On appeal from the Superior Court of New Jersey, Law Division, Gloucester County, Docket No. L-1983-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Axelrad, Lihotz, and J. N. Harris.
This appeal involves a contractual dispute between a commercial landlord and its tenant. Specifically, it relates to the manner of allocating real property taxes*fn1 as part of a triple net*fn2 ground lease. In the context of cross-motions for summary judgment, the Law Division granted declaratory relief in favor of the tenant, which adjusted the parties' admeasurement and allocation of real property taxes. In denying the landlord's cross-motion, the motion judge dismissed the counterclaim that sought recovery of several years' of underpaid real property taxes by the tenant. Because we find that the Law Division erred as a matter of law in reforming the ground lease, we reverse and remand for further proceedings.
On January 1, 2000, plaintiff SPJ, Inc. (SPJ) entered into a ground lease with defendant's predecessor in title, Midwest Heritage Inn of Deptford, Inc. (Midwest). The leased premises -- an area of approximately one acre -- consisted of a portion of Midwest's land located in Deptford Township. The overall property once was comprised of three lots, designated as lots 5, 6, and 7 in block 484, but was billed to the owner for real property tax purposes as a single parcel, identified as block 484, lot 5.
The property contained substantial improvements, including a Fairfield Inn Hotel and an accessory parking lot with access to public streets. The ground lease contemplated leasing an unimproved area of 42,788 square feet, upon which SPJ subsequently established and operated a Pizzeria Uno Chicago Bar & Grill. The ground lease conveyed to SPJ the right to use all common ways and areas on the overall property, plus a license for vehicle parking and vehicular and pedestrian ingress and egress to and from the premises.
On March 31, 2006, defendant W2005/Fargo Hotels (Pool C) Realty L.P. (Realty) purchased the entire parcel and was assigned the ground lease.
The ground lease provided for a term of twenty-five years, with a conditional option to renew for five additional five-year periods. The contracting parties expressly intended the ground lease to be a "net-net-net" lease. Accordingly, SPJ was obliged first to pay its landlord "Basic Rent," then pay the "Lessee's Proportionate Share . . . of the Operating Costs of the Property," and finally pay "Additional Rent."
Section VI(A) of the ground lease states:
Lessee shall pay as Additional Rent, Lessee's Proportionate Share of: (i) all real estate taxes, ad valorem taxes and assessments, general and special, use and occupancy taxes and any other tax imposed upon or levied against real estate, or upon owners of real estate as such rather than persons generally, which are assessed against Lessor, payable with respect to or allocable to the Property.
In Section V(A)(2), the ground lease defines "Lessee's Proportionate Share" as a fraction "which shall be equal to the number of gross square feet in the Premises." Although arithmetically imperfect -- a fraction requires both a numerator and a denominator -- the parties do not dispute that what was intended was for the "Lessee's Proportionate Share" of real property taxes to be equal to the total square footage of the leased premises (42,788 square feet) divided by the total square footage of the overall property (128,723 square feet). This produces a fraction of one-third, or 33% of the real property tax bill for the property.
The ground lease provides an alternate procedure for the allocation of real property taxes. It grants an option to the tenant, on notice to the landlord, to seek a separate assessment for the leased premises. Section VI(C) states:
Lessee shall have the option to have the Premises separately assessed for real estate tax purposes; provided, however, that Lessee gives Lessor at least sixty (60) days prior written notice of the exercise of such option. In the event that Lessee exercises such option and the Premises is separately assessed for real estate tax purposes, Lessee shall, in lieu of paying Lessee's Proportionate Share of Taxes, as aforesaid, pay the Lessor all real estate taxes, ad valorem taxes and assessments, general and special, use and occupancy taxes and any other tax imposed upon or levied against real estate, or upon owners of real estate as such rather than persons generally, which are assessed against Lessor, payable with respect to or allocable to the Premises.
The ground lease neither defines the phrase "separately assessed for real estate tax purposes" nor provides guidance as to how the separate assessment is to be obtained.
Shortly after its restaurant was completed, SPJ complained to Midwest's managing agent that the ground lease's real property tax allocation was being unfairly determined. SPJ expressed its concern that the cost to build the facility was only $732,000, but it was being allocated a real property tax burden, using the proportionate share fraction of one-third, as if its improvements were assessed for $1,583,000. Accordingly, SPJ requested that Midwest "appeal the assessed taxes and have the taxes separately assessed. We shall agree to pay for the costs in accordance with our agreement but need for you to submit said appeal."
After the restaurant was completed in 2002, the Deptford Township Tax Assessor (Tax Assessor) maintained a permanent property record and appraisal card*fn3 for the overall property, which itemized the land and improvement values, listing $1,030,000 for the land and $5,663,000 for all improvements. Real property tax bills reflecting the property's total assessment of $6,693,000 were presented by the municipality to the owner for payment. Because Midwest did not initiate the requested tax appeals, SPJ filed its own appeals with the Tax Court of New Jersey for the years 2003, 2004, 2005, and 2006, claiming "the assessment is in excess of the true or assessable value of the property."
When Realty acquired the property in March 2006, SPJ executed a document akin to a tenant's estoppel certificate. The instrument contained a provision that specifically addressed the simmering real property tax allocation dispute and corresponding tax appeals:
6. Except as set forth herein to the best of [SPJ]'s knowledge, both [SPJ] and [Midwest] have performed all of their respective obligations under the Lease and [SPJ] has no knowledge o[f] any event which with the giving of notice, the passage of time or both would constitute a default by [Midwest] under the Lease. Notwithstanding the above, [Midwest] and [SPJ] have exchanged numerous letters on the issue of the real estate tax assessment and appeal. [SPJ] has requested [Midwest] to join in the appeal of the real estate assessment and to date, [Midwest] has not agreed to join any appeal. [SPJ]'s position is that [Midwest] is required to join in and [Midwest] has yet to agree to join in the appeal. Without the joinder of [Midwest], the Board of Assessment Appeals [sic] will not accept, hear and decide an [a]ppeal by [SPJ] only. [SPJ] believes that [Midwest] has an obligation under the Lease Agreement to join in the appeal even if it is only for [SPJ]'s assessment.
Approximately nine months after Realty's acquisition, on November 10, 2006, counsel for SPJ provided Realty with written notice that, among other things, SPJ intended to explore "a separate assessment for SPJ's portion of the Property as provided for under Paragraph VI(C) of the Lease." Within weeks, SPJ unilaterally requested that all of its then-pending tax ...