Pocatello Hospital, LLC v. Quail Ridge Medical Investor, LLC

Citations: 156 Idaho 709; 330 P.3d 1067; 2014 Ida. LEXIS 196Docket: No. 40566

Court: Idaho Supreme Court; August 1, 2014; Idaho; State Supreme Court

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In this case, Quail Ridge Medical Investors, LLC (Quail Ridge) appeals a district court's declaratory judgment that Quail Ridge must increase its annual rent payment to Pocatello Hospital, LLC d/b/a Portneuf Medical Centers, LLC (PMC) from $9,562.50 to $148,500 and pay $416,812.50 for the rent period from 2010 to 2012. The dispute arises from a 1983 Ground Lease for 4.25 acres in Pocatello, Idaho, originally between Intermountain Health Care, Inc. (IHC) and Sterling Development Co. (Sterling). The lease stipulates rent adjustments every three years based on the land's fair market value, starting at a value of $15,000 per acre. Despite scheduled adjustments in 1986, 1989, 1992, 1995, 1998, 2001, 2004, 2007, and 2010, no adjustments were made by the parties. In 1996, Pocatello Medical Investors (PMI) became a subtenant of Sterling, and a Landlord Consent and Estoppel Certificate confirmed the current rent of $9,562.50 and noted the next adjustment date as March 1, 1998. However, IHC did not pursue subsequent rent adjustments after this certificate.

In 2001, Sterling sold a building on a leasehold to PMI, which established Quail Ridge to purchase the building and assume the Lease with IHC. Quail Ridge took over a $2.8 million loan from PERSI, secured by a deed of trust on the property. PMI became Quail Ridge's subtenant. To formalize this arrangement, all parties signed a 2001 Estoppel Certificate, which confirmed the Lease's validity, set annual rent at $9,562.50, and included a personal guarantee from Quail Ridge principal Forrest Preston for payment obligations under the Lease.

In February 2009, after PMC acquired the property and IHC’s rights, PMC sought a rent adjustment under section 1.3(b) of the Lease, culminating in an appraisal of the 4.25 acres. When negotiations failed, PMC filed a complaint for breach of contract and rent adjustment for 2007 and 2010. Both parties waived mandatory arbitration, and cross-motions for summary judgment were denied. PMC subsequently amended its complaint for declaratory relief regarding the Lease.

Before trial, the district court determined the 2001 Estoppel Certificate was clear, but found ambiguities in section 1.3(b) of the Lease, allowing extrinsic evidence for interpretation. During a two-day trial in May 2012, PMC's breach of contract claim was dismissed unopposed, leaving only the declaratory judgment claim. In October 2012, the court ruled section 1.3(b) was partly ambiguous but found no credible evidence for its interpretation, thus applying the current fair market value of $232,941.18 per acre to set annual rent at $148,500 for 2010-2012. The court denied retroactive rent modification for 2007 due to PMC's untimely request and concluded that the 2001 Estoppel Certificate did not alter the Lease terms. Ultimately, the court calculated Quail Ridge's total obligation to PMC at $416,812.50 after deducting the rent paid during those years.

The district court issued a Declaratory Judgment on November 26, 2012, which Quail Ridge promptly appealed. The standard of review for this appeal focuses on whether the evidence supports the district court's findings of fact and whether those findings support the legal conclusions. Appellate courts will liberally construe findings in favor of the district court's judgment, as it serves as the trier of fact, weighing evidence and assessing witness credibility. Findings based on substantial evidence, even if conflicting, will not be overturned. Conversely, legal conclusions are reviewed freely to ensure the correct law was applied. 

The court also reviews decisions on the admissibility of expert testimony for abuse of discretion, following a three-part inquiry: (1) whether the trial court recognized the matter as discretionary; (2) whether it acted within the bounds of discretion and legal standards; and (3) whether the decision was made reasonably.

In the analysis section, the court determined that the district court did not abuse its discretion in admitting the testimony of PMC’s appraiser, Brad Janoush. Quail Ridge objected to Janoush's testimony on grounds of lack of foundation, arguing that it ignored the Lease's language. The court countered that I.R.E. 702 allows expert testimony if it aids the trier of fact in understanding the evidence. An expert’s opinion does not need universal agreement among peers but must have sufficient reliability. Expert testimony that is speculative or unsupported is inadmissible, yet mere disagreement with the expert's conclusions does not render their opinion inadmissible.

Expert testimony is evaluated by the trier of fact, which in this case is the district court. Janoush testified that the market value of the property, without improvements, was $990,000 as of January 27, 2010, and notably did not consider the Lease in his appraisal. Quail Ridge objected to this valuation, arguing that it ignored section 1.3(b) of the Lease, which states that market value should factor in the parties’ agreement regarding initial minimum rent. Quail Ridge did not challenge Janoush's methodology but sought to exclude his opinion because it conflicted with their valuation approach.

The district court addressed these concerns, asserting that its interpretation of the Lease aligns with PMC’s position that the fair market value is the focus of section 1.3(b). The court deemed Janoush's testimony relevant and ruled that any issues regarding his consideration of the Lease were matters of weight rather than admissibility. The court found sufficient foundation for Janoush’s testimony and concluded that Quail Ridge failed to demonstrate that his opinion was unsubstantiated, merely presenting an alternative valuation method.

Additionally, Quail Ridge's arguments for estoppel, modification, and waiver as defenses against enforcing the Lease were rejected. The district court correctly applied the relevant law and found substantial evidence supporting its conclusions regarding these defenses. Consequently, the district court’s decision to allow Janoush's testimony and to affirm PMC's enforcement of the rent adjustment provision was upheld.

The 2001 Estoppel Certificate does not prevent PMC from seeking a rent adjustment. The district court found the certificate unambiguous and indicated that it did not modify the 1983 lease agreement in any way. Quail Ridge contends that the certificate should estop PMC from adjusting rent, arguing that it reflects a consistent course of performance at a fixed rent of $9,562.50. PMC counters that the certificate's plain language does not remove the right for rent adjustments or the provision stating that annual rent should be 15 percent of the market value of the land. The certificate explicitly states it was not intended to modify the Lease. It was also clarified that an estoppel certificate, which certifies certain facts about a lease, cannot be used to make undisclosed changes to a lease agreement unless explicitly stated. The relevant provisions of the 2001 Estoppel Certificate confirm that the Lease is valid and enforceable, with rent obligations intact, and that it does not modify the terms regarding rent adjustments. Thus, the certificate only bars IHC from claiming breaches based on events occurring before its execution, without establishing fixed rent or modifying the lease terms.

The 2001 Estoppel Certificate's clear language indicates that PMC is not prevented from enforcing the rent adjustment clause of the Lease. The district court concluded that the Lease's terms were not modified to establish a fixed rent. Quail Ridge argues two points for modification: first, that the 2001 Estoppel Certificate represents a mutual agreement to modify the rent adjustment provision; second, that PMC's actions after this certificate imply a modification. PMC counters that there is no evidence of mutual consent for any modification, and the court agrees. 

Modification of a contract requires mutual assent, as established in various Idaho cases. One party cannot unilaterally change a contract's terms. While agreement can be inferred from conduct, without a meeting of the minds, such conduct cannot effect a modification. In a cited case, Watkins, even though both parties acted contrary to a jury waiver clause, the court ruled that without a written modification signed by both, there was no valid change. 

Similarly, the Lease contains an Amendment of Lease provision indicating that any amendments must be documented and signed by both parties, which did not occur here. Quail Ridge's assertion that differences between the 1996 and 2001 Estoppel Certificates indicate an intent to modify the Lease is unsupported, as the 1996 certificate explicitly notes the rent adjustment timeline. Thus, no valid modification of the Lease occurred.

The 2001 Estoppel Certificate states that Sterling is required to pay an annual rent of $9,562.50 and confirms that rent was paid through February 28, 2001. Quail Ridge argues that the removal of "rent shall be adjusted" from the 1996 Estoppel Certificate indicates a mutual agreement to modify the Lease's rent adjustment terms. Richard Faulkner, who drafted the 2001 Estoppel Certificate, testified that he omitted the adjustment language to reflect a waiver of rights based on the parties' conduct, yet he acknowledged that rent adjustments were never discussed. Guy Kroesche, counsel for IHC, corroborated that there was no request for modification from Quail Ridge.

The district court concluded that Faulkner’s unilateral intent to modify the Lease did not demonstrate mutual consent, emphasizing that the removal of language from a prior document without discussion does not equate to mutual assent. The court found Faulkner's undisclosed intent insufficient to prove that both parties agreed to modify the Lease. Additionally, PMC’s actions post-execution of the 2001 Estoppel Certificate were deemed inadequate to imply modification based on conduct, as Quail Ridge did not discuss any changes regarding the rent adjustment provisions.

Quail Ridge claimed that PMC’s inaction on rent adjustments between 1983 and 2009 implied a waiver of its rights. However, the district court determined that PMC, through its predecessor IHC, simply failed to manage the adjustment process rather than intentionally waiving its rights. The court upheld that Quail Ridge could not demonstrate that the parties had agreed to modify the Lease and that PMC did not waive its right to seek rent adjustments, rejecting Quail Ridge's argument of detrimental reliance based on investments made in the property.

Quail Ridge did not provide sufficient evidence to demonstrate that PMC waived its right to increase rent under section 1.3(b) of the Lease. Waiver requires a clear, intentional relinquishment of a known right, which must be evidenced by the party asserting the waiver. The burden is on the party claiming waiver to show clear intent and reasonable reliance, along with a change in position to their detriment. Silence or mere neglect is inadequate to establish waiver. The court noted that IHC's failure to exercise rent adjustment rights was due to neglect, not intentional waiver. 

Additionally, the district court found substantial evidence supporting its interpretation of the Lease's ambiguous provisions. Section 1.3(b) states that adjusted rent is based on 15% of the fair market value of the leased land, excluding improvements, determined by the highest and best use on the rent adjustment date. The district court deemed the first sentence unambiguous, while the last two sentences were ambiguous. Quail Ridge accepted the court's conclusion that there was insufficient evidence to clarify the original $15,000 figure or the parties' intentions regarding subsequent adjustments. As a result, the court decided to apply the current fair market value of the 4.25 acres for the rent adjustment.

Quail Ridge contends that the district court incorrectly ignored the 'take into account' language in its value assessment and failed to recognize a course of dealing between the parties. Quail Ridge argues that if the court had considered the original rent of 15 percent of $15,000 per acre, the fair market value in 2010 should reflect the original amount adjusted for the land's depreciation from 2007 to 2010, thereby suggesting a value less than $15,000 per acre. They assert that the consistent rent of $9,562.50, unchanged during the execution of estoppel certificates in 1996 and 2001, should also have been factored in. In contrast, PMC argues that the district court justifiably disregarded the 'take into account' language due to a lack of supporting evidence. The interpretation of whether a contract is ambiguous is a legal question, while ambiguous contracts require factual interpretation to ascertain the parties' intent at the time of the contract. The court considers the contract as a whole, the circumstances of its creation, objectives, and any prior conduct between the parties, as subjective intent remains irrelevant. Quail Ridge's claim that PMC’s failure to seek rent increases from 1983 to 2009 indicated a course of dealing was rejected, as the lack of adjustments did not inform the interpretation of section 1.3(b) of the Lease. The district court found no error in this regard. Additionally, Quail Ridge's argument about the initial land valuation was dismissed due to insufficient credible evidence presented, with testimony suggesting uncertainty about the original $15,000 figure's validity and context. The court ultimately deemed the evidence inadequate to determine if the initial valuation was appropriate or the result of market analysis.

The district court's finding, based on the absence of meaningful evidence, will not be altered. It determined there was no credible evidence to support any valuations of the land, leading to the decision to disregard the ambiguous language of the Lease. The court's interpretation was deemed thorough, affirming its role as the trier of fact to evaluate evidence and witness credibility. PMC is entitled to attorney fees on appeal as the prevailing party, despite Quail Ridge's argument that PMC failed to address this request appropriately in their brief. The court acknowledged that the citation of authority and argument presented by PMC in its statement of the case sufficiently met the requirements of Idaho Appellate Rule 35(b). Consequently, PMC's request for attorney fees is granted based on the Lease's provision for the prevailing party to receive reasonable attorney fees in breach of covenant suits. The court affirmed the district court's declaratory judgment in favor of PMC and awarded attorney fees and costs. The Lease, originally for thirty years with a ten-year extension option exercised by Quail Ridge, remains effective until January 31, 2023. IHC Health Services, Inc. is recognized as the successor in interest under the Lease, with no substantive changes following the transfer. Quail Ridge’s claim of waiver or modification of the Lease provisions by IHC and Bannock County is rejected, and its assertion that detrimental reliance may establish waiver is deemed incorrect.

Detrimental reliance is a crucial element in a waiver claim, alongside the intentional relinquishment of a known right. Quail Ridge relied on the Court of Appeals' decision in Clearwater Minerals Corp. v. Presnell to support its claim; however, the analysis reveals flaws in this reliance. Clearwater Minerals mentions "detriment" only once and emphasizes that a party claiming waiver must demonstrate reasonable reliance on the waiver, resulting in a change in position to their detriment. The Presnells did not establish such detrimental reliance on any claimed waiver. The essential elements of waiver identified in Clearwater Minerals align with other court decisions, confirming that detrimental reliance alone is insufficient for a waiver claim. Although Quail Ridge pointed out that the district court did not address its claim of detrimental reliance, the inability to demonstrate that PMC intentionally relinquished a known right undermined its waiver defense. Additionally, the lease's Section 1.3(b) stipulates that "determinations of market value" should be prioritized over the rent amount, but Quail Ridge failed to clarify how the absence of rent adjustments should influence the market value assessment.