The ancient doctrine that a mortgagor's equity of redemption may not be "clogged" has rarely been involved in litigation in this state. This case involves a novel application of the doctrine and, so far as research by counsel and the court has disclosed, there are no precedents directly in point. The specific point involved is whether the doctrine, which bars a mortgagee from clogging the mortgagor's equity of redemption and prohibits him from taking an option to purchase the property from the mortgagor as a part of the original mortgage transaction, also bars the mortgagor's guarantor from taking such option. In the circumstances of this case it is the conclusion of the court that it does.
Certain of the factual issues were hotly contested, including those relating to the value of the property at the time of the option, the alleged ignorance of the optionors as to the existence and meaning of the option, and whether or not there were fraudulent misrepresentations and concealment in the obtaining of the option. However, the case does not
really turn upon the resolution of these issues and the result is the same regardless of how they are determined. The basic facts are as follows.
Defendant Josephine Venice Rokita Doerr (hereinafter referred to as "Josephine") is the owner of a piece of real property located on the northeast corner of Boulevard and Michigan Avenue in Kenilworth. The parties agree that it is now one of the choice locations for a gasoline service station in Union County. The property was acquired in about 1944 by Pat Venice, Josephine's first husband. He intended to erect a service station thereon but died in 1947 without having carried his plans into effect, and Josephine succeeded to the sole ownership of the premises as well as to other parcels of real estate in Kenilworth. A few years thereafter Josephine's family, and in particular her brother Sal Amoroso, erected a three bay service station on the property and operated same, apparently making "rent" payments from the income of the business to Josephine. In connection with the initial construction of the station the property was mortgaged to the Union County Trust Company, which granted a $12,000 loan for ten years at 5% interest in 1952 to Josephine, her brother and his wife.
In 1953 Josephine remarried. Her second husband, Victor W. Rokita (hereinafter "Victor"), took over the management of the service station. In 1958 he took steps to add three bays to the garage in order to expand the facilities for performing automotive repair work. He went to the Union County Trust Company, which already held the mortgage on the premises, to arrange for additional financing, and that bank apparently agreed to advance approximately $20,000 secured by first mortgage on the land and building. These plans came to the attention of plaintiff Humble Oil & Refining Company (then Esso Standard Oil Company and hereinafter referred to as "Humble"), whose products were sold at the station. John Alden, the Humble representative who serviced Victor's account, approached Victor and told him that Humble could get him better terms --
$35,000, rather than $20,000, at a lesser interest rate and for a longer term. Alden discussed the matter and negotiated first with Victor alone and then with both Victor and Josephine. These favorable terms were to be obtained by leasing the station to Humble at a rental equal to the amount to be paid each month by Victor and Josephine on the new mortgage, which would be granted by The National State Bank, Elizabeth, N.J., and by having Victor and Josephine assign the Humble rental payments to the bank as additional security. Humble would then lease back to them at the same rental and they would continue to operate the service station. (This arrangement is referred to as a "two-party" lease. See Point IV, infra.)
As the result of the negotiations it was agreed that the financing arranged by Humble would be accepted, and a lease was entered into between Victor and Josephine, as lessors, and Humble, as lessee, under date of September 5, 1958, for a 15-year term commencing on September 1, 1959 (approximately one year later) and ending on September 1, 1974, at a rental to be paid by Humble of $272.30 a month, the exact amount required to be paid each month to The National State Bank by Victor and Josephine under the contemplated mortgage. This lease, entitled "Lease to Company," was written on a printed Humble form bearing the legend "Lessor Built S.S.," which was drafted by Humble for use as the standard lease form to be utilized in instances where Humble leased premises with stations already built thereon or being constructed thereon by owner-lessors. The provisions of this form were obviously designed to be fully protective of Humble's interest as lessee.
The provision of the lease which is directly involved here is that which granted a purchase option to Humble. The option provision recites that the lessors, "in consideration of this lease," grant to Humble the option to purchase the property for the sum of $150,000 "at any time" during the term of the lease. The price is to be paid on transfer of good and marketable title by the lessors by warranty deed
free and clear of all encumbrances, and requires that title should be closed and deed delivered on the 30th day after the exercise of the option, unless extended by mutual agreement.
On May 29, 1959 Victor and Josephine entered into a $35,000 construction mortgage with The National State Bank and formally assigned their interest in the Humble lease to the bank. Thereafter the additional three bays were apparently constructed and on January 12, 1960, the 15-year permanent mortgage loan for $35,000 was entered into. The new mortgage provided that, in addition to the monthly payments of $272.30, the Rokitas were required to deposit with the bank monthly payments equal to one-twelfth of annual estimated taxes. It also required maintenance of insurance and contained the customary provision that if the mortgagors did not make tax and insurance payments, the mortgagee could make them and add such amounts to the indebtedness of the mortgagors. A new note agreement was also entered into on January 12, 1960 between the bank and the Rokitas which contained a formal assignment to the bank of the Humble lease. This agreement provided that as "collateral security" the Rokitas assigned their interest in the Humble lease to the bank, and they agreed that the bank should collect the "rents, issues and profits accruing out of the premises" demised to Humble until repaid the full sum of $35,000 plus interest, and further, until the bank had been repaid all sums paid by it pursuant to the loan agreement and mortgage "and not repaid to it out of the rents derived from said premises." By the note agreement, as well as the mortgage, the Rokitas agreed to pay to the bank monthly a sum equal to one-twelfth of taxes. The note agreement expressly provided that if Humble should fail to pay any installment of rent provided for in the lease, or the Rokitas should default in performance of any of their obligations contained in the note, mortgage or lease , and the default continued for ten days, the bank at its option could demand immediate payment of the entire unpaid mortgage
balance. The net result of this agreement was that a default by Humble or a failure by the Rokitas to comply with any of the conditions of the lease could constitute a mortgage loan default by the Rokitas.
By an agreement dated January 12, 1960, the same date on which the permanent mortgage papers were signed for the bank, a supplement to the Humble lease was signed by the Rokitas and witnessed by the attorney for the bank, modifying the lease so that the original term thereof commenced on February 1, 1960. This supplement ratified and confirmed all other terms of the lease.
On January 18, 1960 a lease was entered into between Humble, as lessee, and Victor Rokita, trading as Mayfair Esso Servicenter, whereby Humble leased the premises to Victor for a monthly rental of $272.30 a month, the same amount which Humble was required to pay to Josephine and Victor under the lease to Humble and the same amount which Josephine and Victor were obliged to pay each month to the bank. This lease was for a period of one year and thereafter from year to year unless cancelled by 30 days' notice directed to the end of a yearly renewal period. The lease was written on a printed Humble form, and, like the other Humble lease form, was obviously designed to fully protect Humble's interests. It required the lessee to pay all taxes, provided general indemnity to Humble arising from injuries or accidents on the premises, and provided that Humble could terminate the lease and re-enter the premises without formal demand in the event that any rent was unpaid or default made in any other covenant of the lease.
Thereafter Victor encountered personal difficulties which affected his management of the service station and his relationship with his wife. Josephine divorced him in 1965. On December 16, 1961 his lease with Humble was cancelled by mutual consent and on the same day Humble leased the premises to Mayfair Servicenter, Inc., of which Salvatore Amoroso, Josephine's brother, was president. This lease was on the same form and contained the same terms as the
earlier lease to Victor. The latter lease has continued in force to date and Josephine's son has in recent years managed the station.
In May 1968 Josephine married George H. Doerr. Prior to the marriage Doerr signed an agreement waiving all right to curtesy in property owned by Josephine. He defaulted and did not participate at the trial. He has no interest in the property.
By letter dated October 7, 1968, approximately ten years after the original lease was signed and 8 1/2 years after the 15-year term of the lease commenced to run under its terms as modified, Humble wrote to Josephine and Victor exercising the option to buy the premises, free and clear of all encumbrances, for $150.000. Humble re-exercised its option by letter dated March 3, 1969. When Josephine replied through her attorneys that the option had no legal validity, Humble started this action.
Humble sues for specific performance and, in the alternative, for damages. It claims that the value of the property in 1969 at the time of final exercise of the option was $240,000. Josephine filed an answer denying that she was even aware of the option prior to receipt of Humble's first letter exercising it in October 1968. In addition, she charged that the option was granted because of mutual mistake or mistake on her part induced because of inequitable conduct on the part of Humble, and that she was caused to sign the lease because of Humble's fraud and inequitable conduct in that she, a person of limited education and without business experience, and without legal representation or independent advice, was induced to sign the complicated lease and mortgage papers which she did not understand. The effect of this, she averred, was (a) to deprive her of all income from the real estate for 15 years while still requiring her to pay taxes, repairs, etc.; (b) to cause her to pay unconscionable attorneys' fees and other charges to the bank; (c) to require her to option her real estate and the business located thereon for a consideration having no reasonable relation to the true value thereof;
(d) to require Humble to spend no money, and (e) to cause Humble to be unjustly enriched. She further charged that Humble fraudulently represented that the lease would contain no option and that it fraudulently concealed the same and that she signed the lease in reliance thereon. Finally, on the basis of the above, she counterclaimed for reformation of the lease, seeking to have the option clause expunged therefrom.
As is apparent from the above recitation, at no time in her pleadings did Josephine spell out in so many words that the option was invalid because it constituted an impermissible clog on her equity of redemption. Nor was such theory specifically mentioned in her contentions contained in the pretrial order or in the trial briefs submitted in advance of trial. It was first advanced at the end of the case after the court had referred counsel to the decision in Barr v. Granahan , 255 Wis. 192, 38 N.W. 2 d 705, 10 A.L.R. 2 d 227 (Sup. Ct. 1949). Humble argues that the clogging doctrine may not be considered in the case because there was no notice to it that the doctrine would be relied upon. However, defendant's answer does spell out facts and contentions which give notice that the option is claimed to be invalid because, among other reasons, it is unconscionable and inequitable, unjust to the defendant, and unjustly enriches Humble at defendant's expense, and her contentions in the pretrial order, among other things, state that "the option provisions of the lease and the lease itself are so manifestly unfair, unreasonable and unjust, so as to preclude the remedy of specific performance, and to require the reformation of the lease by the elimination of the option provisions." The factual allegations and contentions in her answer and the pretrial order, and the evidence adduced in support thereof, warrant relief on any legal theory that accommodates them, including the clogging doctrine, and Humble's objection is obviously without merit. See Wimberly v. Paterson , 75 N.J. Super. 584, 604 (App. Div.
I have concluded that Humble was not guilty of fraudulent misrepresentations or concealment and that Josephine is not entitled to relief under normal rules because of mistake. No useful purpose would be served in reviewing in detail the testimony adduced at the trial on these issues. It was established that Josephine's schooling ended at the fifth grade. However, her testimony that she did not know of the option until Humble exercised it did not impress me as being credible. I do not believe that she was candid and truthful in her protestations that she was completely ignorant as to what she signed and in her attempts to deny the genuineness of her signature on various documents. I believe that she placed reliance on her husband Victor, who had more formal education than she, and I believe Alden's testimony that he dealt primarily with Victor and told him that Humble insisted on the option if the company were to be involved. Although the claim is that Victor was an alcoholic and that he was drinking at the time the lease was signed in 1958, I do not believe he was lacking competency at the time the lease was negotiated and consummated. Nor do I believe that Alden told them that they should not get counsel or that he tried or succeeded in "concealing" the option from them. He denied that he told them that the option was simply a right of first refusal. I believe his testimony, referred to hereinafter, as to the casual way in which the option price contained in the lease was fixed and that Josephine told him at that time that she did not want to sell the property.
It may well be that the Rokitas, and Josephine in particular, did not really understand all of the ramifications of the option. But they can read and they did place their initials alongside the option provision in the lease, which
contained the option price inserted in ink. It was shown that they went to Josephine's present law firm on June 22, 1959, at a time prior to the execution of the permanent mortgage, when a modification to the lease, correcting the legal description of the property but ratifying and confirming the lease in all other respects, was submitted to them for signature, and the partner so consulted acted as a witness to their signatures and took their acknowledgments to the modification. There was testimony to the effect that he told them that it was too late to do anything about the option. Moreover, in May 1959, at the time the construction mortgage and first assignment of the lease to the bank were being signed, Josephine and Victor signed a statement prepared by the bank's attorney which stated that they were aware that said attorney had nothing to do with the Humble lease prior to its execution and which specifically recited, "We further understand that said lease contains a clause granting Esso an option to buy the property at $150,000.00 at any time during the term of the lease, which is satisfactory to us." In the circumstances, Josephine is not entitled to relief under conventional doctrines of fraud or mistake -- she was not completely ignorant of the option.
Nor is she entitled to relief, setting aside for the moment the fact that the option was given in connection with a mortgage loan, because the option price was inadequate in the light of the value of the property at the time it was given, or because of an increase in the value of the premises during the years since the granting of the option. She originally advanced as an alternative argument to the court that, at the very least, applying conventional rules, plaintiff should be denied specific performance and relegated to recovery of damages because the option price was grossly inadequate. There are precedents which hold that the court should deny specific performance where the consideration is grossly inadequate. See Rodman v. Zilley , 1 N.J. Eq. 320, 324 (Ch. 1831); Crane v. Decamp , 21 N.J. Eq. 414, 418 (E. & A. 1869); Page v. Martin , 46 N.J. Eq. 585 (Ch.
1890), rev. on other grounds, 46 N.J. Eq. 589 (E. & A. 1890); Williams v. M.E. Blatt Co. , 95 N.J. Eq. 326 (E. & A. 1923); Migel v. Bachofen , 96 N.J. Eq. 608 (E. & A. 1924); De Caro v. De Caro , 13 N.J. 36 (1953). Here, however, the option price was not grossly inadequate when compared to the value of the land in 1958-1959. Humble's expert testified that the value of the property was $85,000 prior to the erection of the three additional bays and $100,000 after the erection of the additional bays. He also testified that the value of the land at the time of the exercise of the option in 1969 was $240,000. The defendant's expert testified that the value of the land was $150,000 in 1958 prior to the erection of the additional bays and $180,000 after the erection of the bays. He was not asked to give testimony as to the value of the land at the time of the exercise of the option.
I am inclined to accept the valuations expressed by Humble's expert. Not only was I impressed by his qualifications and expertise, the basis for his opinions, and his candor and truthfulness in answering questions, but it was demonstrated to my satisfaction that some of the underlying facts upon which defendant's expert based his opinions, including gallonage prices, used in computing value based upon income, were open to question. It may also be noted that on July 27, 1959 Victor Rokita, in listing assets on an application to Humble for credit, listed the six-bay station as having a value of $100,000. I conclude that the market value of the real estate at the time when the option was granted was approximately $100,000 and clearly less than the option price. However, even if defendant's values were accepted, the option price would not be considered grossly inadequate in the absence of other considerations.
It is also well settled that, in the normal case, an option to purchase at a named price cannot be voided merely because of subsequent enhancement of the value of the property. See Behr v. Hurwitz , 90 N.J. Eq. 110 (Ch. 1918); Gulf ...