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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
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. ...