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175 Broad Street, L.L.C v. the Nead Organization

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


January 10, 2013

175 BROAD STREET, L.L.C., PLAINTIFF-APPELLANT,
v.
THE NEAD ORGANIZATION, INC., NEAD ELECTRIC, INC., NEAD ELECTRIC OF NEW JERSEY, INC., NEAD INFORMATION SYSTEMS, INC., AND DOROTHY M. MARZIOTTO, DEFENDANTS-RESPONDENTS.

On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-8143-11.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued October 11, 2012

Before Judges Fuentes, Ashrafi and Hayden.

In this appeal, we must determine the scope of an arbitration clause in a commercial lease. Plaintiff 175 Broad Street, L.L.C., the landlord, appeals from a March 14, 2012 order of the Law Division that dismissed its lawsuit against the tenant in favor of arbitration of the dispute. We affirm.

Plaintiff alleged that defendants breached the written lease agreement by vacating the premises without notice, by failing to pay rent and other charges, and by neglecting to remove their fixtures and to restore the premises to their original condition. Plaintiff sought damages for lost rent and "additional rent," late charges, expenses of repairing and restoring the premises, loss of future use of the property, and attorney's fees and expenses of the lawsuit. Defendants filed an answer denying plaintiff's allegations and a counterclaim for refund of their security deposit. Shortly after the pleadings were filed, defendants moved to dismiss the complaint, citing the mandatory arbitration clause of the lease. The court granted defendants' motion by its order of March 14, 2012.*fn1

The pleadings and related documents demonstrate the following facts.

On March 15, 2001, plaintiff as landlord and Nead as tenant entered into a five-year lease for 12,017 square feet of a commercial building located at 175 Broad Street, Carlstadt, New Jersey. In September 2005, the parties executed a written addendum expanding the leased space and extending the term for an additional five years, to March 31, 2011. The base rent was $7,360.41 per month during the first year of the lease and increased each year to a high of $9,603.68 during the tenth year. In addition, Nead was obligated to pay monthly "additional rent" consisting of its net proportional share of taxes, insurance premiums, maintenance costs, and other specified charges.

The lease addressed installation of fixtures and alteration of Nead's interior space. At the end of the lease term, Nead was required to restore the premises to their original condition except for fixtures that the landlord chose to retain.

A "holdover" provision stated that, if Nead continued occupancy after March 31, 2011, without the landlord's consent, it would pay double the amount of base rent per month. The holdover provision also required Nead to give sixty days' written notice of its intent to vacate the premises and to terminate the resulting month-to-month rental term.

The lease granted to the landlord several alternative remedies in the event of the tenant's default or other breach of the agreement. It preserved the landlord's right to sue in court, as well as to declare default and insist on cure by the tenant without suing or terminating the lease. The landlord was also entitled to reimbursement of its reasonable attorney's fees and other enforcement expenses in the event of the tenant's default or breach. A separate provision of the lease, however, provided for mandatory arbitration of disputes.

In March 2011, as the end of the lease term approached, Nead was not ready to vacate the premises. Plaintiff notified Nead that it would not consent to an extension of the lease term and that Nead would be required to pay double the monthly base rent as a holdover tenant. From April through July 2011, Nead made the required payments. It also issued a check for the August rent, but it later stopped payment on the August rent check. Nead vacated the premises as of August 16, 2011.*fn2

By its amended complaint filed in December 2011, plaintiff sought the following damages:

a) $28,126.25 August 2011 base and additional rent;

b) $1,418.32 Late fee for August;

c) $28,160.76 September 2011 base and additional rent;

d) $1,408.04 Late fee for September;

e) $27,036.15 October 2011 base and additional rent;

f) $1,351.81 Late fee for October;

g) $77,250.00 Repairs and removal of unauthorized work and tenant fixtures;

h) $7,725.00 10% overhead fee for repairs and removal work (¶12 of lease);

i) $84,000.00 November 2011 to January 2012 use and occupancy losses while repairs are performed (using $28,000/month average base and additional rent);

j)($32,007.74) Balance of security deposit;

k)$224,468.59 Total (Plus interest, attorney's fees, and use and occupancy beyond January 2012 if necessary).

At the center of the competing arguments on appeal is the mandatory provision in the lease under the subheading "ARBITRATION," which states:

All disputes under this Lease, OTHER THAN THOSE RELATING TO THE PAYMENT OF RENT OR OTHER CHARGES BY TENANT, must be submitted to arbitration.

Plaintiff asserts that all its listed monetary claims are excluded from mandatory arbitration by the carve-out language in this clause for "the payment of rent or other charges by tenant."*fn3 In response, defendants argue that, with a minor exception for rent through August 16, 2011, plaintiff's claims are not "rent or other charges" but are "damages" for breach of the lease agreement that allegedly arose after the termination of the tenancy.

The trial court agreed with defendants. It reasoned that the arbitration clause and its carve-out language were intended to preserve the landlord's right to bring a summary dispossess action in the Special Civil Part in the event of the tenant's failure to pay rent or other related monthly charges. The court concluded that "complex litigation," such as this case, is subject to mandatory arbitration under the lease. On appeal, plaintiff argues that the trial court erred in attributing an intent or purpose of the parties beyond the express, unambiguous words of the carve-out language.

We must interpret the meaning of "rent and other charges" in the arbitration clause as it pertains to plaintiff's claims. Such matters of contract interpretation are subject to plenary review on appeal. Selective Ins. Co. of Am. v. Hudson E. Pain Mgmt. Osteopathic Med. & Physical Therapy, 210 N.J. 597, 605 (2012); Kieffer v. Best Buy, 205 N.J. 213, 222-23 (2011); see also Jennings v. Pinto, 5 N.J. 562, 569-70 (1950) ("general rule that the construction of a contract is a question of law").

Our role is not to resolve factual disputes, such as the intent of the parties when they entered the lease, but only to review and interpret the language of the lease within the context of undisputed facts. We do not defer to the trial court in reviewing pure issues of contract interpretation. See Kieffer, supra, 205 N.J. at 223 n.5 ("[d]e novo review of a contract is predicated on the absence of a factual dispute at issue. When there is such a factual dispute, the finder of fact must resolve it, and a deferential standard of review applies." (internal citations omitted)).

"[W]here the terms of a contract are clear and unambiguous there is no room for interpretation or construction and the courts must enforce those terms as written." Schor v. FMS Fin. Corp., 357 N.J. Super. 185, 191 (App. Div. 2002) (quoting Karl's Sales and Serv., Inc. v. Gimbel Bros., Inc., 249 N.J. Super. 487, 493 (App. Div.), certif. denied, 127 N.J. 548 (1991)). However, whether the terms of a contract are clear as written or are ambiguous is a question of law subject to our independent review and conclusions. Nester v. O'Donnell, 301 N.J. Super. 198, 210 (App. Div. 1997).

"An ambiguity in a contract exists if the terms of the contract are susceptible to at least two reasonable alternative interpretations." Schor, supra, 357 N.J. Super. at 191 (quoting Nester, supra, 301 N.J. Super. at 210) (internal quotation marks omitted). "To determine the meaning of the terms of an agreement by the objective manifestations of the parties' intent, the terms of the contract must be given their 'plain and ordinary meaning.'" Ibid. But the contract must also be viewed and interpreted as a whole and not by examining individual phrases independent of one another. Nester, supra, 301 N.J. Super. at 210; see also Hardy ex rel. Dowdell v. Abdul-Matin, 198 N.J. 95, 103 (2009) ("A basic principle of contract interpretation is to read the document as a whole in a fair and common sense manner.").

In this case, the arbitration clause first states that "all disputes under the lease" are subject to arbitration. A party to the lease may decline to participate in arbitration only if disputes fall within the terms of the exception carved out for "the payment of rent or other charges by tenant."

We begin by considering whether any of plaintiff's claims are for "rent." Except for the month of August 2011, we cannot categorize any of plaintiff's listed damage claims as including "base" or "fixed rent" within the meaning of the lease. The section of the lease with the subheading "RENTAL" defines "base" or "fixed rent" with reference to a rate per square foot of space and it contains a table with actual dollar amounts per month of base rent, increasing from year to year during the potential ten-year term of the lease.

The holdover provision of the lease, upon which plaintiff makes its claim for rent due from August through October 2011, increases the base rent to twice the amount of the last month of the lease term.*fn4 Because this provision makes rent payable in advance for the entire month on the first day of the month, plaintiff's August claim for the entire month may appropriately be categorized as "rent" payable by the tenant.*fn5

Plaintiff's claims for September and October 2011, however, are not correctly designated "rent." Instead, they are claims for damages arising from Nead's alleged breach in failing to give sixty days' notice before it vacated the premises. We reach this conclusion for the following reasons.

First, the holdover provision does not explicitly state that the tenant must pay "rent" for an additional two months if it fails to give sixty days' written notice of its intent to terminate the holdover rental agreement.

Second, as defendants argue, the "normal meaning" of the term "rent" is "consideration paid by a tenant for the use or occupation of property." Modular Concepts, Inc. v. S. Brunswick Twp., 146 N.J. Super. 138, 147 (App. Div.), certif. denied, 74 N.J. 262 (1977). Because Nead did not use or occupy the property after August 2011, the amounts potentially due for months after it vacated the premises are not "rent" within the usual meaning of that term.

Third, after the tenant vacates the premises, the landlord has a duty to mitigate its losses by attempting to re-rent to a replacement tenant. See McGuire v. Jersey City, 125 N.J. 310, 321 (1991); Fanarjian v. Moskowitz, 237 N.J. Super. 395, 402-04 (App. Div. 1989). Hypothetically, if the landlord in this case had been successful in finding a replacement tenant that began paying rent as of September 1, 2011, it would not be entitled to collect the same amount of "rent" from Nead because of its breach of the notice provision. If the landlord failed to re-rent the premises, the "rent" it would have received is a fair measure of its losses, but plaintiff's September and October claims are actually for post-tenancy damages for the alleged breach of the lease agreement, subject to the landlord's duty to mitigate those damages.

We consider next what claims made by plaintiff should be categorized as "additional rent." That phrase is not used in the arbitration clause, but it is nevertheless "rent" that may be excepted from mandatory arbitration. The phrase "additional rent" appears in at least ten sections and subsections of the lease. The first use of the phrase appears to be in the section entitled "RENTAL." That section states that payment of "basic" or "fixed rent" is "in addition to the other amounts, payments and other monetary obligations as elsewhere provided herein ('Additional Rent')." The next sentence describes "Additional Rent" as "consisting of utilities, taxes and other payments provided in this Lease."*fn6 Plaintiff argues that the use of the phrases "other monetary obligations" and "other payments provided in this Lease" means that all monetary obligations of the tenant pursuant to the lease are "additional rent" and are subject to the carve-out language of the arbitration clause. We disagree.

Several sections of the lease use the phrase "additional rent" to designate specific obligations of the tenant to the landlord. The following subheadings in the lease identify what constitutes "additional rent":

* "TAXES; ASSESSMENTS," which also includes the five percent "late charge" on monthly payment arrears;

* "INSURANCE";

* "TENANT RESPONSIBILITY TO PREMISES," which contains subsections pertaining to charges for fire and smoke alarms, sprinklers, and "other charges or expenses of the Property incurred by Landlord to the extent not paid by or billed directly to Tenant" including sewer charges; and repairs, maintenance, or replacement expenses of the landlord's property caused by the tenant or its agents and invitees;

* INSURANCE DEFAULT BY TENANT; and

* DEFAULT; REMEDIES; SECURITY DEPOSIT, which provides that "reasonable attorney's fees and expenses incurred by Landlord in enforcing its rights under this Lease shall be deemed Additional Rent and due and payable by Tenant upon demand."

The sections of the lease entitled "FIXTURES" and "ALTERATIONS" do not use the phrase "additional rent" to designate expenses chargeable to the tenant at the end of the lease term. The provisions of the lease we have listed demonstrate that "additional rent" has a specific meaning in the context of the entire lease. It does not apply to all monetary obligations that may be imposed upon the tenant.

The resulting question, then, is whether the carve-out language applies to all monetary claims of the landlord arising from the lease by its use of the phrase "other charges." We agree with defendants that "other charges" does not have such a broad meaning, or at least, it is ambiguous and, in the context of the entire lease, it should be interpreted more narrowly.

First, the phrase "other charges" follows immediately after the word "rent," which we have construed also to mean "additional rent." In the context of interpreting a statute, the Supreme Court has stated: "It is an ancient maxim of statutory construction that the meaning of words may be indicated and controlled by those with which they are associated." Germann v. Matriss, 55 N.J. 193, 220 (1970) (citing City of Absecon v. Vettese, 13 N.J. 581, 588 (1953); see also Herzog v. Twp. of Fairfield, 349 N.J. Super. 602, 608 (App. Div. 2002) (general words should not be construed broadly when a clear intent for such breadth is not shown). In the interpretation of contracts, too, "general words are controlled by the specific." George M. Brewster & Son, Inc. v. Catalytic Constr. Co., 17 N.J. 20, 35 (1954). Here, "other charges" is a general description that should be interpreted within the same context as "rent" and "additional rent," that is, those charges that are obligations of the tenant in exchange for the right of use and occupancy of the premises.

Furthermore, if "other charges" were to include broadly any claim for money damages, the mandatory arbitration clause would effectively be written out of the lease. The landlord's disputes with the tenant are bound to involve the recovery of money. "A contract 'should not be interpreted to render one of its terms meaningless.'" Porreca v. City of Millville, 419 N.J. Super. 212, 233 (App. Div. 2011) (quoting Cumberland Cnty. Imp. Auth. v. GSP Recycling Co., 358 N.J. Super. 484, 497 (App. Div.), certif. denied, 177 N.J. 222 (2003)).

Plaintiff strives to find some use for the mandatory arbitration clause if all its money claims are excluded by the carve-out language. Plaintiff contends that the lease requires arbitration of matters such as the landlord's withholding of permission for the tenant to sublet the premises or to make interior alterations. It would be an unusual contract clause, however, that begins by referring to mandatory arbitration of "all disputes" and then eliminates all disputes except a minimal few by the insertion of exclusionary language. Also, the powers expressly granted to the arbitrator by the lease include "the establishment of a value incident to the resolution of a valuation dispute." So, it appears that the lease grants power to the arbitrator to resolve at least some monetary disputes.

At the very least, the phrase "other charges" is ambiguous in the context of the lease as a whole. Nead's narrow interpretation, that "other charges" refers only to its payment obligations during its period of use and occupancy, is at least as reasonable as plaintiff's broad interpretation that it means any and all monetary claims of the landlord.

We do not rely upon the rule of contract interpretation that resolves ambiguities against the party that drafted the contract, see, e.g., Pacifico v. Pacifico, 190 N.J. 258, 267 (2007), although that rule seems to be applicable here. By all indications, plaintiff must have drafted the lease because of its many terms favoring the landlord's interests, and counsel for defendants stated in the trial court that plaintiff drafted the lease. But the factual record does not identify which party drafted the lease.

Nevertheless, the ambiguity in the phrase "other charges" should be resolved in favor of arbitration. "Generally speaking, arbitration is a favored form of relief." Marchak v. Claridge Commons, 134 N.J. 275, 281 (1993) (citing Barcon Assocs. v. Tri-County Asphalt Corp., 86 N.J. 179, 186 (1981)); accord Alamo Rent A Car, Inc. v. Galarza, 306 N.J. Super. 384, 389 (App. Div. 1997). "[P]ublic policy favors the arbitration process, and contracts should be read liberally to find arbitrability if reasonably possible." Ohio Casualty Ins. Co. v. Benson, 87 N.J. 191, 196 n.1 (1981) (quoting Brick Twp. Mun. Util. Auth. v. Diversified R.B.& T. Constr. Co., 171 N.J. Super. 397, 402 (App. Div. 1979)).

Here, the bulk of plaintiff's damage claims are not for "rent," "additional rent," or "other charges" payable by Nead in exchange for its renting of the premises. Certainly, the $84,000 or more plaintiff claims for loss of future use of the premises cannot be described as "rent or other charges" pursuant to the lease. The sections of the lease entitled "FIXTURES" and "ALTERATIONS" indicate that the tenant may be required to pay for removing fixtures and restoring the premises at the end of the lease term, but they do not refer to damages for loss of use if the tenant does not fulfill that obligation. Plaintiff's claim for loss of use is brought as potential damages under the common law of contracts. Whether recoverable by plaintiff or not, such consequential damages are not "other charges" within the terms of the lease.

Plaintiff's claims for $77,250 in expenses of removing fixtures and restoring the premises, together with a ten percent overhead fee of $7,725, do arise expressly from the terms of the lease. But those damages did not occur, and those claims could not be determined, until the end of the lease term and until Nead vacated the premises. They are not "other charges" payable by the tenant on a monthly basis along with "rent" and "additional rent." They resemble more plaintiff's claim for loss of use. Stated succinctly, they are damages arising from defendants' alleged breach of the lease agreement.

We have previously discussed why plaintiff's claims for September and October 2011 rent and late charges, a total of $57,956.76, also constitute damages arising from breach of the lease and not "rent" or "additional rent." Because those claims are more appropriately viewed as contract damages, they are also not "other charges" within the narrower meaning we have attributed to that phrase.

The remaining claim is for August 2011 rent and other charges totaling $29,544.57. If recoverable in full, the August claim amounts to approximately thirteen percent of plaintiff's total damage claims of $224,468.59. Nead argues that the August claim should be included with the other arbitrable claims in the interest of fairness and economy. Our Supreme Court "view[s] piecemeal litigation as anathema, [and] look[s] with disfavor upon the unnecessary bifurcation of disputes between judicial resolution and arbitration." Ohio Casualty Ins., supra, 87 N.J. at 199; cf. EPIX Holdings Corp. v. Marsh & McLennan Cos., 410 N.J. Super. 453, 463 (App. Div. 2009) (party that did not sign arbitration agreement could compel party that did sign the agreement to arbitrate intertwined issues); Bruno v. Mark MaGrann Assocs., 388 N.J. Super. 539, 548 (App. Div. 2006) (court can compel arbitration to avoid piecemeal litigation and to recognize the interests of efficiency and fairness to all parties).

Although plaintiff's August claim falls at least in part within the exception carved out of the mandatory arbitration clause, it is properly included in the order to arbitrate.

Affirmed.


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