On certification to the Superior Court, Appellate Division.
For reversal -- Chief Justice Wilentz and Justices Handler, O'Hern and Garibaldi. For affirmance -- Justices Clifford, Pollock and Stein. The opinion of the Court was delivered by Garibaldi, J. Stein, J., dissenting.
[100 NJ Page 433] The sole question here is whether the landlord or the defaulting tenant receives the rent, in excess of that due under the original lease, that the landlord collects from a subsequent tenant for the unexpired term of the original lease. Specifically, the issue is whether the excess rent is to be applied retroactively as a full credit against the rent the prior defaulting tenant owes for the period the property was vacant. The landlord, New Jersey Industrial Properties, Inc. (N.J.I.P.), agrees that the defaulting tenant is entitled to credit in the amount of monthly rent due from the tenant for the rent paid by the subsequent tenant during the latter's occupancy of the premises for the unexpired term of the defaulting tenant's lease. However, the landlord denies the right of the defaulting tenant to have the excess rent applied retroactively as a credit against the unpaid rent the defaulting tenant owes for the period when the property lay vacant.
On December 17, 1976, N.J.I.P. leased commercial property located at 42 Mileed Way, Woodbridge, New Jersey to Sheina Industries, Inc. (Sheina), which later changed its name to Y.C. & V.L., Inc. (Y.C.V.L.). The lease between N.J.I.P. and Sheina was for a term of five years and one month, commencing January 1, 1977 and terminating on January 30, 1982. The lease was a triple net lease, with the tenant responsible for maintaining the premises and for paying all utilities, taxes, and other charges associated with the property. In addition, the tenant agreed to an annual rent of $50,004, to be paid in equal monthly installments of $4,167. The monthly rent was later raised to $4,461.91.
The premises were to be used for manufacturing and sales, with space for offices and showrooms. On December 29, 1977, Vito Licari and Yaffa Chirnomas (later Yaffa Licari) (the Licaris), the principals of Sheina, executed a written guarantee in conjunction with the lease, covenanting and agreeing that if the tenant defaulted in the payment of rent or the performance of the covenants in the lease, they would pay all rent and damages that might arise out of the nonperformance of the lease to the extent of $26,000.
On July 7, 1977, the landlord agreed to Y.C.V.L.'s assignment of all of its rights, title and interest as tenant under the lease to Crayonne, U.S.A., Inc. (Crayonne). Pursuant to a rider to the lease, if the tenant defaulted, as assignor, Y.C.V.L. remained liable at all times for the full performance of the lease. In conjunction with the assignment, the Licaris agreed in writing that their personal guarantee survived the assignment, and, hence, that they would continue to be liable for the rent upon the tenant-assignee's default.
Crayonne occupied the premises for four years. In June 1981, it vacated the premises and stopped paying rent. On June 11, 1981, the attorney for the landlord notified Crayonne by letter that "[p]ursuant to paragraph 20th of the lease, you
are notified that the landlord terminates the lease and lease terms with respect to both premises by reason of your default in payment of rent and your abandonment of the properties * * *." By letter dated June 23, 1981 the landlord's attorney notified Y.C.V.L. and the Licaris that Crayonne had abandoned the premises and had failed to pay the June, 1981 rent and other additional rent; that by reason of the breach by Crayonne, the landlord had terminated the lease; that as assignor and pursuant to paragraph 25 of the lease, Y.C.V.L. was liable to the landlord; and that in addition Vito Licari and Yaffa Licari were liable to the landlord as guarantors of the lease to the extent of $26,000.00 of damages suffered by the landlord.
Promptly after the property was abandoned, the landlord printed and posted signs in front of the property announcing its availability for rent. The landlord then distributed mailers to more than 300 brokers so that they could advertise the premises. Nevertheless, the property remained vacant for four months, from June through September, 1981. In October, 1981, the landlord relet the premises to Insulation Distributors Corporation (Insulation). The new lease ran from October 1, 1981 to September 30, 1986 and provided for a monthly rental of $7,182.55 during the first two years of the lease. Thus, for the four months remaining on Crayonne's lease, the landlord received excess rent totalling $10,881.56.
In August, 1981 the landlord sued Y.C.V.L. and the Licaris for damages based upon the rent due under the original lease for the months of June through September, 1981, when the premises were vacant. This action was premised on the survival clause in paragraph 25 of the lease, which extends the tenant's liability beyond the time that the lease was expressly terminated.
The landlord alleges that damages should be measured on the basis of rent lost monthly, thereby creating a separate and independent cause of action for each month in which there was a deficiency in rent. Accordingly, the landlord gave Y.C.V.L. a
credit in the amount of monthly rent due from it for rent received from the subsequent tenant for the remaining term of the original lease, but did not extend a credit of the excess rent to Y.C.V.L. for any of the rent due for the period when the property was vacant prior to Insulation's occupancy. Consequently, N.J.I.P. determined that Y.C.V.L. owed $17,846.64 in rent, for the four months when the property remained vacant.*fn1
In contrast, the Licaris, guarantors of the defaulting tenant, claim that the defaulting tenant is entitled to a credit of the excess rent against the rent it owes for the period the property was vacant prior to the subsequent tenant's occupancy. The defaulting tenant alleges that the entire period of the original lease is the proper period for measuring damages. The Licaris argue that for the remaining period of the original lease the landlord will receive from them 4 months rent, from June, 1981 to September, 1981, and 4 months rent from Insulation for October, 1981 to January, 1982, for a total rent of $45,398.00. If the defaulting tenant had remained on the premises during the entire lease term, the landlord would have received $33,336.00 for the same period. Consequently, the landlord will receive $12,072.00 more than it would have received under the original lease if there had not been a default. Thus, the landlord received the excess rent because of the defaulting tenant's breach of its lease; ergo, the defaulting tenant should be entitled to a credit for this excess rent. Under this theory, if the excess rent exceeds the tenant's liability, the defaulting tenant, rather than the landlord, is entitled to receive all of the excess.
The landlord contends that this result gives a windfall to the breaching tenant, is basically unfair, and fails to comport with the lease or the reasonable expectations of the parties. The landlord argues that the tenant's position penalizes the landlord
for mitigating its damages and rewards the defaulting tenant for its wrongful breach of the lease. If the landlord had immediately re-let the premises at the higher rent, by applying the principle espoused by the defaulting tenant, the tenant would have been entitled to a payment from the landlord in addition to the credit it would have received for the rent owed under the lease.
The trial court held for the landlord. In awarding the landlord damages of $19,636.14 (which consists of rent, repairs, cleaning, utilities, insurance, etc., and credits for security and tax escrow), the court stated:
Plaintiff gave defendants credit for rent and additional rents received from Insulation from October 1, 1981 until January 30, 1982, the remainder of the term of the lease. Defendants are not entitled to a credit for the surplus rent paid by Insulation over and above the monthly rent due from Y.C. & V.L.
The Appellate Division affirmed the trial court in all respects except for the amount of credit it gave the defaulting tenant. The Appellate Division found that paragraph 10 of the lease "expressly recognizes that after reimbursement of the landlord's reentry expenses, all of the balance of subsequent tenant's rent is to be applied to the defaulting tenant's account even if that balance exceeds the defaulting tenant's own rent obligation." (Emphasis in original). Accordingly, the Appellate Division held that the excess rent received from the subsequent tenant was to be applied towards the rent due from the defaulting tenant for the period during which the property was vacant.
We granted the landlord's petition for certification, 97 N.J. 690 (1984), limited to a determination of the amount of the credit the defaulting tenant is entitled to receive.
We first examine the terms of the lease to determine whether the defaulting tenant is entitled to credit the excess rent the landlord received from the subsequent tenant towards the unpaid rent it owed for the time the property was vacant.
While no provision in the lease specifically addresses the issue of who receives "excess rent," several lease provisions are relevant.
The lease provides the landlord with two alternative methods by which to reenter the premises: (1) as the agent for the tenant pursuant to paragraph 10, or (2) on its own behalf, having terminated the lease pursuant to paragraph 20. If the landlord enters as the agent of the tenant, the tenant remains liable for the rent during the vacancy and for any deficiency upon reletting. If, however, the landlord enters on its own account, the law implies an acceptance of the tenant's surrender, thereby relieving the tenant of any future liability. Consequently, the amount of damages a landlord may recover depends on whether the landlord relets for its own account or for the account of the tenant. See 52 C.J.S. Landlord and Tenant, § 498 (1968).
In this case, the Appellate Division relied on paragraph 10 of the lease to determine that the landlord entered the premises as an agent of the tenant, and therefore the tenant was entitled to a credit in the amount of actual rent received by the landlord. Paragraph 10 provides:
10th: That if the said premises, or any part thereof, shall become vacant during the said term, or should the Tenant be evicted by summary proceedings or otherwise, the Landlord or Landlord's representatives may re-enter the same, either by force or otherwise, without being liable to prosecution therefor; and re-let the said premises as the Agent of the said Tenant and receive the rent thereof; applying the same, first to the payment of such expenses as the Landlord may be put to in re-entering and then to the payment of the rent due by these presents; the balance (if any) to be paid over to the Tenant who shall remain liable for any deficiency.
We find no support for the Appellate Division's reliance on paragraph 10. It is undisputed that the landlord terminated the lease pursuant to paragraph 20*fn2 and reentered the premises
pursuant to paragraph 15.*fn3 When Crayonne abandoned the property and defaulted in the payment of rent, the landlord notified Crayonne and then the Licaris that it was terminating the lease pursuant to paragraph 20. Thus, the landlord did not enter the premises as the agent for the tenant, but for its own account under paragraph 15.
The law in this state provides an exception to the rule that when a landlord terminates a lease, reenters the premises, and relets for his own account, the tenant is relieved of any future liability for the rent. Parties to a lease may agree that certain obligations will survive the termination of the landlord-tenant relationship. 49 Am.Jur. 2d Landlord and Tenant, § 559, p. 1055; Restatement (Second) of Property, § 12.1, Comment g. Leases with survival covenants are enforceable in New Jersey.*fn4 See Fibish v. Bennett, 131 N.J.L. 98, 99 (Sup.Ct.1943),
aff'd, 132 N.J.L. 168 (E. & A.1944); Raleigh Realty Corporation v. Jacobs, 127 N.J.L. 454, 455 (Sup.Ct.1941); Fleming v. Matter Construction Corp., 11 N.J.Misc. 129, 132-33 (Hudson County Ct.1933).
In this case, there is a survival covenant in paragraph 25, which provides:
25th. In the event that the relation of the Landlord and Tenant may cease or terminate by reason of the re-entry of the Landlord under the terms and covenants contained in this lease or by the ejectment of the Tenant by summary proceedings or otherwise, or after the abandonment of the premises by the Tenant, the Tenant shall remain liable and shall pay in monthly payments the rent which accrues subsequent to the re-entry by the Landlord, and the Tenant shall pay as damages for the breach of the covenants contained in this lease the difference between the rent reserved and the rent collected and received, if any, by the Landlord, during the remainder of the unexpired term, such difference of [sic] deficiency between the rent reserved and the rent collected, if any, shall become due and payable in monthly payments during the remainder of the unexpired term, as the amounts of such difference or deficiency shall from time to time be ascertained.
Thus, the record establishes that the lease was terminated pursuant to paragraph 20 and the landlord reentered the premises under paragraph 15 for his own benefit and not as an agent of the tenant. Under paragraph 25 the tenant remained liable for the rent accruing after the termination of the landlord-tenant relationship. Pursuant to that paragraph the tenants also agreed to pay as damages the difference between the rent reserved and the rent collected and received, if any, as a result of reletting.
Both parties rely on paragraph 25 for support of their positions. The landlord relies on paragraph 25 to establish that damages are to be based on the monthly lost rent, thus creating a separate and independent cause of action for each month in which there is a deficiency in rent. The defaulting tenant relies on paragraph 25 to show that the proper period for measuring damages is the entire period of the lease. The Appellate Division found that paragraph 25 establishes the manner but not the quantum of payment.
While paragraph 25 does not expressly provide for the situation before us, namely, whether the landlord or the prior defaulting tenant should get the excess rent, similar provisions have been interpreted as providing that after a lease is terminated, a separate and independent cause of action for damages accrues each month, for the rent due until the end of the lease period.
In McCready v. Lindenborn, 172 N.Y. 400, 65 N.E. 208 (1902), language similar to paragraph 25 was at issue. There the lease provided that the tenant would pay "as damages for breach of the covenant for rent" the difference between the rent reserved and the rent received, "in equal monthly payments, as the amount of such difference shall from time to time be ascertained." Id. at 407, 65 N.E. at 210. Based on that lease provision, the court held that damages would be measured by the rent lost monthly, not the total rent lost at the end of the lease term. Further, the court held that the landlord "was at liberty to allow the causes of action for monthly deficiency to accumulate, and to recover upon several at the same time." Id.
As Justice, then Judge, Cardozo stated in Hermitage Co. v. Levine,
No doubt, a damage clause can be drawn in such a way as to make a tenant responsible for monthly deficits after the re-entry of his landlord, and this
without charging the landlord with a duty to account for a surplus in other seasons. Such a clause will be found in McCready v. Lindenborn, 172 N.Y. 400, 65 N.E. 208, where the lease was to the effect that the tenant would pay the difference in rent "in equal monthly payments as the amount of such difference shall from time to time be ascertained." [248 N.Y. 333, 162 N.E. 97, 98 (1928) (emphasis added).]
In Hermitage, such a clause was not present. Hence, the court held that damages arising from the reletting would be based on a single cause of action, the deficiency to be ascertained when the term ended. The court noted, however, the great hardship this decision imposed on a landlord by postponing a cause of action until the end of the term. "The hardship is so great as to give force to the argument that postponement to a date so distant may not reasonably be held to have been intended by the parties." Noting that the outcome in this case was the result of poor draftsmanship, the court nevertheless required the landlord to wait until the end of the lease term to ascertain the deficiency. Had there been a " McCready clause" in the lease it is clear the holding would have been otherwise.
Here, the draftsman was careful to insert in the lease paragraph 25, establishing not only the manner of payment but also the quantum of payment. This interpretation avoids not only a totally impractical result but also avoids, as Justice Cardozo noted in Hermitage, a great imposition on the landlord. Assume, for example, a situation in which a landlord relets for the fifteen-year unexpired portion of a lease that has been terminated. Without such an interpretation, the landlord would have to wait until the end of that fifteen-year period in order to calculate the rent owed by the breaching tenant for the period left on his lease at the time of his breach. And more complicated calculations would be involved were the second tenant also to breach his lease. Moreover, determining the "excess" rent can itself be a difficult procedure; terms of leases of commercial property differ substantially. In order to avoid these complications, the lease provides for the calculation of the rent owed by the breaching tenant each month after the lease is breached, rather than requiring the landlord to await the end of
the lease term to calculate damages based on the aggregate rent collected from reletting.
Further, as Justice Cardozo noted in Hermitage, supra, 162 N.E. at 98, this result conforms with the reasonable expectations of the parties. When, as here, the parties have inserted a provision such as paragraph 25 in their lease, we think that the most reasonable belief attributable to the parties when the reletting yields a higher rent than does the original lease, is that the credit due the breaching tenant is to be limited to the period during which the second tenant leased the premises. Certainly, no landlord could expect that the excess rent he received from a subsequent tenant would accrue to the benefit of the breaching tenant.
While few courts have addressed this issue, most courts that have considered it, including New Jersey's Court of Errors and Appeals, have held that the defaulting tenant was not entitled to credit the excess rent the landlord received from a subsequent tenant towards the unpaid rent owed by the original tenant for the period of time the property was vacant. See 49 Am.Jur. 2d, Landlord and Tenant, § 623, p. 597 (the tenant "after having violated his lease by abandoning the premises," may not turn its breach into a gain "by asserting a claim to the excess of the rental obtained on the reletting above that provided in its lease."); Restatement (Second) of Property, § 12.1, (1977) ("* * * what authority there is denies the tenant the excess on the principle that it would allow the tenant to profit by his breach.")
In support of its conclusion the Restatement cites Whitcomb v. Brant, 90 N.J.L. 245 (E. & A.1917). In that case, the Court held that although the premises may have been relet for the benefit of the original lessee, in order to reduce his liability for having violated his lease by abandoning the premises, he could not turn that breach into a gain by asserting a claim to the
excess rent obtained from reletting. The Whitcomb court rejected the original lessee's claim that his estate as a tenant had not been terminated and he was therefore entitled to the increased monthly rent that the new letting yielded during the time of the original lease. The Court held that the tenant's abandonment of the premises without the consent of the landlord severed his privity of estate, but did not terminate the privity of contract, which still imposed upon the tenant the obligation to pay rent under the lease. Whitcomb, supra, 90 N.J.L. at 248 (citing Hunt v. Gardner, 39 N.J.L. 530 (Sup.Ct.1877); Creveling v. DeHart, 54 N.J.L. 338 (Sup.Ct.1892)). Unable to find support in any legal principle for awarding a retroactive credit to the breaching tenant, the Court also refused to imply a right of action "in favor of one who by the voluntary violation of his covenant, produces a status of nonfeasance and default, from which acts of deliction he seeks to reap a benefit and extract a reward; an anomaly, as we have seen, which can find no support in legal principle." Id. at 251. The Court allowed the tenant a credit from the reletting only to the extent of the rent that accrued under the original lease after the new tenant's occupancy.
The tenant's claim for a credit based on the excess rent was similarly denied in Trick v. Eckhouse, 82 Ind.App. 196, 145 N.E. 587 (App.Ct.1924). The court refused to allow the defaulting lessee to profit from the reletting.
The fact that [the landlord] was able to rent the property at an increased rental is no reason why she should not recover the rent for the two ...