawful rents under the Ordinance.
The third amended complaint pleaded three causes of action against the School, labeled (1) breach of written contract, (2) fraud and deceit-suppression of fact, and (3) negligent misrepresentation. It must be borne in mind that the allegations related only to the rental units at 1047 and 1051 4th Street.
The essence of each cause of action alleged by Sefton was that the School had submitted to the escrow a document captioned “Escrow Instructions, Re Rents,” setting forth the rents then being collected from the units on the property, that thereby the School had represented and warranted that the amounts of the rentals set forth on that document were in conformity with the Ordinance and lawful, that such representation was false in that the stated rents were not lawfully chargeable under the Ordinance, and that Sefton had justifiably relied on such representation to his damage.
As noted in the majority opinion, Sefton has abandoned his cause of action for fraud and deceit-suppression of fact since there is no evidence of intentional fraud and deceit. The majority also correctly holds that Sefton's cause of action for breach of written contract (breach of warranty) does not apply to the facts of this case. There remains the cause of action for negligent misrepresentation.
In its motion for summary judgment the School took the position that the contract with Obeji contained no warranty or representation as to the legality of the rents under the Ordinance and imposed no duty on the School to inquire about the legality of the rents, but that the contract, instead, provided the buyer had the right to review and approve all leases and rental agreements.
In his supporting declaration Livadary stated he “never made any representations to anyone regarding the legality of the rents. [He] was never even asked about the legality of the rents. [He] did report during escrow the then-current rents being collected at the property. Those rents were accurately set forth on the [Escrow Instructions, Re Rent]․”
On February 1, 1989, Sefton filed a separate statement of disputed facts as well as opposition to the motion and to the evidence submitted by the School.
As evidentiary support, Sefton submitted portions of Livadary's deposition, his own declaration, and the declaration of Obeji.
On February 7, 1989, the School filed reply papers and objections to the evidence submitted by Sefton.
Following a hearing on February 15, 1989, the court granted defendant's motion for summary judgment on all causes of action. Judgment was entered on February 17, 1989.
Plaintiff Sefton's principal contention is that the trial court incorrectly weighed the evidence which was submitted, and thus erroneously found no triable issues of fact and granted the motion.
In order for Sefton's contention to be upheld it would be necessary to find that the representation as to rents in the Escrow Instructions, Re Rents constituted a negligent misrepresentation to Sefton that those rents were lawful, in conformity with the Ordinance. The facts do not permit that finding.
California recognizes the tort of negligent misrepresentation; its statutory elements are set forth in footnote 12 on page 340, ante. The critical issue in this appeal is whether the representation as to rents, set forth by the School in the Escrow Instructions, Re Rents, satisfies each of those elements. I would hold that it does not: 1) An action for negligent misrepresentation can not be founded upon an implied representation; 2) No representation by the School was made with the intent to induce Sefton to enter a contract or to alter his position; and 3) Sefton was not entitled to rely on any representation by the School.
“Fraud in this state includes not only intentional misrepresentation, but may also consist of a negligent misrepresentation. Section 1572 of the Civil Code includes in its definitions of ‘actual fraud’ the ‘positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.’ Section 1710, subdivision 2, of the same code defines ‘deceit’ as ‘The assertion, as a fact, of that which is not true, by one who has no reasonable ground[ ] for believing it to be true.’ Under these sections intent to deceive is not necessarily a part of the cause of action, and a negligent misrepresentation made with intent to induce the other party to enter into the contract, if the other elements of fraud exist, is actionable. (Gagne v. Bertran [ (1954) ] 43 Cal.2d 481 [275 P.2d 15] ․; Gonsalves v. Hodgson [ (1951) ] 38 Cal.2d 91 [237 P.2d 656] ․; Spreckels v. Gorrill [ (1907) ] 152 Cal. 383 [92 P. 1011] ․; McMahon v. Grimes [ (1929) ] 206 Cal. 526 [275 P. 440] ․; Richard v. Baker [ (1956) ] 141 Cal.App.2d 857 [297 P.2d 674]․)
“The basic elements of a fraud action of this type that must be pleaded and proved, are well settled. The plaintiff must plead and prove that defendant made a representation of a material fact; that such fact was false; that defendant knew it to be false or negligently or recklessly made the assertion as a fact without reasonable grounds to believe it to be true; that such representation was made with intent to induce the other party to act upon it; that it was relied upon by the other party to his damage. [Citation.]” (Clar v. Board of Trade (1958) 164 Cal.App.2d 636, 644–645, 331 P.2d 89, emphasis added; see also Christiansen v. Roddy (1986) 186 Cal.App.3d 780, 785–786, 231 Cal.Rptr. 72.)
A. No Actionable Representation
The contract between the School and Obeji was entered into on April 28, 1986. The “Escrow Instructions, Re Rents” was signed by Livadary on May 16, 1986. The representations, and instructions in that document were addressed to the escrow company and Obeji on a form supplied by the escrow company. On June 10, 1986, Obeji signed the provision at the bottom of that document, which read: “The above statement is hereby approved as a basis for rent adjustment through this escrow.”
A plain reading of the statement is that it sets forth the amounts of rent which were being paid to the school during the escrow period; it does not support Sefton's claim that by making such statement the School was representing that this amount of rent was lawful. The representation as to the amount of rents being collected by the School during the escrow period was not itself a statement of fact made by one party in order to induce another party to enter into a contract or to alter its position.
Assuming, arguendo, that the express representation regarding the amounts of rent collected by the School also constituted an implied representation that such amounts were lawful rents, such implied representation as to the legality of the rents would not be actionable.
Here, the so-called “implied representation” as to the legality of the rents collected, at best, amounts to no more than a bare legal conclusion. Sefton does not claim the $568 sum set forth in the statement regarding rents was not in fact the amount collected, i.e., the “true facts.” Rather, he asserts that this sum was not lawfully collectable. (Cf. Pearson v. Allen (1957) 150 Cal.App.2d 638, 641–643, 310 P.2d 688 (representations that lessor had all licenses required by law, but in fact had no such items, were actionable statements of fact, instead of matters of law which are not cognizable).)
An “implied representation” cannot be the foundation of an action for negligent misrepresentation. As the court pointed out in Huber, Hunt & Nichols, Inc. v. Moore (1977) 67 Cal.App.3d 278, 304, 136 Cal.Rptr. 603: “No case has been cited and we find none in which any court held that the doctrine of negligent misrepresentation applies to implied representations. In all cases a ‘positive assertion’ was involved. (See Gagne v. Bertran, supra, 43 Cal.2d 481 [275 P.2d 15]; Hale v. George A. Hormel & Co. (1975) 48 Cal.App.3d 73, 82–87 [121 Cal.Rptr. 144] ․; United States v. Rogers & Rogers (S.D.Cal.1958) 161 F.Supp. 132; Civ.Code, § 1572, subd. 2; 4 Witkin, Summary of Cal.Law (8th ed. 1974) Torts, §§ 480–482, pp. 2739–2744.) An implied representation would not appear to be a ‘positive assertion’ which Civil Code section 1572, subdivision 2, requires as the basis for a negligent misrepresentation.” (Emphasis in original; see now, 5 Witkin, Summary of Cal. Law, (9th ed. 1988) Torts, § 721, pp. 820–821; accord, Yanase v. Automobile Club of So. Cal. (1989) 212 Cal.App.3d 468, 472–473, 260 Cal.Rptr. 513.)
I hold that an implied representation is not and cannot be the “positive assertion” required by Civil Code section 1572, subdivision 2, nor “the assertion, as a fact” required by Civil Code section 1710, subdivision 2. (See, e.g., Wilson v. Schultz (1951) 102 Cal.App.2d 345, at p. 351, 227 P.2d 524.)
The cases cited by the majority for a contrary conclusion do not support their conclusion that an action for negligent misrepresentation can be based on an implied representation.
The Mary Pickford case involved the sale of securities, which sale required a permit. By offering the securities for sale the seller impliedly represented that he had a permit to sell them. The court held that the falsity of that representation could give rise to a cause of action for fraud or for breach of warranty, depending on the culpability of the seller. To state a cause of action for fraud it was necessary to show that the seller knew, or should have known, that the representation was false. (Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 519–520, 86 P.2d 102.) It was in this context that the Pickford court stated: “If this implied representation is false, then it is a negligent misrepresentation which is an actionable fraud․” (Id. at pp. 525–526, 86 P.2d 102.)
From the foregoing it is apparent that the Pickford court was using the term “negligent misrepresentation” to characterize the manner in which a representation was made, not in the sense of a type of cause of action. In fact, no cause of action for negligent misrepresentation was pleaded in Pickford. (Id. at pp. 508–509, 519, 86 P.2d 102.)
In Taormina v. Antelope Mining Corp. (1952) 110 Cal.App.2d 314, 319–320, 242 P.2d 665, the court cited to Mary Pickford and pointed out that the plaintiff's action “sounds in tort, for fraud.” No case has cited to Mary Pickford for the proposition that an implied representation can be the basis for an action for negligent representation.
Universal By–Products, Inc. v. City of Modesto (1974) 43 Cal.App.3d 145, 117 Cal.Rptr. 525, involved an action for fraud and deceit, not negligent representation. (Id. at pp. 151–155, 117 Cal.Rptr. 525.) The Universal court addressed the issue of an implied representation in the context of an intent to deceive, which is not an element of an action for negligent misrepresentation. (Id. at. pp. 151–152, 117 Cal.Rptr. 525.)
Tijsseling v. General Acc. Etc. Assur. Corp. (1976) 55 Cal.App.3d 623, 127 Cal.Rptr. 681 was not an action for negligent misrepresentation. Instead, it was an action for declaratory relief and breach of contract regarding insurance coverage. (Id. at p. 625, 127 Cal.Rptr. 681.)
The precise nature of the representation, express or implied, was not necessary to the determination of the issues before the Tijsseling court, which concerned the interpretation of the insurance contract in question.
In contrast, the court in Walters v. Marler (1978) 83 Cal.App.3d 1, 17–18, 147 Cal.Rptr. 655 held that a title insurance policy covering the contingency of houses encroaching on neighboring land did not give rise to an actionable implied representation that the houses did not so encroach.
B. There Was No Representation To Sefton
The representation as to the amounts of rent collected by the School during the escrow period was made to the escrow company and to Obeji. When the sale escrow closed, on July 24, 1986, the rents were adjusted and allotted between the School and Obeji; no rents went to Sefton.
Sefton later, on September 1, 1986, bought the two parcels at 1047 and 1051 from Obeji, not from the School. There was not one scintilla of evidence before the trial court that Sefton ever saw or ever knew about, nor that he ever relied upon, the “Escrow Instructions, Re Rents” prior to the close of escrow. Thus, no representation of any kind was made to Sefton by the School.
Thus, as a matter of law, I conclude Sefton was not in fact someone entitled to rely on the express representation as to the amounts of rent set forth on the Escrow Instructions, Re Rent, and therefore, the purported implied representation as to the legality of such rents. Accordingly, the School also negated the necessary element of intent to induce Sefton to enter into the contract.
In Christiansen v. Roddy, supra, 186 Cal.App.3d 780, 231 Cal.Rptr. 72, the court was urged to adopt a foreseeability of harm test for determining the class of persons entitled to rely on a representation. The Christiansen court declined to do so, noting the narrow scope of liability in California, as set forth in a well-known treatise. “In his treatment of negligent misrepresentation, Witkin specifically observes that ‘the class of person entitled to rely upon the representations is restricted to those to whom or for whom the misrepresentations were made. Even though the defendant should have anticipated that the misinformation might reach others, he is not liable to them.’ Witkin, Summary of Cal. Law (8th ed. 1974) Torts, § 480, p. 2740.)” (Christiansen v. Roddy, supra, 186 Cal.App.3d 780, 787, 231 Cal.Rptr. 72; see now, 5 Witkin, Summary of Cal.Law (9th ed. 1988) Torts, § 721, p. 820.)
I would decline Sefton's invitation to extend the scope of liability to encompass this situation.
1. On our own motion, and after giving the parties a reasonable period to respond (Evid. Code, §§ 455, subd. (a) and 459, subds. (c) and (d)), we take judicial notice of Article XVIII of the Charter of the City of Santa Monica (which is the city's rent control ordinance) and the regulations and forms promulgated thereunder. (Evid.Code, §§ 451, subd. (a); 452, subd. (b).) Of specific relevance to the issue before us are the following provisions.(1) Section 1803, subdivision (q) of Article XVIII provides:“(q) REGISTRATION: Within sixty (60) days after the adoption of this Article, the Board shall require the registration of all controlled rental units, which shall be re-registered at times deemed appropriate by the Board. The initial registration shall include the rent in effect at the time on the date of the adoption of this Article, base rent ceiling, the address of the rental unit, the name and address of the landlord, the housing services provided to the unit, a statement indicating all operating cost increases since the base rent ceiling date, and any other information deemed relevant by the Board. The Board shall require the landlord to report vacancies in the controlled rental units and shall make a list of vacant controlled rental units available to the public. If the Board, after the landlord has proper notice and after a hearing, determines that a landlord has wilfully and knowingly failed to register a controlled rental unit, the Board may authorize the tenant of such a non-registered controlled rental unit to withhold all or a portion of the rent for the unit until such time as the rental unit is properly registered. After a rental unit is properly registered, the Board shall determine what portion, if any, of the withheld rent is owed to the landlord for the period in which the rental unit was not properly registered. Whether or not the Board allows such withholding, no landlord who has failed to register properly shall at any time increase rents for a controlled rental unit until such units are properly registered.” (Emphasis added.)(2) Regulation 13001, subdivision (b) provides:“(b) Change in Ownership. Whenever a change in ownership of a controlled rental property occurs, the new owner is required to file an amendment to the registration form setting forth the name(s) and address(es) of all new owners and the date of change in ownership within sixty (60) days of the change in ownership. A new owner must examine the initial registration form and, if the new owner believes that the information on the initial registration is incorrect, the new owner must file a new registration form with corrected information.”The City requires the new owner to fill out and sign (under penalty of perjury) a “Change of Ownership Registration Form.” The form contains a paragraph which reads: “I have received a letter or printout from the Rent Control Board listing the current maximum allowable rents (MARs) of the units on this property. I have been informed that the MAR(s) listed in the printout are the lawful rents which I may charge, unless and until altered in an administrative hearing.”
2. We find this concession to be significant in light of the School's failure to comply with the re-registration requirements of the regulations promulgated under the Ordinance. (See fns. 1, ante and 4 and 7, post.)
3. This is a common condition for contracts involving the sale of income real property. Obviously, the income which a property produces may have a substantial impact on its value and therefore on the price which a buyer is willing to pay. The initial agreement to pay a particular price is frequently accompanied by the reserved contractual opportunity to evaluate the purchase in light of the terms of existing leases and rental agreements as well as represented income.
4. Nor, he concedes, did the School comply with the change of ownership requirements which included (1) reviewing the initial registration for accuracy, (2) re-registering the units and (3) acknowledging the current “maximum allowable rents.”
5. A review of the rental increase notices reflects that they each contained the express statement that the described rent was the “maximum allowable rent.” Thus, it would appear that Machris made express representations to the School as to rent legality and the School, in turn, repeated them to Obeji, Sefton's assignor. However, those notices were apparently never delivered to Sefton, inasmuch as he makes no attempt herein to rely upon any writing other than the Escrow Instructions Re Rents submitted by the School to the escrow.
6. The record reflects that these tenants apparently had not refused to pay such rents to either (1) the prior owner, Machris, who had originally instituted the rental increases or (2) the School, which owned the property for four months and ten days (March 14 to July 24, 1986). Indeed, in the “Escrow Instructions, Re Rents,” the School expressly represented that these two tenants were current with respect to the payment of the increased rent through May 31, 1986.
7. The record indicates that each of those rental increases exceeded the maximum allowed by the Rent Control Board (see Regulations 3000 through 3007, General Rent Adjustments Nos. 1 through 8). Machris may or may not have had actual knowledge of the requirements imposed by the Ordinance, but as a landlord imposing and collecting ever increasing rents she would certainly be charged with such knowledge. Similarly, the School also had such constructive knowledge since, if it had complied with its own registration duties (see fn. 1, ante), it would have discovered that the maximum allowable rents were substantially less than those which the School had represented in its escrow submission.
8. Sefton's complaint alleges he was required to pay the sum of $25,883.48. This figure actually represents the total excess rent which Sefton was ultimately required to credit to all of the tenants on the property as a result of the repeated violations of the Ordinance which had occurred prior to his assumption of ownership.
9. However, Sefton now concedes that he is unaware of any evidence that the School intentionally misrepresented any information regarding rents. Thus, he does not assert a claim for intentional fraud or deceit.
10. The record reflects that Livadary is an attorney of 25 years experience.
11. A portion of this declaration contained inadmissible statements regarding Obeji's “understanding” as to the character and scope of the School's representations regarding rents as well as his speculation as to the status of the School's subjective belief. The trial court properly sustained the School's objections to these averments.
12. Civil Code section 1572, subdivision (2) provides:“Actual fraud, within the meaning of this chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:“․;“2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; ․” (Emphasis added.)
13. Civil Code section 1709 provides:“One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.”Civil Code section 1710, subdivision (2) provides:“A deceit, within the meaning of the last section, is either:“․;“2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true; ․” (Emphasis added.)
14. The dissent argues that the Escrow Instruction, Re Rents (1) was not a representation and, in any event, (2) was not made to Sefton but was submitted to the escrow for a specific purpose. However, the School does not dispute that the document constituted a representation to Sefton as to the amount and status of rents. That the rental schedule also served another purpose (i.e., provided a basis for calculation of rental allocation) does not foreclose its characterization as a positive representation of fact. Submission of a document to escrow constitutes submission to the other parties to the transaction as well. It is settled that an escrow acts as the agent for all parties to the escrow. (Spaziani v. Millar (1963) 215 Cal.App.2d 667, 682, 30 Cal.Rptr. 658.) Communication to an agent is communication to the principal. (Civ.Code, § 2332; Northern Natural Gas Co. v. Superior Court (1976) 64 Cal.App.3d 983, 992, 134 Cal.Rptr. 850.) Whether and to what extent Sefton relied on the escrow submission are issues which were not reached by the trial court and are therefore not before us. They will have to be resolved in subsequent proceedings.
15. We do not view the agreement of sale as imposing a duty upon Sefton to have investigated or determined rent legality. Such a reservation simply gave him the delayed right to approve the rental agreements and the submitted rent schedule. It did not mean, at least as a matter of law, that he had agreed to accept the risk that the rent schedule might be inaccurate or false.
16. This factual statement is based on the evidence before the trial court in support of and in opposition to the motion for summary judgment.
17. It is obvious from this fact, and the only possible inference that can be drawn from it is, that since the School believed that the units were subject to rent control “because the rents were rather low” it must also have believed that the stated “low” rents were in accordance with the rent control ordinance and lawful. This conclusion is the direct opposite of the “sense” of the underlying action, that the rents were “excessive” and that the School knew or should have known that to be the case. Thus I find that majority footnote 2 (p. 337, ante ), and its implications, to be irrelevant.
18. It is apparent that Obeji's initial offer, of April 28, was conditioned on whether he could build “24 plus 6 affordable units” on the site and whether he could get a Removal Permit. He no doubt wished to be able to review and approve all leases and rental agreements so that he would know whether he would be confronted with a leasehold which would interfere with his anticipated redevelopment of the property. As noted in the majority opinion, with one exception there were apparently no written agreements and the tenancies were all month-to-month.
19. Notations on a copy of the “Escrow Instructions, Re Rents” in the record indicate that the escrow holder did, in fact, adjust the rents at the close of escrow, on July 24th, on the basis of 24/30ths of the monthly rental.
20. As to removal permits, Section 1803, subdivision (t) of Article XVIII of the Ordinance provides, in part:“(t) REMOVAL OF CONTROLLED UNIT FROM RENTAL HOUSING MARKET:“(1) Any landlord who desires to remove a controlled rental unit from the rental housing market by demolition, conversion or other means is required to obtain a permit [removal permit] from the Board prior to such removal from the rental housing market․”
21. The record does not reveal the addresses of the units which had been rented by Colligen and Hall. There is no evidence in record that any of the excess rent payments went to tenants of 1043 4th Street.
CROSKEY, Associate Justice.
KLEIN, P.J., concurs.