MOSS DEVELOPMENT COMPANY v. GEARY (1974)

OPINION

Appellant is the owner of a planned unit development in Sacramento County known as Campus Commons. A planned unit development is a subdivision project where all or some of the several owners of separate lots or parcels have the beneficial use and enjoyment of an improved area, referred to as the ‘common’ area, consisting of recreational and similar facilities; the ‘common’ area is owned, operated and maintained by a non-profit corporation or association in which the lot owners are the members. (3 Cal.Real Estate, § 848, p. 243; Bus. & Prof.Code, §§ 11003, 11003.1.) Such a project is subject to section 11018.2 of the Business and Professions Code which prohibits a person from selling or leasing or offering for sale or lease any lots or parcels in a subdivision without first obtaining a public report from the Real Estate Commissioner of the State of California. It also is subject to section 11018.5 of the Business and Professions Code. This section reads in pertinent part as follows:

‘(2) If the . . . facilities within the common area are not completed prior to the issuance of a final subdivision public report on the project, the subdivider shall specify a reasonable date for completion and shall comply with one of the following conditions:

‘. . .

‘(B) All funds from the sale of lots or parcels or such portions thereof as the commissioner shall determine are sufficient to assure construction of the improvement or improvements, shall be impounded in a neutral escrow depository acceptable to the commissioner until the improvements have been completed and all applicable lien periods have expired; provided however, the commissioner determines the time for said completion is reasonable.

‘. . .

‘(D) Such other alternative plan as may be approved by the commissioner.’

Appellant brought this action in the court below to secure a judicial declaration as to the meaning of certain agreements contained in the Declaration of Restrictions, Covenants and Architectural Control which was recorded in connection with two units of the Campus Commons development. The development contemplated several subdivision units with a total of 1,500 residential lots and a ‘common’ area containing extensive community and recreational facilities, including a club house, swimming pools, tennis courts and a putting green; the first two units are designated as Campus Commons Unit No. 1 and No. 2, respectively, and contain 191 lots. Respondents are purchasers of lots in these units. Appellant appeals from a judgment entered on the court's order granting respondents' motion for a summary judgment.

The remaining facts, as disclosed by the record, are there:

In the latter part of 1965, appellant's predecessor, hereinafter referred to as the developer, made an application with the Real Estate Commissioner for the issuance of a public report for Unit No. 1. At that time the improvements for the ‘common’ area were not completed, and the attorney for the developer and representatives of the Real Estate Commissioner commenced negotiations for the purpose of determining how this matter should be handled. It ultimately was decided that the developer would have five years, or until such time as 500 residential lots were sold, to complete the improvements specified for the ‘common’ area and to transfer the improvements to a non-profit corporation created for the benefit of the lot owners; to assure the construction of the improvements, the developer agreed to impound the sum of $1,000 from the proceeds derived from the sale of each lot in the development and to deposit the impounded amounts in a neutral escrow. Thereupon, the developer formed a corporation by the name of Campus Commons Park Corporation, and one membership in that corporation was made appurtenant to each subdivision lot.

On January 4, 1966, the developer recorded a Declaration of Restrictions, Covenants and Architectural Control for Unit No. 1. This instrument, hereinafter referred to as the Declaration of Restrictions, states, among other things:

‘DECLARATION:

‘. . .

‘1. DESIGNATION OF AREAS. Pursuant to the map heretofore filed by Developer with respect to the real property, certain areas of the real property have been variously designated. With respect to these different areas:

‘. . .

‘(b) Area A. This area comprising Lot A on the map shall be retained by Developer. Pursuant to provisions hereinafter set forth, it may be conveyed by Developer to Campus Commons Park Corporation, a California non-profit corporation, hereinafter designated ‘Park Corporation’, at a future date.

‘. . .

‘8. AREA A. It is contemplated that Developer will construct improvements on the property designated in paragraph 1(c) [sic] as Area A, which improvements are intended to provide community and/or recreational facilities for the residents of the entire [development]. It is further contemplated that Developer will create additional memberships in Park Corporation for additional lots and residential units as provided in paragraph 6 hereof and that such lots and residential units will be sold by Developer. The expenses of maintaining and operating Area A shall be borne proportionately by all owners of lots or residential units, including Developer. In addition, until Area A is conveyed to Park Corporation, Developer shall be obliged to make all payments necessary to maintain and operate Area A over and above the payments received by Park Corporation from the dues, fees and assessments levied by Park Corporation referable to the lots and residential units which have been sold. It is intended that Area A shall be conveyed to Park Corporation at some time on or before the completion of the sale of 500 lots and residential units. When 500 lots and residential units which have appurtenant memberships in Park Corporation are completely sold by Developer to individual purchasers, Developer shall, upon the completion of the sale of the 500th lot or residential unit, convey Area A free and clear of all liens and encumbrances to Park Corporation without charge. In the event that 500 of such lots and units are not completely sold prior to December 31, 1970, Developer shall refund to the members of Park Corporation the sum of $1,000.00 each. For the purposes of this paragraph, lot or residential unit shall be deemed ‘completely sold’ upon the receipt by Developer of the full purchase price for such lot or residential unit.'

The public report for Unit No. 1 was issued on January 13, 1966. This report, after stating inter alia that the developer proposed to improve and convey the ‘common’ area to the Campus Commons Park Corporation, stated:

‘MANAGEMENT AND OPERATION: THE PLAN OF MANAGEMENT AND OPERATION OF THE CORPORATIONS among others, includes the following provisions:

Purchasers must become members of the Campus Commons Village Corporation No. 1 and the Campus Commons Park Corporation, which shall be managed by Boards of Directors consisting of 3 members until the first annual election meeting which shall be held on the 2nd Thursday of June, 1966, at which time new Boards of Directors shall be elected by the owners.

‘Owners shall be notified of the place, date and hour of any meeting of owners and, in the case of a special meeting, the notice shall set forth the general nature of the business to be transacted. Such notices shall be sent to owners at least 7 days and not more than 60 days before the meeting.

‘At any meeting, the owners' voting rights shall be allocated on the basis of 1 vote for each lot and owners shall be entitled to cumulative voting on election or removal of members of the Boards of Directors.

‘At least a majority of the voting power shall prevail at all meetings, and the presence, in person or by proxy, of owners holding majority of membership votes shall constitute a quorum for the transaction of business.

‘The provisions of any documents relating to management and operation of the project may not be amended without the vote or written approval of 60% majority of voting power of the Corporations.

‘The Boards of Directors, among other things, shall have power to: Enforce the provisions of the By-Laws and Restrictions; Contract and/or pay for fire, casualty, liability and other insurance and bonding of its members, maintenance, gardening, utilities, materials, supplies, services and personnel necessary for operation, taxes and assessments which may become a lien on the entire project or the common area, and reconstruction of portions of the project which are to be rebuilt after damage or destruction; Delegate its powers to others; and Enter, or authorize a representative to enter, any unit when necessary in connection with its responsibilities for management or maintenance.

‘The accounts of the Corporations shall be subject to an annual independent audit, a copy of which shall be delivered to each owner within 30 days after completion.

‘Upon dissolution of the corporations the assets remaining after payment of debts shall be distributed to a charitable institution.

‘Owners' interest in the common area may not be severed from other interest conveyed.

‘The Campus Commons Park Corporation will ultimately own, operate and maintain the community and recreational facilities of this subdivision and any additional increments which may in the future be added to this development and shall serve as the community and recreational agency for the entire development. Its cost of operation will be raised by assessments of the various lot owners within this and the future additional units of this development.

‘The Campus Commons Village Unit Corporation #1, is intended to serve as the ‘house-keeping agency’ for Unit One of this development. Its function will be primarily concerned with landscaping and upkeep of the grounds and the exteriors of the house within this Unit. An additional Campus Commons Village Corporation will be established for each successive unit of the development, each having independent control of its respective unit and providing essentially similar service to that above described. The cost of operation of each Campus Commons Village Corporation will be raised by assessment of the various lots within the respective subdivision unit to which it applied.

‘MAINTENANCE AND OPERATIONAL EXPENSES: Owners or members shall be assessed approximately $425.00 per lot per year or such other amounts as may be determined necessary by the Boards of Directors to meet expenditures and reserves authorized in connection with the management and operation of the project. The estimated annual budget for maintenance and operation is $75,000.00.

‘This sum represents $25,000.00 estimated as maintenance costs and reserves for landscaping the 119 residential lots within this subdivision and will be prorated equally among said lots. The remaining $50,000.00 represents estimated maintenance, operation costs and reserves for club house, recreation facilities and administration expenses to be spread over 500 residential lots comprising this unit of the development and proposed increments thereto, and each lot will be assessed an estimated $100.00 therefor. In addition, lots will be assessed an estimated $115.00 per year for exterior maintenance of homes constructed thereon.

‘Expenses of operation are difficult to estimate initially and even if accurately estimated, tend to increase substantially with price increases and the increased age of the facilities. Prospective purchasers should know that their control of operations and expenses it [sic] limited to the right to vote at any meeting of the owners.

‘Default in the payment of such assessment may become a lien upon the defaulting owner's unit.

‘In the event such assessment is not paid when due, it shall become delinquent and interest at the rate of 10% per annum and all costs including reasonable attorney's fees shall be added thereto.

‘Assessments charged to unsold units shall be the debt of the subdivider. To assure such payments the subdivider has complied with Regulation 2792.9 as follows:

‘Subdivider has posted a cash bond.’

After the public report for Unit No. 1 was issued, the developer opened an escrow with a neutral escrow company, and as lots were sold from the unit it impounded the sum of $1,000 derived from the sale of each lot and deposited the impounded amounts in the escrow.¹

The developer did not sell 500 lots within the five-year period allowed by the Real Estate Commissioner for the completion of the improvements specified for the ‘common’ area. However, the developer completed the improvements and tendered conveyance of them to the Park Corporation within that period. Then respondents took the position that because the developer did not sell 500 lots within the five-year period, each lot owner also was entitled to a refund of $1,000. This action for declaratory relief followed.

On July 12, 1971, respondents moved for a summary judgment. The motion was supported by the declarations of respondents Hager and Nevraumont, stating in essence that before purchasing a lot each declarant had read the Declaration of Restrictions and had understood it to mean that the developer was obligated not only to convey Area A to the Park Corporation as soon as 500 lots were sold, but to refund $1,000 to each member of the corporation if 500 lots in the development were not sold prior to December 31, 1970.

On July 29, 1971, appellant also moved for a summary judgment; through the declaration of Attorney Weintraub, the draftsman of the Declaration of Restrictions, and the deposition of Hoyt C. Duty, an attorney with the Department of Real Estate, and other documentary evidence, appellant attempted to show that Paragraph 8 of the Declaration of Restrictions was a security arrangement to assure the construction of the improvements designated for the ‘common’ area and that it was intended to mean that the developer would become obligated to refund $1,000 to each member of the Park Corporation if less than 500 lots were sold as of December 31, 1970, and if the developer failed to complete the improvements and to transfer the improved area to the Park Corporation.

On September 21, 1971, the trial court entered an order granting respondents' motion for summary judgment and denying appellant's motion for summary judgment. In his Memorandum of Decision the trial judge observed that there were ambiguities in the Declaration of Restrictions and that he had resolved those ambiguities in favor of respondents. He also observed that the intention of the developer and the Real Estate Commissioner as to what was intended by Paragraph 8 of the Declaration of Restrictions was immaterial because that intention was not communicated to the lot purchasers. Judgment was entered accordingly and, as we have indicated, appellant appealed.

The pertinent rules pertaining to interpretation of contracts may be summarized briefly.

The construing of a written contract is essentially a judicial function to be exercised according to generally accepted canons of interpretation so that the purpose of the instrument may be given effect. As the Supreme Court stated in Parsons v. Bristol Development Co., 62 Cal.2d 861, 865, 44 Cal.Rptr. 767, 770, 402 P.2d 839, 842:

‘It is . . . solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence. Accordingly, ‘An appellate court is not bound by a construction of the contract based solely upon the terms of the written instrument without the aid of evidence . . . where there is no conflict in the evidence . . . or a determination has been made upon incompetent evidence. . . .’'

In the interpretation of contracts, the paramount consideration is the intention of the contracting ‘parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.’ (Civ.Code, § 1636; Stewart Title Co. v. Herbert, 6 Cal.App.3d 957, 963, 96 Cal.Rptr. 631.) This intention must be ascertained from the words used, after taking into consideration the entire contract and the circumstances under which it was made. (Civ.Code, §§ 1641, 1647; Code Civ.Proc., § 1860; Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., 69 Cal.2d 33, 38–39, 69 Cal.Rptr. 561, 442 P.2d 641; Universal Sales Corp. v. Cal. etc. Mfg. Co., 20 Cal.2d 751, 760–761, 128 P.2d 665.)

The words used in a contract must be given their ordinary meaning, unless there is evidence that the parties intended to use them in a unique sense or to give the words some different meaning. (Civ.Code, § 1644; Stewart Title Co. v. Herbert, supra, 6 Cal.App.3d 957, 962, 96 Cal.Rptr. 631.) If a contract is reasonably susceptible to more than one interpretation or if it contains latent or patent ambiguities, the court may use extrinsic evidence to clarify the uncertainties. (Delta Dynamics, Inc. v. Arioto, 69 Cal.2d 525, 528, 72 Cal.Rptr. 785, 446 P.2d 785; Pacific Gas & E. Co. v. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 40, 69 Cal.Rptr. 561, 442 P.2d 641.)

In construing a contract, it is not a court's prerogative to alter it, to rewrite its clear terms, or to make a new contract for the parties. (Apra v. Aureguy, 55 Cal.2d 827, 831, 13 Cal.Rptr. 177, 361 P.2d 897; Barker v. Sherman, 123 Cal.App.2d 810, 812, 267 P.2d 863.) Courts will not add a term to a contract about which the agreement is silent. (Code Civ.Proc., § 1858; Jensen v. Traders & General Ins. Co., 52 Cal.2d 787, 790, 345 P.2d 1.)

If a contract is susceptible to more than one interpretation, and if the ambiguity is not eliminated by extrinsic evidence, the court is bound to give the contract ‘such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.’ (Civ.Code, § 1643; Rodriguez v. Barnett, 52 Cal.2d 154, 160, 338 P.2d 907.)

‘In cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist. The promissor is presumed to be such a party; . . .’ (Civ.Code, § 1654; B. L. Metcalf General Contractor, Inc. v. Earl Erne, Inc., 212 Cal.App.2d 689, 695–696, 28 Cal.Rptr. 382.)

We have concluded that the judgment must be reversed. The language of Paragraph 8 of the Declaration of Restrictions itself indicates that the interpretation contested for by appellant is a reasonable construction of the instrument. The paragraph is entitled ‘AREA A,’ and it is immediately evident that it pertains to the improvements contemplated for the ‘common’ area. The first sentence announces that the improvements specified from the area are intended to provide community and/or recreational facilities for the residents of the entire development and that upon completion will be conveyed to the Park Corporation. The paragraph then provides that the developer may convey the completed improvements to the corporation at any time prior to the sale of 500 lots and that it shall do so upon the sale of the 500th lot. But these clauses, standing alone, are equivocal; they do not specify a time limit for the sale of the 500 lots nor do they state what is to occur if 500 lots are not sold in the development. It seems clear to us that it is this uncertainty which is clarified by the sentence which states that ‘In the event that 500 of such lots . . . are not completely sold prior to December 31, 1970, Developer shall refund to the members of the Park Corporation the sum of $1,000.00 each.’ When viewed in this light, the developer's promise is a dependent obligation which was intended to arise only if it failed to sell 500 lots and to convey the completed improvements for Area A to the corporation, free and clear of all encumbrances, prior to December 31, 1970.

Moreover, when all of the circumstances under which the contract was made are considered, it is apparent that Paragraph 8 contemplates a security arrangement and that appellant did not become obligated to refund $1,000 to each member of the Park Corporation merely because 500 lots were not sold prior to December 31, 1970. First, according to the record, the improvements designated for the ‘common’ area were not completed when the developer applied for public reports for Units 1 and 2; under these circumstances, the Real Estate Commissioner, to insure the construction of the improvements, was empowered by subparagraph (2)(B) of subdivision (a) of section 11018.5 of the Business and Professions Code to require the developer to impound all or any part of the funds derived from the sale of the lots and to deposit the impounded funds into a neutral escrow. Next, the record reveals that the Real Estate Commissioner gave the developer five years in which to complete the improvements, and then to assure construction required the developer to impound $1,000 from the sale of each lot and to deposit the impounded amounts in a neutral escrow. Lastly, the shows that the developer impounded $1,000 from the sale of each lot from Units 1 and 2 and deposited the impounded funds into the neutral escrow; the record also shows that the improvements were completed within the five-year period allowed by the Real Estate Commissioner and tendered to the Park Corporation within that period. Suddenly to declare that Paragraph 8 contains an irreconcilable ambiguity which must be construed against the developer to mean that something more than a security transaction was intended and that the developer was obligated not only to make the costly improvements on Area A but to refund almost $200,000 if it did not sell 500 lots prior to December 31, 1971, is an unwarranted extension of the rule articulated in section 1654 of the Civil Code (see ante p. 355).

Finally, after the testimony of Hoyt Duty as set forth in his deposition is considered, it is patent that the agreement in question was a security transaction and that the testimony was relevant and admissible. The testimony was not offered to vary the terms of the agreement nor was it even offered to show that the language of Paragraph 8 was used in some unique or special sense. On the contrary, the deposition was offered to show that the intention of the negotiating parties as to the meaning of Paragraph 8 was consistent with the language used and the circumstances under which the agreement was made and to avoid a penalty; it is basic that the law abhors forfeitures and penalties.

The cases of Oakland Bank of Commerce v. Washington, 6 Cal.App.3d 793, 86 Cal.Rptr. 276, and Houghton v. Kerr Glass Mfg. Corp., 261 Cal.App.2d 530, 68 Cal.Rptr. 43, upon which respondents rely for the opposite proposition are distinguishable; in each case one of the negotiating parties to a bilateral contract had failed to disclose his secret intention to the other negotiating party, and the court applied the well-settled principle of contract law that the intention of a party to a bilateral contract which is undisclosed and uncommunicated to the other is, in the absence of mistake or fraud, immaterial. For example, in the Oakland Bank case the defendants had guaranteed loans made by the plaintiff bank to a third party, and the defendants wanted to show that they did not intend the guarantee to extend to loans made prior to its execution. In Houghton the agent of the defendant negotiated a contract with the plaintiff in which the plaintiff was to be paid $20,000 upon the termination of his employment with the defendant. The defendant tried to prove that its agent had been told that the defendant was to be relieved of the obligation if the assets of the corporation were sold.

To hold that evidence relating to the intention of the negotiating parties (in this case, the developer and the Real Estate Commissioner) was immaterial because that intention was not communicated to the lot purchasers, as the trial judge ruled, would set a precedent which could lead to strange and harsh results. The office of the Real Estate Commissioner is the state agency entrusted by law with the responsibility of protecting the interests of purchasers of lots and subdivision developments; the agreement in this case was negotiated by that state agency in the exercise of its legal responsibility; the evidence primarily came from the very state official who was in charge of the negotiations and who approved the language of the instrument. It would be one thing to state that evidence of the uncommunicated intention of the Real Estate Commissioner is admissible to vary or change the terms of an agreement negotiated by that office for the protection of lot purchasers in a subdivision development after the lot purchasers purchased lots in reliance upon the unambiguous language of the instrument. It is another matter to decree that the testimony of the state official who negotiated and approved such an agreement cannot be utilized to clarify any possible doubt as to the true meaning of a promise or condition contained therein where, as here, his testimony is consistent with the language used and the circumstances under which the agreement was made.

Respondents suggest that the last sentence of Paragraph 8 of the Declaration of Restrictions must be construed as a separate promise on the part of the developer to sell 500 lots in the Campus Commons Development by December 31, 1970, because the owners of lots in Units 1 and 2 had a real interest in the speed with which the developer sold the lots in other units. Respondents argue that this is so because the initial assessments for the operation and maintenance of Area A were to be spread over the 191 lots contained in Units 1 and 2 until lots in other units were sold; they allege that as the total number of lots sold increased ‘the prorata assessment to each member of Park Corporation would become relatively lower.’

It is of course true that purchasers of lots in Units 1 and 2 had an interest in the speed with which the developer sold 500 lots in the Campus Commons development. This factor alone does not alter the developer's agreement, nor does it change the security arrangement set forth in Paragraph 8 to something more. Absent evidence to the contrary, respondents' assertion that the last sentence of Paragraph 8 is in the nature of a penalty clause to compel the developer to sell 500 lots as expediently as possible is speculation.

Parenthetically, we do not believe that the developer's obligation to contribute toward the cost of operation and maintenance of Area A after the area is conveyed to the unsold lots in Units 1 and 2. The agreement states that ‘[t]he expenses of maintaining and operating Area A shall be borne proportionately by all owners of lots or residential units, including Developer.’ Because the improvements specified for Area A were for the benefit of the entire development, and because the developer'a obligation to contribute toward the maintenance and operation of that area is not limited expressly to unsold lots in Units 1 and 2, arguable the amount of the developer's contribution is determined on the basis of all unsold lots, including unsold lots in other units. In fact, when the language of the agreement is considered in conjunction with the public report which was issued by the Real Estate Commissioner, it even may be argued that the developer's share of the operation and maintenance costs is calculated on the basis of 500 lots. This question was not presented adequately in the court below, and we do not reach it in this opinion.

In summary, we hold that when the language of Paragraph 8 of the Declaration of Restrictions is considered in light of the circumstances under which it was made and the uncontradicted testimony of the legal representative of the Real Estate Commissioner who negotiated the agreement, it must be construed to mean that appellant's obligation to refund $1,000 to each lot purchaser in Units 1 and 2 was to arise only if, prior to December 31, 1970, the developer of the Campus Commons Development did not sell 500 lots and did not convey the completed improvements specified for Area A to the corporation. If this were an appeal from a trial on the merits, we would reverse the judgment with directions to the trial court to enter judgment in favor of appellant under the well-established rule that ‘it is . . . solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence.’ (Parsons v. Bristol Development Co., supra, 62 Cal.2d 861, 865, 44 Cal.Rptr. 767, 770, 402 P.2d 839, 842.) This is an appeal from a judgment entered on the court's order granting respondents' motion for a summary judgment. It is conceivable that respondents can produce evidence in support of their interpretation of the contract other than their conclusionary statements as to what they understood the contract to mean. It is also conceivable that evidence can be produced by the parties as to the extent of appellant's obligation to contribute toward the maintenance and operation of the improvements for Area A once those improvements are conveyed to the corporation.

For the foregoing reasons, the judgment is reversed, and the cause is remanded for further disposition in accordance with the issues raised by the pleadings now on file in the court below or any appropriate amendment thereto.

FOOTNOTES

1.  The same procedure was followed as to Unit No. 2 except that the preamble to Paragraph 8 of the Declaration of Restrictions, which was recorded for that unit on July 3, 1967, instead of stating ‘It is contemplated that Developer will construct improvements on . . . Area A’ states ‘Developer has under construction improvements on . . . Area A.’

GARGANO, Associate Justice.

GEO. A. BROWN, P. J., and FRANSON, J., concur.