For reversal -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For affirmance -- None. The opinion of the court was delivered by Weintraub, C.J.
This action arose out of an agreement whereby plaintiff leased its property to defendant municipality for a term of 25 years, to commence upon the completion of extensive alterations which plaintiff undertook to make. Plaintiff sought specific performance or alternatively damages for breach. Because of the death of the trial judge, the matter was assigned to another judge for decision upon the stenographic record. He found for defendant upon the ground that certain statutory requisites had not been met. 70 N.J. Super. 293 (Ch. Div. 1961). We certified plaintiff's appeal before the Appellate Division heard it.
The property consisted of a ramp garage containing a number of levels. The structure was erected in the mid-1920's. In 1951 it was acquired by Messrs. Cronheim and Vinik, who, finding their purchase an unhappy one, approached the city in the hope that it would be interested in the property. The city had some unsatisfied needs, to wit, a jail, facilities for the municipal court, police headquarters, and additional public parking space. The proposal was that the structure be altered and renovated to supply such facilities. The negotiations began in 1954 and the lease itself was executed on December 31, 1956 by the city and the plaintiff corporation formed by Cronheim and Vinik.
There is no claim of corruption. We think it perfectly clear that the transaction was handled in good faith and in plain daylight. The proposal was debated fully. Other buildings were suggested and considered before the decision was made to accept plaintiff's property. The transaction was
opposed by one councilman, but solely because he thought the deal was a poor one. We are satisfied that none of the legal objections urged in this litigation were advanced during the long period in which the transaction was negotiated and the alterations made. The sole point along legal lines made by the councilman (he is a member of the bar) was that the agreement had to be authorized by an ordinance rather than by a resolution. That claim was met. An ordinance, in which the agreement was set forth at length, was introduced on February 14, 1956 and finally adopted on June 26, 1956. The lease itself was executed at the end of that year, as we have already noted.
The plans and specifications represented the combined effort of both parties. Each selected an architect and the two chose a third. The city's representative watched the work and reported periodically to the City Manager. The city requested certain changes and they were made. According to plaintiff, its actual cash outlay under the agreement was $196,061.56, which, with taxes, interest, and supervision, resulted in a total cost of $264,546.92. On March 25, 1958 plaintiff tendered the structure as completed in accordance with the contract. In the meantime, however, there was a significant change in the local scene. The councilman who had voted against the transaction had led a slate to victory in the municipal election. We think it clear the new administration was minded to get out of the deal if an escape could be found. This became evident in the city's reluctance to specify the work it claimed to be defective or not in accordance with the plans and specifications when it refused plaintiff's tender of the property.
The answer, filed on May 23, 1958, asserted only that plaintiff had failed to perform the contract. The amended answer filed on December 3, 1958 introduced some generalized claims of illegality: (1) the agreement violates Art. 8, § 3, par. 2 and 3 of the Constitution (section 2 prohibits gifts of municipal property or loans of its money or credit; section 3 prohibits donations of municipal property); (2) the agreement
"is tantamount to a lease purchase agreement and violates the constitutional provision prohibiting the lending of credit by a municipality"; (3) the agreement is "a legal subterfuge" in that it is "an installment contract of purchase, and, therefore, would result in an increase in the debt limitation of the said City of Asbury Park," contrary to Art. 8, § 2, par. 3 of the Constitution (this provision applies to the State only); and (4) the agreement violates R.S. 40:47-13 (authorizing a lease for not more than five years for use of the police department). Next we come to the pretrial order dated April 30, 1959, where, seemingly for the first time, the city asserted that the agreement was void because made "without the sanction and approval of the Municipal Finance Commission, as required by N.J.S.A. 52:27-22." This was one of two grounds upon which the trial court held for defendant, the other being the absence of an appropriation found to be required by R.S. 40:2-29 and 40:50-6, which further ground itself seems different from the issues projected in the amended answer and pretrial order. And at some stage after pretrial defendant advanced the additional defense that the transaction fell within the provisions of the public bidding statutes, N.J.S.A. 40:50-1 and 40:9-3.
Thus a case which at first involved only the question of performance became progressively more complicated as the city strove to avoid an obligation it had solemnly incurred. The trial court said that it would have found a private corporation was estopped to assert its own internal omissions, but deemed a public corporation to be another matter. Indeed it is, but not without some limitations. The law has become increasingly sensitive to the need for business integrity in public transactions as well as in private ones. True it is important to protect the public against official imprudence, but there is also the moral principle that a government which would encourage fair dealing in private transactions should insist upon nothing less of its own agencies. It is one thing to expect officials to know and stay within their power and to call them to account if they wilfully exceed it. It is something
else to ask all who deal with a municipality to bear the burden of officialdom's ignorance of its own authority.
We have heretofore noted "the strong recent trend towards the application of equitable principles of estoppel against public bodies where the interests of justice, morality and common fairness clearly dictate that course." Gruber v. Mayor and Township Committee of Raritan Tp., 39 N.J. 1, 13 (1962). In broad terms, it may be said that where a contract is beyond the power of the municipality or where the Legislature has explicitly barred any liability if a restriction upon the exercise of power is not met, relief ordinarily will be denied. Slurzberg v. Bayonne, 29 N.J. 106, 115 (1959); Bauer v. Newark, 7 N.J. 426, 434-435 (1951). But if the difficulty is an irregularity in the exercise of a power the municipality does have and the Legislature had not decreed the consequences of the irregularity, our cases seek a just result. In such circumstances, one who deals with the municipality in good faith may be permitted to invoke the concept of ratification, Johnson v. Hospital Service Plan of New Jersey, 25 N.J. 134 (1957), or estoppel, Gruber v. Mayor and Township Committee of Raritan Tp., supra, 39 N.J. 1; Robbins v. Jersey City, 23 N.J. 229 (1957); Summer Cottagers' Ass'n of Cape May v. Cape May, 19 N.J. 493 (1955); Vogt v. Belmar, 14 N.J. 195 (1954); or if in the public interest the agreement itself ought not to be enforced, still relief may be granted to the extent of the benefit conferred upon and knowingly accepted by the municipality, Hudson City Contracting Co., Inc. v. Jersey City Incinerator Authority, 17 N.J. 297 (1955).
In the present case plaintiff seeks relief in quantum meruit if it should be held the contract is unenforceable. That alternative relief, however, is not available since the alterations were to plaintiff's own property and hence no benefit was conferred upon defendant by the work done. Unless the contract is held to be binding, plaintiff is without remedy. We proceed then to the sundry legal objections which are the ramparts of the city, mindful however that as
to those objections the equities are with the plaintiff. In good faith it invested a substantial sum under plans and specifications framed to meet the needs of the city, and if plaintiff performed the agreement but is nonetheless denied relief, it will have for its investment a courtroom, a jail, police headquarters and a pistol range, items of no merchantable value except to a governmental consumer.
The city contends the transaction was an installment sale rather than a lease, and refers to litigation in our State and elsewhere in which lease arrangements were assailed as evasions of statutory or constitutional limitations, citing De Lorenzo v. Hackensack, 9 N.J. 379 (1952); McCutcheon v. State Building Authority, 13 N.J. 46 (1953); Annotation, 71 A.L.R. 1318 (1931); Magnusson, "Lease-Financing by Municipal Corporations as a Way around Debt Limitations," 25 Geo. Washington L. Rev. 377 (1957); Morris, "Evading Debt Limitations with Public Building Authorities: The Costly Subversion of State Constitutions," 68 Yale L.J. 234 (1958).
In the present case no constitutional limitation is involved. The constitutional provisions mentioned above in our recital of defendant's pleadings are not at all pertinent. The question is whether some statutory restraint is evaded, a question which ultimately can be answered only in the light of specific statutes alleged to be offended. We will later point out that the agreement does not clash with the policy of the statutes to which defendant refers. Our immediate purpose is to demonstrate that the parties could and did deem the agreement to be a lease and should be barred from disputing its nature at this late date.
The agreement calls for the payment of net rental, the lessee municipality to assume all burdens including taxes, insurance and repairs. It provides for continued liability even if the building is destroyed, with insurance proceeds made
available for rebuilding. All of those provisions are consistent with conventional long-term leases.
There is, however, a singular provision upon which the city places great stress. Under it the city will receive title upon paying $1 at the end of the 25-year term. The trial court held the city had to accept title and had no choice in the matter. We think it is not crucial whether that is so, and for convenience we refer to this provision as creating an option. The city argues that the option price of a dollar demonstrates that the periodic payments represent the purchase price, and hence the transaction must be a sale. Ordinarily that would be so, but not under the peculiar facts of this transaction.
Since a lessor expects to recover out of rent the depreciation in his investment in addition to a return upon that investment, the amount of rent necessarily depends upon the life expectancy of the structure. If the term of a lease equals the expected life of a building, the lessor will seek to recapture its full value within that period. In such circumstances an option to buy the residual value at the end of the term for a small sum is compatible with the concept of a lease.
Here we have a structure which as a ramp garage was quite single in its purpose and with the alterations we have described became uniquely so, since a jail, a courtroom, police headquarters, and pistol range are of no general utility. Hence the lessor would expect to recoup his investment during the period of the lease. A realtor testified that after 25 years the structure would be of no value to the owner and the cost of demolition would equal the land value. That testimony is somewhat supported by the objecting councilman himself, who in opposing ...