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Profitable Ground Leases. Anticipating Malice of the Lessor. Assaults on Park Operators

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UPSHOT:

A new wave of avarice has reared its predatory head in California. Ground leases of yesteryear were predicated on risk: a remote gamble that "trailer parks" might be successful. No one knew the idea would mushroom into good investments, sometimes. But grow they did.

So long as the total housing cost (rents and home mortgages) stayed about $500 less than equivalent sized and located stick-built housing, mobilehome parks could survive. And land owners with large dormant acreage could lease orange groves and dormant acreage to lessees. The lessees hoped to construct mobilehome parks, built, sometimes, with their own hands, shovels and foresight.

But times change.

No longer can you buy gasoline for $.19 per gallon. And the ground leases have, in some instances, become profitable. Very profitable. Now, some ground lessors want more than they bargained for. Some may take unscrupulous steps to try and take back the park. The incisive observations of the courts, in turn, reflect a story of frivolous challenges, groundless pursuit of extreme remedies, and malicious intent-is some instances, great sums of money are spent for attorney's fees with questionable results. And these cases will likely continue so long as there are innocent lessors that can be talked into it.

Some fall victim to a slick sales pitch-from attorneys, urging scorched earth attacks on ground lessees to take a park back. Based on the malicious prosecution actions against the failures of ground lessors discussed below, lessors may seek assurances (a guarantee) from their lawyers it will not happen to them (indemnification for such cavalier litigation). Rest assured, virtually no lawyers in this industry sue park owners. But some do. Even WMA and MHET members. The effort is sometimes abandoned or dropped or defeated, but only after a sizeable fee has been paid.

Here we discuss a recent malicious prosecution case by park operators that followed a failed effort to terminate the ground lease. The case is emblematic of a failed and groundless assault on a lessee, and a lesson for all "thinking" ground lessors.

THE CASE OF THE AVARICIOUS ATTORNEYS ("poster child" for cases for an improper purpose, said the Court of Appeal)

In one case, the long-term ground lease was for a mobilehome park in Anaheim, California.

The land lessor was Avi Reese (not real name). He hired Helena Handbasket, Esq. Avi leased the land on which a park was constructed. The park operator and ground lessee was "MHP, Limited" (not the real name). Barry Goodman (not real name) was a limited partner.

Avi was very unhappy with the lease's terms (paltry rents) and wanted to sell and redevelop the property, which was impossible because of the long-term ground lease and mobilehome park. Avi began to look for ways to end the lease. He offered MHP's president a personal "seven-figure" payment if he would work with Avi to end the lease. Avi also contacted Barry Goodman to see if he could organize the limited partners against MHC and its president. Avi also tried to persuade Anaheim to "at least threaten condemnation to get the lessee to fall in line."

Unable to succeed with persuasion, Avi hired Helena, Esq. and sued MHP. Avi and Helena named a number of the limited partners, including Barry Goodman. The partners were later dismissed. They had nothing to do with park operations. Twelve of those partners then sued for "malicious prosecution" naming Avi and Helena.

Avi and Helena defended with a legal motion/tactic claiming their actions were constitutionally protected activity. The court did not agree. The court found there would be sufficient evidence for a malicious prosecution claim.

Avi and Helena are stuck. Their tactics were deemed to constitute legal "malice" in attacking the partners. Their intent was to inflict damage and harm for an ulterior motive. The court found there was "ample" (indeed "overwhelming") evidence of malice.

For example, Helena 's admission that "[t]he limited partners make no decisions" strongly suggests that she was aware that as a general rule, the partners did not actively engage in management. They should not have been sued.

After that case was over, Helena even sent an e-mail to MHP's counsel that included a number of thinly-veiled threats of ongoing litigation:

■ Pointing to "many other battles ahead between these clients."

■ Helena warned of a new action and stated that if MHP did not wish to discuss settlement seriously, "[t]here will be many opportunities in the next five years of Superior Court and Court of Appeal litigation to further develop the clients view points."

■ She said that ... [A]t this point I assume they understand that 500K a year of an attorneys fees budget on this lease will become the norm for many years to come. . ."

■ Several months later Helena again stated that if MHP did not settle, they could look forward to "the next five to ten years are going to be between our clients in multiple Courts" which would be a "fee generator" for the lawyers in the case. (Ed.: Such admissions are a plaintiff attorney's dream. As if designed to inflame a jury)

■ Taken together, all of these statements raise a strong inference that Helena 's (and Avi Reese's) goal in the ongoing litigation was not to resolve genuine legal disputes, but to push MHC into a settlement.

■ Why sue limited partners? Lessor-attorney-Helena responded that "[she] has plans for the limited partners."

■ Lessor-attorney-Helena even suggested that the limited partners be "aligned" against MHC. She offered to "represent the Limited Partners in a 'derivative' action against MHC on contingency and ... provide a 'finders fee.'"

■ After the limited partners were dismissed, attorney Helena called and said Avi would "re-sue" the limited partners unless certain terms were met. She repeated similar threats in court.

The court stated that all of these acts raise a very strong inference that the limited partners had not been sued to vindicate a legal right but to act as "pawns" in Avi's ongoing "chess game" against the park lessee MHC.

"Indeed, a reasonable trier of fact could conclude that this case appears to be a poster child for cases instituted primarily for an improper purpose, which is one of the hallmarks of malice."

Was the evidence sufficient? "Overwhelming" would be a better word, said the court. The limited partners more than met their burden to establish a prima facie case of malice as to Helena the attorney.

WHAT DO "AT RISK" PARK OWNERS DO?

Ground lessors may continue to be seduced into badgering a ground lessee on the hope and attorney-assurances it will lead to a successful result. But ground lessees are typically well-experienced operators. They are tough people. They have faced rent controls and failure to maintain lawsuits. Our managers are shot at, spat upon, cursed, assaulted. Not much will ruffle their feathers. Not, certainly, just another of the gaggle of aggressive "Rambo"-like attorneys.

Lessees pay attention. Lease duties will be and are respected. Some ground lessors may be blind to these realities, or persuaded otherwise by counsel. But even if minor discrepancies emerge in the operation of a property, the larger issue-the bad bargain- is not enough to escape from the burdens of continuing, what has become, an unprofitable ground lease. And in the unlikely event that a court would ever consider a forfeiture of a long tenured lease, the procedure for reinstatement, absent equitable considerations, will be a strong case to restore the ground lessee to the terms of the lease on conditions set by the court.

The first issues for consideration of a defensive plan against the assertion of groundless claims are the "soft spots" of lease obligations. These soft spots allow for easy fabrication without substance, because the determination is a question of fact in which opinion, discretion, or judgment blurs otherwise precise white lines. "Are you operating a first class park?" is more open to dispute than "did you pay ground rent by the first of the month"?

Class of operation can be debatable-payment of the rent is "yes" or "no." So matters of discretion in the lease can be used to try to obfuscate ill and malicious intent, when in fact the operations of the lessee are perfectly within custom and practice.

Custom and Industry standards should not be transgressed in the operation of mobilehome parks. Custom and standards should be followed. "Best practices"should be the ultimate goal for park operators. It should be the goal for ground lessees too. Periodic inspections, maintenance schedules, appearance, audits, disclosures, routine photo shoots, retaining 'happy camper' letters. All business operations should be legally consistent.

Leases Nearing Expiration: As the ground lease moves toward expiration, the aging infrastructure must be considered. In some cases, counsel may demand the removal of homes per the express terms of the grounds lease. Is that enforceable? Interim conduct, understandings and agreements may not mean enforcement of the lease as expressly drafted.

Closure of the Park to Deprive the Client of All Income. One Strategy for Lessee. "Nuance" is a term absent form some attorney vocabularies. They may oversell a strategy, its costs, risks and likelihood of success. Some may urge very destructive positions and risk the best interests of their clients.

In one case, a ground lessor attorney handling an extension negotiation, demanded that all the mobilehomes be removed at lease expiration as per one interpretation of the ground lease-all in order to pressure the ground lessee for better terms. The lessee scoffed at such a ham-fisted approach; the cost of relocation was probably less than the cost of seeking an adjudication of the lease terms or formal closure. Lessee's counsel ignored the hardball and suggested the practical solution which did not involve the courts. With excellent property management, the lessee arranged consensual relocations with the homeowners, all of them. Of course, the lessee's response spelled gloom for the lessor: removing the homes means the previous revenues plummet to zero. Counsel was willing to turn his client into a penniless farmer. Not much later, the lessor "changed horses" and with a different lawyer, re-established a dialogue and made a deal.

Infrastructure. Resolve Well Ahead. If the land reverts without the mobilehome park, aging infrastructure, post-expiration, is not a major consideration-clearing it is. If the mobilehome park use is transferred intact to the ground lessor, the infrastructure issue may be present and should be discussed. The ground lessee wants not to replace infrastructure on eve of expiration. If the lessor and lessee expect more than "band-aids," with litigation to follow, a discussion of the issues can always supplement the terms of the lease. It may also be good cause to discuss extension of the ground lease, especially if the lessor can relax while lessee performs the replacement with lease proceeds instead of lessor capital infusions.

Where the ground lessor seeks relief against the ground lessee over trifles and "nit-picky" complaints, there is little likelihood of success; there is little chance the lessor can prevail where notices to cure are satisfied. There is little likelihood of ultimate success because the well-entrenched ground lessee may ask for relief from the forfeiture of the lease and be reinstated. The relief from forfeiture form for non-residential property under ground lease is a form in some "form books" attorneys use everyday.

For the ground lessee, reasonable operation is all that is required. This may  minimize the chance of unfair challenges to operations fueled by those bent on harmng hard-working operators.

- TRD

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