July 13, 2010
RICHARD GRABOWSKY, LLC, AND MARLEEN GRABOWSKY, LLC, PLAINTIFFS-APPELLANTS,
BANGZ BEAUTY CENTER, INC. AND RICHARD CRONK, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-7211-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted April 21, 2010
Before Judges Stern and Sabatino.
This is a commercial lease dispute. Following a four-day bench trial, the Law Division entered a final judgment determining that the tenants owed $60,012.12 in past rent, and fixing a fair market rental of $18,901.60 per month for the last five months of the tenancy. The landlords now appeal, contending that the trial judge miscalculated the rental amounts in several respects. For the reasons stated herein, we affirm the final judgment in part, vacate it in part, and remand for additional proceedings.
The tenants in this matter collectively are defendants Bangz Beauty Center, Inc. ("Bangz") and Richard Cronk ("Cronk"). The landlords are plaintiffs, Richard Grabowski, LLC and Marleen Grabowski, LLC.*fn1 The relevant fact, which we set forth in detail, are as follows.
A. The 1994 First Floor Lease
On March 25, 1994,*fn2 the tenants entered into the first of three leases with the landlords' predecessor in interest, Clairidge Mall Associates ("Clairidge") to occupy certain commercial property on Bloomfield Avenue in Montclair. The property is located on Block 2207, Lot 5 of the Montclair TaX Map and encompasses the entire triangular intersection of Bloomfield Avenue and Church Street.
Under this particular lease (the "first floor lease"), the tenants rented "[a]pproximately 2,700 [s]quare feet" at 470 Bloomfield Avenue in Montclair for a total rent of $224,304 over five years. Handwritten on the first page of this lease is the notation "1st floor" next to the description of the premises.
The first floor lease contained a clause in which the monthly rental would increase at five percent each year, beginning at a monthly rental of $3600 for the term of July 1, 1994*fn3 until February 28, 1995, and ending at a monthly rental of $4376 for the term of March 1, 1998 to February 28, 1999.
Attached to the first floor lease was a rider that provided, among other things, a holdover clause and a renewal option. The holdover clause established that, should the tenants remain on the premises after the expiration of the lease, they would owe Clairidge the sum of 125 percent "of the rate per square foot of [r]entable [a]rea being paid by [the tenants] immediately prior to the termination date[.]"
Paragraph thirty-nine of the first floor lease, which set forth the renewal option, granted the tenants an option to "extend the [l]ease for an additional five (5) year period" upon giving notice to the Clairidge of such intent. The renewal clause required that the tenants "[have] fully and timely satisfied all of [their] obligations, and [have] not breached or defaulted any of the terms of [the] agreement[.]" The rent for the renewal option was set at "the prevailing rental value[,] increased annually by [five percent] on the anniversary date of this [l]ease."
The rider to the first floor lease also included a personal guarantee clause. This personal guarantee established that defendant Richard Cronk was liable to Clairidge for up to "twelve (12) months of the prevailing rental value" in the case of a default by defendant Bangz.
B. The 1995 Lease Amendment
More than a year later, on May 15, 1995,*fn4 Clairidge and the tenants signed an amendment and modification of the first floor lease. The amendment specifically relied on paragraph thirty-nine of the 1994 lease--the renewal option--as authority to extend the operative terms of the lease for an additional five years, until February 29, 2004.
Similar to the original first floor lease, the lease amendment contemplated a five percent annual increase in the monthly rent for the remaining term, i.e., beginning at $4595 per month*fn5 for the period of March 1, 1999 through February 29, 2000, and increasing to $5585 per month for the term of March 1, 2003 through February 29, 2004.
The 1995 lease amendment also included a modified renewal term, again conferring upon the tenants the option to renew their lease for an additional five years at the close of the now-amended lease. However, the clause changed the method of calculating the rent due for any further renewal period from "the prevailing rental value[,] increased annually by [five percent]" to a new requirement that the rent "shall be negotiated at current market value."
C. The 1995 Second Floor Lease
On May 15, 1995, the parties also entered into a second lease for additional property located on the same block (the "second floor lease"). This second floor lease described an area of "approximately 3,176 [s]quare [f]eet" in "484 Bloomfield Avenue - 2nd Floor[.]" Specifically, the second floor lease covered the premises encompassing "[s]uites 13, 14, 15, 16, 17 & 18" in that building.*fn6
Unlike the parties' previous agreements, the second floor lease was established for a term of eight years and six months, running from September 1, 1995 until February 29, 2004. The total rent due for the entire term of this lease was $326,748. Similar to the first floor lease, the lease contained an escalation clause, whereby the monthly rent due increased at approximately five percent annually throughout the life of the lease--beginning at $2647 per month for the term of September 1, 1995 through August 31, 1996--and finishing at $3910 per month for the period of September 1, 2003 through February 29, 2004.
As with the first floor lease, the second floor lease contained a rider, which included a holdover provision and a renewal provision. The holdover provision was identical to the one in the first floor lease. It required payment of 125 percent of the rental value immediately preceding any holdover period. The renewal clause was identical to the substituted renewal clause in the amendment to the first floor lease, in that it permitted a renewal for a five-year period, but required the parties to negotiate the rent due for that period "at current market value."
Neither the second floor lease nor its attached rider contained a personal guarantee by Bangz similar to the one contained within the first floor lease.
D. Amendment of the Second Floor Lease
On November 15, 1995*fn7 Clairidge and the tenants amended the second floor lease to reflect a different measurement of the premises, as well as a lower monthly rent. The premises described on the amendment incuded "[a]pproximately 2,923 [s]quare [f]eet" encompassing "[s]uites 13, 14, 15, 16, 17, 18 and 21" in "484 Bloomfield Avenue[,] 2nd Floor[.]" This change in the wording of the lease reflected a decrease of 253 square feet from the original second floor lease but the addition of suite 21.*fn8 The term of the amendment was limited to "eight (8) years and [four and one-half] months commencing [on] October 15, 1995 and ending on February 29, 2004." Thus, the amendment would run for the entire duration of the original second floor lease, with the exception of the month of September 1995 and the first two weeks in October 1995.
The amendment also adjusted the monthly rent escalation schedule on the second floor lease downward to reflect a final total rental cost for the amended term of $294,856. The five percent escalation began with a monthly rental rate of $2436 per month from November 1, 1995*fn9 until October 31, 1996, and peaking at $3600 per month for November 1, 2003 through February 29, 2004.
Although the amendment to the second floor lease included no renewal clause, it did contain language that stated: "[e]xcept as herein modified, supplemented[,] or amended, all of the terms, covenants[,] and conditions of the original [l]ease dated May 4, 1995 [the second floor lease], shall remain in force and effect as heretofore written and the [l]ease as modified, supplemented[,] and amended by this [a]greement is hereby ratified and confirmed in every respect." This contract language signified that the five-year renewal clause in the second floor lease--providing that the parties will negotiate a renewal rent at "current market value"--remained intact.
E. The 1997 Kerwin Lease
Subsequently, on July 14, 1997, Clairidge entered into a lease with a third party, Suzanne Kerwin*fn10 of Totowa. This third lease (the "Kerwin lease") described a premises of "[a]pproximately 414 [s]quare [f]eet," including "Suite #12 -2nd Floor" of 484 Bloomfield Avenue. The Kerwin lease rented the premises for a term of three years "beginning September 1, 1997 and ending August 31, 2000," at a total rent of $15,540. The Kerwin lease provided for an annual four percent increase of the monthly rent payment, beginning at $414 per month for the lease period of September 1, 1997 through August 31, 1998, and concluding at $449 per month for the period of September 1, 1999 through August 31, 2000.
Similar to the first and second floor leases, the Kerwin lease contained a rider, which included identical holdover and renewal provisions to those found in the earlier leases. Additionally, the Kerwin lease included a personal guarantee that held Suzanne Kerwin liable for the entire amount of the lease plus damages in the event of default by the tenant. Finally, the rider to the Kerwin lease provided the only reference in any of the leasing documents to real estate taxes. Specifically, paragraph thirty-three of the rider established that Kerwin was liable for "[one percent] of any increase in [r]eal [e]state [t]axes on the entire property in which the demised premises is a part. Such increases to be based on taxes as assessed from the year 1997[.]"
At some later point, the Kerwin lease was amended to substitute the present tenants as parties to the lease. This amendment also apparently extended the duration of the Kerwin lease, so that the end date of the lease coincided with the newly amended end dates of the first and second floor leases.*fn11
F. The Construction and Occupancy of the Mezzanine Level and the Tenants' Basement
Sometime thereafter, in 1998 or 1999 the tenants, at their own expense, disassembled part of the "drop ceiling" above the first floor and constructed a 656 square foot "mezzanine" level within the premises. None of the written leases were amended to include this mezzanine area.
Throughout the pendency of the leases, the tenants operated a hair salon on the first floor and the mezzanine level, and a "day-spa" on the second floor of the building. Immediately after entering into the first floor lease, the tenants began to use a portion of the basement area for storage and eventually for laundering towels related to the spa activities. At no point was the basement area specifically included in any of the leases or the amendments.
G. The Landlords' 2003 Purchase From Clairidge
In October 2003, approximately four months before all three leases were set to expire, the landlords purchased the building that included the entire subject premises from Clairidge for $4,250,000. A month later, on November 18, 2003, an attorney representing the tenants sent a letter to the landlords, informing them of the tenants' intention to exercise their five-year renewal options under the leases. In that letter, the attorney for the tenants referenced only the first floor lease and the second floor lease. The attorney asserted that, as a result of the renewal, "[t]he rent for the first floor [l]ease shall be the prevailing rental value to the increased annually by [five percent] on each anniversary date. The rent for the second floor [l]ease shall be negotiated at current market value."*fn12
The leases all expired in March 2004. The tenants continued to pay rent in excess of the 125 percent rate, which would have been required of a holdover tenant. Throughout this time period, the parties attempted to renegotiate the current market value of the rent.
On May 21, 2004, the tenants received a letter from an attorney for the landlords, offering "an extension of the lease at a monthly rent of $32,864 per month." The letter specifically identified the square footage of the proposed new lease to include "the basement area of 2,488 s[quare] f[eet], the first floor of 2,920 s[quare] f[eet], the mezzanine of 656 s[quare] f[eet] and the second floor of 3,588 s[quare] f[eet]."*fn13
H. Darpino's Valuation for the Tenants
In September 2004, the tenants procured an expert valuation by Ernest R. Darpino, Ph.D., ASA, a licensed real estate appraiser, who served as an independent contractor with Medici Appraisal Services, Corp. Darpino performed an assessment of the "fair market rental value" of the premises. The tenants' attorney provided Darpino with the same dimensions for the premises as had been provided in the May 2004 letter from the landlords' attorney.
Darpino thereafter provided the tenants with a written expert report that considered the premises' basement and mezzanine areas as separately rentable spaces. In particular, Darpino's report proposed a market rental value for each of the areas as: $24 per square foot for the first floor; $22 per square foot for the mezzanine; $20 per square foot for the second floor; and $12 per square foot for the basement. His total final market rental value for the entire premises, based upon the square footage figures that he had been provided, was $186,128 per year.
In his report, Darpino referred to what he considered to be five comparable neighborhood properties, which ranged in rental value from $17.75 per square foot to $24 per square foot. All but one of these comparable properties were located on Church Street, in proximity to the subject premises. Each of the properties was close in square footage to the individual leased portions of the subject premises.
Darpino noted in his comparative analysis that he was "unable to confirm any additional rental information for basement rentals or for second floor rentals. It appears that basements may be included in the base cost of . . . most of the rentals." He thus assigned the first floor space a rental rate at the top of his comparable range, i.e., $24 per square foot. He then adjusted the rental value of each remaining area downward, based on asserted factors of "location, exposure, condition[,] and size."
I. Gillooly's Valuation for the Landlords
In March 2005, the landlords engaged their own valuation expert, John Gillooly, SCGREA, CTA, of Integra Realty Resources. Gillooly used different dimensions than Darpino had used when calculating the market rental value.*fn14 His estimates of the area of the property encompasses: the same 2488 square feet of basement space, 3348 square feet of gross rentable space on the first floor,*fn15 4114 square feet of gross rentable space on the second floor,*fn16 and 752 square feet of gross rentable space in the mezzanine. However, Gillooly's report also included "subject unit sketches," which included dimensions that corresponded to the numbers used by Darpino.
Gillooly utilized four allegedly comparable properties from the neighborhood to evaluate the market rental of the subject premises. Of these other properties, three were in the same building as the subject premises. All three were owned and leased by the landlords to other parties at least five months after the termination date of the subject tenants' leases. Each of these properties comprised only half of the gross area of each individual part of the subject premises. Specifically, the three respective comparable properties measured 1109 square feet, 607 square feet, and 1418 square feet. According to Gillooly, these three properties had a rental value of $44.84 per square foot, $41.10 per square foot, and $39.03 per square foot, respectively.
The fourth comparable property identified by Gillooly was a bank across the intersection of Bloomfield Avenue from the subject premises. The bank property approximated the size of the subject premises. It was owned and rented by an uninvolved third party. This property had a rental value of $38 per square foot.
Gillooly then adjusted the valuations of the four comparable properties to enable comparison with the subject premises. Specifically, he adjusted the value of the three smaller properties upward by twenty-five percent, so as to account for the superior location of the subject property and the presence of the basement area.*fn17 The fourth comparable, the bank property, also had its value increased by ten percent, so to account for the lack of a basement area.
However, Gillooly devalued each of the comparable properties, at levels between fifteen and thirty-five percent, to reflect "the typically inverse relationship between size and unit rent" and that a portion of the subject premises included "less desirable [second] story and mezzanine space." He thus achieved a range of comparable valuations ranging from $35.14 per square foot to $39.62 per square foot.
Gillooly's final calculation set the value of the subject premises at a flat $38 per square foot. His report noted that he considered this computation to reflect "adjusted gross basis with the tenant[s] paying a pro-rata share of [building] taxes."
J. The Landlords' Complaint and the Tenants' Counterclaim
The landlords filed their initial complaint against the tenants in the Law Division in August 2006. Their complaint requested a declaratory judgment against the tenants, setting the market rental of the premises for the entire term of the lease at $1,725,000 "plus a proportionate share of real estate taxes." In addition, the landlords--acknowledging that the tenants had paid some rent since the date of renewal--requested that the tenants be required to pay the $473,494.25 difference between the rent that they had paid to that point and the requested amount of the declaratory judgment. The landlords' complaint further requested that Cronk be found personally liable for "any unpaid amount up to $140,616" according to the terms of his guarantee in the earlier lease. Finally, the landlords demanded possession of the premises from tenants "for failure to pay rent."
The tenants answered and filed a counterclaim in November 2006. In their counterclaim, the tenants alleged that the landlords had breached their contract to negotiate the market rental rate for the renewal option in good faith. The tenants also alleged that the landlords had maliciously filed an earlier action for possession in the Special Civil Part as a method of intimidating them into giving up their interest in the property. The tenants further alleged improper interference with their business by landlords, a breach of the implied covenant of good faith and fair dealing, constructive eviction, and constructive fraud in the formation of the lease agreements.
K. The Trial Proofs
The bench trial took place over four days in August 2008. The landlords began with testimony by Richard Grabowsky as to the events leading up to his purchase of the building and the nature of his negotiations with the tenants. Grabowsky testified that, at the time he bought the property, the "rents were way, way, way below what the market rents were, what the rents were, what the value of the -- of the property was." Grabowsky also explained in greater detail the concept of "loss factor." He defined this additional square footage as "the space occupied by common areas within the building, such as elevator, lobby, and shafts." Grabowsky further noted that the "the market values that our appraiser [Gillooly] ha[d] used are market values for what we were charging for other spaces in the same building, and those market values reflect the loss factor of the lobbies, as well as the cost of taxes."
On cross-examination, the tenants' trial counsel provided Grabowsky with a letter written to the tenant on the landlords' letterhead, stating that the "[r]ental is considered a holdover March 1st, 2004, amount of rent during holdover period is 125 percent of rate immediately prior to expiration."*fn18 The letter further stated that "[the Kerwin] lease expired August 31st, 03. A second amendment was signed July of 03 to consider that lease on a month to month basis at [$]512 per month for [the] rental portion."
The landlords also called Gillooly as an expert, who testified as to the contents of his report, which was also admitted into evidence.
Gillooly was challenged on cross-examination about the selection of his comparable properties. In response to questions of why he had used three properties owned by landlords in his report he acknowledged that "the subject [property] I think is its own best comparable."
Under questioning from the judge, Gillooly admitted that his conclusion on valuation "was a blended rate essentially" that resulted from the fact that some of his comparable properties "had second level space as well." This feature, he explained, accounted for the singular market rental calculation when the subject premises admittedly contained different types of property that rated differently in value.
The tenants presented at trial the competing expert testimony of Darpino. Similar to Gillooly, Darpino reiterated many of the aspects of his own report and that report was also admitted into evidence.
The tenants also called Cronk, who testified as to the course of negotiations between himself and landlords. Cronk further recounted the history of the leases, including the amendments and his company's construction of the mezzanine level area at its own cost. In particular, Cronk testified that he had spent nearly $800,000 to refurbish the interior of the space and make it useful for his purposes.
Finally, the tenants called Dominick Sansevero, a co-owner of Bangz, who also acted as a "stylist/operator" of the premises. Sansevero testified about the contentious nature of the negotiations between the landlords and the tenants.
Sansevero admitted to signing a "[l]ease [e]stoppel [c]ertificate" that was faxed to him by Richard Grabowski during the course of the negotiations and that purportedly fixed a "five year market rate option" through February 29, 2009. Sansevero acknowledged that the certificate required the tenants "to pay the base monthly rent installments in the amount of the lease[,] $16,275, which rent obligation is continued and is not past due or delinquent in any respect." Sansevero claimed that Grabowsky had asked that he sign the document because Grabowsky "was going for refinancing of his building."
During the rebuttal testimony of Grabowsky, he testified that he had provided the tenants with an accounting of the real estate taxes assessed on the property since 2004. This document--which also included handwritten calculations in which Grabowsky assigned 17.88 percent of those taxes to tenants--was admitted into evidence.
The landlords' trial counsel attempted to introduce two unrelated leases through Grabowski's rebuttal testimony. The leases were proffered as examples of the types of leases that the landlords were negotiating with other tenants in the area at the time. The trial court excluded one of those leases for lack of an authenticating signature by one of the parties. However, the trial court did admit the other lease, after Grabowski attested that the relevant tenant had provided the lease to him and that it was signed by that individual.*fn19
After summations, the trial judge issued a detailed oral ruling in the record. In his ruling, the judge found that, by virtue of the letter sent to landlords in November 2003, the tenants exercised their option for renewal under all leases and thus "become subject to the term of what the . . . market rental is." The judge found the parties' inability to agree on the terms of the rent for the renewal period did not void to option. The judge specifically found that "[w]hen . . . an option becomes exercisable[,] it's not unusual that the parties are not able to agree on a fair market rental or value. [The] [s]ame thing being true for market value . . . as a consequence they must resort to consultants, appraisers[,] and other experts." However, the judge made clear that the lease renewal was not a "new lease" between the parties, but merely an extension of the prior lease as it previously existed, with a newly-negotiated rent term.
Commenting upon both of the experts' valuations, the judge found that each proposed comparables and that "all of the comparable[s] [cited by the experts] are problematic for one reason or another." The judge further found that "at best[,] taking the experts together[,] what they have done is established a range . . . from [thirty-nine] on the high side to [seventeen] and three-quarters on the bottom side."
The judge considered, in his analysis several factors bearing on valuation:
If you take the location, okay, if you take the fact that there are no additional charges for taxes or for lost -- what I guess [the landlords] called lost area, then the range certainly for the first floor needs to be nearer to the top of the range than to the bottom of the range.
But because the total amount being rented is 6,508 square feet, because the lease is [going to] be for five years, a substantial period of time, it shouldn't be at the top, because these are factors which would cause the rent to be a little lower.
The judge declined to include the mezzanine and the basement areas in arriving at the first floor figure, "because the use of the basement and the use of the mezzanine are not guaranteed in the lease." At any point, the judge reasoned, the landlords could lawfully eject the tenants from either portion of the premises. Instead, the judge used what he perceived were "the verified numbers" in order to determine the rented premises' square footage, because "both appraisers used those numbers." Also, the judge found that:
[The landlords] had an architect go through and measure. We no longer have to deal with approximate numbers, we can deal with real numbers. They're not substantially different [from those on the faces of the leases], so those are the numbers so that everybody understands[:] [f]irst floor, 2,920 square feet; second floor, 3,588 square feet.
Additionally, the judge found that the second floor area was markedly less valuable than the first floor area, because the second floor had no access to an elevator and did not have the convenience for potential customers of walking right in off the street.
In summarizing his analysis, the judge stated:
I find by a preponderance of the evidence that the current rental figure for March of 2004 for the first floor is $35 per square foot. When you multiply that out and apply it to the [fifty-four] months, which I believe the parties agree were covered from the termination of the first until I guess [August 2008], that's . . . $459,900.18. For the second floor I find the current rent to be $25 a square foot. When you multiply it out that's $40,650. A total rent due for the [fifty-four] months of $863,550.18.
A credit is given to the tenants for the money they paid during this period of time, which was $855,473.06, leaving a total due from the tenant[s] of $8,077.12[.]
[P]lus[,] on the [Kerwin lease][,] there was in fact a clause that said that the tenants [we]re responsible for a tax adjustment which would amount to one percent of the tax increases from 1997. They're entitled to that also.
The judge denied all of the tenants' counterclaims.
L. Post-Trial Motions
Six weeks later, on October 17, 2008, prior to the final order being entered, the parties were back before the trial judge on a motion by the landlords. The landlords asserted that the judge had previously erred when he had not included in his ruling "an escalation of rent over the five year period of time, which in all of [the] leases has that provision."
In his bench ruling addressing the landlords' post-trial application, the judge acknowledged that "the rent that was established was the rent for the day of the extension of the lease. Not for five years, but for that day, first year of the lease." The judge acknowledged that his earlier finding that tenants "didn't have a statutory right or a legal right to insist on the use of the basement or the mezzanine that [they] didn't have to pay any rent for it" had gone into his consideration of the per-square foot market rent, and that it "played a role in why it was near the top of the range versus the bottom of the range." As to the five percent annual increases contained in the earlier lease, the judge did acknowledge that he should have considered these increases.
Turning to the issue of taxes, the landlords advised the court that one percent of the real estate tax increases "over the term of the lease came out to $3,355.58." The tenants, however, alleged that they had been billed for and had paid this amount for taxes already, so the judge found no need to adjust the rent accordingly. Both parties later agreed that the tenants had paid the $3,356 in tax increases separately from the rent credited, as required by the Kerwin lease. Therefore, the landlords were not entitled to that additional amount.
The judge adjourned the matter, instructing the parties to bring forward copies of the checks for the taxes paid in order to get additional credit against the judgment and for the landlords to provide him with a form of judgment.
A month later, on November 13, 2008, the trial judge reconvened the parties, this time to hear an objection advanced by the tenants to the terms of the judgment. By agreement of both parties, the amount that the tenants had paid in rent over the course of the litigation was adjusted upward by the court from $855,473.06 to $860,476. The tenants attempted to claim an additional $4,000 in rent setoffs for repairs done to the premises, but the judge indicated that, "if that was going to be litigated that should have been litigated as part of the trial where we could take testimony." Consequently, the judge denied that portion of tenants' motion and kept the amount of allowable credit at $860,476.
The judge further determined that the personal guarantee by Cronk is "complicated by the fact that the whole building is not rented at the same rate." As a result, the judge found that the guarantee applied only to the first floor lease, and was capped at twelve months of the prevailing rental rate. The judge agreed with the landlords that the first floor lease consisted of fifty-three percent of the total rental, and thus Cronk was personally liable for only fifty-three percent of the judgment.
The tenants then requested the court to accept certified square footage numbers that differed from those entered by the judge in his oral opinion of August 2008. The judge declined to re-open the record as to that square footage, noting that he had already ruled on the evidence that had been presented to him, including the tenants' own expert at trial, and that his ruling would stand.
Finally, the judge noted that the area covered by the Kerwin lease--the 414 square feet of Suite 12 on the second floor--was integrated into tenants' second floor premises for the purposes of their spa facility. The judge found that this space was subject to its own agreement, which is reflected by the July 28, 2003 second amendment and modification to the Kerwin lease. That July 2003 amendment established a fixed and unchanging rental rate for that section of the property of $512 per month on a month-to-month lease. The judge acknowledged this factor and ordered the area of the Kerwin lease removed from the calculations of the second floor and excluded from the five percent annual increases.*fn20
The tenants again attempted to raise with the trial judge the issue of the five-percent annual increases of the first and second floor leases. They argued that if any area of the property should be subject to the increase, it should only be the first floor, as the renewal provision of the second floor lease never included a clause that contemplated an escalating rent, whereas the first floor lease did so prior to its amendment.
In rejecting those contentions, the judge stated: when the lease leaves it open as to it being negotiated at current market value, you've got to look at what the history was of this property, okay. And if, in fact, every year there was a [five] percent -- we're talking about the second floor. If in every year the history of the rental value was [that] the rent went up [five] percent, then in determining the current value one would have to assume that a landlord having gotten it for all those years would continue to insist on it.
The judge therefore rejected the tenants' request, confirming his earlier opinion recognizing a five percent annual increase in the rental rates for both areas.
On January 5, 2009, the trial court entered a final judgment in a written order. The instant appeal by the landlords followed. The tenants moved to file a cross-appeal out of time; which motion was denied by an order of this court.
In their appeal, the landlords contend that the trial court erred in: (1) not adding a proportionate share of real estate taxes to the per-square-foot rent; (2) omitting the square footage of the mezzanine area as part of the rented space; and (3) omitting a rental value for the basement area.
Our standard of review of the trial court's determinations following this non-jury trial is a limited one. In general, the findings of a trial judge sitting without a jury are "considered binding on appeal when supported by adequate, substantial[,] and credible evidence." Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974). In the present case, we review factual findings and associated legal conclusions as to the interpretation of numerous contract documents concerning a commercial lease. When courts are called upon to enforce contractual agreements, their main objective is to carry out the mutual intent of the parties. Conway v. 287 Corporate Ctr. Assocs., 187 N.J. 259, 269 (2006). The "court must try to ascertain the intention of the parties as revealed by the language used, the situation of the parties, the attendant circumstances, and the objects the parties were striving to attain." Celanese Ltd. v. Essex County Imp. Auth., 404 N.J. Super. 514, 528 (App. Div. 2009). However, a trial court's application of legal principles in construing meaning of a contract is subject to de novo appellate review. Fastenberg v. Prudential Ins. Co. of Am., 309 N.J. Super. 415, 420 (App. Div. 1998).
Measured by these well-known review standards, we are satisfied that, except for the issues relating to the mezzanine area, the trial court's determinations in this case are legally sound and supported by substantial credible proof in the record.
With respect to the omission of real estate taxes from the market rental calculation, the trial court's rationale is well grounded in the evidence adduced at trial. Except for the Kerwin lease, none of the other lease agreements mention real estate taxes. The Kerwin lease itself, which was executed after and separately from the first and second floor leases, is inconsequential to the analysis here, as it provided that the tenants would be liable for "[one percent] of any increase in [r]eal [e]state [t]axes on the entire property in which the demised premises is a part." The trial judge found, and both parties conceded, that the tenants had satisfied this one percent requirement. Moreover, the leases for at least two of the comparable properties identified by Darpino, the tenants' expert, called for the real estate taxes to be paid by the landlords and not passed through to the tenants.
The Tax Court case principally cited by the landlords on this tax-shifting issue, Speigel v. Town of Harrison, 18 N.J. Tax 416, 421 (Tax 1999), aff'd, 19 N.J. Tax 291, 293 (App. Div. 2001), is not on point, because the lease in that case, unlike the lease instruments here, expressly provided that the tenant would pay the landlord a specified yearly sum "in the nature of a tax reimbursement." Ibid. We agree with the trial judge that the absence of a similar contract term in this case is indicative of a lack of mutual assent to make the tenants bear the costs of real estate taxes. Moreover, the judge indicated in his opinion that he had taken the absence of a tax-shifting obligation fairly into account when he fixed a rental rate near the higher end of the potential rental charges per square foot.
We are equally convinced that the trial judge had a reasoned basis to omit the basement area from the square footage calculation. The landlords' own valuation expert Gillooly did not include the basement square footage within his dimensional calculations. Rather, Gillooly used the basement only as an intangible "modifier" to justify his choice of comparable properties. The basement area was never included in any of the parties' lease agreements. Here again, although the trial judge did not incorporate the basement square footage within his mathematical calculations, the judge did recognize the tenants' historical usage of that space as an enhancing factor, and it provided additional support for the judge's selection of a rental rate at the higher end of the spectrum. The judge had no obligation to go further than that, particularly given the omission of the basement from the parties contractual instrument.
We reach a different conclusion with respect to the mezzanine. The experts for both parties agreed that the square footage for the mezzanine was part of the leasehold, and, in fact, they included the mezzanine's area in their numerical calculations. In declining to include the mezzanine area in his own calculations, the trial judge relied upon the fact that the mezzanine area was not specified in the lease agreements when they were negotiated and executed. However, at the time those original leases were created, the mezzanine--unlike the basement area and the real estate tax obligation for the property--did not exist.
As we have noted, the mezzanine area was subsequently created within the leased first floor space. Given that chronology, we believe the trial court erred in rejecting the testimony of both experts and omitting the mezzanine from his calculations. Unfortunately, the experts did not agree on the appropriate rental rate for the mezzanine space, as the landlords' expert treated the mezzanine consistently with the rest of the first floor square footage, whereas the tenants' expert valued the mezzanine area at $22 per square foot, an intermediate figure less than the rate he ascribed to the first floor and higher than the rate he ascribed to the second floor. In light of this numerical divergence, we cannot fairly exercise original jurisdiction on this issue and fix the appropriate rent for the mezzanine. Consequently, we remand to the trial judge to fix that amount, based upon the proofs in the record and on appropriate credibility determinations. We therefore direct the trial judge to enter an amended judgment within forty-five days of this opinion.
Affirmed in part, and remanded in part for the entry of a modified judgment consistent with this opinion. We do not retain jurisdiction.