(310) 451-3669
July 12, 2024
VIA E-MAIL
Susan Cola, Assistant City Attorney
Heidi von Tongeln, Chief Deputy City Attorney
City of Santa Monica
1685 Main Street, Room 310
Santa Monica, CA 90401
Re: Threat of Litigation to Enforce Judgment and Settlement Agreements Property address: 205 Washington Avenue (Sovereign Hotel & Apts) Our client: Sovereign Restoration Partners, LP
Our File No. 22785.001
Dear Mses. Cola and von Tongeln:
Thank you for meeting with me on March 18th to discuss possible resolution of the City’s failure to honor its 1992 Settlement Agreement, as amended in 1996, as to the landmark1 Sovereign Hotel & Apartments. For its part, the property owner has honored its obligations under these agreements for the past 30 years, but the City has now balked at doing so. Please be informed that there is a Judgment in place that forces the City to comply with the terms of the Settlement Agreement.
This letter is submitted on behalf of the Sovereign Restoration Partners, LP (“SRP”), the owners and operators of the property at 205 Washington Avenue. Please treat this letter as a formal threat of litigation.
SUMMARY OF SRP’s DEMAND
The purpose of this letter is to reiterate the property owner’s demand that the City comply with the terms of the Settlement Agreement and Release dated July 6, 1992 (“1992 Agreement”), as amended by the Amendment to Settlement Agreement and Release dated April 10, 1996 (“1996 Amendment”). In particular, in accordance with Paragraphs 2 and 5 of the 1992 Agreement (and as reiterated in Paragraph 5 of the 1996 Amendment), SRP asserts the right to operate 52 of the 86 units on the subject 1 The building and property were designated as a City Landmark and Landmark Parcel, respectively, on January 8, 1996. (LC-04-052.)
[email protected]
Susan Cola
Heidi von Tongeln
July 12, 2024
property as hotel rooms, furnished short-term rentals and/or long-term rentals--in the property owner’s sole and absolute discretion--as and when each unit becomes vacant.
This right to operate up to 52 hotel rooms is further confirmed by the 1992 Judgment entered by the Los Angeles Superior Court in LASC Case No. WEC 128286.
I have obtained a copy of that Judgment, and a copy is enclosed. That Judgment is a final binding decision with which the City must comply.
Furthermore, the City would be “shooting itself in the foot” were it to take the position that these 52 units cannot be operated as hotel rooms generating as much as $1,162,755 annually in bed tax revenue.
SRP’s RIGHT TO OPERATE 52 HOTEL ROOMS AT THE
SOVEREIGN IS MADE CRYSTAL CLEAR IN BOTH THE
1992 AGREEMENT AND THE 1996 AMENDMENT
The right to operate 52 hotel rooms is clear and unambiguous in the fully executed agreements with the City, both of which are accompanied by written approval of the then City Attorneys:
Hotel Units. The City and the [Rent Control] Board stipulate and agree that all units in the main building at the Subject Property, except for the basement units and those specific Apartment Units identified on the second and third floors of the main building, shall be deemed permanently exempt
from the RCCA irrespective of future use or occupancy and [the property owner] shall specifically be permitted to operate these units as hotel rooms for occupancy by transient guests or for use by long-term tenants. These units are identified on Exhibit "A" as Unit Nos. 102-106, 109-111, 111A, 112, 114, 204-210, 301, 302, 306-311, 401-412, 414, 501-512, and
514 ("Hotel Units"). There are a total of fifty-two (52) Hotel Units at the Subject Property. (¶2 of the 1992 Amendment.)2 2 The 1996 Amendment switched some of the units between Hotel Units (a/k/a Uncontrolled Units) and Apartment Units. Per the 1996 Amendment, the units available for hotel use (after repayment of the loan and upon vacancy by the existing tenants) are as follows: Unit #s 102, 103, 104, 105, 106, 109, 110, 112, 114, 205, 206, 209, 210, Susan Cola
Heidi von Tongeln
July 12, 2024
Hotel Usage.
(a) The City and the Board hereby stipulate and agree that except for the occupancy rights of any Existing Tenants currently occupying a Hotel Unit as set forth in Section 3 herein, [property owner] is legally authorized to operate each Hotel Unit as a hotel room for daily, weekly and
monthly occupancy by transient guests, and such use
shall be deemed lawful without requiring any additional land use, zoning or other permits or approvals from the City. [Property owner] agrees to comply with all City rules and regulations applicable to similarly situated hotels, except as otherwise provided herein. The City and the
Board further stipulate and agree that these units shall be permanently exempt from the RCCA regardless of their
future use and that use of the Hotel Units as hotel rooms for daily, weekly and monthly occupancy by transient
guests shall be deemed to be in compliance with the
RCCA, the City’s General Plan, the Zoning Ordinance,
and all other City laws and ordinances.
(b) Based upon the special circumstances of this matter, and in consideration for deed restricting the Apartment Units, the City hereby stipulates and agrees that use of the
Hotel Units for daily, weekly and monthly occupancy by
transient guests shall be legally permitted to continue permanently as a legal non-conforming use regardless of the present or future zoning of the Subject Property.
(c) Nothing herein shall be construed to prohibit or otherwise limit use of the Hotel Units for short or long term
residential purposes, and such residential use of the
Hotel Units by tenants will not affect the status of the Hotel Units as permanently exempt from the RCCA as
set forth herein.
212, 214, 303-314, 401-414, 501-514, except there are no units identified as 313, 413, and 513.
Susan Cola
Heidi von Tongeln
July 12, 2024
(d) There shall be no limit on the sums [property owner] can charge for occupancy of the Hotel units, whether such
occupancy is by short-term or long-term occupants,
whether guests or tenants; provided, however, that the
rent [property owner] can charge any Existing Tenant
occupying a Hotel Unit shall be limited as set forth in Sections 3.c. and d. herein.
(¶5 of the 1992 Agreement.)
Hotel Usage. Except as provided in this Section, Owner
may operate the [52] Uncontrolled Units as "Hotel Units" in accordance with Section 5 of the July 6, 1992
Agreement . . . . (¶5 of the 1996 Amendment.)
BACKGROUND
The Sovereign Hotel Apartment building was constructed in 1928. It is a fivestory Spanish Colonial Revival structure with a landscaped inner courtyard located at 205 Washington Avenue in Santa Monica. It is located a mere block from Palisades Park and a short distance from the Santa Monica Beach and Pacific Ocean.
The Sovereign contains 86 units.
In 2019, the City itself published this summary of the property:
“The number of single and one bedroom units and the
availability of daily maid service seems to indicate that the building may have been targeted primarily at those seeking a vacation residence. In the 1930s, the Sovereign’s operation appears to have transitioned to include a more traditional hotel format with the construction of the small wing that may have contained a dining room. The street level sign
identifying the building as the ‘Sovereign Hotel’ also dates from this era.” (Miranda Iglesias, “History Spotlight:
Sovereign Apartment/Hotel,” City of Santa Monica blog
(July 18, 2019), https://www.santamonica.gov/blog/historyspotlight-sovereign-apartment-hotel.) Litigation Over Sovereign’s Hotel Operations . The Santa Monica Rent Control Law was adopted by the voters on April 10, 1979. On October 5, 1987, the City Susan Cola
Heidi von Tongeln
July 12, 2024
filed a lawsuit against Jett Mora, who then owned the property. The City’s complaint alleged that Mora was operating the Sovereign as a hotel in violation of the Rent Control Law.
The following year, Mora filed a lawsuit against the City and the Rent Control Board, seeking declaratory relief to operate the property as a hotel.
On July 6, 1992, Mora, the City and the Rent Control Board entered into the Settlement Agreement and Release, providing, inter alia, that 52 units are uncontrolled units and can be operated interchangeably as hotel units, short term rentals or longterm apartments. The remaining 34 units must be operated as rent controlled apartments. The parties also recorded a corresponding deed restriction. The existing tenants were allowed to continue residents in their units, whether they were Hotel Units or Apartment Units, with protection against evictions except for good cause.
Furthermore, upon vacancies, 17 of the 34 apartment units were deed restricted to low income (60% of median income) and the other 17 were deed restricted to moderate income (100% of median income).
Entry of Judgment. On July 16, 1992, pursuant to the written stipulation of Mr. Mora, the City and the Rent Control Board, the Honorable Joel Rudof, Judge of the Los Angeles County Superior Court, entered Judgment in the case of Mora v. City of Santa Monica (LASC Case No. WEC 128286). A copy of that Judgment is enclosed.
Paragraph 3 of the Superior Court Judgment provides as follows:
Hotel Units. All units in the main building at the Subject Property, except for the basement units and those specific Apartment Units identified on the second and third floors of the main building, shall be deemed permanently exempt
from the RCCA irrespective of future use or occupancy and Mora shall specifically be permitted to operate these units are hotel rooms for occupancy by transient guests or for use by long-term tenants. These units are identified as Unit Nos. 102-106, 109-111, 111A, 112, 114, 204-210, 301, 302, 306- 311, 401-412, 414, 501-512, and 514 (“Hotel Units”). There are a total of fifty-two (52) Hotel Units at the Subject Property.
Susan Cola
Heidi von Tongeln
July 12, 2024
Paragraph 6 of the Superior Court Judgment provides as follows:
Hotel Usage.
a. Except for the occupancy rights of any Existing Tenants currently occupying a Hotel Unit as set forth in Section 4 herein, Mora is legally authorized to operate such Hotel Unit as a hotel room for daily, weekly and monthly
occupancy by transient guests, and such use shall be
deemed lawful without requiring any additional land use, zoning or other permits or approvals from the City. Mora shall comply with all City rules and regulations applicable to similarly situated hotels, except as otherwise provided herein. These units shall be permanently exempt from
the RCCA regardless of their future use and that use of the Hotel Units as hotel rooms for daily, weekly and
monthly occupancy by transient guests shall be deemed
to be in compliance with the RCCA, the City’s General
Plan, the Zoning Ordinance, and all other City laws and ordinances.
b. Based upon the special circumstances of this matter, and in consideration for deed restricting the Apartment Units, use of the Hotel Units for daily, weekly and monthly
occupancy by transient guests shall be legally permitted to continue permanently as a legal non-conforming use
regardless of the present or future zoning of the Subject Property.
c. Nothing herein shall be construed to prohibit or otherwise limit use of the Hotel Units for short or long term
residential purposes, and such residential use of the
Hotel Units by tenants will not affect the status of the Hotel Units as permanently exempt from the RCCA as
set forth herein.
d. There shall be no limit on the sums Mora can charge for occupancy of the Hotel Units, whether such occupancy is by short-term or long-term occupants, whether guests or tenants . . . .
Susan Cola
Heidi von Tongeln
July 12, 2024
Paragraph 2 of the Stipulation provided as follows:
The purpose of this Stipulation is to avoid further litigation in this matter between Mora, the City and the Board. The
parties agree that the amicable resolution of this matter, under the terms and conditions set out in this Stipulation, is to the respective legal and economic interests of the parties involved herein.
Paragraph 27 of the Stipulation provided as follows:
Each and every party waives any right of appeal, whether directly, indirectly, or by collateral attack, which, may arise from the entry of Judgment . . . including, but not limited to, the right to appeal said Judgment.
Northridge Earthquake. On January 17, 1994, Los Angeles County was struck by the Northridge Earthquake, causing massive damage throughout the County.
The Sovereign was one of the buildings that was severely damaged. It was determined to be uninhabitable, and the tenants were required to vacate.
Thereafter, Mora defaulted on a promissory note secured by a deed of trust recorded against the property. The lender instituted foreclosure proceedings.
On December 16, 1994, SRP purchased the property through foreclosure by the lender.
On January 8, 1996, the Landmarks Commission designated the building as a City Landmark and the property as a Landmark Parcel. (LC-04-052.) On April 10, 1996, SRP, the City and the Rent Control Board entered into the 1996 Amendment to Settlement Agreement and Release, reiterating that 52 units are uncontrolled units and can be operated interchangeably as hotel units, short-term rentals or long-term apartments; however, all tenants displaced by the earthquake were given the right to return and reoccupy their units with the protection of the Rent Control Law following repairs. The remaining 34 units are rent controlled apartment units.
Furthermore, for 30 years 22 of the 34 units are deed restricted to low income units (60% of median income) and 12 units are deed restricted to moderate income (100% of median income). Certain of the unit numbers of the deed restricted units changed at this time. An amended deed restriction was recorded on April 16, 1996, as Instrument No. 96-597966 of Official Records of the Los Angeles County Recorder’s Office.
Susan Cola
Heidi von Tongeln
July 12, 2024
On April 16, 1996, the City loaned SRP the sum of $3,275,000 for a period of 10 years pursuant to the City’s Multifamily Earthquake Repair Loan (“MERL”) Program.
The loan was used to refinance the property and partially fund some of the soft costs associated with rehabilitating the property.
SRP started to repair and rehabilitate the vacant building in mid-1995.
The repairs were completed in late September 1996, and tenants began to move back in October. At present, two of the pre-Northridge Earthquake tenants continue to occupy their units.
The rehabilitated Sovereign was listed on the National Register of Historic Places in 1997. This is an image of the property today:
The MERL loan was repaid in full on October 2, 2006. It is our understanding that the repaid sums were accumulated in the City’s Housing Trust Fund.
The deed restriction (Instrument No. 96-597966 of Official Records of the Los Angeles County Recorder’s Office) requiring 22 units of low income housing and 12 units of moderate income housing will expire on April 16, 2026.
Susan Cola
Heidi von Tongeln
July 12, 2024
COVID Pandemic. In early 2020 the COVID-19 pandemic commenced. During the COVID pandemic Santa Monica imposed a moratorium for evictions for nonpayment of rent. https://www.santamonica.gov/coronavirus-evictionmoratorium#:~:text=Limited%20Santa%20Monica%20Moratorium%20for,2023%20to% 20repay%20covered%20rent.
Current Hotel Usage. Following full repayment in October 2006 of the MERL loan and after faithfully honoring the ten-year no-hotel-use loan commitment, the owner began converting units eligible for “hotel use” to short-term stays as and when the units became available--consistent with the Judgment and the agreements with the City and Rent Control Board. As the owner was preparing next to resume less than 30-day rentals, a confluence of unforeseen events--the onset of COVID-19, the need to care for aged parents with dementia, and the owner’s own serious health issues—delayed the ultimate conversion of the units to less than 30-day rentals. The confluence of these events made it impractical to reprogram and reinstitute less than 30-day stays use at the property despite the ongoing intention to do so. In 2023, the Sovereign commenced offering various eligible Hotel Units for less than 30-day stays.
In September 2023, SRP applied to the City of Santa Monica for a hotel business license. That application was routed to City Planning. On October 2, 2023, the Santa Monica Planning Division (wrongly) informed SRP that the Sovereign was not allowed to operate hotel rooms. On October 31, 2023, the City Attorney’s Office declined to discuss this matter directly with the principal for SRP.
On February 21, 2024, Airbnb informed SRP that the listings for hotel rooms were being blocked due to receipt of a (false) Santa Monica Code Enforcement report that the listings were unlawful. At that time, nine units offered for less than 30-day stays were starting to generate close to $47,000 per month in gross revenue. Another two premium units were expected to be available for hotel use very soon. Currently, sixteen units are not occupied by long-term tenants and are available for hotel usage. The potential revenue that could be generated by renting those sixteen hotel rooms for less than 30-day stays is estimated to be approximately $180,500/month.
Bed Tax Revenue. Whenever any of the 52 units are operated as hotel rooms, the property owner has collected and paid to the City its transient occupancy tax, through Airbnb. SRP estimates that when all 52 units are operated as hotel rooms, over the course of a year, the transient occupancy tax revenue to the City would be approximately $1,162,755 in current dollars (assuming a 10% vacancy rate).
Susan Cola
Heidi von Tongeln
July 12, 2024
ANALYSIS
We strenuously dispute that there is any lawful basis for the City to renege on its obligations as to SRP’s right and ability to operate the 52 rooms from time to time as either hotel, short-term rentals or long-term rentals consistent with the longstanding agreement of the parties. Any such reversal by the City is in direct contravention of the final Judgment entered on July 16, 1992, by Los Angeles County Superior Court Judge Joel Rudof in Mora v. City of Santa Monica (LASC Case No. WEC 128286).
Issue Preclusion. Code of Civil Procedure Section 1908(a)(2) provides as follows:
The effect of a judgment or final order in an action or special proceeding before a court or judge of this state, or of the United States, having jurisdiction to pronounce the judgment or order, is as follows:
* * *
. . . the judgment or order is, in respect to the matter directly adjudged, conclusive between the parties and their
successors in interest by title subsequent to the
commencement of the action or special proceeding, litigating for the same thing under the same title and in the same capacity, provided they have notice, actual or constructive, of the pendency of the action or proceeding.
See also Montana v. United States, 440 U.S. 147, 153-54 (1979):
A fundamental precept of common-law adjudication,
embodied in the related doctrines of collateral estoppel and res judicata, is that a “right, question or fact distinctly put in issue and directly determined by a court of competent
jurisdiction . . . cannot be disputed in a subsequent suit between the same parties or their privies . . . .” Under res judicata, a final judgment on the merits bars further claims by parties or their privies based on the same cause of action.
Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior Susan Cola
Heidi von Tongeln
July 12, 2024
litigation. Application of both doctrines is central to the purpose for which civil courts have been established, the conclusive resolution of disputes within their jurisdictions.
To preclude parties from contesting matters that they have had a full and fair opportunity to litigate protects their adversaries from the expense and vexation attending
multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by minimizing the possibility of inconsistent decisions. [Citations omitted; footnote omitted.] The City is legally precluded from second guessing the aforementioned Judgment. The Entry of Judgment to which the City stipulated is a full and final decision that cannot now be collaterally attacked by the City thirty years later. Indeed, the Superior Court expressly reserved jurisdiction to enforce the terms of its Judgment:
In the event any party is found to have failed to comply with any term or provision of this Judgment, the Court shall make any and all orders necessary to assure the term or provision that has not been complied with by such party will in fact be implemented. (¶18 of Judgment.)
Detrimental Reliance. Per the 1996 Amendment, for the past 27 years, SRP has rented the remaining 34 of the 86 units on the property as deed-restricted housing, thereby foregoing an estimated $9,409,214 in additional rent revenue thus far that would have been recovered through implementation of the rights to implement rent increases upon voluntary vacancies under the Costa-Hawkins Rental Housing Act (Civ. Code §§ 1954.50, et seq.). Twenty-two of those 34 units are restricted to low income rents (i.e., 60% of County median income). The other twelve units are restricted to moderate income rents (i.e., 100% of County median income). This rent forbearance has been honored by SRP in reliance on the respective obligations of the parties under the 1992 Agreement, as amended.
In addition, SRP spent $5,124,157 and 21 months repairing the historic building that had been rendered inhabitable by the Northridge Earthquake. SRP also repaid a $3,275,000 earthquake recovery loan to the City. (Copy of Promissory Note enclosed.) Furthermore, demolition of the Landmark Sovereign building could have been pursued based on the damage it suffered during the Northridge Earthquake, rendering the building uninhabitable. (See Recital D of the 1996 Amendment (“On January 17, 1994, as a result of the ‘Northridge’ earthquake, the subject property suffered Susan Cola
Heidi von Tongeln
July 12, 2024
substantial damage and was deemed uninhabitable. The subject property remains uninhabitable as of the date of this Amended Agreement.”).) Instead, SRP agreed to repair and reopen the building in reliance on the 1996 Amendment.
By returning all 86 units to long-term rental housing for not less than the 10-year duration of the earthquake recovery loan, by foregoing market-rate rents on 34 units, and by proceeding to repair and restore the historic building after it was damaged and rendered uninhabitable by the earthquake, SRP has detrimentally relied on the rights conferred by the 1992 Agreement and 1996 Amendment--most specifically, the right to operate 52 units as hotel rooms in SRP’s sole and absolute discretion without triggering the need for any “land use, zoning or other permits or approvals from the City.” (¶5(a) of the 1992 Agreement.)3
Continuous Operation. SRP’s rights under the agreements with the City and the Rent Control Board have never been abandoned. Except only for the duration of time when the property was rendered uninhabitable by damage from the 1994 Northridge Earthquake and the ensuing repairs, the property has at all times been continuously operated and generally fully occupied by either transient guests, short-term rentals or long-term tenants. With the exception of the period following the Northridge Earthquake, the Sovereign has never been “shutdown” and the 86 units left vacant for any extended period of time. This is no different than was the case in Hansen Bros. (discussed further below) where the California Supreme Court held that the ongoing operation of mining, production and sales of sand, gravel and rocks from a riverbed was sufficient to allow the owner and operator to also resume quarrying rock from the property owner’s hillside.
As to the Sovereign, except when ordered to be vacated for repairs following the earthquake damage, the property’s use has never been abandoned. (See SMMC § 9.27.050(B).) (See also ¶5(b) of the 1992 Agreement (“the City hereby stipulates and agrees that use of the Hotel Units for daily, weekly and monthly occupancy by transient guests shall be legally permitted to continue permanently as a legal non-conforming use regardless of the present or future zoning of the Subject Property”).) Furthermore, the California Supreme Court has held: “Cessation of use alone does not constitute abandonment.” Hansen Bros. Enters. v. Board of Supervisors, 12 Cal. 4th 533, 569 (1996). As explained by the California Supreme Court:
3 Indeed, arguably, not even a business license is required.
Susan Cola
Heidi von Tongeln
July 12, 2024
Abandonment of a nonconforming use ordinarily depends
upon a concurrence of two factors: (1) An intention to
abandon; and (2) an overt act, or failure to act, which carries the implication the owner does not claim or retain any
interest in the right to the nonconforming use [citation omitted]. (Id.)
As the Supreme Court explained in Hansen Bros., where the operation of a commercial or industrial facility discontinues “during a business slowdown,” that alone does not constitute a “cessation of operation.” (Id.) Particularly where “the plant, equipment, inventory, and utilities were maintained throughout the period and the plant could be made operational within two hours.” (Id.) Here, the Sovereign and its rooms were at all times ready to be returned to hotel use.
More importantly, SRP never had any intention of abandoning the right to operate the 52 rooms for hotel usage. Once the MERL loan was paid off, SRP began by offering short-term rentals for minimum 30 day stays. Until recently, the principal of SRP had personal health issues, plus the challenges inherent with the COVID-19 pandemic, and these were some of the factors that contributed to using the unregulated Hotel Units for other purposes permitted under the agreements (i.e., long-term rentals and shortterm tenancies), but not at the cost of giving up the right to operate the units as hotel rooms. Similarly, in Hansen Bros., the Supreme Court held:
Since we have concluded that the aggregate mining,
production, and sales business was the land use for which Hansen Brothers had a vested right in 1954, the fact that rock quarrying may have been discontinued for 180 days or more is irrelevant. Hansen Brothers has a vested right to continue all aspects of its aggregate business at the Bear's Elbow Mine. (12 Cal. 4th at 571.)
Lack of Notice. Now, without any advance warning, the City is wrongfully refusing to issue a business license to SRP for any hotel operation of the property.
This constitutes a clear breach of the agreements between the parties. At no time has the City asked SRP whether it intended to relinquish its right to operate the 52 units as hotel rooms. If it had asked that question, SRP would have emphatically repudiated any such intention.
Susan Cola
Heidi von Tongeln
July 12, 2024
No Waiver. Paragraph 21 of the 1992 Agreement expressly provides as follows:
Any waiver of this Agreement must be in writing and signed by an authorized representative of the waiving party. Failure by any party to enforce its rights under this Agreement shall not be deemed to be a waiver of its rights to enforce the same or any other term, condition or covenant. (Emphasis added.)
At no time has SRP expressly waived its rights to operate the 52 hotel rooms, nor has SRP expressed any intention of waiving those rights.
Breach of Contract. By virtue of the City’s failure to issue a business license for hotel use on the property and by City Code Enforcement’s notification to Airbnb that listings for the property are unlawful, SRP is being denied the benefit of the bargain. (See ¶5(b) of the Amendment (“Based upon the special circumstances of this matter, and in consideration for deed restricting the Apartment Units, the City hereby stipulates and agrees that use of the Hotel Units for daily, weekly and monthly occupancy by transient guests shall be legally permitted to continue permanently as a legal nonconforming use regardless of the present or future zoning of the Subject Property.”).) The City (and the residential tenants of the 34 deed-restricted units) have benefited under the 1996 Amendment.4 The City’s current refusal to issue a business license for hotel usage on this property, and the Code Enforcement directive to Airbnb that listings for this property are unlawful, each constitutes a clear breach of contract.
Breach of Covenant of Implied Covenant of Good Faith and Fair Dealing.
The law implies in every contract a covenant of good faith and fair dealing, “meaning that neither party will do anything which will injure the right of the other to receive the contract’s benefits.” Bushell v. JPMorgan Chase Bank, 220 Cal. App. 4th 915, 928-29 (2013). Actions by the City to bar the use of the 52 identified units for hotel use despite the clear intent of the 1992 Agreement and 1996 Amendment would violate the implied covenant of good faith and fair dealing. (See Badie v. Bank of America, 67 Cal. App. 4th 779,796 (1998) (“good faith performance of the discretionary power to affect the other party's rights requires the party holding such power to exercise it ’for any purpose within the reasonable contemplation of the parties at the time of [contract] formation—to 4 Recital D of the MERL Regulatory Agreement provides in pertinent part: “the City acknowledges that it has received a direct benefit by Borrow’s agreement to restrict twenty-two (22) of the eighty-six (86) Project units for use by families whose household incomes are at or below 60% of Los Angeles County Median Income.” Susan Cola
Heidi von Tongeln
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capture opportunities that were preserved upon entering the contract, interpreted objectively,’ and that, conversely, breach of the covenant occurs when the discretionary power is used to ’recapture opportunities foregone’ when the contract was entered into.
Where, as in this case, a party has the unilateral right to change the terms of a contract, it does not act in an ‘objectively reasonable’ manner when it attempts to ’recapture’ a forgone opportunity by adding an entirely new term which . . . was not within the reasonable contemplation of the parties when the contract was entered into.” [Citations omitted.]).)
Unconstitutional Taking of Property Right Without Just Compensation. The City’s failure to honor SRP’s right to operate 52 units as hotel rooms constitutes an unlawful taking of a property right without just compensation. The California Supreme Court has held that when a city initiates “an unreasonable, oppressive, or unwarranted interference with an existing use, or a planned use for which a substantial investment in development costs has been made, the ordinance may be invalid as applied to that property unless compensation is paid.” Hansen Bros. Enters. v. Board of Supervisors, supra, 12 Cal. 4th at 551-52. See also Ali v. City of Los Angeles, 77 Cal. App. 4th 246 (1999) (affirming damage award to property owner against city for temporary taking “where the position by the City was ‘so unreasonable from a legal standpoint’ as to be arbitrary, not in furtherance of any legitimate governmental objecting, and for no other purpose than to delay”).
Compensatory Damages. Currently, sixteen (16) units are not occupied by long-term tenants and are available for hotel usage. The potential revenue that could be generated by renting those sixteen hotel rooms is estimated to be approximately $180,500/mo.). As more vacancies arise in the 52 units, additional hotel revenue will be at risk.
Attorneys’ Fees. Attorneys’ fees are recoverable in the event of any action to enforce the Sovereign Agreements with the City. (See ¶14 of 1992 Agreement.) Furthermore, attorneys’ fees are recoverable for temporary or permanent takings under 42 U.S.C. § 1988 and Code of Civil Procedure Section 1036. See also Hensler v. City of Glendale, 8 Cal. 4th 1, 15 (1994) (“Moreover, the expense of a meritorious taking claim will not be borne by the owner. Not only are damages for a temporary taking available, but the owner's reasonable costs and attorney fees must be reimbursed by the local entity if the owner establishes that the restriction on land use is a compensable taking.”).
Punitive Damages. Furthermore, to the extent that the City is interfering with SRP’s Airbnb listings, that Code Enforcement intervention arguably constitutes tortious Susan Cola
Heidi von Tongeln
July 12, 2024
interference with business relations and triggers risk of punitive (as well as compensatory) damages. See Ramona Manor Convalescent Hosp. v. Care Enters., 177 Cal. App. 3d 1120, 1142 (1986) (“the retrial on the issue of damages need not examine the malice issue, except to the extent necessary to determine the amount of punitive damages necessary to effectively punish and deter [defendant] and others from engaging in such tortious activity.”).)
CONCLUSION
For the reasons described above, we assert that the City’s withholding of the Sovereign’s hotel business license for this property and the City’s interference with the Sovereign’s Airbnb listings are being done in bad faith, given entry of Judgment, and the 1992 Agreement and 1996 Amendment, and the good faith detrimental reliance shouldered by my client throughout. The City’s actions are not only impacting SRP’s revenue, but will also have a major impact on the long-term value of the Sovereign property.
Accordingly, we request that the City Attorney’s Office take up this matter in closed session with the City Council on July 23 for a speedy and prompt resolution before litigation commences.
If this matter is not resolved short of litigation, we anticipate a judicial ruling in favor of SRP, including a very substantial compensatory damage award as well as attorneys’ fees and court costs. Under the circumstances, the City is also at risk of an award for punitive damages and/or sanctions.
Very truly yours,
Kenneth L. Kutcher
KLK:sna
Enclosures
cc: Douglas Sloan (w/ Judgment encl.)
Susan Connally (w/o encl.)
Beverly Moore (w/o encl.)
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