February 29, 2008
CITY OF CAPE MAY, A BODY CORPORATE AND POLITIC, PLAINTIFF-RESPONDENT,
STEVEN DASH AND JOEL M. DASH, DEFENDANTS-APPELLANTS, AND MOHAMMED ABDELSALEM AND MOHAMMED M. ATTA, T/A THE OASIS, DEFENDANTS, AND STEVEN DASH AND JOEL M. DASH, THIRD-PARTY PLAINTIFFS-APPELLANTS,
DAN J. RICKER, INDIVIDUALLY AND AS TRUSTEE, THIRD-PARTY DEFENDANT-RESPONDENT.
CITY OF CAPE MAY, A BODY CORPORATE AND POLITIC, PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
STEVEN DASH AND JOEL M. DASH, DEFENDANTS-APPELLANTS/CROSS-RESPONDENTS, AND MOHAMMED ABDELSALEM AND MOHAMMED M. ATTA, T/A THE OASIS, DEFENDANTS, AND STEVEN DASH AND JOEL M. DASH, THIRD-PARTY PLAINTIFFS-APPELLANTS,
DAN J. RICKER, INDIVIDUALLY AND AS TRUSTEE, THIRD-PARTY DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Cape May County, Docket No. L-272-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 16, 2008
Before Judges Cuff, Lisa and Simonelli.
In 1951, the City of Cape May (City) leased to the Boardwalk Corporation a parcel of City-owned beachfront property for ninety-nine years at the annual rental of $150. The lease was entered into without public bidding and at a time when the statutory limit on the duration of such leases was five years. The principals of the corporate lessee were Francis Dwyer, who at that time was the City magistrate, and Dan Ricker. The lease required the lessee to construct within one year a commercial building in accordance with specifications approved by the City. That was accomplished, and the building was operated mainly as a gift store and snack shop over the years.
The lease also required the lessee to pay local real estate taxes. The property was assessed by the City assessor, and the taxes were paid over the years in a timely manner. The annual rental was also timely paid each year.
In 1974, Ricker bought out Dwyer's interest and, by virtue of an assignment of the lease, was the sole lessee. From the outset of the lease term, the aunt and uncle of the two brothers who are the appellants, Steven and Joel M. Dash, operated the snack shop. Eventually, the Dash brothers (Dashes) took over this operation. In 1988, Ricker decided to dispose of his interest in the property, and the Dashes were the natural parties to acquire it.
The Dashes and Ricker entered into a purchase agreement on January 7, 1988, by which Ricker agreed to sell the remainder of the ninety-nine-year lease, the vacant land and building, fixtures, inventory, equipment, company name and good will for a total price of $375,000.*fn1 The agreement required payment of $75,000 at settlement, with the remaining $300,000 secured by a mortgage payable over twenty years with ten percent interest. There was no prepayment penalty, and the Dashes satisfied the mortgage obligation in May 2002. In the intervening period, they paid $345,717 in interest. The transaction included an assignment of the lease, which was recorded in the county clerk's office. From 1992 to 2004, the Dashes subleased the snack shop portion of the property to Mohammed A. Abdelsalem and Mohammed M. Atta. The sublease produced more than $400,000 in rental income during that period.
In 2001, the City notified the Dashes that "an issue over the validity of the long-term lease for this property has been raised." After a period of discussions that failed to resolve the situation, the City filed a complaint for ejectment in 2003, alleging that the lease was void ab initio. The City also sought mesne profits. The Dashes filed a counterclaim, seeking a declaration that the lease was valid and other relief. The Dashes also filed a third-party complaint against Ricker seeking damages and other equitable relief for harm resulting from the early termination of the lease, if the City prevailed.
On November 22, 2004, Judge Visalli granted summary judgment in favor of the City, declaring the lease void ab initio because of the lack of public bidding, which he concluded was statutorily required in 1951, and because the ninety-nine-year term exceeded the five-year statutory limit. Alternatively, the judge found that even if the lease was not void ab initio but only voidable, the City was not equitably estopped from voiding the agreement more than fifty years after its execution.
On April 5, 2006, sitting without a jury, Judge Visalli tried the remaining issues. He denied the City's claim against the Dashes for mesne profits. Notwithstanding the apparently mandatory requirement in N.J.S.A. 2A:35-2 to award such damages, the judge denied them on equitable grounds, because of the reliance of the Dashes on the validity of the lease and the City's long delay in bringing the action. The judge also rejected the Dashes' third-party claim against Ricker. He concluded that the nullification of the original lease precluded the parties' power to execute the 1988 assignment. He rejected the Dashes' reliance on the doctrines of mutual mistake and frustration of purpose, concluding that there existed here a mutual mistake of law, not fact, and the Dashes could not rely on the illegality of the original lease to benefit above and beyond the fruits of the assignment.
In back-to-back appeals, the Dashes challenged the adverse rulings against them. In A-1613-06T1, they argue that the judge erred as a matter of law in finding the lease void ab initio. They further argue that, if the lease was voidable, the City should have been equitably estopped from declaring it void in light of the fifty-year delay and the reliance by the Dashes and their predecessors on the apparent validity of the lease over that time. In A-1739-06T1, the Dashes argue that the judge erred in dismissing their third-party complaint against Ricker for damages arising out of the early termination of the lease. The City has cross-appealed, arguing that the judge erred in denying its claim for mesne profits. It argues that such a claim is statutorily mandated and the judge erred in denying it based upon equitable considerations.
Although for reasons somewhat at variance with those expressed by the trial judge, see Isko v. Planning Bd. of Twp. of Livingston, 51 N.J. 162, 175 (1968), we conclude that the lease was void ab initio and the record supports the rejection of the City's mesne profits claim against the Dashes as well as the Dashes' third-party complaint against Ricker. Therefore, we affirm on both appeals and the City's cross-appeal.
We first address the validity of the 1951 lease. The analysis begins with the fundamental principle that, as a creature of statute, municipal corporations such as the City possess only such powers as expressly granted to them by the Legislature, or such powers as are necessary to effectuate expressly granted powers. N.J. Good Humor, Inc. v. Bd. of Comm'rs, 124 N.J.L. 162, 164-65 (E. & A. 1940).
The critical issue in this case is whether the City's act of entering into a ninety-nine-year lease in 1951, without public bidding, was statutorily authorized. If not, it was an ultra vires act. However, as we will discuss, the consequence of such an ultra vires act is further qualified by our State's jurisprudence, in which an ultra vires act in the primary sense is void from its inception, and an ultra vires act in the secondary sense is merely voidable.
Before proceeding with our ultra vires discussion, we address the Dashes' threshold argument that summary judgment on this issue should have been denied because the motion record was insufficient to eliminate a genuine issue as to a material fact, namely whether or not the original lease resulted from public bidding in 1951. See R. 4:46-2(c); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). In support of its summary judgment motion, the City presented documents and an attorney certification demonstrating a lack of public advertisement for bids in 1951. The information provided was unrebutted. While it is difficult to prove a negative, namely the absence of bidding, we are satisfied from our review of the record that the trial judge's conclusion that no reasonable factfinder could conclude that the City advertised for bids was well founded.
We now turn to the substantive issue regarding the legality of the lease. The City advances two bases of illegality, the excessive duration and the absence of public bidding. With those two facts established, we must determine whether the legal consequences flowing from those facts support the summary judgment in favor of the City. In this regard, we owe no special deference to the trial court's interpretation of the law, or the legal consequences flowing from established facts, and our legal analysis is de novo. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
An ultra vires contract is "one which 'is not within the power of a municipal corporation to make under any circumstances or for any purpose.'" Wood v. Borough of Wildwood Crest, 319 N.J. Super. 650, 657 (App. Div. 1999) (quoting 10 McQuillin, Municipal Corporations § 29.10 (3d rev. ed. 1999)). Rather than adhere to this treatise's additional conclusion that "'[a] contract that is merely the result of a defective exercise of existing authority is not ultra vires,'" ibid., New Jersey precedent considers "defective" exercises of authority to be ultra vires acts, but in a "secondary" rather than "primary" sense. The practical effect of this distinction was addressed by our Supreme Court more than five decades ago:
There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation and the irregular exercise of a basic power under the legislative grant in matters not in themselves jurisdictional. The former are ultra vires in the primary sense and void; the latter, ultra vires only in a secondary sense which does not preclude ratification or the application of the doctrine of estoppel in the interest of equity and essential justice. [Summer Cottagers' Ass'n of Cape May v. City of Cape May, 19 N.J. 493, 504 (1955).]
Thus, prior to any consideration of the equities, we must assess the character of the questioned governmental exercise of power. Williams Scotsman, Inc. v. Garfield Bd. of Educ., 379 N.J. Super. 51, 58 (App. Div. 2005), certif. denied, 186 N.J. 241 (2006); Wood, supra, 319 N.J. Super. at 656-57 (noting the possible confusion engendered by this approach). Looking to the relevant authorizing legislation, it is necessary to decide if the municipal action "was ultra vires, and if so, whether it was ultra vires in the primary or the secondary sense." Middletown Twp. Policemen's Benevolent Ass'n Local No. 124 v. Twp. of Middletown, 162 N.J. 361, 369 (2000). An act falling in the first category is void ab initio; unlike acts in the second category, it "is a nullity and can never be cured by subsequent events, because it is an act by a public official 'utterly without capacity' to act in that manner." Independence One Mortgage Corp. v. Gillespie, 289 N.J. Super. 91, 94 (App. Div. 1996) (quoting Bauer v. City of Newark, 7 N.J. 426, 434 (1951)).
The City argues that the original agreement was ultra vires in the primary sense because it exceeded the clear durational limits on the lease of public property. The Dashes argue that the City possessed the basic power to lease property in 1951 and the irregular exercise of that power could not support the trial court's decision to void the ninety-nine-year lease ab initio on that basis. We agree with the Dashes on this point.
Both sides rely on the clear statutory language authorizing all municipalities to "[l]ease, for any term not exceeding five years, any part of any public resort and recreation place owned by the municipality and any building thereon." N.J.S.A. 40:61-1g. Municipalities bordering the Atlantic Ocean, like the City, possess the additional power to "lease, rent or hire, the whole or any part of any public parks, recreation grounds or places of public resort, owned by it and not presently needed by the municipality for municipal purposes" for a period not to exceed five years. N.J.S.A. 40:61-36; see Asbury Park Press, Inc. v. City of Asbury Park, 19 N.J. 183, 194 (1955).*fn2 It is thus clear that the ninety-nine-year lease did not comply with the applicable law and was ultra vires.
However, the City possessed the underlying power to lease its beachfront property in 1951. N.J.S.A. 40:60-42, quoted by the Court in Asbury Park Press, permitted any municipality to "lease for fixed and limited terms to any person or persons any land or building of the municipality not presently needed for public use."*fn3 Even though the additional legislation here imposed a clear ceiling on the duration of all leases of public resort property, this lease more closely resembles an "irregular exercise" of the basic power to lease property to private parties under the general legislative grant than an act "utterly beyond" the City's jurisdiction. See Juliano v. Borough of Ocean Gate, 214 N.J. Super. 503, 508-09 (Law Div. 1986) (finding that a municipality's failure to abide by an age requirement in its appointment of a police officer was only an irregular exercise of power, especially when the municipality sought to invalidate the appointment).
The City, citing Lake End Corp. v. Township of Rockaway, 185 N.J. Super. 248, 256 (App. Div. 1982), argues in the alternative that we should deem the ninety-nine-year lease an act "utterly beyond" the City's jurisdiction because it constitutes an improper sale of beachfront property. The Dashes contend that the City's argument extends the rationale of Lake End beyond its original facts and that the nonrenewable lease here should not be deemed an improper sale. We agree with the Dashes.
Our Tax Court has noted that "[t]he issue of whether a lease can create ownership in the lessee has been addressed in numerous contexts by the courts of New Jersey." Renaissance Plaza Assocs., L.P. v. City of Atl. City, 18 N.J. Tax 342, 347 (Tax 1998). Each court to consider the issue begins with the terms of the lease and the nature of the legislation involved. Ibid. For example, the conveyance of a long-term leasehold interest, renewable in perpetuity, creates an "ownership equivalent to a fee simple" in real property. Ocean Grove Camp Meeting Ass'n v. Reeves, 79 N.J.L. 334, 338-39 (Sup. Ct. 1910), aff'd, 80 N.J.L. 464 (E. & A. 1911); see also Ric-Cic Co. v. Bassinder, 252 N.J. Super. 334, 341-42 (App. Div. 1991) (permitting perpetual lessee to apply for statutory variances).
We reached a similar conclusion in Lake End, supra, in which the corporate owners of large real estate developments leased individual tracts to the sole shareholders for ninety-nine-year terms. 185 N.J. Super. at 249-52. We concluded that the township could assess the tracts to the leaseholders because the individual shareholders held the power to renew the leases ("in practical terms . . . perpetual") at a later time. Id. at 257. Thus, even though we stated that "[a]s a matter of law and fact, 99-year leaseholds are the equivalent of a fee ownership for the purposes of real property taxation, valuation and assessment," id. at 256, the holding applied to de facto perpetual leases.
Conversely, we refused to grant property tax exemptions to holders of nonrenewable ninety-nine-year leases in West Jersey Grove Camp Ass'n v. City of Vineland, 80 N.J. Super. 361, 365 (App. Div. 1963). And, our Supreme Court held that the holder of a ninety-nine-year leasehold interest did not possess the same rights as a fee simple owner in condemnation proceedings in City of Atlantic City v. Cynwyd Investments, 148 N.J. 55, 72 (1997).
The Dashes did not possess the right to renew the ninety-nine-year lease in perpetuity. We decline to apply the Ocean Grove Camp Meeting Ass'n or Lake End rationale to infer fee ownership from the lease in this case. In our view, this lease should be construed as an irregular exercise of the general power to lease property.
To be sure, the irregularity is blatant and extreme. No party can point to any basis upon which the original parties in 1951 could have believed that any term greater than five years was authorized, and the lease was a nearly twentyfold violation of the law. While this circumstance may affect equitable considerations, it does not negate our conclusion that the excessive duration was an irregular exercise of an authorized power. We reach a contrary conclusion, however, regarding the absence of bidding.
The City argues that the failure to advertise the lease for public bid violated the clear language of N.J.S.A. 40:61-39 and -40, as a result of which the City lacked jurisdiction to enter into the lease, rendering it void ab initio. For legal support, the City argues that the Supreme Court's 1955 holding in Asbury Park Press, supra, 19 N.J. at 199-200, making clear the bidding requirement, warrants retrospective application. The Dashes argue that the 1951 lease complied with the controlling authority at the time, Whirl-O-Ball, Inc. v. City of Asbury Park, 136 N.J.L. 316 (E. & A. 1947), which held that bidding was not required. We reject the Dashes' argument for a limited application of the new rule announced in Asbury Park Press. We conclude that retrospective application is appropriate, and the entry into the lease without bidding in 1951 was an act that was "utterly beyond the jurisdiction" of the City.
The City was authorized to lease the property for any period not exceeding five years, N.J.S.A. 40:61-36, but by virtue of other provisions in effect in 1951, any such lease was to go to "the highest responsible bidder," N.J.S.A. 40:61-39, and the City was required to advertise any such letting "in some newspaper circulating in the municipality at least ten days prior to the receipt of bids," N.J.S.A. 40:61-40. An analysis of a series of decisions between 1947 and 1955 regarding the effect of this language guides our determination of the effect of these statutory provisions on the 1951 lease.
In 1947, the Supreme Court addressed the City of Asbury Park's lease without public advertisement of boardwalk property to an amusement park operator. Whirl-O-Ball, Inc. v. City of Asbury Park, 135 N.J.L. 382, 383 (Sup. Ct.), rev'd, 136 N.J.L. 316 (E. & A. 1947). The plaintiff, a former lessee of the property, alleged that the failure to advertise voided the subsequent lease. Id. at 383-84. Asbury Park argued that N.J.S.A. 40:61-40 supplemented prior statutes that did not require advertisement for such leases. Id. at 384. The Supreme Court concluded that N.J.S.A. 40:61-36 to -41, and the general language in N.J.S.A. 40:61-1g, expressed the legislative intent to protect both the public and the municipality through the full disclosure of lettings and the complete solicitation of bids. Id. at 384-85.
The Court of Errors and Appeals, in an 8-4 decision, reversed. The majority concluded that the language in N.J.S.A. 40:61-36 to -41 did not repeal by implication a prior statute, R.S. 40:179-116, that Asbury Park relied on to let the property without advertisement. Whirl-O-Ball, supra, 136 N.J.L. at 317, 320-22. The inclusion of the language in N.J.S.A. 40:61-41 - "The power conferred in this article is in addition to those given by any other law or laws" - supported the Court's conclusion that Asbury Park could let boardwalk property without advertisement pursuant to R.S. 40:179-116. Id. at 321-22.
Justice Burling, joined by three other justices, dissented. He found controlling the clear language of "[t]he latest expression of the legislature on the subject." Id. at 322 (Burling, J., dissenting). The most recent enactment required all municipalities on the Atlantic Ocean to submit their leases to public advertisement and bidding, and "was aimed at good government and to prevent evils which might flow from" the absence of such precautions. Id. at 324. Justice Burling further noted that the part of the Home Rule Act codified in N.J.S.A. 40:61-1g could be read to require public advertisement and bidding on all municipal leases. Id. at 325-26.
The former Supreme Court adhered to the Whirl-O-Ball holding in Anschelewitz v. Borough of Belmar, 137 N.J.L. 617 (Sup. Ct. 1948), aff'd, 2 N.J. 178 (1949). There, the borough approved a new lease for a current lessee without public advertisement and without the receipt of bids. Id. at 618. The court held, despite the language of N.J.S.A. 40:61-36 to -41, that "the statutory authorizations for lettings without advertising [e.g., R.S. 40:60-42 and R.S. 40:61-1g] are applicable and are to be construed as conferring additional powers on the borough." Id. at 620. Therefore, following Whirl-O-Ball, it found no requirement for bidding. However, the court declared the lease invalid because of the absence of an authorizing resolution of the governing body. Id. at 620-23.
The newly constituted court of last resort, the current Supreme Court, affirmed the decision, but relied solely on the absence of an official resolution authorizing the lease. Anschelewitz, supra, 2 N.J. at 183. It reserved comment on the question of advertisement and bids, with this admonition:
Having reached this conclusion on the basis of the inadequacy of the resolution . . . we do not find it necessary to pass at this time on the specific holdings of the former Supreme Court, but they will be reserved for later consideration in appropriate cases.
[Id. at 184.]
In 1955, the Supreme Court addressed Asbury Park's lease of boardwalk property to a private party without prior advertisement or solicitation of bids in Asbury Park Press, supra, 19 N.J. at 186-87. Asbury Park argued that the proposed lease was valid under Whirl-O-Ball's interpretation of the myriad statutes concerning the topic. Id. at 187. Justice Burling, now writing for the majority, disagreed. He first noted that the Court's refusal in Anschelewitz to address the bid requirement, choosing instead to void the lease on other grounds and clearly "declaring the issues involved therein open, including the rationale of the Whirl-O-Ball case," should have "alerted the Legislature to prospective judicial consideration"; the Legislature's failure to respond to Anschelewitz lessened the dispositive force of Whirl-O-Ball. Id. at 190-91.
As for the statutes, Justice Burling noted the friction between R.S. 40:179-116 and N.J.S.A. 40:61-36 to -41. The former authorized municipalities to lease resort property "'for such rental or return as they may deem for the best interest of said city.'" Asbury Park Press, supra, 19 N.J. at 191-92 (quoting the since-repealed statute). This language contrasted with the latter's requirement to lease to "the highest responsible bidder." N.J.S.A. 40:61-39. Justice Burling concluded that the later language impliedly repealed the earlier "best interest" language. Asbury Park Press, supra, 19 N.J. at 196. To hold otherwise would have "'render[ed] impotent the clear and unambiguously expressed intention of the whole act.'" Ibid. (quoting Grogan v. DeSapio, 11 N.J. 308, 324 (1953)). Quoting from his dissent in Whirl-O-Ball, he reiterated that in enacting the later provision, "[i]t is to be assumed that the Legislature was doing more than merely restating an existing power without in any way amplifying or modifying it." Id. at 196. This logic is compelling, for a municipality is always free to bid a contract when bidding is not mandated by statute, but the converse is not true.
Justice Burling held that advertising for bids was required under the statutes. Id. at 199. This interpretation required the invalidation of the resolution authorizing the lease and any subsequent lease. Id. at 200. As for the continued viability of the construction of the statutes in Whirl-O-Ball - the question "prophesied" by Anschelewitz - Justice Burling noted that the case could not survive the new construction and would need to be overruled. Id. at 199-200.
Thus, the applicable statutes, which did not change over the course of these decisions, would have required the City to advertise this lease for public bid after the Court's decision in Asbury Park Press.*fn4 The dispute arises over the effect of the decision on the 1951 lease. The Dashes argue that Whirl-O-Ball constituted the authoritative interpretation of the statutes at the time of the original lease and the City's reliance on the later precedent to void the lease would be unfair. The City argues that the general rule of retrospective application governs.
Our Supreme Court ordinarily follows "'the traditional rule that the overruling of a judicial decision is retrospective in nature.'" Rutherford Educ. Ass'n v. Bd. of Educ., 99 N.J. 8, 21 (1985) (quoting Darrow v. Hanover Twp., 58 N.J. 410, 413 (1971)). It is nonetheless conceivable that the fair and equitable disposition of a case will counsel against retrospective application. Fischer v. Canario, 143 N.J. 235, 244 (1996); N.J. Election Law Enforcement Comm'n v. Citizens to Make Mayor-Council Gov't Work, 107 N.J. 380, 387 (1987) ("[W]e accord our rulings prospective effect in cases where the interests of justice mandate such an approach."); Salorio v. Glaser, 93 N.J. 447, 463, cert. denied, 464 U.S. 993, 104 S.Ct. 486, 78 L.Ed. 2d 682 (1983). However, "there is a presumption in favor of retrospectivity, and 'that presumption can be overcome only by a clear demonstration in a particular case that there are sound policy reasons for according a judicial decision prospective application only.'" Rutherford, supra, 99 N.J. at 21 (quoting Cogliati v. Ecco High Frequency Corp., 181 N.J. Super. 579, 583 (App. Div. 1981), aff'd, 92 N.J. 402 (1983)).
The first part of the retrospectivity analysis requires determination of whether the subject ruling creates a "new rule of law." Twp. of Stafford v. Stafford Twp. Zoning Bd. of Adjustment, 154 N.J. 62, 74 (1998). "Prospective application is appropriate when a decision establishes a new principle of law by overruling past precedent or by deciding an issue of first impression." Montells v. Haynes, 133 N.J. 282, 295 (1993). Asbury Park Press' explicit overruling of Whirl-O-Ball, occasioned by the revised statutes' confusing, inconsistent treatment of the municipal power to lease property, permits consideration of prospective application here.
Our courts utilize an "equitable balancing test" in civil cases to decide whether to limit a new rule's application to future cases. N.J. Election Law Enforcement Comm'n, supra, 107 N.J. at 389. This test considers "whether retroactive operation of the decision would further or retard the purpose of the new rule" and "whether retroactive application would work an injustice upon those who had reasonably relied upon the old rule." Coons v. Am. Honda Motor Co., 96 N.J. 419, 440 (1984) (Garibaldi, J., dissenting) (citing Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355, 30 L.Ed. 2d 296, 306 (1971)), cert. denied, 469 U.S. 1123, 105 S.Ct. 808, 83 L.Ed. 2d 800 (1985).
"Depending upon the facts of a case, one of the factors may be pivotal." Rutherford, supra, 99 N.J. at 23. For example, "[r]eliance is often a critical factor in determining the extent of a new ruling's retrospective application. However, reliance on a contrary rule will not support prospective application unless it is shown to have been reasonable." N.J. Election Law Enforcement Comm'n, supra, 107 N.J. at 390 (citations omitted). For purposes of this appeal, there is conflicting authority on whether the uncertainty of prior case law can justify refusal to apply contrary new law in a retrospective fashion. Compare Montells, supra, 133 N.J. at 296-98 (referring to prior conflicts over the applicable statute of limitations for LAD claims), with Mirza v. Filmore Corp., 92 N.J. 390, 399 (1983) (noting that a commercial landowner's reliance on its prior limited immunity for sidewalk conditions was "dubious" where "[t]he demise of that immunity had been foreshadowed, at least in part, for years").
After consideration of both factors, we conclude that the new rule announced in Asbury Park Press should apply retrospectively to void the 1951 lease. The Dashes have not offered sound policy reasons to permit the inexpensive lease to survive the application of the new rule. As to the first factor, the rule's retrospective application would further the purposes of the rule and the underlying statutory scheme. The special attention given to a municipality's duty to advertise for public bid all leases of public park and resort property bordering the Atlantic Ocean reflects the State's paramount interest in the proper management of these areas. It is likely that the inclusion of these requirements represented a historical recognition that bidding statutes protect the public good. "'Bidding statutes are for the benefit of the taxpayers and are construed as nearly as possible with sole reference to the public good. Their objects are to guard against favoritism, improvidence, extravagance and corruption; their aim is to secure for the public the benefits of unfettered competition.'" Keyes Martin & Co. v. Dir., Div. of Purchase & Prop., 99 N.J. 244, 256 (1985) (quoting Terminal Constr. Corp. v. Atl. City Sewerage Auth., 67 N.J. 403, 409-10 (1975)). Even without any proof that Dwyer used his influence as the City's magistrate to negotiate the 1951 lease, the application of the rule to past conduct lessens the chance that leases that were procured through such misconduct continue to harm the public good. The purpose or public policy prong weighs particularly heavily against prospective application here in light of the blatant and excessive disregard of the undisputed five-year statutory limitation existing in 1951.
Further, the development of the law concerning the municipal power to lease beachfront property could not have induced reasonable reliance at the time of the original lease, at least as to make it "unjust" to apply the new rule rather than the old rule. The Legislature's inconsistent use of the advertisement requirement in the first half of the last century, Justice Burling's strong and persuasive dissent in Whirl-O-Ball employing a common sense interpretation of the statutory language to require bidding, and the reluctant treatment of the precedent in Anschelewitz, giving clear notice that the issue was an open one, raised significant doubt about the old rule's continued viability. See Mirza, supra, 92 N.J. at 399 & n.4 (noting the dissents in a series of cases to address sidewalk immunity from 1954 to 1976).
We therefore conclude that retrospective application is appropriate, and the law in 1951 required bidding. Therefore, failure to bid was a fatal defect, depriving the City of jurisdiction to enter into the lease and rendering it void ab initio. Summary judgment was properly granted in the City's favor on this issue.
As we stated earlier, in granting summary judgment, Judge Visalli alternatively held that even if the lease was only ultra vires in the secondary sense, and thus voidable, the equities of the situation did not bar the City from voiding the lease. The Dashes argue that the judge erroneously reached this conclusion, and, at the very least, the issue was not appropriate for disposition on summary judgment. They point, for example, to their reliance on the validity of the lease for many years and the City's repeated ratification of the lease by accepting rent and tax payments and approving the various assignments that occurred. And, of course, they point to the fifty-year delay in the City's action.
Because of our determination that the lease was properly determined to be void ab initio, we do not address this alternate basis upon which the judge invalidated the lease.
We next address the City's cross-appeal from denial of its mesne profits claim. An entity claiming the right of possession of or title to real property may have its rights determined in an action in Superior Court. N.J.S.A. 2A:35-1. A successful claimant in such an action "shall be entitled to recover from the defendant any and all incidental damages, including mesne profits, and the full value of the use and occupation of the premises for the time, not exceeding 6 years, before the commencement of the action, during which the defendant was in possession thereof." N.J.S.A. 2A:35-2. The entitlement to damages, however, may be offset: "Where permanent improvements have been made on the premises in good faith, under circumstances entitling the defendant to have the value thereof allowed to him, the court may allow the same to be set off against the damages of the plaintiff, but only to the extent of such damages." N.J.S.A. 2A:35-3.
On the face of these statutory provisions, it appears that the right of a successful claimant to the described damages is mandatory ("shall"), and the right of the defendant to an offset is permissive ("may"), depending upon the equities of the situation. If that is so, measurement of the amount of damages should first be made, and only then should an evaluation of the equities be considered to determine whether any offset for the value of improvements should be allowed.
In this case, Judge Visalli considered the equities, which he concluded weighed in favor of the Dashes and against the City, and concluded that notwithstanding the statutory provision that mesne profits "shall" be awarded, he found it inappropriate, "under these circumstances and on this record [to] say that there can be any profits assessed as against the Dashes." We reach the same result, but by a somewhat different rationale.
For purposes of our analysis, we assume that the damages provision of N.J.S.A. 2A:35-2 is mandatory. But see J & M Land Co. v. First Union Nat'l Bank, 326 N.J. Super. 591, 599-600 (App. Div. 1999) (commenting that "[e]ven assuming that a trial court has the discretionary authority to withhold an award of damages [under N.J.S.A. 2A:35-2] for the full six-year period," there was "no equitable basis" to deny full recovery under the facts of that case), aff'd in part, rev'd in part on other grounds, 166 N.J. 493 (2001).
As part of its proofs at trial, the City presented the testimony of its tax assessor. His appraisal process was based upon the income approach, and he provided his opinion as to the rental value of the property for each of the six years preceding the commencement of this action, which totaled $510,450. He acknowledged that $2,000 per year should be deducted from his rental figures to account for necessary physical repairs of the property, thus resulting in a net rental value of $498,450. He also acknowledged that his figures did not include deduction for insurance premiums to cover the property. The assessor further testified that he valued the building, constructed by the Dashes' predecessors, at $500,300, and carried it on the City's books at that value.*fn5 The Dashes' real estate expert testified that the building had a value of $1.5 million.*fn6
Thus, even accepting the City's income and valuation figures, the value of the improvement exceeded the net rental value for the six years preceding commencement of the action. Assuming that the City was mandatorily entitled to an award of mesne profits equal to the rental value for the six years, the next question is whether the permissive offset for the value of the improvements should be granted. We reach our conclusion based upon Judge Visalli's determination that the equities in this regard favored the Dashes.
We will not interfere with a trial judge's findings if they are supported by adequate, substantial and credible evidence. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974). Further, we leave the application of equitable principles to the sound discretion of the trial judge. Sears Mortgage Corp. v. Rose, 134 N.J. 326, 354 (1993); Todaro v. County of Union, 392 N.J. Super. 448, 456 (App. Div. 2007). Absent a showing of a clear abuse of discretion, we will not substitute our judgment for that of the trial judge. Civic S. Factors Corp. v. Bonat, 65 N.J. 329, 333 (1974).
The record here supports the trial judge's finding that equitable considerations weighed in favor of the Dashes on the mesne profits issue, thus supporting the conclusion that the appropriate exercise of discretion in these circumstances is to allow in full the offset for the value of the improvements.
Therefore, denial of the City's claim for mesne profits is supported by the record and was proper.
With respect to their claim against Ricker, which the trial judge rejected, the Dashes argue that they shared a mutual mistake of fact with Ricker as to the validity of the original lease agreement between the City and the Boardwalk Corporation. They claim that this mutual mistake, or the frustration of the purpose underlying the assignment of the lease,*fn7 requires us to award damages equal to seventy-three percent (the nullified portion of their lease) of the total sum (including interest) they paid for the property ($645,717), namely $471,373.*fn8
Ricker responds that he and the Dashes were "in pari delicto." He emphasizes that he did not warrant that the original lease would continue for another sixty years. Furthermore, the Dashes assumed the risk that the lease would terminate prior to the end of its natural term. Because this appeal does not support the reformation of the contract, and because the Dashes received a financial windfall from the assignment, Ricker urges us to affirm Judge Visalli's order.
First, we note that the trial court found that the effect of the void lease was to invalidate the 1988 assignment. Yet, "merely to call a contract illegal is not to state the effects of such illegality." Marx v. Jaffe, 92 N.J. Super. 143, 146 (App. Div.), certif. denied, 48 N.J. 140 (1966). The Dashes cite mutual mistake and frustrated purpose to define the effect.
"The doctrine of mutual mistake applies when a 'mistake was mutual in that both parties were laboring under the same misapprehension as to [a] particular, essential fact.'" Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 608 (1989) (quoting Beachcomber Coins, Inc. v. Boskett, 166 N.J. Super. 442, 446 (App. Div. 1979)). Sections 152 and 154 of the Second Restatement explain the legal effect of a mutual mistake. The former provides:
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.
[Restatement (Second) of Contracts § 152 (1981).]
Assuming that the Dashes' full enjoyment of the remainder of the lease was a basic assumption of the assignment agreement, "[r]elief is only appropriate [if the] mistake of both parties has such a material effect on the agreed exchange of performances as to upset the very basis for the contract." Id. comment a. "It is not enough for [a party] to prove that he would not have made the contract had it not been for the mistake. He must show that the resulting imbalance in the agreed exchange is so severe that he can not fairly be required to carry it out." Id. comment c.
In our view, the imbalance in the agreed exchange is not so severe to require Ricker to pay damages on the judicially-voided contract. The Dashes expended a significant sum of money, through the securing of the mortgage, to acquire the property. However, they received the right to operate an oceanfront business for more than fifteen years for nominal rent. Opposing the City's motion for summary judgment, the Dashes attached a copy of the sublease between themselves and Abdelsalem and Atta. Judge Visalli heard undisputed testimony that this sublease yielded total revenue in excess of $400,000 from 1992 to 2004. Thus, even though the Dashes lost the right to operate the property for the balance of the contractual term, the mutual mistake does not support an award of damages against Ricker.
Further, because the agreement contained no warranty as to the lease duration, the Dashes bore the risk of the mutual mistake. Restatement (Second) of Contracts § 154(a) (1981). We find persuasive Ricker's claim that the parties were in pari delicto. Part of a longer equitable maxim, this Latin expression "means that where the wrong of both parties is equal, the position of the defendant is the stronger." Stella v. Dean Witter Reynolds, Inc., 241 N.J. Super. 55, 73 (App. Div.), certif. denied, 122 N.J. 418 (1990). "[T]he law will not assist either party to an illegal contract. The parties being in pari delicto, it will leave them where it finds them." Cameron v. Int'l Alliance of Theatrical Stage Employees, 118 N.J.Eq. 11, 20 (E. & A. 1935).
Accordingly, we agree with the refusal to rely on the parties' mutual mistake to award damages.
Because the legal invalidity of the lease deprived the Dashes of the remainder of the lease term, they also ask for relief based on the frustration of purpose doctrine. Unlike mutual mistake, frustration of purpose may accord relief to one party even when the other party gains no contractual advantage. Restatement (Second) of Contracts § 154 comment a (1981). The doctrine discharges a party's duty to perform when the party's principal purpose for entering into the contract "is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made." Id. § 265. This language, and each illustration, demonstrates that the doctrine does not act as a sword, but rather as a shield to excuse performance of contractual duties. Here, each party performed under the voided contract. There is no basis to award damages, restitutionary or otherwise, to the Dashes. See supra n.7.
Finally, we consider two additional arguments raised by the City. It argues that the judge improperly precluded the introduction of expert testimony to rebut the opinions rendered by the Dashes' expert regarding valuation of the improvements. The preclusion was based upon discovery considerations. We find no mistaken exercise of discretion in the judge's ruling. The City also argues that the Dashes' tax returns, which reflect the depreciated value of the improvements, should control the valuation determination. We agree with the Dashes that this is not so.