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Kruh v. Ehrman


November 28, 2007


On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket Nos. L-4099-06 and L-4139-06.

Per curiam.


Argued September 18, 2007

Before Judges Coburn, Fuentes and Grall.

Ken Ehrman, buyer, and Robert A. Vort and Tina Kruh, sellers, executed a contract for the sale of a residence in Saddle River, Bergen County. Prior to closing, buyer and sellers filed separate complaints seeking declaration of the parties' rights under that contract. See N.J.S.A. 2A:16-2 to-54. The actions were consolidated. On cross-motions for summary judgment, the judge determined that buyer waived any right he may have had to cancel the contract, declared the contract valid and enforceable, entered judgment in favor of sellers and dismissed buyer's complaint. Buyer appeals.*fn1 We conclude that genuine issues of material fact preclude summary judgment. Accordingly, we reverse and remand for further proceedings.

The property includes a private well that supplies water to the residence, and this dispute about contract rights centers on the presence of perchlorate in that water. Before the parties executed the contract, local newspapers reported that the New Jersey Department of Environmental Protection (DEP) was testing private wells in Saddle River for perchlorate contamination. The parties discussed the articles, and sellers asked DEP to test their well.

The parties executed the contract on November 25, 2005.

The well water was not tested until November 30, 2005. By report dated January 27, 2006, DEP advised that it had detected perchlorate at a ratio of 11.8 parts per billion ("ppb"). DEP explained that it was utilizing a ratio of 5 ppb for drinking water pending formal adoption of a standard and cautioned that "this well water should not be used for drinking purposes." (emphasis added). DEP enclosed a form for submission of a claim against the spill fund for diminished property value. On January 30, 2006, sellers' attorney mailed the DEP report to buyer's attorney with a letter inviting buyer to call sellers directly and offering to answer any questions. There was no response. On April 12, 2006, DEP advised sellers that a second test of their water showed perchlorate at a ratio of 11.3 ppb.*fn2 Sellers' attorney faxed that report to buyer's attorney on April 20, 2006. On the cover sheet, the sellers' attorney included an offer to respond to questions. Buyer did not respond.

After receiving the first report, on March 22, 2006, sellers entered into a contract to purchase a home in Woodcliff Lake. That contract provided for a closing on the same day as the closing on the sellers' Saddle River property.

Beginning with a fax transmitted on May 3, 2006, sellers attempted to set the date for closing on the Saddle River property for June 27, 2006. Vort claims that he spoke to buyer on May 10, 2006, and buyer agreed to close on that date. Buyer's attorney contacted sellers' attorney on May 23, 2006, and discussed possible dates for closing.

On May 25, 2006, buyer attempted to cancel the contract. Buyer explains that he did not see either of the two DEP reports until May 23, 2006 and that he decided to cancel after reading those reports.*fn3 Buyer called Vort and told him. Buyer claims that Vort told him that he was happy about the cancellation because he did not want to move. According to buyer, Vort said that the cancellation would not be a problem because his agreement to purchase the home in Woodcliff Lake was contingent upon the sale of his Saddle River home. On the same day, buyer's attorney wrote a letter advising sellers' attorney that her client was exercising his right to cancel the contract based on breach of a warranty and demanding return of his deposit, $127,500 held by sellers' attorney, with interest.

Sellers objected to the cancellation. By letter dated May 30, 2006, sellers' attorney advised that his clients had provided the DEP reports and, in the absence of a response, had been led to believe that buyer "had every intention of purchasing the property." Sellers' attorney also refused to return the deposit and advised that his clients were considering whether to seek specific performance or damages.

On June 5, 2006, the parties filed their respective complaints for declaratory judgment.

On June 26, 2006, sellers made an effort to address the perchlorate problem. They installed a water filtration system, and a post-installation test performed by a private company was negative for perchlorate. On July 26, 2006, DEP reiterated that it had not adopted a formal standard for acceptable levels of perchlorate. Based on information sellers had provided, DEP concluded that the filtration system sellers installed "appears to be appropriate for the situation and the analytical results for the treatment would meet the Department's anticipated" standard. DEP, however, "recommend[ed] that the system be maintained in accordance with manufacturer[']s recommendations and the treated water tested periodically."

A representative of DEP was deposed on August 11, 2006. He did not anticipate approval of a final standard for acceptable perchlorate levels before December 2007. He had never seen and was not aware of a memorandum issued by the United States Environmental Protection Agency, dated January 26, 2006, advising regional administrators that its standard for drinking water is a perchlorate ratio of 24.5 ppb. He acknowledged that there was no formally approved solution for removing perchlorate from well water but stated that sellers' filtration system was one that DEP would recommend and was similar to those DEP was testing in other homes in Bergen County. He stated that the results of DEP's filtration system tests were not yet complete.

The parties' contract addresses the physical and environmental condition of the property. In pertinent part paragraph eleven provides:

(a) This property is being sold "as is." The Seller makes no claims or promises about the condition or value of any of the property included in this sale except as otherwise provided for in this contract. . . .

(b) Buyer, at its sole cost and expense, shall have the right, within thirty

(30) days of the Contract Date, to conduct a non-invasive (Phase I) environmental audit of the property.

Buyer hereby agrees to provide Seller, promptly upon receipt by Buyer, with copies of all reports, studies and test results obtained by Buyer . . . . If the Buyer is not satisfied with the results of the environmental audit and the parties do not agree on what corrective actions or repairs are to be made by the Seller, Buyer shall have the right to cancel this Contract, whereupon the Seller shall cause the return of the Deposit to the Buyer, and the parties shall thereafter have no rights against or obligations to the other.

(c) Seller represents and warrants . . . that no environmental condition currently exists which affects the property. The foregoing representation shall survive the closing of title. Upon execution of this Contract, Seller agrees to deliver to Buyer or Buyer's counsel (i) copies of any and all environmental documentation and materials with respect to the property, and (ii) Seller's title report or commitment with respect to the property. [Emphasis added.]

Paragraph nineteen of the contract addresses cancellation. It provides for return of buyer's "deposit together with any interest," if the "contract is legally and rightfully cancelled." It provides additional relief -- sellers to pay "all title and survey costs" incurred by buyer -- for cancellations based on specified contract provisions, including "cancell[ation] in accordance with paragraph[] 11 [eleven]."

Other specified grounds for cancellation warranting relief beyond return of deposit and interest are an uncured violation of the building or zoning law, paragraph thirteen; discovery that the property is located within a designated "flood area," paragraph fourteen; and uncured boundary and title problems, paragraph seventeen.

The contract does not include a general provision requiring notice of intention to cancel at a particular time or obligating buyer to give sellers time to cure a defect giving rise to a right to cancel. Rather, time for notice or cure is stated in specific provisions addressing specific grounds for cancellation. For example: paragraph seventeen gives the sellers thirty days after notice from buyer to cure boundary and title defects; paragraph fourteen gives the buyer thirty days from signing of the contract to cancel based upon "flood area" designation; paragraph eleven (b), which is quoted above, gives buyer thirty days to conduct a non-invasive environmental audit but does not specify a time within which buyer and seller must attempt to agree on an action to correct a problem before buyer exercises his right to cancel.

There is no dispute that the contract price for this property met or exceeded fair market value of the property at the time of the contract. The purchase price is $1,275,000. A licensed realtor, who submitted an unsolicited bid on the property in October 2005, was not authorized to offer $1,275,000. In that realtor's opinion, the real estate market in Saddle River and surrounding communities had changed between November 2005 and June 21, 2006, and "the market value of [s]ellers' property [was] substantially less" in June 2006 than it was in the fall of 2005.

In the opinion of the primary physician for buyer, his wife and their two children, ages two and four, "it would be irresponsible for any parent to purchase the home in question, even with the filtration system suggested by the sellers."

Based on this evidence submitted on the motion, the judge found that buyer knew or should have known about the perchlorate problem when notice was given to his attorney and concluded that buyer unreasonably delayed in giving notice of his intention to cancel the contract. Noting that "[t]he DEP, if you will, signed off on" the filtration system sellers installed after this litigation commenced, the judge concluded that sellers had eliminated all detectable perchlorate from the water in the house.

The standard this court must apply on appeal from orders entered on summary judgment is clear. We must consider the evidential materials submitted on the cross-motions in the light most favorable to sellers on buyer's motion and in the light most favorable to buyer on sellers' motion. See Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995); Prudential Prop. and Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). In both cases, we must determine whether there is a genuine dispute of material fact or whether the relevant evidence is so "one-sided" as to permit a decision in favor of the moving party as a matter of law. Brill, supra, 142 N.J. at 540. We conclude that neither party was entitled to summary judgment.

This case does not involve exercise of a right to rescind, terminate or cancel a contract expressly provided in the contract. See Restatement (Second) of Contracts § 283 comment a (1981) (distinguishing an agreement to rescind "from a 'termination,' which 'occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach' and from a 'cancellation,' which 'occurs when either party puts an end to the contract for breach by the other'") (quoting Uniform Commercial Code § 2-106). Buyer does not and cannot claim a right to cancel pursuant to paragraph eleven (b) of the contract based on the sellers' failure to satisfactorily cure a problem uncovered by an environmental audit he performed.*fn4 He did not undertake such an audit. Cf. Kotkin v. Arison, 175 N.J. 453, 454-55 (2003) (considering the express right to terminate a contract for sale of real estate stated in that contract); Davis v. Strazza, 380 N.J. Super. 476, 484 (App. Div. 2005), certif. denied, 186 N.J. 242 (2006) (discussing the right to cancel based upon mortgage contingency expressly stated in the contract). Buyer's claim is made pursuant to paragraph eleven(c) of the contract -- that the perchlorate in the well water is a breach of sellers' "represent[ation] and warrant[y] . . . that no environmental condition currently exists which affects the property." Paragraph eleven(c) does not state a time for or otherwise address notice, cure or cancellation based on breach of warranty.

Buyer's right to cancel based on breach of the warranty is, accordingly, dependent upon general contract principles. The contract, paragraph nineteen, of which provides for return of deposit on any legal and rightful cancellation and additional relief upon exercise of specified cancellation rights provided in the contract, must be understood to contemplate cancellation based upon contract law.

The law of contracts allows cancellation "for material breaches." Ramirez v. Autosport, 88 N.J. 277, 284 (1982) (using the term "rescission" in discussing the right to refuse to render performance based on the other party's material breach); see Nolan v. Lee Ho, 120 N.J. 465, 472 (1990) (noting that breach of a material term of a contract permits the non-breaching party to refuse to continue to perform). To be material, the breach must be "so substantial and fundamental as to defeat the object of the parties in making the agreement." Miller & Sons Bakery Co. v. Selikowitz, 4 N.J. Super. 97, 102 (App. Div. 1949) (quotations omitted); see Herbstman v. Eastman Kodak Co., 68 N.J. 1, 9 (1975) (discussing this general principle of contract law in explaining the Uniform Commercial Code).

The standard for materiality "is necessarily imprecise and flexible." Restatement, supra, § 241 comment a (discussing measure of materiality of breach relieving one party of the obligation to perform when the parties have promised to exchange performances simultaneously, as is typical in a contract for sale of real property, see id. at § 238). "It is to be applied in the light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances." Ibid. The question is whether there is a sufficiently "substantial impairment of the value to" the party seeking termination to warrant termination under the circumstances. A-Leet Leasing Corp. v. Kingshead Corp., 150 N.J. Super. 384, 398 (App. Div.), certif. denied, 75 N.J. 528 (1977). Factors relevant to that determination include the extent that the breach will deprive the injured party of a benefit reasonably expected; the adequacy of compensation for the lost benefit; the potential for cure, and whether the party in breach acted in a manner consistent with standard of good faith and fair dealing. Restatement, supra, § 241; see id. comment a (noting applicability of this measure of materiality in cases involving relief from the obligation to render performance of the sort required in typical contracts for the sale of real estate, which are addressed in § 238 of the Restatement).

A contract is construed so as to determine the intent of the parties. See Highland Lakes Country Club & Community Ass'n v. Franzino, 186 N.J. 99, 115-116 (2006). Courts give the language its ordinary meaning and consider the contract as a whole and in light of its purpose and the circumstances. See ibid.; Davis, supra, 380 N.J. Super. at 483. While the precise contours of this contract warranty against "environmental condition currently exist[ing] which affects the property" are far from clear, it is apparent that a non-potable water supply for a residence caused by perchlorate contamination present at the time of the contract is a breach of that warranty. The plain meaning of the terms used and the circumstances surrounding the grant of this warranty indicate an intention to address well water that is unsafe to drink.

The question whether this breach is material -- "so substantial and fundamental" as to relieve buyer of the obligation to complete the purchase because of a substantial impairment of the value of the residence to him -- is not one that can be decided in favor of either buyer or sellers on this record.

The facts relevant to the significance of the perchlorate on the non-economic benefits of this real estate transaction are in dispute. Sellers contend that the water never exceeded the federal standard, but the federal standard has not been adopted by DEP. The level of perchlorate in the well water exceeds the interim and informal standard DEP is presently using as a measure for potable water. There is, however, evidence that the filtration system now installed removes all perchlorate from the drinking water. On the other hand, DEP has not approved this filtration system or any other, and buyer's family doctor has expressed his opinion that it would not be responsible to move young children into the house.*fn5

There also are disputed facts relevant to an assessment of any impact on the dollar value of the transaction, which are relevant to the question whether damages to compensate for the breach can be fixed if the contract is not cancelled. DEP and the manufacturer recommend maintenance of the system and periodic testing. The cost and effort necessary to operate, maintain and monitor the filtration system is not clear on this record. Similarly, there is evidence -- the claim forms provided to sellers' by DEP -- that would permit an inference that the perchlorate has an impact on the value of this property, for which buyer was to pay "top dollar." There is, however, no evidence that would permit assignment of a dollar value to the loss attributable to the perchlorate.

For all of these reasons, we cannot conclude that either side of this litigation has shown its entitlement to a favorable ruling on the question whether this breach is or is not sufficiently substantial to warrant termination based upon materiality. The question of material breach is ordinarily a question of fact that requires trial. See Magnet Resources, Inc. v. Summit MRI, Inc., 318 N.J. Super. 275, 286 (App. Div. 1998). We see no adequate ground for deviation from that general rule here.

Sellers also argue that even if the evidence is adequate to raise a factual question about breach of their warranty against environmental conditions affecting the property, buyer's delay between receipt of the first DEP notice on January 30, 2006, and assertion of the right to cancel on May 25, 2006, amounts to a waiver of the breach. As discussed above, this contract does not state a time for notice of intention to cancel based on breach of this warranty. Absent an explicit agreement about time or notice -- i.e., one of the sort these parties included in addressing cancellations pursuant to paragraph eleven (b), fourteen, fifteen and sixteen of this contract -- the measure is reasonableness. Miller, supra, 4 N.J. Super. at 102 (suggesting that clear notice within time reasonable to permit cure should be given when the time left for performance and, presumably, possibility of cure permits). An obligation of "reasonable" conduct in performance of a contract is based on the duty of good faith and fair dealing that is "an implied term of every contract." Pickett v. Lloyd's, 131 N.J. 457, 467 (1993). It is a mutual obligation.

On this record, the evidence relevant to delay is not sufficiently one-sided to permit a finding that buyer's delay was "unreasonable." To the contrary, there is no readily apparent basis for distinguishing these parties with respect to notions of good faith and fair dealing relevant to their conduct after DEP reported the test results. The duty of good faith and fair dealing is imposed on both parties to a contract in part to encourage communication that avoids problems that lead to litigation. See generally , 8 Corbin on Contracts §§ 37.11, 37.12 (Perillo rev. 1999).

Buyer gave notice of his intention to reject the property on the basis of breach of warranty after the sellers attempted to set a closing date. Buyer's performance, completion of the transaction, was not due until sellers offered to tender a conforming property. See Restatement, supra, § 238; Miller, supra, 4 N.J. Super. at 102 (discussing impropriety of insisting upon termination without allowing opportunity for cure as anticipatory breach). Buyer did not delay until the closing date, however. His notice came more than one month prior to the date for closing set in the contract and time was not of the essence under this contract.

Sellers knew about the perchlorate and DEP's warning against drinking the well water before buyer knew. The perchlorate was a condition affecting the property against which sellers had warranted. Although the perchlorate, at least while uncured, precluded sellers from performing their promise to deliver a property that conformed to the warranty, they demanded buyer's performance and took no action to cure the problem until this litigation commenced. Although sellers were fully aware of buyer's concern about perchlorate and his insistence upon that warranty, they made no effort to confirm that buyer was willing to accept the property before they entered into a contract to purchase another home and sought a firm date for this closing. Thus, facts relevant to allocation of responsibility for any financial loss due to market forces and sellers' agreement to purchase a replacement home do not all point to buyer. Sellers' reliance on sections 380 and 381 of the Restatement addressing delay in asserting a right of avoidance based on fraud, mistake and the like is misplaced. Buyer does not argue that he has a right to rescind or cancel on those grounds.

Sellers' objections to certifications considered by the trial judge lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

Reversed and remanded for further proceedings.

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