This is a Chancery proceeding to specifically enforce a certain written agreement between the parties hereto, or in the alternative, in the event said agreement is not so enforced, then for the recovery of damages by the plaintiff.
This matter was tried for 16 days before Judge Lester A. Drenk but was not determined by him due to his untimely and unfortunate demise. Thereafter, it was stipulated by
counsel that this matter would be determined by me upon the transcript. This has been read and digested.
The basic facts are as follows: Prior to the year 1954, plaintiff owned a certain "ramp garage" located in the City of Asbury Park. This building was then constructed as a typical ramp type parking garage with seven levels of parking in addition to roof parking. At the time the defendant city had problems connected with public parking, police parking, and the condition of its jail. Negotiations were then commenced the latter part of 1954 or the early part of 1955 between the plaintiff and the city for the leasing of this building; the plaintiff to make certain improvements and renovations thereon in accordance with mutually approved plans and specifications. After many conferences an ordinance authorizing the leasing thereof was introduced and passed on first reading February 18, 1956, at a meeting of the City Council of the City of Asbury Park. One or more public hearings were held by the city council; the passage of said ordinance was postponed by it from time to time while it considered, not alone this proposition, but other suggested buildings. Finally, on June 26, 1956 the ordinance was approved, being passed on second and third reading. Thereafter, on December 31, 1956 the written agreement involved herein was entered into between the parties. The agreement by its own terms was designated "this indenture of lease," and provided for a 25-year term in addition to other pertinent provisions which will be discussed hereinafter.
Plaintiff commenced its remodeling and renovations in the first part of 1957 and terminated the same in March 1958. On the 25th day of that month a letter was written to the mayor and city council of defendant advising them that said building was fully completed in accordance with said agreement and the approved plans and specifications. To this letter the city manager, Mr. Lee, replied on April 8, 1958 stating that said building was not ready for acceptance. One of the controversial issues involved herein is whether or not plaintiff complied with said approved plans and specifications.
Much occurred between the parties on this score. However, I will not now discuss this phase of the facts. Suffice it to say the city did not accept the building; hence this litigation.
The city contends that while the agreement entered into between the parties purports to be a lease, it was in reality an installment purchase agreement and was therefore ultra vires and void for the following reasons:
1. The city being under the control of the Municipal Finance Commission, no assent in writing was first secured from said Commission therefor.
2. Said agreement violated the statutory limitation upon the municipal debts.
3. No prior appropriation had been made by the city for said agreement.
Thus, the primary question to be determined is whether the agreement of December 31, 1956 was a lease or, on the other hand, an installment contract of purchase or purchase agreement.
The fact that the parties hereto designated the agreement as "this indenture of lease" is not conclusive. The label which the parties give to a transaction does not determine its character. Shapiro v. Marzigliano , 39 N.J. Super. 61 (App. Div. 1956). Equity looks at the substance, not merely the outward form. Stockton v. Central R.R. Co. , 50 N.J. Eq. 52 (N.J. Ch. 1893); DeLorenzo v. City of Hackensack , 9 N.J. 379 (1952); McCutcheon v. State Building Authority , 13 N.J. 46 (1953).
Looking through the form of agreement involved herein and looking at its substance, this court finds that the agreement, Ex. P-1, contains the following provisions:
"1. The lessee shall pay the annual rent of $17,500 per annum, payable in equal monthly installments of $1,458.33 each on the first of each and every month during the term, together with additional rent as hereinafter provided.
2. The lessee agrees to bear, pay and discharge, in the name of the lessor, in addition to the said rent above reserved, without deduction
or abatement for any cause whatsoever, during each year of said term, including the year 1956, all taxes, assessments, rates and charges.
3. The lessee, in addition to the rent above reserved, agrees to bear, pay and discharge, promptly when due all water rents, sewer charges, duties, impositions, license or permit fees, charges for public utilities of any kind.
4. The lessor covenants and agrees to make such alterations, improvements and repairs to the building standing upon the demised premises in accordance with the plans and specification of Edward M. Annitto, dated January 27, 1956, approved by the lessee, provided, however, that upon the completion of such alterations, improvements, and repairs, and their acceptance by the lessee, thenceforth the obligation to maintain said building in a state of good repair shall be upon the lessee at its own cost and expense.
7. The lessee shall at all times, throughout the term of this lease, insure all buildings and improvements in the leased premises for the full insurable value thereof, against loss or damage to said buildings by fire, windstorm, tornado * * * and shall deliver policies covering such insurance with the lessor as a named assured therein to the mortgagee, if any, and copies of such policies to the lessor, and shall pay the premium for such insurance before the expiration of said policies.
8. Should the demised premises be damaged by fire, tornado, windstorm, or any other hazard, the insurance monies collected, however payable, shall be applied in accordance with the terms of the mortgage now on said premises, or that may hereafter be placed thereon. Should such insurance monies come into the hands of either the lessor or the lessee, the same shall be applied in payment of the cost of repairing such damage * * *. It is further agreed by the parties hereto that should the demised premises be partially destroyed by fire and should the mortgagee require that the proceeds of said insurance be applied towards the payment or satisfaction of the mortgage, the lessee shall have the right to substitute a new mortgage on the demised premises to the extent of the unpaid balance of principal due at the time of such damage.
9. This lease shall be subject and subordinate to any mortgage, now or hereafter to be placed on said premises * * * and provided further that any mortgage that may hereafter be placed shall by its terms be a self-reduction mortgage which will be fully paid before the expiration date of this lease and provided further that the annual payments of interest and amortization shall not exceed the sum of $17,500.
10. It is further covenanted and agreed by the parties hereto that at the end of this lease, provided the lessee has fully complied with all the terms, conditions, covenants and obligations thereof for the full period of its 25 year term, and in consideration thereof and in
further consideration of one dollar, title to the demised premises and the improvements thereon shall vest in the lessee and thereupon lessor shall execute for recordation such instrument or instruments as reasonably shall be required by the lessee in order to convey clear title of said demised premises in the lessee.
12. It is covenanted and agreed, that no damage to or destruction of any of the buildings or improvements that may be erected or placed upon the demised premises, by fire or otherwise, shall be taken to entitle the lessee to surrender the demised premises nor have the effect of terminating this lease; nor shall there be any abatement, suspension or cessation of the payment of the reserved rent and other charges by reason thereof.
19. Lessor warrants and represents that it is the owner in fee simple of the premises herein demised and that said premises are free and clear of all liens and encumbrances except a first mortgage in the sum of $95,000; and lessor warrants and covenants that it will as hereinbefore provided, at the end of the term of this lease, by deed of general warranty, make, execute and deliver to the lessee, convey a good, indefeasible title in said premises to lessee, free and clear of all liens and encumbrances." (Emphasis added)
The question whether this type of agreement is to be considered as a lease or a purchase agreement, has been before many of the courts throughout our country. While at first blush these decisions appear to be inconsistent one with the other, further research indicates that there have been established certain fixed rules and legal doctrines; they are as follows:
"Where a so-called lease is in fact intended as a lease, and the rentals are in fact such, rather than payments on the purchase price, the courts without exception, hold that such a lease of property by a municipality, with an option to purchase the same at a fixed price in addition to the rentals, does not create an indebtedness or liability within the meaning of a constitutional or statutory limitation of indebtedness. Some of the cases have reached this conclusion even where the rentals paid are to be applied or credited on the amount of the purchase price in the event the municipality elects to exercise the option to purchase. In a few instances it has been applied although the rentals were sufficient to cover the entire purchase price without the payment of any further sum. On the other hand, where ...