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Wasserman's Inc. v. Township of Middletown

Decided: August 2, 1994.

WASSERMAN'S INC. AND JO-RO, INC., PLAINTIFFS-RESPONDENTS,
v.
TOWNSHIP OF MIDDLETOWN, DEFENDANT-APPELLANT.



On certification to Superior Court, Appellate Division.

Pollock, Wilentz, Clifford, Handler, O'Hern, Garibaldi, Stein

Pollock

The opinion of the court was delivered by POLLOCK, J.

Pursuant to a public advertisement for bids, plaintiff Wasserman's Inc. (Wasserman's) and defendant, Township of Middletown (the Township or Middletown), entered into a commercial lease for a tract of municipally-owned property. The agreement contained a clause providing that if the Township cancelled the lease, it would pay the lessee, Wasserman's, a pro-rata reimbursement for any improvement costs and damages of twenty-five percent of the lessee's average gross receipts for one year. In 1989, the Township cancelled the lease and sold the property, but refused to pay the agreed damages. On cross-motions for summary judgment, the Law Division held that the lease and the cancellation clause were enforceable. It subsequently required the Township to pay damages in the amount of $346,058.44 plus interest. In an unreported opinion, the Appellate Division affirmed. We granted certification, 134 N.J. 478 (1993), and now affirm the judgment on liability but reverse and remand for a plenary trial on damages. We conclude that the lease is enforceable. We affirm the award of renovation costs and remand to the Law Division the issue of the enforceability of the stipulated damages clause.

-I-

The Township owned a parcel of approximately 20,500 square feet in a commercial area at 89 Leonardville Road, in the Belford section of the Township. From 1948 to 1968, Wasserman's leased the property from the Township for a 3,200-square-foot general store. In 1969, the Township advertised for bids to lease the property, which the Township evaluated at $47,500. Wasserman's submitted the sole bid. After rejecting Wasserman's bid, the Township again advertised in May 1970. Once again, Wasserman's submitted the only bid. Subsequent negotiations resulted in the Township adopting a resolution approving the lease on September 22, 1970. The parties signed the lease on May 21, 1971.

At the center of the dispute is the cancellation clause in the lease. The bid specifications provided that if the Township cancelled the lease, it would pay the tenant a pro-rata reimbursement of improvement costs. Consistent with the specifications, the clause provides in part for reimbursement: "payment to be made shall be (1.) total value of all improvements made by lessee at time of construction x (multiplied by) years remaining in Lease term (divided by) total number of years in Lease term." More controversial is the second half of the clause, the terms of which were not included in the original specifications. That provision requires the Township to pay "(2.) twenty-five percent of the lessee[']s average gross receipts for one year (to be computed by (adding) the lessee[']s total gross receipts for the lessee[']s three full fiscal years immediately preceding the time of cancellation of the lease and (dividing by) 12 (twelve)[)]." The lease also provided for a fixed monthly rental of $458.33, with no escalation for the entire thirty-year term.

Wasserman's made the agreed improvements, spending $142,336.01 in 1971 on the expansion and renovation of the store, which now is approximately 5,600 square feet. In August 1973, Wasserman's sold "the business," presumably the corporate assets, and sublet the premises to Rocco Laurino doing business as Jo-Ro, Inc. (Jo-Ro). The sublease provided that Jo-Ro was to pay Wasserman's a monthly rent of $1,850. Wasserman's and Jo-Ro, jointly described as "plaintiffs," provided for an allocation of any payments made by the Township if it cancelled the lease.

In 1977, Samuel Krawet and Arnold Kornblum purchased from Laurino all of the Jo-Ro stock for $95,000. In connection with the sale, Laurino executed an affidavit, representing that the lease between Middletown and Wasserman's was in full force and effect. Additionally, the Township sent a letter to Wasserman's stating that the Township would permit subletting the property to Jo-Ro.

By letter dated December 7, 1987, the Township cancelled the lease effective December 31, 1988. Krawet and Kornblum vacated the premises, leaving them without a place for their business. In June 1989, the Township, after advertising the property at public auction, sold it for $610,000, nearly thirteen times the value of the property at the time the Township had leased it to Wasserman's in 1971.

The statute in effect when Wasserman's and the Township executed the lease provided:

Every municipality may lease for fixed and limited terms to any person any land or building of the municipality not presently needed for public use. If any portion of a building owned by a municipality is not presently needed for the use of the municipality, the governing body may rent such portion for private purposes to the person who will pay the highest rent therefor, for any use not detrimental to such building or the use of the remainder by the municipality.

[N.J.S.A. 40:60-42, repealed by L. 1971, c. 199, § 29 (effective July 1, 1971).]

On July 1, 1971, six weeks after the Township and Wasserman's signed the lease, N.J.S.A. 40A:12-14 took effect. The new statute replaced N.J.S.A. 40:60-42 and requires public bidding for leases of unused municipal property. N.J.S.A. 40A:12-14(a) provides:

In the case of a lease to a private person . . ., said lease shall be made to the highest bidder by open public bidding at auction or by submission of sealed bids. Advertisement of the method of bidding shall be published in a newspaper circulating in the municipality or municipalities in which the leasehold is situated by two insertions at least once a week during two consecutive weeks; the lease publication to be not earlier than seven days prior to the letting of the lease. The governing body may, by resolution, fix a minimum rental with the reservation of the right to reject all bids where the highest bid is not accepted. Notice of such reservation shall be included in the advertisement of the letting of the lease and public notice thereof shall be given of the time of the letting of the lease. Such resolution may provide that upon the completion of the bidding, the highest bid may be accepted or all of the bids may be rejected. It shall also set out the conditions, restrictions and limitations upon the tenancy subject to the lease. Acceptance or rejection of the bid or bids shall be made not later than at the second regular meeting of the governing body following the completion of the bidding, and, if the governing body shall not so accept such highest bid, or reject all bids, said bids shall be deemed to have been rejected. Any such award may be adjourned at the time advertised for not more than one week without readvertising.

Contrary to N.J.S.A. 40:60-42, N.J.S.A. 40A:12-14(a) requires public bidding if a municipality proposes to lease property to a private person and requires that the lease "shall be made to the highest bidder . . . ." The Township argues that N.J.S.A. 40A:12-14(a) should apply retroactively to void the lease. We disagree.

-II-

Plaintiffs sued for breach of contract, seeking in part damages under the terms of the lease. The Township filed an answer and counterclaim seeking a declaration of invalidity of that part of the cancellation clause that required the Township to pay as damages twenty-five percent of the lessee's gross receipts. Originally the Township also disputed its obligation to reimburse Wasserman's for a pro-rata portion of the cost of renovations, but it now concedes the validity of that provision. The parties filed cross-motions for summary judgment.

The Law Division initially granted plaintiffs a partial summary judgment according "full force and effect" to the lease and the cancellation clause. On a subsequent motion, the court awarded plaintiffs damages of $346,058.44 plus ten-percent prejudgment interest. The trial court calculated damages as follows:

$142,336.01 (construction costs) multiplied by 11.75 (remaining years) divided by 30 years (term of lease) for a total of $55,748.27.

$3,483,722.25 (Jo-Ro's gross receipts for the years 1985, 1986, 1987) divided by 12 equalling $290,310.18

Construction compensation $55,748.27

Gross receipts compensation ...


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