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Boston Market Corp. v. Hack

August 20, 2007


On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-400-02.

Per curiam.


Argued February 27, 2007

Before Judges Axelrad, R. B. Coleman and Gilroy.

Defendant, Myrus Hack, LLC, appeals from an August 10, 2005, Amended Final Judgment, entered following a bench trial before Judge Gerald C. Escala. The judge determined, for reasons stated in a written decision, dated May 31, 2005, that plaintiff Boston Market Corporation, a tenant in a commercial building owned by defendant, was not in default of provisions relating to insurance requirements in the lease between the parties and that the lease continued in full force and effect. Defendant also challenges the court's earlier order, dated July 11, 2003, denying its motion for leave to amend its counterclaim to assert claims of fraudulent concealment against plaintiff. Plaintiff cross-appeals from that portion of the Amended Final Judgment that denied plaintiff's motion for an award of reasonable attorneys' fees pursuant to R. 4:58-2. We affirm each of the orders from which the parties appeal.

The central dispute involves the proper interpretation of the parties' lease agreement and, more particularly, whether the insurance obtained by plaintiff, with high deductibles of up to one million dollars, constituted self-insurance or no insurance at all, as defendant charges. Judge Escala, who had also presided over an earlier trial between the parties concerning a different aspect of the same lease, framed the issue thusly: "The simple question posed here is whether or not the insurance arrangements made by [plaintiff] comply with the lease provisions respecting the tenant's insurance obligation." He concluded that "the position taken by Rosen [the general partner of defendant] that no deductible is permitted under the lease is not a reasonable position and is not sustainable as an argument to declare the tenant to be in breach." We agree.

On appeal, defendant argues that the court should not have considered plaintiff's creditworthiness, post-termination efforts to cure the breach, defendant's failure to purchase insurance itself and seek reimbursement from plaintiff for its cost, and defendant's motivation in terminating the lease. We are satisfied that the factors and circumstances that defendant argues the judge should not have considered are relevant to the implied covenant of good faith and fair dealing, which exists in every contract. Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420-21 (1997). As the Court has recognized, "[a]lthough the implied covenant of good faith and fair dealing cannot override an express term in a contract, a party's performance under a contract may breach that implied covenant even though that performance does not violate a pertinent express term." Wade v. Kessler Institute, 172 N.J. 327, 341 (2002) (quoting Wilson v. Ameroda Hess Corp., 168 N.J. 236, 244 (2001)). In Wilson, the Court articulated the test for determining whether the implied covenant of good faith and fair dealing has been breached as follows: a party exercising its right to use discretion in setting price under a contract breaches the duty of good faith and fair dealing if that party exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract. [Wilson, supra, 168 N.J. at 251.]

A party's purported exercise of discretion to attempt to terminate a lease for an asserted breach is likewise subject to scrutiny to determine whether that action is arbitrary, unreasonable or capricious. Indeed, the trial judge observed, with justification, that "the real motivation here is to escape from a lease that is economically disadvantageous to [the] landlord and becoming more so over the years."

Language in a contract that may result in a forfeiture of one party's interest should be strictly construed. Mandia v. Applegate, 310 N.J. Super. 435, 447 (App. Div. 1998). "The polestar of contractual interpretation is the intention of the parties." Communications Workers v. Monmouth Co. Bd. of Soc. Serv., 96 N.J. 442, 452 (1984). "The starting point in ascertaining that intent is the language of the contract." Ibid. But, it is also permissible, to shed further light on the parties' intent, to consider and examine the circumstances that existed when the contract was made." Ibid. "[T]he chosen words and phrases are to be realistically assessed, in relation to the context and the obvious general purpose of the compact, for the meaning that is reasonably clear, such as is within the reasonable understanding of the symbols of expression." Great Atl. & Pac. Tea v. Checchio, 335 N.J. Super. 495, 501 (App. Div. 2000) (quoting Cozzi v. Owens Corning Fiber Glass Corp., 63 N.J. Super. 117, 121 (App. Div. 1960)).

The obvious purpose of the insurance provisions of the lease in this case is to require the tenant to obtain insurance naming the landlord as an additional insured to protect the landlord by eliminating or reducing the risk of financial loss to the landlord during the term of the lease. To that end, the lease, which was negotiated by the predecessors of these parties, requires the tenant to maintain at its expense hazard insurance and general public liability insurance of the type and amount specified in Paragraph 13 of the lease. In pertinent part, Section 13 of the lease specifies the following insurance requirements:

§ 13.1. Types and Amounts of Insurance Required. Tenant shall at all times maintain at its expense the following insurance with respect of the Leased Premises:

(1) Insurance against loss or damage by fire, lightning, explosion, smoke damage and other risks from time to time included under "extended coverage" endorsements in amounts sufficient to prevent Landlord or Tenant from becoming a co-insurer of any loss under the applicable policies but in any event in amounts not less than 100% of the full insurable value of the Leased Premises. The term "full insurable value," as used herein, means actual replacement value, less actual physical depreciation.

(2) General public liability insurance against claims for bodily injury, death or property damage occurring on, in or about the Leased Premises and the adjoining streets, sidewalks and passageways, with limits of not less than $500,000 with respect to bodily injury or death to any one person, not less than $1,000,000 with respect to any one accident, and not less than $500,000 with respect to property damage.

All such insurance shall be written by companies of recognized financial standing which are authorized to do insurance business in the state in which the Leased Premises are located, and such insurance shall name as the insured parties Landlord, Tenant . . . (as their respective interests may appear). Such insurance may be obtained by Tenant by endorsement on its blanket insurance policies; provided, that such blanket policies fulfill the requirements specified in this § 13[.]

Notably, the lease does not expressly prohibit insurance with a high deductible amount. It does not even mention deductibles. And as the trial judge observed, it is "not uncommon for there to be some deductible amount on the risk insured against in order to economize on the premium." Accordingly, in the absence of language in the lease that specifies a maximum allowable deductible or that directly prohibits insurance that features a deductible amount, the trial ...

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