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Verizon New Jersey, Inc. v. One Washington Park Urban Renewal Association

May 18, 2010

VERIZON NEW JERSEY, INC., FORMERLY KNOWN AS BELL ATLANTIC - NEW JERSEY, INC., FORMERLY KNOWN AS NEW JERSEY BELL TELEPHONE COMPANY, PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
v.
ONE WASHINGTON PARK URBAN RENEWAL ASSOCIATION, AND SIETE URBAN RENEWAL ASSOCIATES, DEFENDANTS-APPELLANTS/CROSS-RESPONDENTS, AND EDWARD R. MCMAHON, ESQ., SOLELY IN HIS CAPACITY OF RECEIVER FOR ONE WASHINGTON PARK URBAN RENEWAL ASSOCIATES, DEFENDANT.



On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-120-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued March 9, 2010

Before Judges Carchman, Parrillo and Ashrafi.

Defendant Siete Urban Renewal Associates, LLC (Siete), successor-in-interest to defendant One Washington Park Urban Renewal Association, appeals from a final judgment awarding it $81,000 out of the $1,850,000 in damages it claimed was due under the terms of a lease agreement with its former tenant, plaintiff Verizon New Jersey, Inc.*fn1 On appeal, defendant contends that the trial judge erred in requiring it, rather than plaintiff, to present its proofs first, in precluding the testimony of its expert on restoration damages and in failing to, sua sponte, declare a mistrial following the testimony of another of its damages experts. On its cross-appeal, plaintiff asserts that the trial judge erred in his damages award, and that the counsel fee award to defendant was unwarranted. We affirm the damage award and reverse and remand on the cross-appeal as to counsel fees.

These are the relevant facts adduced at the bench trial of these issues. On March 6, 1981, plaintiff and Siete*fn2 entered into a written lease agreement in connection with Siete's soon-to-be-constructed seventeen-story office building in Newark. Specifically, Siete agreed to lease ninety-four percent of the building, known as One Washington Park, to Verizon for a term of twenty years, ending January 31, 2003.

Under the terms of the lease, in addition to a base rent of $532,759 per month, Verizon agreed to pay ninety-four percent of Siete's "operating expenses" in connection with the building. Operating expenses that qualified as "pass-throughs" or rent "escalations" were defined in the original lease and then redefined in January 1992 in a third amendment to the lease as all reasonable costs, expenses and disbursements which Landlord shall pay or become obligated to pay in connection with the operation, maintenance, replacement and repair of the Building and/or the Land, and the personal property, fixtures, machinery, equipment, systems and apparatus located in, on or used in connection with the Building and/or the Land . . . [including] current amortization (using useful lives) of capital improvements to the Building and/or the Land which are required by law or which are reasonably necessary for the operation, maintenance, repair or replacement of the Building and/or the Land.

Under the third amendment, operating expenses did not include, among other things:

(i) capital improvements except for the current amortization thereof . . . ,

(ii) costs for which Landlord is compensated for [sic] insurance,

(iii) costs for the construction of tenant space in the Building,

(iv) costs for which a tenant specifically reimburses Landlord without reference to this Article V,

(v) costs for which Landlord is reimbursed by a contractor's or manufacturer's guarantee,

(vi) brokerage or leasing commissions,

(vii) management fees,

(viii) costs required to correct latent defects, faulty design and faulty construction of the Building,

(xiii) any expense, including, but not limited to, petty cash expenses, for which proper documentation, including an invoice, is not provided,

(xiv) any expense for legal services that do [sic] not pertain to the operations of the Building and/or the Land,

(xv) with the exception of a reasonable fee for any annual audit(s) of the Landlord's operations conducted by an outside accountant or accounting firm (a copy of said annual audit(s) shall be provided by Landlord to Tenant within 30 days from the date of Landlord's receipt of same), any accounting fee and any expense incurred by Landlord associated or related in any manner to any accounting work, including, but not limited to, preparation of tax returns or work relating to refinancing[.]

In the third amendment, Verizon "reserve[d] its right to contest any 'Operating Expense' being passed through to it by Landlord that Tenant believes is not in accordance with the Primary Lease and all Amendments thereto."

Siete was obligated under the lease to provide Verizon with timely written statements of the projected escalation expenses for each year of the lease term, as well as timely final statements of the actual escalations for each year. Siete was further obligated to maintain "books and records showing Operating Expenses and Taxes" and to make these records available to Verizon for audit. In July 1998, Siete agreed to provide its written statements of projected escalation expenses by the end of the first quarter, March 31, of the year at issue and to provide its final escalation statements for each year with accompanying financial statements by March 31 of the following year.

Notwithstanding the foregoing, Siete failed to provide any statements of projected escalation expenses for 1997, 2000, 2001 and 2002. On November 12, 1998, it provided two statements of projected escalation expenses, one for 1998 and one for 1999, of which only the latter was timely. Siete also did not provide:

(1) its final escalation and financial statements for 1997 until November 1998, eight months after they were due; (2) its final escalation and financial statements for 1999 until June and August 2000, three to five months after they were due; (3) its final escalation and financial statements for 2000 until September 2001, six months after they were due; (4) its final escalation and financial statements for 2001 until March 2003, one year after they were due; and (5) its final escalation statement for 2002 until December 2003, nine months after it was due and without the required financial statement. Siete did provide its 1998 final escalation statement on time, but then failed to provide the corresponding financial statement until October 2002.

During each of the years between 1997 and 2002, disputes arose regarding the escalations due to Siete. Specifically, Siete initially claimed that it was due $4716 for 1997, $211,394 for 1998, $167,669 for 1999, $20,103 for 2000, $137,536 for 2001 and $521,661 for 2002, for a total of $1,063,079. However, a review performed by Siete's own accountant, J.H. Cohen, in 2003 revealed that these numbers were erroneous and that Siete had overbilled Verizon by $400,601. According to Cohen, Siete actually owed Verizon $450 for 1997 and $84,691 for 2000, and Verizon owed Siete only $175,673 for 1998, $15,619 for 1999, $84,914 for 2001 and $471,413 for 2002.

Meanwhile, Verizon had engaged a lease auditor, Jon Levy, who reviewed all available documentation and concluded that Verizon owed only $81,122 in escalations for the period 1997 through 2002. Notably, Levy was paid both a base fee and a thirty-five percent contingency applied against the amount of money he was able to save Verizon.

Although the parties made efforts to resolve the matter of the outstanding escalations, very little progress was made because of the disparity in the amounts each side claimed was due. Verizon became concerned that the statute of limitations might be raised as a defense to its claim that it had overpaid escalations for certain years. When it became clear that the matter would not settle, Verizon filed its declaratory judgment action in January 2005.

At trial, Siete, notwithstanding its status as defendant, was required to present its proofs first regarding the escalation and restoration damages allegedly due, but did not offer a single escalation statement or a single invoice to support any of the expenses it believed Verizon had wrongfully failed to pay. It also did not present the testimony of Cohen or any other accounting expert. Rather, Siete presented the testimony of Charles Geyer, Siete's principal, and Robert Colletti, one of several building managers employed by Geyer, regarding an alleged admission made in October 2002 by Robert Haines, a Verizon representative who had been negotiating all outstanding lease issues with Siete. Specifically, Geyer and Colletti reported that Haines stated, during a meeting, "I know we owe you approximately $400,000 for pass through[.]" However, although Geyer initially insisted that all documentation pertaining to outstanding escalations had been provided to Verizon before Haines made this statement, he subsequently conceded that: (1) Cohen's revised escalation calculations for 1997-2000, which reduced the amount Siete claimed was due for that period from $403,882 to $106,151, had not yet been furnished to Verizon; and (2) no documentation regarding 2001 and 2002 escalations was provided to Verizon until late 2003.*fn3

Haines denied making this statement.

At the close of Siete's case, Verizon moved for judgment. For purposes of the motion, Verizon's counsel stipulated that Verizon owed Siete $81,122 in escalations, i.e. the amount identified by Levy and put into evidence by Siete. Verizon's counsel argued that, aside from this figure, Siete had presented absolutely no proof regarding the amount of escalations it was allegedly due. In response, Siete's counsel insisted that the alleged admission by Haines that Verizon owed $400,000 in escalations was sufficient to defeat Verizon's motion. The judge reserved decision on the motion and required Verizon to present its evidence in defense of Siete's counterclaim.

Thereafter, accountant Lawrence Chodor testified on behalf of Verizon with respect to the disputed escalations. He reported that he recalculated the escalations due to Siete based upon his own review of the lease and its amendments, the financial statements prepared by all of Siete's accountants over the years, including Cohen, Siete's general ledgers, its depreciation schedules, numerous invoices, certain correspondence and the Levy report. After explaining each deduction he had made from Cohen's numbers, Chodor concluded that Verizon owed only $69,973 to Siete for escalations.

The parties also disputed whether certain items should have been removed from the Building. Section 31.01 of the lease provided that "Landlord shall construct the Building on the Land in accordance with the Plans and Project Description attached hereto as Exhibit I, and Landlord shall improve each floor of the Demised Premises with the improvements for each floor described on the Work Agreement." Section 31.03 of the lease further provided that Tenant may make or cause to be made any alterations, improvements, additions or installations in the Demised Premises subsequent to the initial occupancy of such premises by Tenant provided that none of such items affect the base Building systems or the structural integrity. . . . All alterations, improvements, additions and installations to or on the Premises shall become part of the Premises at the time of their installation and shall remain in the Premises at the expiration or termination of this Lease, or termination of Tenant's right of possession of the Premises, without compensation or credit to Tenant, except that Tenant may prior to the termination of this Lease remove Tenant[']s trade fixtures from the Demised Premises.

Pursuant to Article XXXVIII of the Lease, entitled "Surrender of the Premises," [u]pon the expiration or termination of this Lease or termination of Tenant's right of possession of the Demised Premises, Tenant shall surrender and vacate the Demised Premises immediately and deliver possession thereof to Landlord in a clean, good and tenantable condition, ordinary wear and tear excepted. Upon any termination which occurs other than by reason of Tenant's default, Tenant shall be entitled to remove from the Demised Premises all moveable trade fixtures and personal property of Tenant without credit or compensation from Landlord, provided Tenant immediately shall repair all damage resulting from such removal and shall restore the Demised Premises to a tenantable condition. . . . Notwithstanding the foregoing, the work performed by Landlord pursuant to the Work Agreement, the carpeting installed by Tenant in the Demised Premises and any wall coverings installed by Tenant in the Demised Premises shall upon the termination of this Lease by lapse of time or otherwise be the exclusive property of Landlord (without paying any compensation to Tenant), and Tenant shall not remove such items from the Demised Premises.

On July 18, 2002, six months before the expiration of the lease, Colletti sent Haines a list, prepared by building engineer Michael Lynch, of 150 items that he asserted had to be removed from the building "to return the building back to its proper state." Colletti wrote that he had yet to obtain prices for removal. In an effort to assist Colletti in obtaining pricing, one of Haines' co-workers, Steve Guarneri, had previously supplied Colletti with the names of several contractors Verizon had used in the past, including Suchana Construction, Inc. (Suchana), Lynch Construction and O'Beirne Construction (O'Beirne). According to Haines, when negotiating the surrender of a lease, Verizon preferred to pay a sum for restoration and let the landlord make the repairs.

By letter dated September 27, 2002, Haines advised Colletti that, in Verizon's view, forty-one of the items on the Lynch list were improvements to the building that Verizon was not obligated to remove under the lease. Among these items were three rooftop cooling towers, a rooftop generator, six exterior antennae, multiple bathrooms situated on the twelfth floor, a multi-floor Moesler mail delivery system and the raised computer floors and related ramps and knee walls on the second, third and fourth floors.

In November 2002, Colletti forwarded to Haines a proposal from Suchana containing itemized prices to perform all of the restoration work originally identified by Lynch, plus the removal of all telephone conduit and electrical wiring on floors five through seventeen. Suchana's total to perform all the specified work was $1,939,133. This included $932,547 to remove the disputed items, i.e., cooling towers, generator and the like, listed above. According to Haines, Verizon went into "sticker shock" upon reviewing the Suchana estimate and never considered the prices contained therein acceptable.

Lynch prepared a multi-column spreadsheet identifying the items Siete claimed were Verizon's personal property, the items Verizon claimed were improvements and the corresponding Suchana price for removal. The parties engaged in extensive negotiations as to which items were improvements and which were personal property. They did not discuss pricing of the removal costs, and several versions of the spreadsheet were produced, wherein items changed columns. These negotiations continued through 2003 and into 2004.

Meanwhile, in December 2002, with no resolution in sight and an imminent deadline, Haines decided to move ahead with the removal of the items Verizon had identified as personal property. Haines had obtained an unspecified, but substantially lower, "lump sum" estimate from O'Beirne which he had originally intended to "bounce off" the Suchana estimate. Instead, Haines decided to simply hire O'Beirne to perform the work. O'Beirne did not remove the Moesler mail system, the three cooling towers, the antennae, the additional bathrooms, the raised floors and knee walls nor the emergency generator.

After O'Beirne performed its work, a janitorial service cleaned each floor. Lynch, who was the Siete point person with respect to the restoration, inspected the work and "signed off" on each floor. According to William Tate, another Verizon employee who was on-site every day in January 2003, Lynch agreed, on behalf of Siete, that Verizon could leave the generator and the raised floors. Tate further noted that Lynch agreed that the concrete trench headers on the eighth floor could remain because they could not be removed without knocking down walls.

Verizon surrendered the building on January 31, 2003. According to Haines, he and Tate waited to meet with Geyer and Colletti, but they never showed up, and so he turned the keys to the building over to Lynch. Haines recalled that, while he was waiting in the parking lot, he received a fax indicating that Siete believed ...


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