June 27, 2011
IAN NIXON AND TAMARA NIXON, PLAINTIFFS-RESPONDENTS/ CROSS-APPELLANTS,
On appeal from the Superior Court of New Jersey, Law Division, Sussex County, Docket No. L-000424-09.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted May 18, 2011
Before Judges Sapp-Peterson, Simonelli and Fasciale.
This case involves cross-appeals by the parties to a residential real estate contract. Defendant-seller appeals from an order granting summary judgment to plaintiffs-buyers, compelling the return of plaintiffs' deposit, and dismissing defendant's counterclaim alleging the breach of the implied covenant of good faith and fair dealing. We reverse that part of the order dismissing defendant's counter-claim because genuine issues of material fact exist concerning plaintiffs' motives for waiting to cancel the contract. We otherwise affirm the order granting summary judgment to plaintiffs because defendant breached the contract of sale.*fn1
Plaintiffs executed a contract to buy defendant's house for $247,000. They agreed to pay a $15,000 deposit and apply for a thirty-year conventional mortgage to pay the balance. Plaintiffs applied to American Mortgage Company (AMC) for a mortgage and obtained an appraisal of the property. Plaintiffs requested that Septic, LLC (Septic), Better Home Inspections, Inc. (BHI), and RAdata, Inc. (RAdata), inspect the septic system, home, and radon levels respectively. Septic reported that the septic system was functional, but expressed concern that there were no permits for the newer portion of the system. BHI issued a report outlining ten items that needed repairs and remediation.*fn2 RAdata stated that a radon remediation system was required and that re-testing was necessary before closing.
The appraiser valued the house at $240,000; therefore, AMC denied plaintiff's mortgage application. Plaintiffs notified defendant they had not yet obtained a mortgage commitment and considered the mortgage contingency deadline to be extended unless defendant objected in writing. Defendant never objected and plaintiffs thereafter took no action to obtain a mortgage. Rather, plaintiffs demanded that defendant make the needed repairs, and extended the closing date because plaintiffs continued to negotiate the home inspection issues.
Defendant complied with some but not all of plaintiffs' demands. Defendant paid RAdata to install a radon reduction and monitoring system and agreed to another radon test before the closing, which resulted in an acceptable reading. Defendant hired E2 Project Management, LLC (E2PM) to evaluate the septic system and make it compliant with all regulations. Defendant incurred approximately $20,000 in expenses to address the septic and radon issues. He also retained a plumber to make repairs.
After defendant undertook repair and remediation efforts, plaintiffs canceled the contract and demanded the return of their deposit. Plaintiffs contended that the contract was null and void because they were unable to obtain a mortgage commitment and defendant refused to make all of the repairs. Plaintiffs also argued that defendant failed to (1) obtain permits and approvals for his past work to the septic system, and was unable to provide as-built plans and permits for the newer part of that system; (2) provide a working septic system; (3) convey clear and marketable title; and (4) show that the water supply met applicable standards.
Defendant rejected plaintiffs' bases for canceling the contract, notified plaintiffs that they should continue to obtain financing, indicated that he was ready, willing, and able to close, and identified September 18, 2009 as the time of the essence closing date. Plaintiffs remained unwilling to purchase the house and contended additionally that defendant misrepresented that he (1) obtained all necessary permits for the septic system; (2) could convey clear title; and (3) that the septic system was located within the property boundaries.
Plaintiffs filed a verified complaint against defendant alleging breach of contract and seeking damages. Defendant filed a counter-claim alleging, among other things, breach of the covenant of good faith and fair dealing. The parties then cross-moved for summary judgment. The judge conducted oral argument and issued an oral and written opinion the same day.
In his oral opinion, the judge stated that although defendant expended substantial resources for radon remediation and modifications to the septic system, defendant refused to make all the repairs. Even though the remaining items were "minor physical defects," the judge stated that under the language of the contract plaintiffs had the right to rescind the contract.
In his written opinion, the judge stated that plaintiffs were entitled to summary judgment and a return of their deposit because defendant: (1) materially misrepresented - - in violation of the "Necessary Licenses Clause" - - that he possessed licenses, permits and final approvals for all work done on the septic system; (2) refused to comply with the "Home Inspection Clause" and remedy all physical defects identified in BHI's inspection report; and (3) failed to meet the applicable statutory water standards required by the "Water Testing Clause." The judge found that there existed a genuine issue of material fact concerning whether plaintiffs attempted to secure a conventional mortgage, and whether plaintiffs' efforts to obtain a mortgage were in good faith. After the judge refused to stay his rulings pending appeal, the parties filed cross-appeals.
On appeal, defendant contends that the motion judge erred by (1) raising facts not in the record; (2) shifting the burden of proof to defendant to disprove the reasons for plaintiffs' cancellation; (3) relying on a net opinion of the home inspector; (4) denying defendant the right to have a jury determine whether he breached the contract; and (5) dismissing the implied covenant of good faith and fair dealing counterclaim.
When reviewing a grant of summary judgment, we employ the same legal standards used by the motion judge. Spring Creek Holding Co. v. Shinnihon U.S.A. Co., 399 N.J. Super. 158, 180 (App. Div.), certif. denied, 196 N.J. 85 (2008); Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). First, we determine whether the moving party has demonstrated that there were no genuine disputes as to material facts, and then we decide whether the motion judge's application of the law was correct. Atl. Mut. Ins. Co. v. Hillside Bottling Co., 387 N.J. Super. 224, 230-31 (App. Div.), certif. denied, 189 N.J. 104 (2006). We view the evidence in the light most favorable to the non-moving party and analyze whether the moving party was entitled to judgment as a matter of law. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523, 529 (1995). We accord no deference to the motion judge's conclusions on issues of law, Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995), which we review de novo. Spring Creek, supra, 399 N.J. Super. at 180; Dep't of Envtl. Prot. v. Kafil, 395 N.J. Super. 597, 601 (App. Div. 2007).
I We begin by affirming the order granting summary judgment to plaintiffs. Plaintiffs were entitled to rescind the contract as a matter of law for three reasons expressed by the judge, with which we agree.
First, defendant breached the "Necessary Licenses Clause." The judge stated The Necessary License Clause clearly stated that [plaintiffs] had the right to declare the [c]ontract null and void if [defendant]'s representations were either false, or in error. It further provided that [plaintiffs] "may" have opted to maintain the [c]ontract and allow [defendant] until the closing of the title to obtain the necessary licenses, permits and final approvals. As is apparent from their April 26, 2009 letter, in which [plaintiffs] declared the contract null and void, they did not elect to do so.
This Court concludes that, by the language of the contract, [defendant] made an affirmative factual misrepresentation, specifically that he had obtained all necessary licenses, permits and final approvals for the septic system located on the Property. As stated in Marcangelo v. Boardwalk Regency Corp., 847 F. Supp. 1222, 1230 (D.N.J. 1994), the victim of misrepresentation "is given the choice of affirming or rescinding the contract." In the instant case, [plaintiffs] chose to rescind the [c]ontract. This alone is a sufficient basis to conclude that [plaintiffs] are permitted to rescind the [c]ontract, as a matter of law, and under the terms of the [c]ontract between the parties.
Defendant did not receive a certification of compliance for the septic system until August 13, 2009, "approximately four months after [plaintiffs] declared the [c]ontract null and void."
Second, defendant breached the "Home Inspection Clause." The judge explained that the Home Inspection Clause was "clear" and "permitted [plaintiffs] to rescind the Contract if 'any' defects and/or environmental contaminants were found," and BHI "clearly found multiple 'physical defects and/or environmental contaminants,'" which defendant "declined to remedy." The judge also remarked that defendant was making unsupported assertions that this Clause does not apply. For instance, [defendant] asserts: 'Mold and mildew' are not always 'environmental contaminants['] . . . I took remedial steps to remove the cosmetic issues of the presence of the alleged 'mold and mildew' in the basement (the only location where it was noted in the report) and it is no longer there." However, [defendant] provides no documentation that this was accomplished. [Defendant also] does not address his refusal to replace or remedy the lower bathroom shower. [Defendant] asserts: "I declined to replace the [boiler] target wall because myself and my licensed plumber were of the opinion that the cracks were superficial and did not render the entire system to be 'unsatisfactory' and 'not in good working order.'" [Defendant] continues: "In any event, the burden is on the Plaintiffs to produce an expert report to establish this alleged crack rose to the level of warranting the cancellation of the binding contract for sale." [Defendant] fails to explain why his "opinion" regarding the boiler target wall is relevant in the face of the clear language of the [c]ontract. Similarly, [defendant]'s attorney does not provide any legal authority or contractual basis for the proposition that "the burden is on the Plaintiffs to produce an expert report," and this point is not even mentioned [in defendant]'s legal brief.
[Defendant] asserts that "[t]he Plaintiff[s'] own report makes absolutely no remarks to establish that the electrical system as a whole is not in 'satisfactory and in good working order' as the contract calls for. It works just fine." However, [defendant] does not address whether the defects noted in [BHI's] Report constitute "physical defects," nor does he provide any support for the proposition that the electrical system "works just fine."
Thus, the judge concluded "that, as a fact, the [p]roperty . . . contained 'physical defects,' that [defendant] declined to remedy . . . and that [plaintiffs] were accordingly permitted to rescind the [c]ontract."
Lastly, defendant breached the "Well Inspection Clause."
The judge explained that on its face, the clause adopted only the statutory substantive standards in the Private Well Testing Act (the Act) for an acceptable water test result, and not the statutory time limits for producing that result. N.J.S.A. 58:12A-27 of the Act states:
a. Every contract of sale of (1) real property the potable water supply for which is a private well located on the property shall include a provision requiring, as a condition of the sale, the testing of that water supply for at least the parameters prescribed pursuant to sections 3 [N.J.S.A. 58:12A-28, water testing parameters] and 4 [N.J.S.A. 58:12A-29, rules and regulations] of this act.
b. Closing of title on the sale of the real property shall not occur unless both the buyer and the seller have received and reviewed a copy of the water test results. At closing, the buyer and seller both shall certify in writing that they have received and reviewed the water test results.
The judge agreed with the argument that defendant was not required to provide acceptable results until the actual closing date. However, the judge declared:
Even assuming, arguendo, that [defendant] was not obligated to furnish water test results in compliance with the [Act] until the date of closing, he failed to do so. Giving all favorable inferences to [defendant], the date of closing would have been the "time of the essence" closing date of September 18, 2009. Specifically, [defendant]'s attorney chose September 18, 2009, as the "time is of the essence" closing date. However, by way of letter dated September 25, 2009, [defendant] was notified by Advanced Water Technology, LLC, that the water on the Property did not satisfy the [Act] until September 24, 2009.
In fact, [defendant] was specifically informed in that same letter . . . that a water test performed by Advanced Water Technology on September 18, 2009, the would-be closing date, failed to meet the Ph standards of the Act.
Accordingly, the judge concluded "that, as a matter of law, and drawing all inferences in [defendant]'s favor, [defendant] was unable to demonstrate that the private well on the [p]roperty met the contractually required standards, even as of the date he chose for the closing (September 18, 2009)."
II Defendant contends that the judge erred by dismissing the breach of the implied covenant of good faith and fair dealing counterclaim. We agree and reverse that part of the order dismissing defendant's counter-claim.
An implied covenant of good faith and fair dealing exists in all contracts, such that "'neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract . . . .'" Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420 (1997) (quoting Palisades Props., Inc. v. Brunetti, 44 N.J. 117, 130 (1965)). See Kalogeras v. 239 Broad Ave., L.L.C., 202 N.J. 349, 366 (2010) (covenant inherent in every contract); Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001). A party may obtain relief "if its reasonable expectations are destroyed when [the other party] acts with ill motives and without any legitimate purpose." Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 226 (2005) (citations omitted). Thus, a breach of this implied covenant necessarily requires "[b]ad motive or intention" on the part of the breaching party. Wilson, supra, 168 N.J. at 251. Consequently, summary judgment is inappropriate when subjective elements, such as intent or motivation, are involved. Spragg v. Shore Care, 293 N.J. Super. 33, 59 (App. Div. 1996).
"[I]n New Jersey 'a party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to terminate.'" Wilson, supra, 168 N.J. at 244 (quoting Sons of Thunder, Inc., supra, 148 N.J. at 422). "'[G]ood faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party . . . .'" Id. (quoting Restatement (Second) of Contracts § 205 comment a (1981)).
Although the judge found that there existed a genuine issue of material fact concerning whether plaintiffs attempted to secure a conventional mortgage and whether plaintiffs' efforts were in good faith, he erroneously dismissed defendant's counter-claim. We conclude that there are issues of fact concerning plaintiffs' motives for waiting to cancel the contract. Plaintiffs admitted that (1) their mortgage application had been denied on March 16, 2009, before defendant started his expensive repairs, (2) they made no other attempts to secure a mortgage after that denial, (3) they never cancelled the contract under the mortgage contingency clause prior to their insistence on March 17, 2009, that defendant reply to their March 11, 2009 letter concerning the property's condition and his intent to repair those defects, and (4) they did not cancel the contract until April 16. Defendant incurred substantial expenses to remediate the premises even though plaintiffs made no effort to secure financing after AMC denied their application. Giving defendant all favorable inferences, had plaintiffs canceled the contract before he made significant repairs, then defendant may not have incurred remediation expenses and could have re-listed the home "as is."
After a thorough review of the record and consideration of the controlling legal principles, we conclude that the remaining arguments on appeal are without sufficient merit to warrant extended discussion in a written opinion. R. 2:11-3(e)(1)(E).
Affirmed in part and reversed in part.