This is a Chancery action for foreclosure of a mortgage on real estate consolidated with a law action for damages involving the same transactions. The foreclosure phase appears to involve questions of first impression in New Jersey.
In October 1963 Leo Hockstein was the owner of a parcel of vacant land of about 1 1/2 acres in Denville Township. During that month he contracted with Associated Realty Company (hereafter Associated) by means of a written instrument which ostensibly gave Associated "executive authority
to sell the property" but which, it is clear from interlineations, obviously looked toward a lease. This contract had written into it as an "additional provision[s]" the following: "The lessor will subordinate to 75% of appraised value of land and building by a recognized financial institution granting both construction and permanent mortgages."
On April 15, 1964 Associated wrote Hockstein advising him of the offer of American National Motor Inns, Inc. (hereafter American) to lease the property. On April 28, 1964 Hockstein and American entered into a written agreement of lease. The term of the lease was for 65 years "commencing on the [a blank here was not filled in] day of April, 1964." Rent of $666.66 per month was not to commence until "the first day of the fifth month after the issuance of" building permits for which provision was also made in the lease, the expressed intention of the lessee being the construction of a motel upon the land.
This lease was prepared by American. It was on its printed form, with blanks provided only for the date, the name of the lessor, the location and the description of the property, the term of the lease and the rental amount.
It required American, at its own expense, to "commence construction and with due diligence complete for use and occupancy a motel fully paid for and free from all liens excepting only the mortgages referred to in Paragraph 6 hereof." It contemplated 52 "rentable motel units." It is not without significance that these were to revert to the ownership of the landlord at the termination of the lease.
The lease dealt with the matter of American's right to mortgage the premises, in extenso and in express terms. The following appeared:
"6. LANDLORD acknowledges that TENANT will require financing to construct the above mentioned motel and by reason thereof, LANDLORD agrees that TENANT shall have the right during the term of the Lease to place mortgages on all or any portion of the Demised Premises as security for loans. Such mortgages shall provide for repayment no later than twenty-five (25) years from the date of completion of the motel. TENANT shall make all interest
and principal payments required under such mortgages. This Lease is hereby made subordinate to all future mortgages, including those referred to in Paragraphs 8 and 17 of this Lease, without the necessity of any further acts, provided the aggregate amount of such mortgages does not exceed Fifty-Five Hundred Dollars ($5,500.00) per motel unit, the number of motel units to be computed as provided in Paragraph 3 of this Lease. However, as further assurance in this connection LANDLORD shall execute promptly upon TENANT'S request any agreement in form requested by TENANT evidencing such subordination. LANDLORD shall perform any act or acts required by the lenders to whom such mortgages are given or to the title insurance company insuring the same in order to consummate such loans. LANDLORD agrees that if it shall fail to perform such act or acts within seven (7) days after request by TENANT, LANDLORD shall be liable for all damages and expenses sustained by TENANT and incurred in consequence of such delay.
8. TENANT shall have the right at any time before payment in full of the mortgages referred to in Paragraph 6 above to refinance the principal balance remaining due on such mortgages provided that the maturity dates of any new mortgages shall not be more than twenty-five (25) years from the date of completion of the motel. Such refinancing shall be at TENANT'S sole expense. LANDLORD shall upon request by TENANT perform any of the acts required of LANDLORD pursuant to Paragraph 6 to consummate the original mortgages.
17. If TENANT exercises its option under Paragraph 6 of this Lease, TENANT may subject the Demised Premises to a construction loan mortgage covering such buildings or improvements or to a consolidated mortgage covering both new and existing buildings and improvements. Any new or consolidated mortgage shall be payable within twenty-five (25) years from the date of the new loan or on or before the fifth year immediately prior to the end of the term of this Lease, whichever is sooner. LANDLORD shall in such event perform all of the acts required under Paragraphs 6 and 8 in connection with the original financing.
21. Wherever in this Lease the word mortgage is used, it shall be deemed to include a 'Deed of Trust' where the use of the latter is customary or desired in the state or area in which the Demised Premises are located, and shall also be deemed to include interim mortgages during construction and permanent mortgages after completion of the motel.
22. LANDLORD agrees that the mortgages on the Demised Premises referred to in Paragraphs 6, 8 and 17 of this Lease shall upon recordation be first liens on the Demised Premises, subject only to liens for current property taxes and special assessments. * * *."
The lease was recorded in the office of the Morris County Clerk on August 5, 1964.
On a date in June 1964, which does not appear, Hockstein executed a "Subordination Agreement" reading as follows:
"THIS INDENTURE made and entered into this day of June 1964, between LEO HOCKSTEIN of 35 E. Lincoln Street, Verona, New Jersey, hereinafter referred to as 'Owner' and AMERICAN NATIONAL MOTOR INNS, INC. a corporation originating and existing under the laws of the State of New Jersey hereinafter referred to as 'Mortgagor' and FIRST NATIONAL CREDIT CORPORATION, a New Jersey Corporation of 60 Park Place, Newark, New Jersey hereinafter referred to as 'Mortgagee'.
WHEREAS the owner is the fee holder of certain lands and premises situated in Tax Block 128A, Lot 2, in the Township of Denville, County of Morris and State of New Jersey, which premises are more particularly described in a certain lease dated April 28, 1964 between owner as Landlord and AMERICAN NATIONAL MOTOR INNS, INC. as Tenant.
WHEREAS said AMERICAN NATIONAL MOTOR INNS, INC. is in the process of erecting and constructing on the aforementioned leased premises a fifty-eight (58) room motel with Gate House and other appurtenances; and
WHEREAS FIRST NATIONAL CREDIT CORPORATION has agreed to advance construction monies to assist in the erection and construction of the aforementioned motel building, gate house and other appurtenances and AMERICAN NATIONAL MOTOR INNS, INC. has agreed to execute and deliver its mortgage as security for the construction loan to which mortgage this agreement shall be attached and form a part.
NOW THEREFORE, in consideration of the sum of One ($1.00) Dollar and other valuable consideration, owner hereby subordinates its fee title to the premises described in the aforementioned lease and mortgage to the lien of said mortgage in the sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) to the end that said mortgage shall be a first and paramount lien on the premises therein described. It is expressly understood and agreed that this subordination shall apply only to owner's interest in and to aforementioned premises and shall in no wise be construed so as to subject owner to any personal liability whatsoever for the indebtedness secured by the mortgage or of any act or acts required to be performed by the Mortgagor under said mortgage. * * *." (Emphasis supplied)
On June 18, 1964, on application of American, the board of adjustment of Denville Township recommended to the township committee the granting of certain variances required to permit the construction of American's motel.
It appears that American had arranged with First National Credit Corporation (hereafter First National) for certain financing in connection with this venture. First National was in the business of real estate financing through loans historically declined by banks. It had done business with American before in connection with motel construction, for a period of at least two years. Generally, its loans to American were for a six-month period and were for the purpose of construction and completion of the motels. Over the years First National had financed about 1 1/2 million dollars of American's motel construction. As many as eight motels may have been involved, of which Denville was among the last. In the case of some of these motels American owned the land. In other cases, where the land was not owned by American, subordinations were secured from the landowner.
A closing between First National and American in connection with financing proposed for the Denville site was scheduled for June 19, 1964, but was postponed in order that an existing mortgage on the premises, held by a bank, might be discharged. This mortgage was discharged by an instrument dated July 9, 1964, but not in fact recorded until August 5, 1964.
On July 1, 1964, the Denville township committee concurred in the recommendation of the board of adjustment relating to the variance and granted the same subject to certain restrictions.
Earlier, First National had sought the participation of The Oxford Finance Companies, Inc. (hereafter Oxford) in financing which First National anticipated handling for American in its construction of motels at Denville and elsewhere.*fn* Such participation had been discussed in depth
between officers of Oxford and First National sometime before the Denville mortgage closing. Financing arrangements for other motels similar to those which eventuated in connection with the proposed Denville motel preceded the Denville closing.
While of limited significance since, absent controlling equities, First National's assignees stand in its shoes, R.S. 46:9-9, certain facts relating to Oxford's participation appear clear. Prior to the closing on the American mortgage to First National, and not later than July 10, 1964, Oxford knew that First National proposed to lend at least $57,500 to American in connection with American's proposal to erect a motel on the Denville land. Oxford knew that American was not the owner, but had leased this land from the owner. It knew that American proposed to secure its obligation to First National with a mortgage on the land. It was anticipated that First National would refinance at least a portion of this loan with Oxford, which was to advance $46,000, and that Oxford would receive from First National an assignment of American's note and mortgage as well as a note from First National, personally endorsed by its president. Oxford was even then sufficiently concerned about the relationship between the owner and the lessee that it promulgated, as a condition precedent to its loan, a requirement that American's mortgage be endorsed by the landowner. It also required that it receive a copy of the lease between the owner and American.
On July 13, 1964 Oxford forwarded $46,000 to William J. Tamburri, attorney for First National, as "the proceeds of a loan to the First National Credit Corp." These monies were to be disbursed by Tamburri only upon satisfaction of some seven escrow conditions, including the receipt by Oxford of a note of American in the amount of $57,500 payable to First National and assigned by them to Oxford, and a first mortgage on the Denville property running to First National, to be "executed by the title holder of the property and by American National Motor Inns as the
lessee." Receipt of a copy of "the lease on the subject premises between the title holder and American National" was also an escrow condition. Oxford required, as well, "A title insurance policy * * * insuring that the aforesaid mortgage is a valid and subsisting first lien on the subject property as the interests of Oxford and First National may appear."
On July 2, 1964 Chicago Title Insurance Company had issued a preliminary certificate and report on title, also called an interim title insurance binder, on the application of First National. By letter of July 13, 1964 an amendment including The Oxford Finance Company as a "proposed insured" was added.
On July 14, 1964 American executed a note to the order of First National in the face amount of $100,000, payable six months thereafter, with interest at 6%. This note recited, inter alia:
"Whereas buildings or improvements are in process of construction or to be erected on the premises described in the accompanying mortgage and
Whereas First National Credit Corporation, the obligee herein, has agreed to make the loan herein described to be paid over to the obligor herein in installments as the work progresses, the time and amount of each advancement to be at the sole discretion of the said obligee, so that when sufficient work on said premises shall have been completed to its satisfaction, the said obligee shall pay over to said obligor any balance necessary to complete the full loan of One Hundred Thousand and 00/100 . . . . ($100,000.00) Dollars."
The mortgage referred to therein was executed the same day by American and only by American. Its drafting was accomplished by filling in blanks on a printed form published by Julius Blumberg, Inc., Law Blank Publishers, and said to be a "N.J. Statutory Mortgage. Act of 1918. Individual or Corporation." The following paragraph was a typed addition:
"Whereas buildings or improvements on said premises are in process of construction or repair, or to be erected or repaired; and whereas the said party of the second part [obviously First National
although the instrument refers to it as "Mortgagee" rather than party of the second part] has agreed to make the loan herein described to be paid over to said party of the first part [obviously American, the mortgagor] in installments as the work progresses, the time and amount of each advancement to be at the sole discretion and upon the estimate of said party of the second part, so that when all of the work on said premises shall have been completed to the satisfaction of said party of the second part, said party of the second part shall then pay over to said party of the first part any balance necessary to complete the full loan of One Hundred Thousand and no/100 ($100,000.00) Dollars; and whereas the party of the first part agrees to complete the erection or repair of said buildings to the satisfaction of said party of the second part within a reasonable time from the date hereof or at the latest on or before six (6) months from this date."
The mortgage was recorded August 5, 1964.
On July 14, 1964, contemporaneously with the execution and delivery to First National of American's note and mortgage, American and First National jointly executed a "Memorandum of Loan Agreement." This acknowledged that "the Lender [First National] is relying on the truth of all of the said statements in making the loan hereinbefore mentioned." In this memorandum American forthrightly stated that the proceeds of the loan were "to be used by [American] for the purpose of conducting and maintaining its corporate business and for the purpose of paying certain of its obligations." The memorandum memorialized the first payment from First National to American thusly: "At the time of the execution and delivery of this agreement [First National] will lend to [American] the sum of Fifty Thousand Dollars ($50,000.00) cash, said monies to be used by [American] for the purpose of conducting and maintaining its corporate business." There was further provision for the payment to American and rebate by them to First National of an additional $7,500 frankly acknowledged to be a "bonus."
Prior to this closing on July 14, First National knew that American was not the owner, but had leased the land. The lease, or a copy, had been available to First National, and its officers were aware of its terms. They knew, for instance,
that if test borings were not suitable for the construction of a motel, American could, at its absolute ...