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Designer License Holding Co., L.L.C. v. Resource Club

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


November 24, 2009

DESIGNER LICENSE HOLDING COMPANY, L.L.C., PLAINTIFF-APPELLANT,
v.
THE RESOURCE CLUB, LTD., AND 99 HOOK ROAD, L.L.C., DEFENDANTS-RESPONDENTS.

On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-3123-08.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued October 13, 2009

Before Judges Reisner, Yannotti and Chambers.

Plaintiff Designer License Holding Company, L.L.C. appeals from an order entered by the trial court on October 22, 2008, which granted motions by defendants The Resource Club, Ltd. (Resource Club) and 99 Hook Road, L.L.C. (99 Hook Road) to dismiss plaintiff's amended complaint with prejudice, and denied plaintiff's motions for leave to file a second amended complaint and for consolidation of this case with another Law Division action. Plaintiff also appeals from the trial court's January 8, 2009 order, which denied its motion for reconsideration. For the reasons that follow, we affirm.

I.

In April 2004, Resource Club and 99 Hook Road executed an agreement under which Resource Club leased from 99 Hook Road approximately 188,720 square feet of retail warehouse space in Bayonne, New Jersey for a five-year period commencing on October 1, 2004 (the Master Lease). On February 15, 2007, the parties executed a consent to sublease a portion of the premises to plaintiff (the Consent Agreement). On February 15, 2007, plaintiff and Resource Club executed the Sublease Agreement, which provides, among other things, for the sublease of 96,240 square feet of the leased space to plaintiff.

According to plaintiff, sometime in the late summer or fall of 2007, several of its employees noticed a foul odor in the premises. Plaintiff's vice-president, John Llano, thought that the odor was emanating from burlap bags that belonged to another sublessee in the building. Plaintiff contacted Resource Club and requested that it take steps to address the problem. Resource Club informed 99 Hook Road, which made two unsuccessful attempts to remediate the problem.

Plaintiff thereafter retained a consultant to perform an air quality survey of the subleased premises. The consultant rendered a report dated February 15, 2008, in which it concluded that there were elevated levels of carbon dioxide in certain locations but that the levels of carbon monoxide were within acceptable guidelines and standards. In March 2008, plaintiff notified Resource Club that the foul odor was damaging its inventory and producing an intolerable working environment for its employees.

Plaintiff's consultant later performed another air quality survey. In a report dated May 15, 2008, the consultant stated that the levels of carbon dioxide were acceptable but there were elevated levels of carbon monoxide in most of the locations tested. The consultant recommended that "site personnel be removed from the area until such time that the source of airborne carbon monoxide is identified." Plaintiff claims that several of its employees became ill because of the conditions in the premises.

On or about May 16, 2008, plaintiff vacated the premises and relocated to a new warehouse in Harrison, New Jersey. In a letter of that same date, plaintiff informed defendants that it had been constructively evicted as a result of the foul odors and high levels of carbon dioxide and carbon monoxide in the premises.

On June 16, 2008, Resource Club filed an action against plaintiff seeking the rent due under the Sublease Agreement. On June 24, 2008, plaintiff filed a complaint and amended complaint against Resource Club and 99 Hook Road and asserted claims for constructive eviction and fraud.

On July 22, 2008, Resource Club filed a motion to dismiss plaintiff's complaint. On August 5, 2008, 99 Hook Road also moved for dismissal of the amended complaint. Plaintiff opposed the motions and filed a cross-motion seeking leave to file a second amended complaint and consolidation of this action with Resource Club's pending lawsuit.

The trial court considered the motions on October 10, 2008, and filed a written opinion dated October 21, 2008. The court determined that plaintiff failed to state claims upon which relief can be granted. The court further determined that plaintiff's fraud claims against both defendants failed because they had not been pled with sufficient specificity, as required by Rule 4:5-8(a). In addition, the court denied plaintiff's motion for leave to file a second amended complaint because assertion of the claims would be futile. The court also denied plaintiff's motion for consolidation as moot. The court entered an order dated October 22, 2008, memorializing its decision.

Plaintiff thereafter filed a motion for reconsideration, which was considered by the trial court on January 8, 2009. The court determined that there was no basis to reconsider its earlier decision. The court entered an order dated January 8, 2009, denying plaintiff's motion. This appeal followed.

II.

Plaintiff first argues that the trial court erred by dismissing its claims against Resource Club. The trial court found that plaintiff's claims against Resource Club were barred by the exculpatory clause in section 15(j) of the Sublease Agreement which states that

In no event shall either party to this Sublease be liable to the other under any theory of tort, contract, strict liability or other legal or equitable theory for any lost profits (excluding rent or damages for rent payable hereunder), exemplary, punitive, special, incidental, indirect or consequential damages, each of which is hereby excluded by agreement [of] the parties regardless of whether or not any party has been advised of the possibility of such damages.

Plaintiff contends that the trial court erred by enforcing the exculpatory clause. We disagree.

The factors to be considered by the court in determining whether to enforce an exculpatory clause are set forth in Gershon v. Regency Division Ctr., Inc. 368 N.J. Super. 237, 248 (App. Div. 2004). The clause will be upheld if (1) it does not adversely affect the public interest; (2) the exculpated party is not under a legal duty to perform; (3) it does not involve a public utility or common carrier; or (4) the contract does not grow out of unequal bargaining power or is otherwise unconscionable. [Ibid. (citing Chemical Bank of New Jersey Nat. Ass'n v. Bailey, 296 N.J. Super. 515, 527 (App. Div.), certif. denied, 150 N.J. 28 (1997); Tessler & Son, Inc. v. Sonitrol Sec. Sys. of N. New Jersey, Inc., 203 N.J. Super. 477, 482-83 (App. Div. 1985)).]

Exculpatory clauses in commercial leases have been enforced when included in contracts between commercial entities, do not involve an inequality of bargaining power and do not affect the public interest. Mayfair Fabrics v. Henley, 48 N.J. 483, 488-89 (1967); Midland Carpet Corp. v. Franklin Associated Properties, 90 N.J. Super. 42, 47 (App. Div. 1966).

The exculpatory clause at issue in this case is part of a contract between private parties that does not affect the public interest. The agreement does not relieve Resource Club of any duty it is legally required to perform. Furthermore, neither party to the agreement is a public utility or public carrier. In addition, when they entered into the Sublease Agreement, plaintiff and Resource Club had substantially equal bargaining power and the exculpatory clause is not unconscionable.

Plaintiff nevertheless argues that the clause should not be enforced because it is inconsistent with the provisions of that agreement pertaining to insurance. However, the fact that the Sublease Agreement only requires plaintiff to obtain and maintain insurance for certain potential losses, and relieves Resource Club from liability for any loss covered by insurance, has no bearing upon the scope or application of section 15(j), which clearly covers the losses claimed here.

Plaintiff additionally argues that the trial court erred by failing to apply the test for determining the validity of exculpatory clauses in Valhal Corp. v. Sullivan Associates, Inc., 44 F.3d 195 (3d Cir. 1995). The Valhal test requires a court to determine whether the exculpatory clause represents a reasonable allocation of the risk between the parties and whether the limitation on liability clause effectively immunizes the parties from liability for their own negligence. Id. at 202-204.

Plaintiff maintains that we adopted the Valhal test in Lucier v. Williams, 366 N.J. Super. 485, 492 (App. Div. 2004). We disagree. In Lucier, we considered the same factors that we considered in Gershon, specifically "the subject matter of the contract, the parties' relative bargaining positions, the degree of economic compulsion motivating the 'adhering' party, and the public interests affected by the contract." Ibid. (citing Rudbart v. North Jersey District Water Supply Comm'n, 127 N.J. 344, 356, cert. denied, 506 U.S. 871, 113 S.Ct. 203, 121 L.Ed. 2d 145 (1992)). Although we also discussed the Valhal factors in Lucier, we did not explicitly endorse that test. Ibid.

III.

Next, plaintiff argues that the trial court erred by dismissing its claims against 99 Hook Road. Plaintiff contends that because 99 Hook Road executed the Consent Agreement, plaintiff is a third-party beneficiary under the Master Lease. Plaintiff maintains that 99 Hook Road had a duty under the Master Lease to address the problems with air quality and foul odors in the subleased premises and, therefore, it may assert claims against 99 Hook Road arising from a breach of that duty.

Although the trial court found that plaintiff was not a third party beneficiary under the Master Lease, we see no need to determine whether the court erred in doing so. We will assume for purposes of our decision that, as sublessee, plaintiff has the right to enforce 99 Hook Road's obligations under the Master Lease.

We note, however, that a sublessee generally does not enjoy greater rights under a lease than the lessee. Xerox Corp. v. List Mark Computer System, 142 N.J. Super. 232, 239 (App. Div. 1976) (citing D'Agostino v. Sheppard, 102 N.J.L. 154, 155-56 (E. & A. 1925)). Therefore, plaintiff cannot assert any claim against 99 Hook Road that Resource Club could not assert.

Section 6.5 of the Master Lease provides in pertinent part that the lessee is familiar with the conditions of the premises and accepts the premises as they existed on the date that the lessee takes possession. Section 6.5 of the Master Lease also provides that Resource Club acknowledges that neither 99 Hook Road nor any person "involved in this transaction [has] made any representation or warranty of any kind or nature regarding the Premises or Property[.]" In addition, section 6.5 of the Master Lease states that Resource Club releases 99 Hook Road "from any claims regarding the condition of the Property, of which the Premises is a part, including without limitation, the environmental condition of the property."

Section 43 of the Master Lease also generally precludes claims by the leasee. This section of the Master Lease bars the lessee from bringing claims for damages to persons or property, including loss of business resulting from the owner's failure to perform its obligations under the lease. Such losses include those "resulting from theft, fire, explosion, falling plaster, water, rain, snow, ice, leaks or by any other cause of any nature[.]"

Therefore, under the terms of the Master Lease, Resource Club is barred from asserting claims against 99 Hook Road for damages to persons and property, including business losses, arising from the conditions of the subleased premises. As sublessee, plaintiff also is barred from asserting such claims. Accordingly, plaintiff's claims against 99 Hook Road for damages arising from the owner's failure to perform its obligations under the lease were properly dismissed.

Furthermore, assuming that 99 Hook Road had an obligation to remedy the deficiencies in the subleased premises and failed to do so, plaintiff's remedy would be limited to recovering the reasonable cost of performing that obligation. Here, there is no allegation that plaintiff ever incurred such costs.

IV.

Plaintiff additionally argues that the trial court erred by dismissing its fraud claims against defendants with prejudice. Again, we disagree.

In counts six and eight of its amended complaint, and in its proposed second amended complaint, plaintiff alleged that defendants made false representations that they had cured the foul odors in the premises. Plaintiff also alleges that defendants attempted to conceal "the chronic problem[s] with the air quality and odors on the subleased premises." Plaintiff claims that, by making these false representations, defendants fraudulently induced it to remain in the leased premises.

We conclude that plaintiff failed to assert a fraud claim against Resource Club upon which relief can be granted. Section 2(a) of the Sublease Agreement states that

Sublessee acknowledges that Sublessee has conducted Sublessee's own investigation of the Premises and the physical condition thereof, including accessibility and location of utilities, improvements, existence of hazardous materials, including but not limited to asbestos, asbestos containing materials and polychlorinated biphenyls (PCB), which in Sublessee's judgment affect or influence Sublessee's use of the Premises and Sublessee's willingness to enter into this Sublease.

Section 2(a) also sets forth certain representations of the Sublessor regarding the premises. Section 2(b) of the Sublease Agreement states that, "Sublessee shall, except for the representations expressly set forth in this subparagraph, rely solely on Sublessee's own inspection and examination of such items and not on any representations of Sublessor, express or implied."

Accordingly, Section 2 of the Sublease Agreement bars plaintiff from asserting claims against Resource Club arising from an alleged failure to disclose facts concerning the conditions of the premises at the time the parties entered into the Sublease Agreement, except for certain limited representations made by Resource Club. None of those representations relate to noxious odors or air quality. Furthermore, to the extent that plaintiff's claims against Resource Club relate to false representations allegedly made concerning the conditions in the premises that arose after the execution of the agreement, those claims are barred by the exculpatory clause in section 15(j) of the Sublease Agreement.

We also conclude that plaintiff failed to assert a fraud claim against 99 Hook Road upon which relief can be granted. As noted previously, in section 6.5 of the Master Lease, the lessee acknowledged that it is familiar with the conditions of the premises and the lessor has not made any warranties or representations as to the suitability of the premises for the lessee's business operations. The lessee also releases the lessor from any claims for damages to persons and properties and for loss of business arising from the conditions of the premises, including environmental conditions.

Furthermore, section 4(b) of the Consent Agreement provides that it shall not be deemed to modify, waive or affect (A) any of the terms, covenants or conditions of the Master Lease, (B) any of Master Lessor's rights against anyone liable for performance under the Master Lease, (C) any of the Sublessor's obligations under the Master Lease, or (D) any rights or remedies of the Master Lessor under the Master Lease, or otherwise[.]

In addition, section 5 of the Consent Agreement states that "[a]ll of the terms, conditions and covenants of the Master Lease are declared to be in full force and effect." Thus, plaintiff's claims that 99 Hook Road knew about and failed to disclose the foul odors and problems with the air quality in the leased premises are barred by the Master Lease and Consent Agreement.

Moreover, plaintiff's claim that 99 Hook Road fraudulently induced it to continue the sublease by asserting that it had cured the odor problem fails as a matter of law. As 99 Hook Road points out, plaintiff could not have reasonably relied upon any such representation because any failure to correct the problem would have been readily apparent to plaintiff.

Plaintiff's claim that 99 Hook Road fraudulently induced it to continue the sublease by representing that it had addressed the problems with air quality also fails as a matter of law. Plaintiff has not alleged that 99 Hook Road took any steps to address that particular problem. The consultant's second report found no problem with the levels of carbon dioxide but elevated levels of carbon monoxide. Plaintiff immediately vacated the premises, thereby giving 99 Hook Road no time to cure that problem, let alone make any representation regarding it.

Plaintiff further argues that, if its fraud claims were deficient as pled, it should have been afforded an opportunity to file another amended complaint to cure any such deficiency. Here, plaintiff had several opportunities to plead its fraud claims but, as we have concluded, the facts as alleged did not state a cause of action for fraud. In our view, the trial court did not err by refusing to give plaintiff another opportunity to plead claims that were clearly deficient as a matter of law.

We note that, its letter opinion of October 22, 2008, the trial court commented that, while plaintiff could not bring affirmative claims against Resource Club for relocation costs and lost business opportunities, those damages could be pled as part of a constructive eviction defense in Resource Club's action against plaintiff for unpaid rent. Our opinion in this case should not be read to preclude plaintiff from asserting an eviction defense in the Resource Club case. We express no view as to the validity of that defense.

Affirmed.

20091124

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