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Davidson Bros. Inc. v. Katz

Decided: July 26, 1990.

DAVIDSON BROS., INC., A NEW JERSEY CORPORATION, PLAINTIFF-APPELLANT,
v.
D. KATZ & SONS, INC., A NEW JERSEY CORPORATION; CITY OF NEW BRUNSWICK, A MUNICIPAL CORPORATION; C-TOWN, A DIVISION OF KRASDALE FOODS, INC., A NEW YORK CORPORATION, AND NEW BRUNSWICK HOUSING AUTHORITY, A BODY CORPORATE AND POLITIC, DEFENDANTS-RESPONDENTS



On certification to the Superior Court, Appellate Division.

For reversal and remandment -- Justices Clifford, Handler, Pollock, O'Hern, Garibaldi and Stein. For affirmance -- None. The opinion of the Court was delivered by Garibaldi, J. Pollock, J., concurring. Justice Clifford joins in this opinion. Justices Clifford and Pollock concurring in the result.

Garibaldi

[121 NJ Page 198] This case presents two issues. The first is whether a restrictive covenant in a deed, providing that the property shall not be used as a supermarket or grocery store, is enforceable against the original covenantor's successor, a subsequent purchaser

with actual notice of the covenant. The second is whether an alleged rent-free lease of lands by a public entity to a private corporation for use as a supermarket constitutes a gift of public property in violation of the New Jersey Constitution of 1947, article eight, section three, paragraphs two and three.

I

The facts are not in dispute. Prior to September 1980 plaintiff, Davidson Bros., Inc., along with Irisondra, Inc., a related corporation, owned certain premises located at 263-271 George Street and 30 Morris Street in New Brunswick (the "George Street" property). Plaintiff operated a supermarket on that property for approximately seven to eight months. The store operated at a loss allegedly because of competing business from plaintiff's other store, located two miles away (the "Elizabeth Street" property). Consequently, plaintiff and Irisondra conveyed, by separate deeds, the George Street property to defendant D. Katz & Sons, Inc., with a restrictive covenant not to operate a supermarket on the premises. Specifically, each deed contained the following covenant:

The lands and premises described herein and conveyed hereby are conveyed subject to the restriction that said lands and premises shall not be used as and for a supermarket or grocery store of a supermarket type, however designated, for a period of forty (40) years from the date of this deed. This restriction shall be a covenant attached to and running with the lands.

The deeds were duly recorded in Middlesex County Clerk's office on September 10, 1980. According to plaintiff's complaint, its operation of both stores resulted in losses in both stores. Plaintiff alleges that after the closure of the George Street store, its Elizabeth Street store increased in sales by twenty percent and became profitable. Plaintiff held a leasehold interest in the Elizabeth Street property, which commenced in 1978 for a period of twenty years, plus two renewal terms of five years.

According to defendants New Brunswick Housing Authority (the "Authority") and City of New Brunswick (the "City"), the

closure of the George Street store did not benefit the residents of downtown New Brunswick. Defendants allege that many of the residents who lived two blocks away from the George Street store in multi-family and senior-citizen housing units were forced to take public transportation and taxis to the Elizabeth Street store because there were no other markets in downtown New Brunswick, save for two high-priced convenience stores.

The residents requested the aid of the City and the Authority in attracting a new food retailer to this urban-renewal area. For six years, those efforts were unsuccessful. Finally, in 1986, an executive of C-Town, a division of a supermarket chain, approached representatives of New Brunswick about securing financial help from the City to build a supermarket.

Despite its actual notice of the covenant the Authority, on October 23, 1986, purchased the George Street property from Katz for $450,000, and agreed to lease from Katz at an annual net rent of $19,800.00, the adjacent land at 263-265 George Street for use as a parking lot. The Authority invited proposals for the lease of the property to use as a supermarket. C-Town was the only party to submit a proposal at a public auction. The proposal provided for an aggregate rent of one dollar per year during the five-year lease term with an agreement to make $10,000 in improvements to the exterior of the building and land. The Authority accepted the proposal in 1987. All the defendants in this case had actual notice of the restrictions contained in the deed and of plaintiff's intent to enforce the same. Not only were the deeds recorded but the contract of sale between Katz and the Housing Authority specifically referred to the restrictive covenant and the pending action.

Plaintiff filed this action in the Chancery Division against defendants D. Katz & Sons, Inc., the City of New Brunswick, and C-Town. The first count of the complaint requested a declaratory judgment that the noncompetition covenant was

binding on all subsequent owners of the George Street property. The second count requested an injunction against defendant City of New Brunswick from leasing the George Street property on any basis that would constitute a gift to a private party in violation of the state constitution. Both counts sought compensatory and punitive damages. That complaint was then amended to include defendant the New Brunswick Housing Authority.

Plaintiff moved for summary judgment, to which defendants responded by submitting three affidavits, one from Agnes Scott, President of the New Brunswick Home Tenants Council; one from Richard M. Keefe, Executive Director of the Housing and Urban Development Authority of New Brunswick; and one from Frank R. Nero, Director of the Department of Policy and Economic Development for New Brunswick, all alleging the need for a supermarket in the area of George Street.

The trial court denied plaintiff's motion and held, in an unreported opinion, that the covenant was unenforceable, relying on Brewer v. Marshall & Cheeseman, 19 N.J. Eq. 537 (E. & A.1868). That case held that the burden of a covenant will not run with the land and therefore bind a successor unless the covenant "affects the physical use of the land itself." This view "effectively stifles any possibility of covenants relating to competition," 5 R. Powell & P. Rohan, Powell on Real Property § 675[3], 60-108 (rev. ed. 1989). (5 Powell). Although the Brewer decision was an old case, (1868), the trial court was satisfied that it was still controlling and found that the covenant was unenforceable because it did not "touch and concern" the land. Additionally, the trial court noted that the enforcement of non-competition covenants is contrary to a longstanding public policy. However, the trial court observed that the determination of whether the covenant was reasonable and consistent with public policy would require a factual hearing and could not be made in a motion for summary judgment.

The trial court also held that the rent-free lease between the Authority and C-Town did not violate the New Jersey Constitution of 1947, article eight, section three, paragraphs two and three. The court found that the lease was valid inasmuch as it furthered a "public purpose" as defined by a two-part test set forth in Roe v. Kervick, 42 N.J. 191, 207, 199 A.2d 834 (1964).

After the court denied plaintiff's motion for summary judgment, defendants moved for summary judgment, which was granted. Plaintiff appealed, and in an unreported opinion, the Appellate Division affirmed the trial court's judgment. For purposes of its decision the Appellate Division assumed that Brewer was not applicable, that noncompetitive covenants may run with the land in appropriate cases, that a leasehold interest in land is a sufficient interest to enforce a covenant, that two miles between the burdened and benefitted properties does not itself prevent a covenant from being enforced, and that the George Street store would impair the profitability of the Elizabeth Street store. Although the Appellate Division found "some merit" to plaintiff's argument that Brewer v. Marshall, supra, 19 N.J. Eq. 537, no longer represented the current law in New Jersey, the court held that the covenant was unenforceable against a subsequent grantee because the benefit did not "touch and concern" plaintiff's Elizabeth Street property. Specifically, the court reasoned that because the covenant restricted such a comparatively small portion of the market area, less than one-half an acre, and did not impair the use of the other 2,000 acres in the market circle from which the Elizabeth store draws its clientele, the covenant did not enhance the value of the retained estate, and therefore, as a matter of law, would not bind a subsequent purchaser. In contrast to the trial court's decision, the Appellate Division's rationale was premised on the failure of the benefit of the covenant to run, not of the burden.

The Appellate Division also affirmed the trial court's judgment that the rent-free lease was constitutionally valid, substantially for the reasons expressed by the trial court.

We granted plaintiff's petition for certification. 113 N.J. 655, 552 A.2d 177 (1988).

II

A. Genesis and Development of Covenants Regarding the Use of Property

Covenants regarding property uses have historical roots in the courts of both law and equity. The English common-law courts first dealt with the issue in Spencer's Case, 5 Co. 16a, 77 Eng.Rep. 72 (Q.B.1583). The court established two criteria for the enforcement of covenants against successors. First, the original covenanting parties must intend that the covenant run with the land. Second, the covenant must "touch and concern" the land. Id. at 16b, 77 Eng.Rep. at 74. The court explained the concept of "touch and concern" in this manner:

But although the covenant be for him [an original party to the promise] and his assigns, yet if the thing to be done be merely collateral to the land, and doth not touch and concern the thing demised in any sort, there the assignee shall not be charged. As if the lessee covenants for him and his assignees to build a house upon the land of the lessor which is no parcel of the demise, or to pay any collateral sum to the lessor, or to a stranger, it shall not bind the assignee, because it is merely collateral, and in no manner touches or concerns the thing that was demised, or that is assigned over, and therefore in such case the assignee of the thing demised cannot be charged with it, no more than any other stranger. [ Ibid. ]

The English common-law courts also developed additional requirements of horizontal privity (succession of estate), vertical privity (a landlord-tenant relationship), and that the covenant have "proper form," in order for the covenant to run with the land. C. Clark, Real Covenants and Other Interests Which Run With the Land 94, 95 (2d ed. 1947) (Real Covenants). Those technical requirements made it difficult, if not impossible, to protect property through the creation of real covenants. Commentary, "Real Covenants in Restraint of Trade -- When Do They Run With the Land?," 20 Ala.L.Rev. 114, 115 (1967).

To mitigate and to eliminate many of the formalities and privity rules formulated by the common-law courts, the English chancery courts in Tulk v. Moxhay, 2 Phil. 774, 41 Eng.Rep. 1143 (Ch. 1848), created the doctrine of equitable servitudes. In Tulk, land was conveyed subject to an agreement that it would be kept open and maintained for park use. A subsequent grantee, with notice of the restriction, acquired the park. The court held that it would be unfair for the original covenantor to rid himself of the burden to maintain the park by simply selling the land. In enjoining the new owner from violating the agreement, the court stated:

It is said that, the covenant being one which does not run with the land, this court cannot enforce it, but the question is, not whether the covenant runs with the land, but whether a party shall be permitted to use the land in a manner inconsistent with the contract entered into by his vendor, and with notice of which he purchased. Of course, the price would be affected by the covenant, and nothing could be more inequitable than that the original purchaser should be able to sell the property the next day for a greater price, in consideration of the assignee being allowed to escape from the liability which he had himself undertaken.

[ Id. at 777-78, 41 Eng.Rep. 1144].

The court thus enforced the covenant on the basis that the successor had purchased the property with notice of the restriction. Adequate notice obliterated any express requirement of "touch and concern." Reichman, "Toward a Unified Concept of Servitudes," 55 S.Cal.L.Rev. 1177, 1225 (1982); French, "Toward a Modern Law of Servitudes: Reweaving Ancient Strands," 55 S.Cal.L.Rev. 1261, 1276-77 (1982). But see Burger, "A Policy Analysis of Promises Respecting the Use of Land," 55 Minn.L.Rev. 167, 217 (1970) (focusing on language in Tulk that refers to "use of land" and "attached to property" as implied recognition of "touch and concern" rule).

Some early commentators theorized that the omission of the technical elements of property law such as the "touch and concern" requirement indicated that Tulk was based on a contractual as opposed to a property theory. C. Clark, supra, Real Covenants, at 171-72 nn. 3 and 4; 3 H. Tiffany, Real Property § 861, at 489 (3d ed. 1939); Ames, "Specific Performance

For and Against Strangers to Contract," 17 Harv.L.Rev. 174, 177-79 (1904); Stone, "The Equitable Rights and Liabilities of Strangers to the Contract," 18 Colum.L.Rev. 291, 294-95 (1918). Others contend that "touch and concern" is always, at the very least, an implicit element in any analysis regarding enforcement of covenants because "any restrictive easement necessitates some relation between the restriction and the land itself." McLoone, "Equitable Servitudes -- A Recent Case and Its Implications for the Enforcement of Covenants Not to Compete," 9 Ariz.L.Rev. 441, 444, 447 n. 5 (1968). Still others explain the "touch and concern" omission on the theory that equitable servitudes usually involve negative covenants or promises on how the land should not be used. Thus, because those covenants typically do touch and concern the land, the equity courts did not feel the necessity to state "touch and concern" as a separate requirement. Berger, "Integration of the Law of Easements, Real Covenants and Equitable Servitudes," 43 Wash. & Lee L.Rev., 337, 362 (1986). Whatever the explanation, the law of equitable servitudes did generally continue to diminish or omit the "touch and concern" requirement.

B. New Jersey's treatment of noncompetitive covenants restraining the use of property

Our inquiry of New Jersey law on restrictive property use covenants commences with a re-examination of the rule set forth in Brewer v. Marshall & Cheeseman, supra, 19 N.J. Eq. at 537, that a covenant will not run with the land unless it affects the physical use of the land. Hence, the burden side of a noncompetition covenant is personal to the covenantor and is, therefore, not enforceable against a purchaser. In Brewer v. Marshall & Cheeseman, the court objected to all noncompetition covenants on the basis of public policy and refused to consider them in the context of the doctrine of equitable servitudes. Similarly, in National Union Bank at Dover v. Segur, 39 N.J.L. 173 (Sup.Ct.1877), the court held that only the benefit of a noncompetition covenant would run with the land, but the burden would be personal to the covenantor. See 5 R. Powell,

supra, § 675[3] at 60-109. Because the burden of a noncompetition covenant is deemed to be personal in these cases, enforcement would be possible only against the original covenantor. As soon as the covenantor sold the property, the burden would cease to exist.

Brewer and National Union Bank have been subsequently interpreted as embodying the "unnecessarily strict" position that "while the benefit of [a noncompetition covenant] will run with the land, the burden of the covenant is necessarily personal to the covenantor." 5 Powell, supra, § 675[3] at 60-109. This blanket prohibition of noncompetition covenants has been ignored in more recent decisions that have allowed the burden of a noncompetition covenant to run, see Renee Cleaners Inc. v. Good Deal Supermarkets of N.J., 89 N.J. Super. 186, 214 A.2d 437 (App.Div.1965) (enforcing at law covenant not to lease property for dry-cleaning business as against subsequent purchaser of land); Alexander's v. Arnold Constable Corp., 105 N.J. Super. 14, 28, 250 A.2d 792 (Ch.1969) (enforcing promise entered into by prior holders of land not to operate department store as against current landowner). Nonetheless, Brewer may still retain some vitality, as evidenced by the trial court's reliance on it in this case.

The per se prohibition that noncompetition covenants regarding the use of property do not run with the land is not supported by modern real-covenant law, and indeed, appears to have support only in the Restatement of Property section on the running of real covenants, § 537 comment f. 5 Powell, supra, at § 675[3] at 60-109. Specifically, that approach is rejected in the Restatement's section on equitable servitudes, see Restatement of Property, § 539 comment k (1944); see also Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 95-96, 390 N.E. 2d 243, 249 (1979) (overruling similarly strict approach inasmuch as it was "anachronistic" compared to modern judicial analysis of noncompetition covenants, which focuses on effects of covenant).

Commentators also consider the Brewer rule an anachronism and in need of change, as do we. 5 Powell, supra, para 678 at 192. Accordingly, to the extent that Brewer holds that a noncompetition covenant will not run with the land, it is overruled.

Plaintiff also argues that the "touch and concern" test likewise should be eliminated in determining the enforceability of fully negotiated contracts, in favor of a simpler "reasonableness" standard that has been adopted in most jurisdictions. That argument has some support from commentators, see, e.g., Epstein, "Notice and Freedom of Contract in the Law of Servitudes," 55 S.Cal.L.Rev. 1353, 1359-61 (1982) (contending that "touch and concern" complicates the basic analysis and limits the effectiveness of law of servitudes), including a reporter for the Restatement (Third) of Property, see French, "Servitudes Reform and the New Restatement of Property: Creation Doctrines and Structural Simplification," 73 Cornell L.Rev. 928, 939 (1988) (arguing that "touch and concern" rule should be completely eliminated and that the law should instead directly tackle the "running" issue on public-policy grounds).

New Jersey courts, however, continue to focus on the "touch and concern" requirement as the pivotal inquiry in ascertaining whether a covenant runs with the land. Under New Jersey law, a covenant that "exercise[s] [a] direct influence on the occupation, use or enjoyment of the premises" satisfies the "touch and concern" rule. Caullett v. Stanley Stilwell & Sons, Inc., 67 N.J. Super. 111, 116, 170 A.2d 52 (App.Div.1961). The covenant must touch and concern both the burdened and the benefitted property in order to run with the land. Ibid.; Hayes v. Waverly & Passaic R.R., 51 N.J. Eq. 3, 27 A. 648 (Ch. 1893). Because the law frowns on the placing of restrictions on the freedom of alienation of land, New Jersey courts will enforce a covenant only if it produces a countervailing benefit to justify the burden. Restatement of Property

§ 543, comment c (1944); Reichman, supra, 55 S.Cal.L.Rev. at 1229.

Unlike New Jersey, which has continued to rely on the "touch and concern" requirement, most other jurisdictions have omitted "touch and concern" from their analysis and have focused instead on whether the covenant is reasonable. See, e.g., Doo v. Packwood, 265 Cal.App. 2d 752, 71 Cal.Rptr. 477 (1968) (covenant not to sell groceries on property conveyed); Natural Prods. Co. v. Dolese & Shepard Co., 309 Ill. 230, 140 N.E. 840 (1923) (covenant not to sell stone on property conveyed); Coomes v. Aero Theatre & Shopping Center, 207 Md. 432, 114 A.2d 631 (1955) (covenant not to compete with shopping center); Raney v. Tompkins, 197 Md. 98, 78 A.2d 183 (1951) (covenant not to compete with gas station); Sun Oil Co. v. Trent Auto Wash, Inc., 379 Mich. 182, 150 N.W. 2d 818 (1967) (covenant not to use retained land as gas station); Kerrick v. Schoenberg, 328 S.W. 2d 595 (Mo.1959) (covenant not to use retained land for gasoline station); Hall v. American Oil Co., 504 S.W. 2d 313 (Mo.Ct.App.1973) (covenant not to use land for gasoline station); Johnson v. Shaw, 101 N.H. 182, 137 A.2d 399 (1957) (covenant not to use land for gasoline stations or overnight cabins); Quadro Stations Inc. v. Gilley, 7 N.C.App. 227, 172 S.E. 2d 237 (1970) (covenant not to use land for sale of petroleum products); Gillen-Crow Pharmacies, Inc. v. Mandzak, 5 Ohio St. 2d 201, 215 N.E. 2d 377 (1966) (covenant not to sell drugs or prescriptions on premises); Hodge v. Sloan, 107 N.Y. 244, 17 N.E. 335 (1887) (covenant not to sell sand on property conveyed); Hercules Powder Co. v. Continental Can Co., 196 Va. 935, 86 S.E. 2d 128 (1955) (covenant not to engage in manufacture of pulp on property conveyed); Carneal v. Kendig, 196 Va. 605, 85 S.E. 2d 235 (1955) (covenant not to use land for moving-picture business); Oliver v. Hewitt, 191 Va. 163, 60 S.E. 2d 1 (1950) (covenant not to sell groceries and soft drinks on land conveyed); Colby v. McLaughlin, 50 Wash. 2d 152, 310 P. 2d 527 (1957) (covenant not to sell drugs, beer, or ice cream on land conveyed); see also McLoone, supra, 9 Ariz.L.Rev. at 442 n. 3

(noting that "great majority" of jurisdictions enforce as equitable servitude both benefit and burden of covenant not to compete on mere principles of notice).

Even the majority of courts that have retained the "touch and concern" test have found that noncompetition covenants meet the test's requirements. See, e.g., Dick v. Sears-Roebuck & Co., 115 Conn. 122, 160 A. 432 (1932) (holding "touch and concern" element satisfied where noncompetition covenants restrained "use to which the land may be put in the future as well as in the present, and which might very likely affect its value"); Singer v. Wong, 35 Conn.Supp. 640, 404 A.2d 124 (1978) (restrictive covenant in deed providing that premises not be used as shopping center "touched and concerned" land because it materially affected value of land); Rosen v. Wolff, 152 Ga. 578, 110 S.E. 877 (1922) ("touch and concern" rule satisfied where noncompetition covenant affected nature, quality, value, or mode of enjoyment of demised premises); Whitinsville Plaza, Inc. v. Kotseas, supra, 378 Mass. 85, 390 N.E. 2d 243 (noncompetition covenant satisfied "touch and concern" rule within the ordinary sense and meaning of the phrase"); Gonzales v. Reynolds, 34 N.M. 35, 275 P. 922 (1929) (noncompetition covenant satisfied "touch and concern" requirement by affecting use or value of it). But see Savings Bank v. City of Blytheville, 240 Ark. 558, 401 S.W. 2d 26 (1966) (anticompetitive agreement increased value of land only indirectly therefore did not "touch and concern"); Kettle River R. Co. v. Eastern Ry. Co., 41 Minn. 461, 43 N.W. 469 (1889) (covenant that denied access to other railroads did not "touch and concern" land inasmuch as it was not a "privilege affecting the land" of either party to covenant). See generally McLoone, supra, 9 Ariz.L.Rev. at 448 n. 28 (listing cases that recognize that a covenant not to use land competitively meets the "touch and concern" test, notwithstanding diverse definitions of "touch and concern").

The "touch and concern" test has, thus, ceased to be, in most jurisdictions, intricate and ...


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