On appeal from the Superior Court, Appellate Division.
For affirmance in part, reversal in part and modification in part -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi and Stein. Opposed -- None. The opinion of the Court was delivered by Handler, J.
This is a property owner's action for breach of a lease by the lessee, a municipality. The lease provided for a twenty-year term of occupancy in two adjoining buildings. The lessor was to renovate the buildings for use by the municipality's housing court and law department. Before completion of the renovations or commencement of occupancy, the municipality notified the lessor that it would discontinue the lease at the end of the year. The municipality claimed that the ordinance approving the lease conditioned the payment of rentals on annual appropriations, and impliedly authorized the municipality to cancel the lease at the end of each year. The lessor then brought this action, contending that the municipality had breached the twenty-year lease. The questions before this Court involve the municipality's liability for breach given the terms of the lease and enabling ordinance, the proper elements of damages if the municipality is indeed liable, and the propriety of awarding attorneys' fees to plaintiff.
In 1982, plaintiff, Hugh A. McGuire, purchased adjoining buildings at 298-300 Baldwin Avenue and 554-556 Newark Avenue, Jersey City (the City), for a total of $92,000. In early 1985, McGuire began discussions with the City about renovating the premises for the City's housing court, law department, and related agencies. McGuire and representatives of the City negotiated a lease for a twenty-year term, to begin September 1, 1985 and to expire on August 31, 2005. The lease provided for a yearly rental of $288,300, payable in monthly installments of $24,025 (excluding cost-of-living increases not at issue here).
Further, the lease called for McGuire to pay $40,498 in yearly operating expenses; the City would be responsible for operating expenses beyond that amount. The City was granted an option to purchase the properties for $2,400,000 during the tenth year of the lease. At trial, McGuire testified that certain provisions of the lease had been drafted to ensure that he could receive federal investment tax credits for renovations to the buildings; however, the lease does not mention any such tax considerations.
McGuire signed the lease, which was subject to and contingent on City Council approval. Subsequently, on March 28, 1985, the City Council passed an ordinance to permit the City to enter into the lease. The ordinance contained the following relevant provisions:
1. The Mayor or Business Administrator is authorized to execute the attached lease agreement in substantially the form attached, subject to such minor modifications as the Corporation Counsel of Jersey City shall deem necessary and advisable;
2. This lease shall endure for a period of twenty (20) years, commencing on or about September 1, 1985 and terminating on or about August 31, 2005. The continuation of this lease beyond each fiscal year during the term shall be subject to the availability and appropriation of funds in the temporary and permanent budgets for the subsequent fiscal year.
McGuire did not receive a copy of the ordinance. The City's business administrator signed the lease shortly after passage of the ordinance. The copy signed by the business administrator was apparently in the same form as had been signed by McGuire, without any of the "minor modifications" referred to in the ordinance.
McGuire continued with the plans for renovations, working with City officials to determine the lessee's required specifications. The City's planning board approved a site plan for the project on May 8, 1985. McGuire undertook demolition work, commissioned architectural plans, and applied for a $1.1 million mortgage to fund the renovations.
Following elections in the late spring of 1985, control of the City's government changed hands. In August 1985, the new
City Council reviewed the McGuire lease, determined that the cost of the lease was excessive in view of the City's fiscal problems, and, relying on the future appropriations provision of the enabling ordinance, determined that the City would not appropriate monies to pay for the lease after December 1985. On September 5, 1985, the City's corporation counsel notified McGuire of the cancellation and recommended that McGuire discontinue renovations. It is apparent from the sequence of events that the buildings were not ready for occupancy by September 1, 1985; in fact, McGuire had never closed on the $1.1 million mortgage for the renovations. In December 1985, McGuire brought this action against the City for breach of the lease. Sometime in 1987, during the course of proceedings before the trial court, McGuire sold the properties for approximately $750,000.
On July 2, 1987, the trial court granted partial summary judgment for McGuire on the issue of the City's liability. The issue of damages was tried in September 1987, and the trial court found McGuire entitled to damages of $1,063,463.12. On liability, the trial court determined that a municipality has the legal power to enter into a long-term lease. Although the City had argued that irregularities in the execution of the lease rendered it invalid, the court held that the subsequent conduct of the City's representatives in encouraging renovations either ratified the City's acceptance of the lease, or estopped the City from asserting the lease's invalidity. After the damages trial, the court based its award on assertions of defendant's expert that the lease was a "tax free deal". Nonetheless, the court specifically refused to award damages for McGuire's lost investment tax credits. The court also declined to permit a "gross up" of the damages award, i.e., an increased amount that would net the judgment amount after taxes, to eliminate the effects of the taxable status of the judgment itself. Finally, the trial court denied McGuire's claim for counsel fees.
The Appellate Division, in an unreported decision, affirmed the finding of liability on different grounds, reasoning that the
language of the ordinance did not materially alter the provisions of the lease. However, the Appellate Division remanded for reconsideration of damages, concluding that McGuire had an obligation to mitigate his damages under case law and under the terms of the lease itself, which provided:
Lessee shall . . . pay Lessor as liquidated damages for its default hereunder any deficiency between the rent hereby reserved and the net amount, if any, of the rents collected [from reletting the property for the balance of the lease term]. . . . [T]he Lessor shall take all reasonable steps to relet the leased premises in order to mitigate the damages or loss which may be charged to the Lessee.
While holding that the lease thus obligated McGuire to mitigate damages regardless of any common-law duty, the Appellate Division noted that it, like the trial court, accepted McGuire's argument that the liquidated damages clause should not apply because McGuire's loss was readily ascertainable. While the continuing disputes over McGuire's damages presented on appeal may belie that his loss is so readily ascertainable, the effect of the liquidated damages clause has not been raised by the parties before this Court. Moreover, the lease's provision for liquidated damages is no more than a restatement of the usual measure of damages for breach of a lease, and even were the provision otherwise applicable, it does not ...