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Town of Kearny v. Discount City of Old Bridge

March 17, 2011

TOWN OF KEARNY, PLAINTIFF-RESPONDENT,
v.
DISCOUNT CITY OF OLD BRIDGE, INC., SPARTECH POLYCOM, FRANKLIN PLASTICS CORP., DEFENDANTS, AND DVL KEARNY HOLDINGS, LLC, DEFENDANT-RESPONDENT, AND JAMES FARM MARKET CORP. AND JAMES WHOLESALE WAREHOUSE, INC., DEFENDANTS-APPELLANTS.



On certification to the Superior Court, Appellate Division.

The opinion of the court was delivered by: Justice Long

SYLLABUS

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

Town of Kearny v. Discount City of Old Bridge

Argued September 28, 2010

Decided March 17, 2011

LONG, J., writing for a majority of the Court.

The issues in this appeal include the following: whether one who is not the record owner of property when a redevelopment designation is being considered under the Local Redevelopment and Housing Law (LRHL), N.J.S.A. 40A:12A-1 to -73, may later challenge a blight designation in an eminent domain proceeding; whether a leasehold interest, standing alone, can be condemned; and, if so, whether the condemning authority has a statutory obligation under the Eminent Domain Act of 1971 (Eminent Domain Act) to conduct bona fide negotiations with the lessee. A discrete issue regarding the effect of a lease condemnation provision on the relationship between landlord and tenant, where the landlord is also serving as the redeveloper, is also presented.

DVL, Inc. (DVL) is a Delaware corporation which wholly owns Professional Service Corp. (PSC), DVL Kearny Holdings, LLC (DVL Kearny Holdings), and Del Toch LLC (Del Toch) (referred to collectively as "DVL"). Del Toch owns Del Toch Industrial Park (Del Toch property or "Complex") and the adjacent eight acres in Kearny. The Del Toch property is leased to: (1) Discount City of Old Bridge, Inc.; (2) James Farm Market Corporation; and (3) James Wholesale Warehouse, Inc. (collectively "James"). James's leasehold interest, 3.8% of the Del Toch property, is based on two lease agreements with PSC. The leases contained a condemnation provision that provided, in part, that the Landlord may terminate the lease "[i]f the Complex of which the Premises are a part, or any portion thereof, shall be taken under eminent domain or condemnation proceedings . . . ." The leases further provided that the tenant would not be entitled to any compensation upon condemnation.

On January 11, 2000, the Mayor and Council of the Town of Kearny (collectively "Kearny") authorized and directed the Planning Board to conduct a redevelopment study of the Passaic Avenue Area, which included the Del Toch property. Following the study, and pursuant to the LRHL, the Planning Board issued notices and held hearings, after which it recommended redevelopment in Area B, which included the Del Toch property. On December 12, 2000, Kearny designated the Passaic Avenue area, including the Del Toch property, "as in need of redevelopment." Kearny adopted a redevelopment plan on October 11, 2001.

On December 6, 2001, DVL, through Del Toch, filed a complaint in lieu of prerogative writs against Kearny and the Planning Board seeking, inter alia, to invalidate the "blight designation" and the Passaic Avenue redevelopment plan as to their properties. After an initial redeveloper designation fell through, Kearny issued a request for proposals for redevelopers for the Passaic Avenue project. On October 16, 2006, DVL Kearny Holdings was designated as conditional redeveloper for the portion of the Passaic Avenue project that includes the Del Toch property. On December 11, 2007, Kearny entered into a redeveloper agreement with DVL Kearny Holdings. James was not notified by Kearny or DVL of those proceedings. The agreement identified James's leases as "property of interests to be acquired by condemnation," provided that DVL would pay just compensation on Kearny's behalf, and required that DVL engage James in negotiations and make "reasonable relocation offers." DVL offered James $250,000, even though it claims that the estimated cost of relocation was only $50,000. James declined the offer, raising concerns about DVL's appointment as redeveloper without any prior communication with its tenants, and countered with an offer for $3 million. At no time was Kearny involved in any separate negotiations with James.

On May 8, 2008, a condemnation action against James was initiated by Kearny. On July 29, 2008, the trial court entered an order in favor of Kearny. James appealed and the Appellate Division affirmed in part, and reversed and remanded in part. First, the panel held that Kearny had the authority to condemn James's leasehold as a separate property interest. Second, the panel declared that DVL had met its obligation under the redeveloper agreement to "'use its best efforts to terminate'" James's leases and that the bona fide negotiations requirement was met. Third, the panel held James, as a tenant, had no right to individual notice during Kearny's exploration and eventual approval of the "blighted" area designation and was, therefore, bound by the forty-five-day limit for challenging a proposed blight designation, which it did not satisfy. However, the panel remanded the issue of whether James had a right to just compensation and relocation expenses. On remand, the trial court held that the words "any portion thereof" in the condemnation clause governed the taking of James's leasehold interest. Judgment was entered in favor of Kearny, disallowing all compensation to James, and dismissing the complaint with prejudice and costs.

The Supreme Court granted James's petition for certification.

HELD: A non-record owner of property is not entitled to individualized notice that redevelopment is being considered but only to newspaper publication. If that party does not object or challenge the blight designation at the hearing or in a timely action in lieu of prerogative writs, the issue is foreclosed. In addition, a leasehold interest is an "interest in land" that, standing alone, can be condemned. In that instance, the lessee has the same rights as any other condemnee, including the right to bona fide negotiations. Because bona fide negotiations did not occur here, the condemnation complaint must be dismissed.

1. The concept of eminent domain is deeply rooted in New Jersey's jurisprudence, having first been declared in the 1776 New Jersey Constitution. The Eminent Domain Clause of the constitution provides: "Private property shall not be taken for public use without just compensation." N.J. Const. art. I, ¶ 20. Pursuant to the Blighted Areas Clause of the constitution a municipality seeking to remedy blight may exercise its eminent domain power so long as it adheres to the Eminent Domain Clause and any applicable statutory requirements. N.J. Const. art. VIII, § 3, ¶ 1. Under the LRHL, a municipality has the power to (1) Cause a preliminary investigation to be made . . . as to whether an area is in need of redevelopment; (2) Determine . . . that an area is in need of redevelopment; [and] (3) Adopt a redevelopment plan . . . N.J.S.A. 40A:12A-4(a). During public proceedings pursuant to N.J.S.A. 40A:12A-(6)(b)(2), the planning board must "hear all persons who are interested in or would be affected by a determination that the delineated area is a redevelopment area." N.J.S.A. 40A:12A-(c)(b)(4). If the board recommends redevelopment, the governing body must notify anyone who filed a written objection to the designation and must wait forty-five days before it takes further action. Once the process is complete, the governing body may adopt a redevelopment plan for the area. Notice of the plan's adoption is not required. If the redevelopment plan is adopted the governing body may use any of the powers listed in N.J.S.A. 40A:12A-8 to implement the plan, including the power to condemn the property and take it by eminent domain. In addition, the governing body may designate a redeveloper who is permitted to exercise eminent domain powers on its behalf. N.J.S.A. 20:3-33. (Pp. 12-17)

2. In the LRHL, the Legislature differentiated between the classes of persons entitled to general notice and those warranting specific notice. DVL, the record owner of the Del Toch property, had a right to individual notice. James, on the other hand, like any member of the public, had a right to notice by way of newspaper publication and could have appeared or entered a written objection to the designation. As a signatory of a lease that declared that it would terminate if the landlord's property was condemned, James was well aware of the effect that Kearny's redevelopment initiative could have on it. James was thus bound to participate in the hearings and, if unsuccessful, to challenge the blight designation in an action in lieu of prerogative writs under Rule 4:69-6(a). Having failed to avail itself of those remedies, it is now foreclosed from pursuing the issue, despite the fact that it is now the sole condemnee. In addition, like the courts below, the Court is satisfied that a municipality has the right to condemn a leasehold interest. That right, however, bears with it concomitant responsibilities. (Pp. 17-22)

3. A municipality seeking to take private property for a public purpose must pay "just compensation" to every condemnee with a compensable interest. In order to achieve a compensation figure that is just, the Legislature has directed public entities to engage in bona fide negotiations with condemnees. Otherwise, the condemnation complaint will be dismissed. Ordinarily a municipality is not required to undertake the burden of negotiating with each and every interest holder in private property. Indeed, the Court has held that where a fee simple is being condemned, negotiations will take place with the fee owner alone. Moreover, where the fee is not at issue, the holder of the interest that is actually at stake is the party with whom negotiations must take place. In this case, DVL's right to its own property remains inviolate. The only interest that was ever at stake was that of James which was, therefore, the party entitled to bona fide negotiations. (22-25)

4. The Eminent Domain Act does not define what is necessary to make a negotiation bona fide. To ensure the condemnee receives "just compensation," this Court has approved the "one-price" offer method. With a one-price offer, the condemnor must identify any appraisals used and disclose the valuation methodology it employed. Failure to supply the appraisals and explain how the offered compensation was calculated is fatal. Here, DVL made a one-price offer to James. However, it appears the offer was solely for relocation. DVL claims that the relocation costs were only $50,000. Thus, the nature of the remaining $200,000 offer is unclear. If it was just for relocation, DVL failed in its obligation to negotiate regarding the underlying value of the lease. Contrariwise, if the $200,000 was actually an offer regarding the value of the lease, it too failed because it was not accompanied by appraisals or an explanation of the valuation method. Without that information, James could not make an informed decision. Either way, DVL did not engage in bona fide negotiations with James. The Appellate Division's contrary conclusion was wide of the mark. (Pp. 25-28)

5. A condemnation clause is, in effect, a waiver of the right the tenant would otherwise have to share in the landlord's condemnation award. Because such a clause works a forfeiture on the tenant, it should be strictly construed. In other words, unless the clause is crystal clear, forfeiture should not occur. The purpose behind a lease condemnation clause is to protect the landlord's interest in its own award when the fee is taken. There is simply nothing in the language of the clause to suggest an intention to bar a claim by a lessee or an easement holder when the landlord's fee is not at stake. However, even if the Court views the clause as ambiguous, which it does not, it could not accept DVL's interpretation. DVL's approach does not account for the full language of the lease, is completely out of synchronicity with the purposes underlying a condemnation clause, and is, at best, ambiguous and thus not clear enough to justify what is, in effect, a forfeiture of James's right to just compensation. As such, the Court holds that the clause will not be enforced in these circumstances. (Pp. 28-37)

The judgment of the Appellate Division is REVERSED. The matter is REMANDED to the trial court for proceedings consistent with the principles to which the Court has adverted.

JUSTICE LaVECCHIA filed a separate, dissenting opinion, in which JUSTICE RIVERA-SOTO and JUDGE STERN join, stating that the majority's decision upends the established and customary meaning of a lease provision at use in countless commercial leases throughout this state and fails to demonstrate any equitable basis for the relief it affords.

CHIEF JUSTICE RABNER and JUSTICES ALBIN and HOENS join in JUSTICE LONG's opinion. JUSTICE LaVECCHIA filed a separate, dissenting opinion, in which JUSTICE RIVERA-SOTO and JUDGE STERN (temporarily assigned) join.

A-76 September Term 2009

Argued September 28, 2010

JUSTICE LONG delivered the opinion of the Court.

The issues on this appeal include the following: whether one who is not the record owner of property when a redevelopment designation is being considered under the Local Redevelopment and Housing Law (LRHL), N.J.S.A. 40A:12A-1 to -73, may later challenge a blight designation in an eminent domain proceeding; whether a leasehold interest, standing alone, can be condemned; and, if so, whether the condemning authority has a statutory obligation under N.J.S.A. 20:3-6 of the Eminent Domain Act of 1971 (Eminent Domain Act), N.J.S.A. 20:3-1 to -50, to conduct bona fide negotiations with the lessee. A discrete issue regarding the effect of a lease condemnation provision on the relationship between landlord and tenant, where the landlord is also serving as the redeveloper, is also presented.

We reaffirm our decision in Iron Mountain Information Management, Inc. v. City of Newark, 202 N.J. 74 (2010), that a non-record owner of property is not entitled to individualized notice that redevelopment is being considered but only to newspaper publication under N.J.S.A. 40A:12A-6(b)(3) and that if that party does not object or challenge the blight designation at the hearing or in a timely action in lieu of prerogative writs, the issue is foreclosed. Id. at 78-79. We further hold that a leasehold interest is an "interest in land" that, standing alone, can be condemned. In that instance, the lessee has the same rights as any other condemnee, including the right to bona fide negotiations. In this case, the lease between the lessor, who was also serving as the redeveloper, and the lessee contained a common condemnation clause which did not relieve the municipality from the duty to negotiate with and compensate the lessee. Because bona fide negotiations did not occur here, the condemnation complaint must be dismissed.

I.

DVL, Inc. (DVL) is a Delaware corporation which wholly owns Professional Service Corp. (PSC), DVL Kearny Holdings, LLC (DVL Kearny Holdings), and Del Toch LLC (Del Toch).*fn1 Like the parties, we refer to those entities collectively as DVL. Del Toch owns Del Toch Industrial Park (Del Toch property) and the adjacent eight acres in Kearny. The Del Toch property is leased to: (1) Discount City of Old Bridge, Inc. (Discount City); (2) James Farm Market Corporation; and (3) James Wholesale Warehouse, Inc. (collectively "James"). Franklin-Burlington Plastics, Inc., d/b/a Spartech Polycrom (Spartech) possessed a reservoir easement on the Del Toch property.*fn2

James's leasehold interest, 3.8% of the Del Toch property, is based on two lease agreements with PSC dated July 21, 1994, and March 31, 1995. The leases describe the "complex" as Toch Industrial Park, 160 Passaic Avenue, Kearny, New Jersey, and the "premises" as 5,544 square feet located in Building 12 of the complex and 7,873 square feet located in Building 113 of the complex. Apparently, the renewal options in the leases were exercised such that James remained a tenant of DVL at all times relevant to this action. Each lease contains the following clause:

CONDEMNATION:

If the Complex of which the Premises are a part, or any portion thereof, shall be taken under eminent domain or condemnation proceedings, or if suit or other action shall be instituted for the taking or condemnation, or if in lieu of any formal condemnation proceedings or actions, Landlord shall grant an option to purchase and or shall sell and convey the Premises or any portion thereof, to the governmental or other public authority, agency, body or public utility, seeking to take said land or any portion thereof, then this lease, at the option of the Landlord, shall terminate, and the term hereof shall end as of such date as Landlord shall fix by notice in writing; and Tenant shall have no claim or be entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation proceedings; and all rights of the Tenant to damages, if any, are hereby assigned to the Landlord. The Tenant agrees to execute and deliver any instruments, at the expense of the Landlord, as may be deemed necessary or required to expedite any condemnation proceedings or to effectuate a proper transfer of title to such public authority, seeking to take or acquire the Premises or any portion thereof. Tenant covenants and agrees to vacate the Premises, remove all the Tenant's personal property and deliver up peaceable possession thereof to Landlord, or to such other party designated by Landlord in the aforementioned notice. Failure by Tenant to comply with any provisions in this clause shall subject Tenant to such costs, expenses, damages and losses as Landlord may incur by reason of Tenant's breach hereof.

On January 11, 2000, the Mayor and Council of the Town of Kearny (collectively "Kearny") authorized and directed the Planning Board to conduct a redevelopment study of the Passaic Avenue area. In relation to the Del Toch property, the report stated:

Parcels 51 and 52, Del Toch Industrial Park and Ozzie's Ford display obsolete layout of structures and obsolescence of buildings and improvements that has resulted in a not fully productive condition of land. The industrial park has reused existing structures, however these structures and the parking and circulation of the site have not been changed since their construction in the first half of the 20th Century to accommodate the new uses. Obsolete tanks remain on-site, and defunct motor vehicles are stored on-site. The subdivided lot that contains Ozzie's Ford has been haphazardly drawn and does not provide comprehensive circulation and access for that property.

The 5- and 6-story buildings on both properties exceed the 40' height limit for the C-4 zoning district.

Following the study, the Planning Board issued notices for the purpose of hearing persons who were interested in or would be affected by a determination that the delineated area was a redevelopment area, as required by N.J.S.A. 40A:12A-6(b)(2). In doing so, it complied with all of the provisions pertaining to publication and mailing of those notices as required by N.J.S.A. 40A:12A-6(b)(3). The Planning Board conducted hearings on October 2 and October 16, 2000, at which time all persons who requested to be heard were permitted to do so as required by N.J.S.A. 40A:12A-6(b)(4). After completing its hearing on the matter, the Planning Board, in accordance with N.J.S.A. 40A:12A-6(b)(5), recommended that Area B on the Planning Board map be a redevelopment area. That area included the Del Toch property.

On December 12, 2000, in response to that study, Kearny designated the Passaic Avenue area, including the Del Toch property, "as in need of redevelopment." Following that designation, Heyer, Gruel, & Associates, P.A., submitted a proposed redevelopment plan which was subsequently adopted by Kearny through an ordinance on October 11, 2001:

This Redevelopment Plan authorizes the Town to exercise its condemnation powers on all properties in the Redevelopment Area, to acquire property or to eliminate any restrictive covenants, easements or similar property interests which may undermine the implementation of the Plan.

The Town plans, however, to continue working with affected property owners and businesses to promote private redevelopment, where appropriate, of the parcels within the Redevelopment Area.

On December 6, 2001, Osborne Capital and Delborne Land Company, along with DVL, through Del Toch, all owners of Passaic Avenue properties, filed a complaint in lieu of prerogative writs against Kearny and the Planning Board seeking, inter alia, to invalidate the "blight designation" and the Passaic Avenue redevelopment plan as to their properties.

On October 8, 2002, Kearny designated the Forest City Ratner Companies as the redeveloper. The plaintiffs in the prerogative writs action then filed an amended complaint which added a count challenging the designation of Forest City Ratner as redeveloper. By judgment dated November 21, 2003, that matter was dismissed with prejudice, except for the inverse condemnation claims which were dismissed without prejudice.

In April 2004, the Forest City Ratner agreement lapsed and was not renewed. Shortly thereafter, Kearny issued a request for proposals for redevelopers for the Passaic Avenue project. On October 16, 2006, DVL Kearny Holdings was designated as conditional redeveloper for the portion of the Passaic Avenue project that includes the Del Toch property. On December 11, 2007, Kearny entered into a redeveloper agreement with DVL Kearny Holdings. James was not notified by Kearny or DVL of those proceedings.

In accordance with the agreement, Kearny acknowledged that DVL owned the vast majority of the redevelopment zone, including the Del Toch property, and pledged to acquire the remaining parcel. In relation to acquiring the leaseholds within the Del Toch property, the December 2007 redeveloper agreement stated:

With regard to the Del Toch Parcels, [DVL] is requesting that the Town use its eminent domain powers, at the sole cost and expense of [DVL], to acquire the property interest identified [in Exhibit E]. The Town agrees to use reasonable efforts, at the cost and expense of [DVL], to acquire these interests.

Exhibit E identified James's leases as "property interests to be acquired by condemnation." The agreement also stated that DVL "shall pay all out-of-pocket costs incurred by the Town arising out of the voluntary acquisition of the Property and/or any condemnation action . . . ." In other words, Kearny would condemn whatever was needed for the project and DVL would pay just compensation on its behalf. Finally, Exhibit E affirmed that DVL "shall first be required to use ...


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