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HomeMy WebLinkAbout05/17/19650 0 lit. N. & ('c.. CERa IF! En PUB L'C ACCOVN-AN TS NEwPCf+T B'E'ACH. CA;; rOPNIA 9266C To the Honorable City Council of Newport Beach, California Gentlemen: May 13, 1965 Nf. f"I 0 CuONCIL: ! .. i The agreement dated July 1, 1964 for our services provides that we shall make two interim reports to you during the fiscal year regarding our services and findings. This is the second of these reports. During the period fron October 30, 1964 to dace, our services have included the following in connection with our regular engagement; 1. We verified the cast, in banks at March 31, 1965 by obtaining con- firmations of balances froi,i each depositary and we examined the reconcilia- tions, prepared by city personnel, of these bank balances to the accounting records of the city; 2. We made test- chec'I(s of the procedures for collecting cash by the Finance Department to determine whether all cash collected is being deposited in the bank accounts promptly and intact, and whether it is being credited to the proper funds; 3� We made test - checks of the procedures for disbursing cash by the Finance Department to determine whether departmental procedures are being followed in the issuing of purchase orders, the receiving of materials, the paying of invoices, and the distributing of charges against the various budget appropriations; 4. We reviewed the minutes of the City Council for the period from October 19, 1964 through April 26, 1965 to ascertain whether the items therein of a financial nature are properly reflected in the accounting records; 5. We reviewed all budget amendments approved by the City Council from Septeriber 30, 1964 through April 26, 1965 and determined that they are properly recorded in the accounting records; and 6. We assisted the City Council's Procedure and Internal Audit Committee in its review and study of budget administration policy. JCd (� f a� L s� To the Honorable City Council of Newport Beach, California May 13, 1965 Page 2 Our interim examination disclose) no exceptions to be reported to the City Council. In addition to our regular engagement, we examined the computation of lease rental from the property commonly known as Beacon Bay for the years 1950 through 1964 upon which we reported to the City Council in a letter dated January 29, 1965. Yours very truly, r � a 0 CITY OF NEWPORT BEACH CITY ATTORNEY DEPARTMENT r- ` S� S May 1965 To: The Honorable Mayor and Members of the City Council From: City Attorney Subject: Beacon Bay Lease - enforcement of clause providing for adjustment of rental payments in accordance with changes in Cost of Living Index Introduction: 'In the master lease of Beacon Bay between the City an vcTarious members of the Beek Family dated January 9, 1950, the following provision appears on page 6: "It is.further agreed by Lessee that any sublease here- after made of any part of the demised premises shall contain a provision providia for periodic (but not more than once in five years readjustment of rentals in accordance with the commodity index, known as the "U.S. Bureau of Labor Statistics Cost of Living Index ", or such other index as may be agreed upon between Lessee and sublessees." A cost of living clause was included in the sublease between the Beek Family and the Balboa Yacht Basin dated February 28, 1950, and in each of the subleases of the individual residential lots, approximately 72 in number. In its audit report dated January 29, 1965, Ira N. Frisbee and Company advised the City Council that its test of the subleases indicated that no adjustment of rentals had been made in accord- ance with the cost of living clauses contained therein. Questions: (1). Do the City's lessees (the Beaks) have a duty under their master lease with the City to enforce the cost of living'clauses contained in the subleases? Yes. The only purpose for requiring the inclusion of such clauses in the subleases was to insure that the City would be protected during subsequent periods of inflation. Although the wording of the requirement in the master lease could have been more explicit, we are of the opinion that the City's lessees are legally obli- gated to make periodic adjustments of the rents payable by the sublessees in accordance with the provisions of the subleases. Tot The Honorable Mayor and Members of the City Council -2- (2) What is the nature of this obligation? May 13, 1965 In substance the rental readjustment clauses contained in both the Balboa Yacht Basin sublease and the residential subleases provide for periodic readjustment of rentals in accordance with the "Cost of Living Index" at intervals of five years, aommencing.on Janu- ary 1, '1955. The residential subleases further provide that the adjustment shall be made only if there is an increase or decrease of 15 %, or more, in the purchasing power of the dollar from its purchasing power on January 1, 1950; the Yacht Basin sublease does not contain such a limitation, In view of the inflationary period that marked the post- Korean War years it seems probable that the City's lessees should have made rental readjustments on January 1, 1955, January 1, 1960, and January 1, 1965. If these readjustments had been made they would undoubtedly have resulted in increased revenues to the City. An accounting analysis would be necessary to determine the dollar amounts involved. (3) To what extent is the obligation enforceable? As previously mentioned the duty of the City's lessees to readjust the rents payable by the subtenants arose on January 1, 1955, January 1, 1960, and January 1, 1965. Since the obligation is based upon a written instrument the applicable statute of limita- tions is four years [C.C.P. 337 (1)]. Therefore, we conclude that the City may not hold its lessees liable for the loss in revenue suffered by the City resulting from their failure to readjust the rentals in 1955 and 1960. However, the City may enforce the obli- gation as of January 1, 1965. Such .a readjustment would be based upon the decrease in purchasing power of the dollar since 1950 which should result in a substantial increase in revenue to the City. THStmec cc - City Manager City Clerk Finance Director 7 Tull". Sey4 City Attorney