July 31, 2009
WINDOW SHAPES, INC., PLAINTIFF-RESPONDENT,
TOMA REALTY, LLC, DEFENDANT-APPELLANT.
TOMA REALTY, LLC, PLAINTIFF-APPELLANT,
WINDOW SHAPES, INC., DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Chancery Division, Union County, Docket No. C-31-08. On appeal from the Superior Court of New Jersey, Law Division, Special Civil Part, Union County, Docket No. LT-1623-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 20, 2009
Before Judges Axelrad, Messano and Kestin.
Window Shapes, Inc. (Window Shapes) entered into a five-year lease (the lease) with its landlord, Toma Realty, LLC, (Toma), for commercial space located at 1121-1125 Springfield Road in Union. The lease, which commenced January 1, 2003, contained an option to purchase, which Window Shapes exercised in writing prior to the lease termination date, December 31, 2007. When Toma refused to convey the property, Window Shapes filed a complaint in Superior Court, General Equity Part, seeking specific performance. Two days later, Toma filed a landlord/tenant complaint in the Law Division, Special Civil Part, seeking to evict Window Shapes for failing to pay January and February 2008 rent. The matters were consolidated, and, after discovery, both parties moved for summary judgment.
Concluding that 1) Toma was aware of technical violations of the lease but continued to accept rent; 2) it never issued default notices under the terms of the lease; and 3) it confirmed the validity of the purchase option, the judge granted Window Shapes summary judgment, ordered Toma to transfer the property for the option price of $2.4 million within sixty days, and further ordered any rent paid by Window Shapes to Toma or to the clerk of the court be credited against the purchase price. The order further denied Toma's motion, and dismissed its complaint and counterclaims. This appeal ensued.*fn1
Toma raises the following arguments on appeal: (1) the judge erred when he found that Toma waived the violations of the insurance provisions of the lease by accepting rent; (2) the judge erred when he found that Toma lulled Window Shapes into the belief that it was in compliance with the lease; (3) Window Shapes failed to faithfully perform its obligations under the lease, and, therefore was not entitled to exercise the option to purchase; (4) Window Shapes failed to strictly perform its obligations under the lease; (5) Toma's motive for refusing to honor Window Shapes' option to purchase was irrelevant; (6) Toma was not required to issue default notices in order to reject the option to purchase; and (7) Window Shapes did not demonstrate any hardship as a result of being denied the right to exercise the option. We have considered these arguments in light of the record and applicable legal standards. We affirm.
The option to purchase was set forth in Paragraph 51 of a rider to the lease and provided in relevant part:
51. OPTION TO PURCHASE. The Landlord hereby grants to the Tenant an option to purchase... the Demised Premises... for the consideration and upon the terms and conditions set forth below:
a. Option Date, Term. The Tenant may purchase the Premises at any time during the fifth year of the initial term of this Lease, i.e., during the period from January 1, 2007 through and including December 31, 2007. If this option i[s] not exercised during such period, this option shall expire and thereafter be of no further force or effect.
b. Exercise of Option. The Tenant shall give notice of its exercise of this option in accordance with Paragraph 27, "Notices", of this Lease.
c. Option Price. Except as otherwise provided herein, the price to be paid by the Tenant to Landlord for the Premises if this option is exercised shall be Two Million Four Hundred Thousand Dollars ($2,400,000.00), payable in good funds at the closing of the purchase.
f. Performance of Lease. The right to exercise this option is conditioned upon the faithful performance by the Tenant of all its covenants, conditions and agreements under this Lease, and the payment by Tenant of all basic rent, additional rent and other special payments as provided in this Lease to the date of the completion of the purchase of the Premises by the Tenant.
Additionally, the lease contained the following default provisions:
21. Events of Default; Remedies Upon Tenant's Default. The following are "Events of Default" under this Lease: (a) a default by the Tenant in the payment of rent...;
(b) a default by the Tenant in the performance of any of the other covenants or conditions of this Lease, which the Tenant does not cure within 15 days after the Landlord gives written notice of such default....
Paragraphs 42 and 43 of another rider to the lease addressed Window Shapes' obligations regarding insurance coverage on the property:
42. Tenant... shall keep the demised premises insured for the mutual benefit of Landlord and Tenant during the term of this Lease against loss or damage by... standard "extended coverage endorsement" in an amount not less than the replacement value of the demised premises. Such policies of insurance shall name Landlord and Tenant as insureds... and shall also include all mortgagees of the demised premises as an insured. The policy... shall be delivered to the Landlord prior to the commencement of the term hereof.... At least fifteen (15) days prior to the expiration or termination date of any policy, the Tenant shall deliver to Landlord a renewal or replacement policy.
In paragraph 43, the rider contained a similar provision regarding "general public liability insurance."
In large part, the facts contained in the motion record were undisputed. Toma is a partnership owned by Jacqueline Tomasella (Jacqueline) and her former husband, Joseph Tomasella (Joseph).*fn2 On August 3, 2007, Joseph wrote to Tom Change, Window Shapes' manager, stating, "Just a reminder that if Window Shapes intends to exercise their option to purchase the... property, could you send me a letter to that effect." On December 20, 2007, Robert E. Hornung, Secretary and Treasurer of Window Shapes, notified Jacqueline in writing that it was exercising the option to purchase.
Jacqueline claimed that Change had told her Window Shapes was not going to exercise the option, and, instead, wanted to negotiate a new five-year lease. In his deposition, Joseph reiterated the claim that based upon representations made by Change, Toma believed Window Shapes was not exercising the option. Therefore, Toma had begun to seek other potential buyers. On December 21, 2007, Joseph wrote back, claiming that Window Shapes "ha[d] not faithfully performed all its obligations under the lease[.]" Since the option was "expressly conditioned on the tenant faithfully performing all of its obligations under the lease[,]" Toma rejected the option notice and litigation commenced shortly thereafter.*fn3
In January 2008, counsel for Window Shapes notified Toma that any alleged reliance upon oral representations made by Change, if indeed they had occurred, was misplaced, because under the lease terms, all notices were required to be in writing. Counsel also asked Toma to identify with specificity Window Shapes' failures to "faithfully perform" its obligations under the lease.
In her deposition, Jacqueline stated that after receiving notice of Window Shapes' intention to exercise the option, she and Joseph reviewed their file "to make sure Window Shapes complied with the lease." She realized that Window Shapes had furnished no certificate of insurance for the period after November 13, 2006. She also concluded that Window Shapes had violated the lease by failing to deliver, at least fifteen days prior to expiration, a renewal or replacement policy of insurance. Jacqueline stated that Window Shapes had always sent certificates of insurance and had never given Toma copies of the actual insurance policies as required by the lease. She acknowledged that she had never requested the policies, never notified Window Shapes that it was in violation of the lease, and further admitted that Toma had sustained no harm as a result of these lease violations. Both Jacqueline and Joseph confirmed that initial conversations with Toma's real estate agent revealed that at the end of 2007, the property was valued at $3.5 million.*fn4 Both Jacqueline and Joseph acknowledged that they wanted to avoid the consequences of the option.
Despite Jacqueline's testimony that Toma was not required to notify Window Shapes of any deficiencies regarding the insurance certificates or policies, the record does reveal that Toma, or its agents, had provided notice of problems with the insurance certificates on numerous occasions in the past. In January and February 2003, June 2004, and September 2005, Toma had notified Window Shapes that the insurance certificates were inadequate and needed to be amended. Whatever responses were furnished, it suffices to say that Toma never notified Window Shapes that it was in default under the lease.
Discovery during the litigation revealed a jumbled mess of contradictions regarding the existence of insurance, and whether Toma was an "additional insured" as required by the lease.
Change, for example, testified that he never saw the lease, or had any familiarity with its insurance provisions, despite the fact that he was the store manager and had been delegated the responsibility of procuring insurance. James Condus, a representative of Window Shapes' insurance broker since 2006, conceded that from October 2006 to October 2007, Toma was not named as an additional insured on the insurance policy for property damage, and that Window Shapes never informed him that Toma's interest in the property was to be insured.
Viewing the evidence in a light most favorable to Toma, the motion judge made the following factual determinations in this regard:
[T]here was, in fact, a gap of coverage in the period, a period of time in 2003; that the tenant did not provide copies of policies to the landlord, but only provided broker[-]issued insurance certificates; that Toma was not named as an additional insured, and that any attempt at making any suggestion  that they were retroactively named additional insured[s] did not actually occur; that the Certificate of Insurance is not an adequate proof that insurance exists....
Nevertheless, the judge concluded that "this  [wa]s really a case of waiver." Relying on A.P. Dev. Corp. v. Band, 113 N.J. 485 (1988), and Carteret Props. v. Variety Donuts, Inc., 49 N.J. 116 (1967), the judge noted that "New Jersey law is clear as a basic principle that acceptance of rent by [a] landlord with knowledge of past breaches by the tenant constitute[s] waiver of the breaches." The judge further found that "[t]he landlord did not object to... the tenant's failure to comply with the lease, when... the landlord... accepted certificates [of insurance] in the past without... concern...." The judge concluded that Toma never objected to not receiving the policies and never "defaulted [Window Shapes] under the lease." Furthermore, the judge found that Toma "actually confirmed the existence of the option by inquiring... whether [Window Shapes] intended to exercise [it][.]"
Citing Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assoc., 182 N.J. 210 (2005), the judge further noted
[T]here is an obligation on the part of the landlord who accepts the benefit of the lease, not to lull the tenant into a belief that... the tenant was in compliance with the lease, not to suggest that the lease was in full force and effect as this landlord did, by making inquiry... to the tenant, do you intend to exercise the option, a clear expression that the lease and option were still in effect.
The judge concluded that this "action by the landlord coupled with the general principle that the acceptance of the rent... on a regular basis... exonerates the tenant from any breaches." He granted Window Shapes summary judgment.
When reviewing a grant of summary judgment, we employ the same standards used by the motion judge. Atl. Mut. Ins. Co. v. Hillside Bottling Co., Inc., 387 N.J. Super. 224, 230 (App. Div.), certif. denied, 189 N.J. 104 (2006). First, we determine whether the moving party has demonstrated that there were no genuine disputes as to material facts, and then we decide whether the motion judge's application of the law was correct. Id. at 230-31. In so doing, we view the evidence in the light most favorable to the non-moving party. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523 (1995). However, we accord no deference to the motion judge's conclusions on issues of law, Atl. Mut. Ins. Co., supra, 387 N.J. Super. at 231 (citing Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)), which we review de novo. Dep't of Envtl. Prot. v. Kafil, 395 N.J. Super. 597, 601 (App. Div. 2007).
In Brunswick Hills, the Court summarized the law regarding options to purchase real estate:
In a real estate transaction, an option contract is a unilateral agreement requiring a party to convey property at a specified price, provided the option holder exercises the option in strict accordance with the terms and time requirements of the contract. Within the terms and time limitations of the option contract, the property owner is bound by an irrevocable offer to sell the property, while the option holder is under no obligation to act. Because the property owner cannot withdraw the offer, we require the option holder, who is free to accept or reject, to adhere strictly to the terms of the contract. [Brunswick Hills, supra, 182 N.J. at 223 (citations and quotations omitted).]
It is undisputed that Window Shapes exercised its option to purchase the property "in strict accordance with the terms and time requirements of the contract" in that it provided written notice of its intention during the fifth year of the lease, and prior to its termination date. The issues in this case, however, are whether Window Shapes forfeited its right to exercise the option because it did not "faithfully perform" its obligations under the lease, whether Toma waived any violations of the lease by its tenant, and whether it would otherwise be inequitable to allow Toma to effectuate a forfeiture of the option contained in the lease.
Toma asserts that Window Shapes failed to faithfully perform its obligations under the lease because it did not obtain any insurance during the first ten and one-half months of the lease; failed to name Toma as an additional insured during the last fourteen and one-half months of the lease; and failed to provide the policies of insurance during the lease term. It concedes that it knew about this latter violation, but argues that it did not know about the other two violations until it engaged in discovery.
We have recognized in other contexts that a lessee's failure to technically comply with all obligations under the terms of an option does not automatically lead to a forfeiture of its rights. Thus, for example, when the tenant has failed to provide timely notice of its intention to exercise its option, "equity has intervened to mitigate the hardship... where it is found that the tenant's delay was slight, where it did not prejudice the landlord and where failure to grant relief would cause the tenant unconscionable hardship." Brick Plaza v. Humble Oil & Ref. Co., 218 N.J. Super. 101, 104 (App. Div. 1987) (quotation and citation omitted).
Toma argues, however, that Window Shapes' conduct in this case amounted to serious violations of the lease terms, not the "faithful performance" upon which the right to exercise its option was predicated. Neither counsel has cited us to any authority in New Jersey that interprets the phrase "faithful performance" in this context. Window Shapes has marshaled several citations from other jurisdictions, all of which are factually distinguishable.
It suffices to say, however, that in other contexts, the issue of whether one party has "faithfully performed" its obligations under a contract rests, in part, upon the reasons for the alleged breaching party's failure to strictly perform. See Marvel v. Jonah, 81 N.J. Eq. 369, 376 (Chan. 1913) (noting there was no breach of a partnership covenant to faithfully perform because the alleged breach was not "by reason of dishonest purposes or acts, but was due to the pressure of [the plaintiff's] professional work and his failure to appreciate the importance of the strict business methods defined by the partnership agreement"), rev'd on other grounds, 83 N.J. Eq. 295 (E. & A. 1914). Similarly, to the extent Window Shapes equates "faithful performance" with "substantial performance," we have said that in order to demonstrate substantial performance, "the [party]'s default should not have been willful[.]" Damato v. Leone Const. Co., 41 N.J. Super. 366, 372 (App. Div. 1956) (quotation and citation omitted); 5 Williston on Contracts § 805 (Jaeger ed., 3d ed. 1961).
Window Shapes raises a number of nuanced arguments regarding the legal effect of insurance certificates and whether, in the end, Toma was effectively denied the insurance coverage it bargained for under the lease, i.e., whether Window Shapes failed to "faithfully perform" its lease obligations. We need not resolve that issue. Although on the motion record, material factual disputes certainly exist as to whether Window Shapes' failure to strictly perform under the lease was the result of a good faith excuse, for the reasons that follow, we nonetheless conclude that Toma's conduct amply demonstrates that forfeiture of Window Shapes' option rights would be inequitable.
Toma contends the motion judge erred in concluding that its "knowledge of past breaches" of the lease by Window Shapes resulted, as a matter of law, in a waiver. It notes in particular that the judge only found that Toma knowingly accepted certificates of insurance in lieu of policies, but not that it knowingly waived its right to have Window Shapes provide full coverage naming Toma as an additional insured. Toma claims it did not waive those provisions of the lease because it did not find out about the breaches until discovery in this litigation.
As the motion judge noted, as a general proposition, "acceptance of rent with knowledge of [a] breach [of the lease]... constitutes a waiver of all past breaches." Carteret Props., supra, 49 N.J. at 129. The same rule applies in the context of a lease that contains an option to purchase. See Matlack v. Arend, 2 N.J. Super. 319, 326 (Ch. Div. 1949) (holding that landlord's acceptance of rent from subtenant waived any breach of lease's prohibition on sub-letting, and thus provided no basis for landlord to deny exercise of option to purchase); and see Schlegel v. Bott, 93 N.J. Eq. 607, 610-11 (E. & A. 1922) (landlord's failure to collect security deposit at inception of lease cannot be used to defeat tenant's option to purchase after landlord collected rent). Toma knew Window Shapes had technically breached the lease by not furnishing insurance policies to it at any time during the lease term. Nevertheless, it continued to accept the rent and acted as if the option was still extant. Such conduct, as a matter of law, constituted a waiver of any violation of the lease provisions in that regard.
We accept for purposes of summary judgment that Toma neither knew of Window Shapes' failure to procure insurance at the beginning of the lease or its failure to name Toma as an additional insured on the property damage coverage a the end of the lease. The essential issue, therefore, is whether Window Shapes' conduct should result in the forfeiture of its option rights under the specific circumstances of this case. We conclude that it should not.
The failure to procure insurance early in the lease term cannot serve as a basis to deny Window Shapes its option rights because it would result in a forfeiture that is entirely inequitable. In other words, since the option could only be exercised during the fifth year of the lease, it would work "disproportionate forfeiture" to permit Toma to escape from honoring the option for something that occurred years earlier and for which Toma admittedly suffered no harm. See Restatement (Second) of Contracts § 229 (1981) ("To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless the occurrence was a material part of the agreed exchange"). Window Shapes could only exercise its option during the final year of the lease. While the procurement of insurance may have been material to the contract when formed, the failure to comply with that condition of the lease four years earlier and without any damage to Toma's interests, cannot serve to defeat the option when Window Shapes exercised in December 2007. Such a result would clearly work a "disproportionate forfeiture."
The failure to include Toma as an additional insured on the property damage coverage during the last fourteen and one-half months of the lease, however, calls for a different analysis. We properly assume on this record that Window Shapes was materially obligated to comply with the insurance provisions of the lease during the option term, and that Toma was unaware that Window Shapes had failed to do so. We cannot conclude, therefore, that Toma knowingly waived its rights, and in this regard we differ with the motion judge. However, implicit in the motion judge's findings and conclusions was recognition of a number of equitable principles that are applicable generally to the exercise of an option or renewal of a lease, and specifically to the facts of this case.
First, the judge noted that Toma had accepted certificates of insurance in the past, never sought the actual policies, and was well aware of how to bring any issue regarding insurance coverage to Window Shapes' attention because it had done so repeatedly in the past. Had Toma ever asked for the actual insurance policy during the last year of the lease, it would have seen that it was not included as an added insured on the property damage coverage. As we noted in the context of another option case, "It is true that '[e]quity does not ordinarily aid one whose indifference was the sole cause of the injury of which he now complains.'" Goodyear Tire and Rubber Co. v. Kin Props., Inc., 276 N.J. Super. 96, 105 (App. Div.) (quoting Moro v. Pulone, 140 N.J. Eq. 25, 30 (Ch. 1947)), certif. denied, 139 N.J. 290 (1994).
Toma's indifference to the true state of affairs is particularly important in this case. As we have pointed out, Toma never sought the actual insurance policies, and never raised the issue until Window Shapes exercised its rights under the option. Yet, it had the right under the lease to demand compliance, the failure of which would have terminated the lease, and, obviously, the option. Likewise, had Toma not acted indifferently and had it served notice that a certificate of insurance was inadequate under the lease, Window Shapes would have had the ability to cure the default and fully comply with its obligations.
The judge also noted Toma's affirmation of the option in August 2007. Significantly, thereafter the property was appraised and was found to have greatly appreciated since the lease was executed. Upon Window Shapes' exercise of the option, Jacqueline and Joseph immediately examined Toma's file specifically looking for a reason to disavow the option. "It is  well settled that... an option to purchase at a named price cannot be voided merely because of subsequent enhancement of the value of the property." Humble Oil & Refining Co. v. Doerr, 123 N.J. Super. 530, 543 (Ch. Div. 1973). Toma's contention that its motivation was irrelevant is inconsistent with the equitable concerns raised by its own actions.
Lastly, we have noted "that the trial court's exercise of discretion in denying [Toma]'s forfeiture claim may be disturbed only if it is 'so wholly insupportable as to result in a denial of justice.'" Gillman v. Bally Mfg. Corp., 286 N.J. Super. 523, 528 (App. Div.) (quoting Goodyear Tire, supra, 276 N.J. Super. at 106) (in turn quoting Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974)), certif. denied, 144 N.J. 174 (1996). Under the specific facts of this case, by considering the "'countervailing equities' [that] call[ed] for such relief[,]" the judge properly exercised his discretion to enforce Window Shapes' option rights and avoid the forfeiture sought by Toma. Dunkin' Donuts of Am., Inc. v. Middletown Donut Corp., 100 N.J. 166, 184 (1985) (quoting Camden Trust Co. v. Handle, 132 N.J. Eq. 97, 108 (E. & A. 1942)).