City of West Hollywood v. 1112 Investment Co.

Opinion

Introduction

This appeal involves application of the rent control ordinance enacted by the City of West Hollywood (City). The pertinent facts are undisputed and were presented to the trial court in the form of a stipulation. The legal dispute is whether two apartment buildings owned by respondents are subject to City’s rent control law.

Prior to City’s incorporation in 1984, respondent owners had received all required state approvals to convert their two buildings into condominiums. In City of West Hollywood v. Beverly Towers, Inc. (1991) 52 Cal.3d 1184 [ 278 Cal.Rptr. 375 , 805 P.2d 329 ] (Beverly Towers), a majority of our state Supreme Court held City could not apply a subsequently enacted ordinance requiring apartment owners to obtain a conditional use permit for a condominium conversion when the owners had all obtained necessary state permits prior to City’s incorporation. Here respondent owners never sold any units as condominiums but instead continued to use the buildings as apartment rentals. Each respondent owner also allowed one of the necessary state approvals for conversion it had obtained—a public report from the Department of Real Estate (Department)—to lapse although each eventually obtained a renewed public report.

This litigation arose when City brought an action against respondent owners for charging rents in violation of its local rent control ordinance.

Based upon a statement of stipulated facts, the trial court granted summary judgment to respondent owners. In a nutshell, it found the lapse of the public reports did not require respondent owners to now comply with City’s requirement(s) for condominium conversion. We reach a contrary conclusion. We will hold respondent owners’ failures to timely renew the public reports resulted in a lapse or expiration of their right to be free from City’s regulation(s). Because respondent owners have not complied with City’s requirement of obtaining conditional use permits as a condition precedent to condominium conversion, the units in their buildings are not alienable within the meaning of state law. The units are therefore subject to the local rent control ordinance. Before we reach that conclusion, we first will reject City’s contention that an amendment to the state rent control law enacted after summary judgment was granted that limits the condominium exemption to units sold to bona fide purchaser applies to this case.

Legal Background

In 1984, West Hollywood incorporated as a city. In 1985, City adopted regulations governing the conversion of apartment houses into condominiums. One of the new requirements was that the building owner obtain from City a conditional use permit before the conversion could be approved. Litigation arose between City and apartment building owners who, before City had become incorporated, had obtained “final subdivision tract maps from the County to convert their existing rental units into condominiums, and, pursuant to a public report issued by the Department of Real Estate, secured approval for the sale of such condominiums.” (Beverly Towers, supra, 52 Cal.3d 1184 , 1188.) The issue was whether City could apply its newly enacted requirements to those owners who had not yet sold a single unit as a condominium. (Id. at p. 1190.)

Based upon “principles of fairness,” a five-person majority of the Supreme Court held that where, as in that case, “a developer secures all state approvals to convert and the only remaining act required to complete the conversion is to convey title to a single unit,” City could not impose new requirements. (Beverly Towers, supra, 52 Cal.3d at pp. 1190 & 1191.) In ' particular, it held “that local agencies [such as City] cannot enforce condominium conversion regulations enacted after a developer secures final subdivision map approval and permission from the Department of Real Estate to sell.” (Id. at p. 1191.) Consequently, the requirement of obtaining a conditional use permit could not be applied to apartment owners who had already received all necessary approvals under the state regulatory scheme. The court expressly overruled its earlier decision in Santa Monica Pines, Ltd. v. Rent Control Board (1984) 35 Cal.3d 858 [ 201 Cal.Rptr. 593 , 679 P.2d 27 ] to the extent it had held “a city may impose conditions on condominium conversion after a developer has secured all the necessary discretionary approvals and satisfied all the requirements established by state law.” (Beverly Towers, supra, 52 Cal.3d at p. 1192.)

Factual Background

This case involves two apartment buildings in City. One is located at 625 North Flores Street and is owned by respondent E. D. Flores Corporation. The other is located at 1112 North Olive Drive and is owned by respondents 1112 Investment Corporation, LLC, and Melvin J. Remba, as trustee of the Melvin J. Remba Family Trust. Prior to City’s 1984 incorporation, respondent owners had obtained all approvals required by state law to convert their two buildings into condominiums: final subdivision maps and the issuance of public reports by Department. Consequently, the buildings could have been converted into condominiums without complying with any of City’s newly imposed requirements, including the application for and issuance of a conditional use permit by City. However, for reasons not explained in the record, respondent owners continued to maintain the buildings as apartments.

The public report issued by Department in regard to condominium conversions is valid for only five years. (Cal. Code Regs., tit. 10, § 2795.3.) The

In regard to the building at 625 North Flores Street, Department’s initial report expired on November 6, 1988. Respondent owner of that building did not request a renewed report until five years later. Department issued a renewed report on November 19, 1993. The renewed report expired on November 18, 1998. Once again respondent owner failed to request an immediate renewal. Department did not issue a second renewed report until 11 months later on October 8, 1999. That report will not expire until October 7, 2004. Only one unit has been sold as a condominium in this building. That sale occurred on July 12, 2000, after this litigation began, and was to Melvin J. Remba, one of the respondent owners of the other building involved in this litigation.

In regard to the building at 1112 North Olive Drive, Department’s initial report expired on March 9, 1987. Within a month, Department issued a renewed report which expired on April 1, 1992. Approximately six months after the expiration of the renewed report, Department issued a second renewed report on September 22, 1992. That report expired five years later but a third renewed report was not issued until slightly more than two years later on October 5, 1999. That report is still in effect and will not expire until October 4, 2004. Apparently one condominium unit in this building was sold after June 2000. The details of this transaction are not set forth in the record.

The bone of contention in this case is whether pursuant to state law the two buildings are exempt from City’s rent control ordinance. In that regard, the relevant state law is the Costa-Hawkins Rental Housing Act. (Civ. Code, §§ 1954.50-1954.535.) The law became effective on January 1, 1996. Pertinent to this case is Civil Code section 1954.52, subdivision (a); which exempts certain units from local rent control laws. The subdivision lists three exemptions, only one of which could apply to this case. It exempts a dwelling or unit if “[i]t is alienable separate from the title to any other dwelling unit or is a subdivided interest in a subdivision, as specified in subdivision (b), (d), or (f) of Section 11004.5 of the Business and Professions Code.” (Civ. Code, § 1954.52, subd. (a)(3)(A).)

“The purpose of a Public Report is to provide complete and full disclosure of statutorily required information to buyers. The term of the Report is 5 years and renewal is mandatory if the required information is submitted. If the State grants the renewal, the fact that this information is submitted before or within a reasonable time after the expiration of the 5 years would not make any difference in whether or not the Public Report accomplished its purposes.”

The trial court denied respondent owners’ subsequent motion for attorney fees.

After the trial court granted summary judgment to respondent owners, the Legislature amended Civil Code section 1954.52, subdivision (a), the provision upon which they had relied to claim exemption from City’s rent control law. It now provides the exemption does not apply to a “condominium dwelling or unit that has not been sold separately by the subdivider to a bona fide purchaser for value. . . .” (Civ. Code, § 1954.52, subd. (a)(3)(B)(ii).) One of the issues on this appeal is whether or not the amendment applies to this case.

This appeal by City challenges the trial court’s grant of summary judgment to respondent owners. We review that ruling under the independent review standard. We “independently determine the construction and effect of the facts presented to the trial judge as a matter of law.” (Rosse v. DeSoto Cab Co. (1995) 34 Cal.App.4th 1047 , 1050 [ 40 Cal.Rptr.2d 680 ].)

The cross-appeal by respondent owners challenges the denial of their motion for attorney fees. The cross-appeal is rendered moot by our reversal on the merits of the summary judgment granted in their favor. Because they are no longer the prevailing parties, there is no need to discuss whether the trial court properly interpreted the law to deny them attorney fees.

Discussion

A. The Amendment to Civil Code Section 1954.52 Does Not Apply to This Case

The trial court granted summary judgment to respondent owners in July 2001. In September 2001, the Legislature amended Civil Code section 1954.52. Previously the statute had exempted from rent control “a dwelling or unit” that “is alienable separate from the title to any other dwelling unit.” (Civ. Code, § 1954.52, subd. (a)(3).) The new law now provides the exemption does not apply to a “condominium dwelling or unit that has not been sold separately by the subdivider to a bona fide purchaser for value.” (Civ. Code, § 1954.52,"subd. (a)(3)(B)(ii).) The Governor signed the bill in October 2001. The amendment, which had been introduced in February 2001 as a non-urgency measure, took effect on January 1, 2002.

The Assembly Committee on Judiciary report on Senate Bill No. 985 (2001-2002 Reg. Sess.) as amended May 17, 2001, contained an analysis identical to that stated above.

After the Legislature passed the bill and sent it to Governor Davis for signature, its author (Senator Sheila James Kuehl) wrote the Governor: “[T]he bill closes a loophole in Costa-Hawkins that allows landlords to . . . raise rents by falsely ‘preparing’ to convert a rental unit to a condominium. Under [Senate Bill] 985, in cities that have rent control, the landlord would be required to actually sell a Unit, rather than merely initiate the conversion paperwork, in order to have rent controls removed.”

Our Supreme Court recently explained the governing principles of statutory interpretation. “A basic canon of statutory interpretation is that statutes do not operate retrospectively unless the Legislature plainly intended them to do so. [Citations.] A statute has retrospective effect when it substantially changes the legal consequences of past events. [Citation.] . . . flj] A corollary to these rules is that a statute that merely clarifies, rather than changes, existing law does not operate retrospectively even if applied to transactions predating its enactment. We assume the Legislature amends a statute for a purpose, but that purpose need not necessarily be to change the law. [Citation.] Our consideration of the surrounding circumstances can indicate that the Legislature made material changes in statutory language in an effort only to clarify a statute’s true meaning. [Citations.] Such a legislative act has no retrospective effect because the true meaning of the statute remains the same.” (Western Security Bank v. Superior Court (1997) 15 Cal.4th 232 , 243 [ 62 Cal.Rptr.2d 243 , 933 P.2d 507 ].)

Giving due consideration to these principles and analyzing the three cases relied upon by City, we conclude the amendment to Civil Code section 1954.52 is not a clarification of existing law but, instead, is a change to the law. Consequently, it can be given only prospective effect.

Because a statute is considered to have retrospective effect if its application would “substantially change[] the legal consequences of past events,” e.g., the rents charged by respondent owners in previous years (Western Security Bank v. Superior Court, supra, 15 Cal.4th 232 , 243), we conclude City’s argument that the statute merely clarifies the law lacks merit. To apply the amendment to respondent owners in this case would substantially change the legal consequences of their past actions: the rents they charged in previous years. In other words, .were we to accept City’s invitation to apply the amendment to this case, we would be giving the amendment retrospective effect. The Legislature did not indicate its intent to do that. The amendment had been introduced as a non-urgency measure and took effect on January 1, 2002.

The three cases City relies upon do not support a contrary conclusion.

The first, Union League Club v. Johnson (1941) 18 Cal.2d 275 [ 115 P.2d 425 ], does not even embody the principle upon which City relies; instead it merely includes in dicta a passing reference to the principle. The case involved payment by a social and political club of sales tax on liquor and meals served to its members and guests. The state Treasurer urged the club was a business within the meaning of the governing tax law. The law defined a business to be “ ‘any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit or advantage, either direct or indirect.’ ” (Id. at p. 277.) The club argued it was not a business because it was a nonprofit corporation. The Supreme Court first rejected that argument, relying upon the plain language of the statute which “does not include the word ‘profit’ in its definitions.” (Id. at p. 278.) The court explained that even if the club did not realize any profit from its dining room and bar operations, the club realized a “gain, benefit or advantage” from these

City’s reliance upon W. R. Grace & Co. v. Cal. Emp. Com. (1944) 24 Cal.2d 720 [ 151 P.2d 215 ] is similarly misplaced. The case involved claims for unemployment insurance benefits. After the claims had been presented the law was amended to provide that “during the waiting period the claimant must be eligible for benefits in virtually all respects.” (Id. at p. 729.) The question was whether that provision applied to the claimants before the court. The court held that “[n]o question of retroactive interpretation of the amendment is . . . involved” (id. at p. 730) because by amending the law, “the Legislature intended simply to clarify the law [citations], since even before the amendment the eligibility requirements for the payment of benefits were properly applicable to the waiting period. [Citations.] The various disqualifications on eligibility for benefits imposed by the act then in effect clearly indicate that they were intended to apply as well to the waiting period. . . . [T]he disqualification imposed ... also applied to the waiting period even before the statute specifically so provided.” (Id. at p. 729.) In other words, the Supreme Court concluded it was clear the amendment was a mere clarification of the law because even before its passage the eligibility requirements for unemployment insurance applied during the waiting period. This case is distinguishable. Prior to the amendment to Civil Code section 1954.52, there was no statutory provision or judicial decision that held the rent control exemption only applied to the condominium unit if sold to a bona fide purchaser for value. It is therefore apparent the amendment to Civil Code section 1954.52 constituted a change in the law.

Last, City relies upon Renee J. v. Superior Court (2002) 96 Cal.App.4th 1450 [ 118 Cal.Rptr.2d 118 ], which held a statutory amendment to be a clarification of existing law. The case is clearly distinguishable. In fact, it demonstrates the fallacy of City’s argument that the amendment of Civil Code section 1954.52 is merely a clarification of existing law.

In subsequent trial court proceedings, the parent sought a writ to compel the trial court to apply the amended version of the statute to her case. The Court of Appeal agreed with the parent. It found the amendment was a clarification of the law which should be applied to all open cases, including the parent’s. The Court of Appeal reasoned: “[T]here has been no change in the law. According to the Supreme Court’s own analysis, [the statutory provision] was ambiguous as previously written. The court ascribed a meaning to it, but only by attempting to discern what policies the Legislature would have been most concerned about in enacting it. Moreover the court specifically invited the Legislature to ‘clarify’ it. Under these circumstances, we have no choice but to conclude that the Legislature intended to do just that: clarify.” (Renee J. v. Superior Court, supra, 96 Cal.App.4th 1450 , 1463.)

In this case, the Legislature’s amendment of Civil Code section 1954.52 arose in completely different circumstances. There had been no judicial interpretations of the earlier version of the statute. There had been no judicial statement the earlier version was ambiguous. There had been no judicial invitation to legislative action. Instead, there was a statute which had been in effect for over five years. The Legislature amended the statute to change the law to “close a loophole” based upon several years of experience with the law as then written. There was no legislative statement of a mere intent to clarify an earlier legislative intent. In sum, the amendment to Civil

This analysis disposes of City’s contention that “alienable” in the pre2002 version of Civil Code section 1954.52, subdivision (a)(3) “referred to a unit that already had been sold and not to a unit that was simply capable of being sold by virtue of all of the precondominium conversion paperwork having been completed.” Until the 2001 amendment took effect, there was no requirement that the unit be sold; all that was required was that it was capable of being sold as a condominium. Whether or not the units in respondent owners’ buildings were capable of being sold is a question that requires interpreting Beverly Towers, supra, 52 Cal.3d 1184 . We now turn to that issue.

B. Beverly Towers No Longer Applies to This Case

As explained earlier, Beverly Towers, supra, 52 Cal.3d 1184 , 1190-1192, held City could not impose its newly enacted requirement of obtaining a conditional use permit to property owners who had already complied with the state requirements of obtaining final map approval and issuance of a public report. At the time of City’s incorporation, respondent owners had already met all state requirements in regard to the two buildings at issue. Consequently, City could not require them to obtain conditional use permits before completing the conversion process. The issue is whether City can now impose that requirement. If City can, and it is undisputed respondent owners have not obtained conditional use permits, then the units are not alienable and the exemption from rent control found in former Civil Code section 1954.52, subdivision (a)(3), the law in effect at the time City initiated this action, does not apply. As we now explain, respondent owners lost whatever rights they had under Beverly Towers when they permitted the initial public reports required by Department to expire. Consequently, City can properly apply its requirements to them before the conversion process can be completed.

In regard to a property owner’s right to proceed with development based upon a vested right, if the approvals which form the basis of the vested right have expired prior to the project’s commencement, any vested right has likewise lapsed or been abandoned. (See, e.g., Court House Plaza Co. v. City of Palo Alto (1981) 117 Cal.App.3d 871 , 887 [ 173 Cal.Rptr. 161 ] [The “permits expired without [the developer’s] having built in accordance with their terms. [The developer] cannot six years later assert that it continues to

In Beverly Towers, our Supreme Court never held the apartment building owners had obtained a vested right to convert to condominiums. This point caused some consternation to the dissent which believed that the majority’s holding was undermining established law. (Beverly Towers, supra, 52 Cal.3d at pp. 1195-1200 (dis. opn. of Broussard, J.).) In particular, the dissent wrote: “The majority silently erode the vested rights doctrine when they confer what can only be termed a vested right to develop without requiring any showing of detrimental reliance.” (Id. at p. 1200.)

Consequently, the majority opinion is apparently grounded on a holding that something short of a vested right precluded City from imposing any further requirements on the apartment building owners before the conversion process could be completed. Given, as set forth above, that a vested right to build or develop can lapse or expire based upon failure to proceed, it follows that whatever right respondent owners gained by Beverly Towers can likewise expire or lapse. This conclusion is consistent with the “principles of fairness” which guided the Beverly Towers court in creating what was, in effect, an exception to the vested rights doctrine. (Beverly Towers, supra, 52 Cal.3d at pp. 1190, 1193-1194.) While it was fair to prevent City from imposing any new requirements upon a developer who had obtained all necessary state approvals for conversion, it is also fair to conclude that a developer who allows one of those approvals to lapse or expire can now be subject to City’s new requirements.

In this case, the right expired or lapsed because the public reports expired before either respondent owner obtained a renewal. As explained earlier, respondent owner of 625 North Flores Street waited five years after the 1988 expiration of the original public report to obtain a renewed report and almost a year after the expiration of the renewed report to obtain another one. In regard to 1112 North Olive Drive, respondent owners waited various periods (one month, six months, and two years) before obtaining renewed reports after the previous report expired. Respondent owners concede that during the expiration period(s), they were precluded from selling a unit.

Respondent owners attempt to avoid the force of this conclusion by minimizing the significance of the public report. They disdainfully characterize the public report as a “white sheet” or “white slip.” Respondent owners’ approach is not persuasive.

Nor do we find any merit to respondent owners’ argument that Department’s renewal of the public reports established they are not required to comply with City’s requirement of obtaining a conditional use permit. Respondent owners point to the fact that Business and Professions Code section 11018, subdivision (c) provides the Department will not issue the public report if there is an “[inability to deliver title or other interest contracted for.” They therefore argue that by issuing them the renewed public reports, Department determined they could deliver title to the sellers and that this determination is a sub silentio finding they were not required to obtain conditional use permits. This argument is not persuasive. For one thing, as respondent owners concede, lack of a conditional use permit is not a basis to deny a public report. For another thing, respondent owners have failed to establish that Department is conversant with or required to be conversant with local zoning laws in reviewing applications for public reports. The reality is that City had no input into the process when respondent owners requested renewals of the public reports. City therefore had no opportunity to argue the pertinent legal point: the prior expirations of the first public reports now required respondent owners to comply with City’s regulations enacted after incorporation. Consequently, Department’s issuances of renewed public reports is not the pragmatic equivalent of a finding (entitled to preclusive effect) that respondent owners do not now have to obtain conditional use permits.

To summarize, whatever rights respondent owners had based upon Beverly Towers lapsed when the first public reports expired without a renewal having been obtained. City could therefore impose the new requirement of a conditional use permit to the conversion process. Because respondent owners ha.ve not obtained a conditional use permit, the individual units are not “alienable” within the meaning of the rent control exemption in Civil Code section 1954.52, subdivision (a)(3). The fact respondent owners sold one unit in each building does not alter that conclusion; they were required to obtain conditional use permits but did not do so. As such, their buildings are still subject to City’s rent control law so that City may properly bring an action against them for violation of its local ordinance.

Our conclusion comports with one of the policies underlying Beverly Towers: safeguarding the investments and expectations of owners who intended to convert apartment buildings to condominiums. (Beverly Towers, supra, 52 Cal.3d 1184 , 1190.) In this matter, respondent owners’ investments and expectations were safeguarded because City could not impose any further requirements before the conversion process could be completed.

It is obvious that the application of Beverly Towers contemplates a legitimate enterprise to develop and sell residential property. Here, however, respondent owners have been engaged in a charade to continue in the apartment rental business, not an enterprise to convert and sell apartment units as condominiums. Beverly Towers was meant to be a shield for a developer to protect it when City sought to impose additional requirements for condominium conversion after all state approvals had been obtained; it was never meant to be a sword to attack City’s rent control ordinance when an owner had allowed the right granted by Beverly Towers to lapse. We cannot believe that Justice Mosk, writing for the majority in Beverly Towers, anticipated an apartment building owner would attempt to periodically rollover the right to be free of City’s requirements in order to avoid City’s rent control ordinance. Justice Mosk’s holding in Beverly Towers was simply an attempt to accommodate those who had legitimately complied with all state law requirements for condominium conversion in preparation of selling their units and leaving the apartment rental business.

We therefore come to the proper disposition of this matter. We will reverse the trial court’s grant of summary judgment in favor of respondent owners and direct it to deny that motion. This will render moot the issue raised by respondent owners’ cross-appeal: did the trial court err in denying them attorney fees as the prevailing parties? We will remand for the court to conduct further proceedings on City’s motion for summary judgment consistent with the views expressed herein. As City concedes, it will be necessary for it to submit evidence of the precise amount of rental overcharges made by respondent owners after the trial court granted summary judgment. In addition, the parties need to address the fact one unit was sold in each building after this litigation was commenced. City’s reply brief, citing Beverly Towers, supra, 52 Cal.3d 1184 , 1188-1189, footnote 1, states: “Even though respondents have sold units in their buildings without obtaining the requisite CUPs [conditional use permits], it does not necessarily follow that a reversal of the trial court’s judgment would void those sales. The City