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Harbor Creek Associates, G.P. v. AtlantiCare Health Services, Inc.

Superior Court of New Jersey, Appellate Division

August 9, 2013

HARBOR CREEK ASSOCIATES, G.P., A New Jersey Partnership, Plaintiff-Appellant,
HARBOR CREEK ASSOCIATES, G.P., Defendant-Appellant.


Argued January 24, 2013

On appeal from Superior Court of New Jersey, Chancery Division, Atlantic County, Docket Nos. C-01-12 and C-02-12.

Jeffrey P. Blumstein argued the cause for appellant (Szaferman, Lakind, Blumstein & Blader, P.C., attorneys; Mr. Blumstein, of counsel and on the brief).

Angelo J. Genova argued the cause for respondent (Genova Burns Giantomasi & Webster, attorneys; Mr. Genova, of counsel; Jennifer Borek and Charles Messina, on the brief).

Before Judges Grall, Koblitz and Accurso.


Harbor Creek Associates, G.P. (Harbor Creek) leased commercial properties with three buildings to AtlantiCare Health Services, Inc. (AtlantiCare). There were two leases, and both provide AtlantiCare an option to buy, which AtlantiCare decided to exercise.[1] Although the leases both had materially identical provisions establishing a procedure for fixing the purchase price in the event of a disagreement on price, the parties were unable to agree on that provision's meaning. Based only upon their differing interpretations of the appraisal process to which they had agreed, AtlantiCare believed it should pay $8, 815, 000 at closing and Harbor Creek believed it should receive $9, 737, 000.

The parties filed complaints for declaratory judgment on the same day, which were consolidated.[2] On cross-motions for summary judgment, the judge accepted AtlantiCare's interpretation of the appraisal process. Harbor Creek appeals contending that the judge misinterpreted the parties' agreement. Because the judge's interpretation is consistent with the plain meaning of the agreement and effectuates the parties' intention, we affirm.

Where the facts are undisputed, an appellate court's review of an interpretation of a contract is de novo. Kieffer v. Best Buy, 205 N.J. 213, 222-23, 223 n.5 (2011). Courts read a contract as a whole and in accordance with the plain and ordinary meaning of the terms in order to determine the parties' intent. Id. at 223. Guided by those principles, we turn to consider the contract.

In 1996, the parties executed two fifteen-year term master lease agreements — one for lot 2.04, block 1401 and building 9 and the other for lots 2.02 and 2.03, block 1401 and buildings 10 and 11. A supplemental agreement executed the same day modifies various sections of both leases.[3]

Section 14.2.1(a) of the master lease agreements establishes the process for determining purchase price by appraisal upon exercise of the options to buy in the absence of an agreement on purchase price. The introductory clause provides: "Unless [Harbor Creek] and [AtlantiCare] otherwise agree . . . the Purchase Price shall be determined by appraisal as follows . . . ."

Two appraisers, one appointed by each party, must determine the value of the "premises, " a term defined to include the real property and improvements and the "privileges and appurtenances thereto." If their appraisers' values differ by no more than ten percent of the lower value, then the purchase price is the average of the two appraisers' values. In pertinent part, 14.2.1(a) states:

[Harbor Creek], on the one hand, and [AtlantiCare], on the other hand, shall each appoint an Appraiser. . . . The two Appraisers shall determine the value of the Premises and if both Appraisals are within ten (10%) percent of each other (using the lower of the two appraisals to determine whether the appraisals are within ten (10%) percent of each other), then the average value arrived at by the two Appraisers shall be binding on the parties.

If there is more than a ten percent difference between the values assigned by the parties' appraisers, 14.2.1(a) requires the appraisers to appoint a third, disinterested appraiser. The parties agreed that they would then average the third appraiser's value with whichever party's value was closest to it. That portion of 14.2.1(a) provides:

If the two Appraisals are not within ten (10%) percent of each other and the two Appraisers cannot agree upon the value of the Premises, the two Appraisers shall appoint a third disinterested Appraiser . . . to do an independent calculation of the value of the Premises. The average of (i) the value arrived at by the third Appraiser, and (ii) the value of whichever value arrived at by the two original Appraisers is closest to the third Appraiser's value, shall be the value of the Premises binding on the parties. . . . For purposes of making the appraisals, the Appraisers shall assume the Premises are subject to a lease with a remaining term of five (5) years with rent equal to the market rental value at the time of the appraisal . . . .

[(Emphasis added).]

Section 14.2.1(a) also includes examples illustrating how the appraisal works under two scenarios — "Example 1, " which addresses the situation where the parties' respective appraisals are sufficiently close to have their average control the purchase price, and "Example 2, " which explains the process where the disparity between the parties' appraisers is too great to permit averaging and, therefore, appointment of a third appraiser is required.

The leases provide little guidance for the appraiser. It simply directs:

For purposes of making the appraisals, the Appraisers shall assume the Premises are subject to a lease with a remaining term of five (5) years with rent equal to the market rental value at the time of the appraisal, but shall disregard the Rent of the Premises and the rent payable pursuant to the [other lease from Harbor Creek to AtlantiCare]. . . .

The provisions of the leases set forth above and the examples illustrating their operation assume that each appraiser has provided a single value.

Nevertheless, a second undesignated paragraph of 14.2.1(a), which follows the examples, contemplates that each appraiser provide a second value — replacement cost. According to Simon R. Shane, Harbor Creek's chairman, this paragraph addresses an issue he raised — inclusion of "an alternate means of valuation to provide a 'floor' below which the purchase price could not go, anything in the appraisal process to the contrary." By Shane's account, which AtlantiCare does not dispute, the purpose of this "floor" was to protect Harbor Creek in the event the option was exercised in a falling market.

The paragraph addressing the "floor" directs:

In addition, each Appraiser shall determine the Replacement Cost of the Premises. For purposes of this Agreement, "Replacement Cost" means the estimated cost to construct, at current prices as of the appraisal date, the buildings located on the Premises, without regard to obsolescence or physical deterioration and without considering the cost of constructing any and all leasehold improvements. Notwithstanding anything to the contrary, the value of the Premises for purposes of this Section 14.2.1(a) shall not be less than the greater of (x) seventy-five (75%) percent of the Replacement Cost or (y) $ [(]75% of the original cost, plus 2%[4] per year for 15 years[)].
[(Emphasis added).]

Shortly after execution of the leases and supplemental lease agreement in December 1996, the parties attempted to supply the term missing from this formula — original cost. They could not, however, agree on the expenses included in original cost, and, as a consequence, the term was never supplied.[5] The source of the disagreement was that Harbor Creek was arguing for a meaning of "original cost" more inclusive than the one AtlantiCare was willing to accept.

In any event, neither party ever took action to address the missing term and neither argues that its absence is fatal to applying the appraisal process to which the parties agreed without the benefit of that term. The parties' appraisers and the third appraiser proceeded as if seventy-five percent of replacement cost was the only component of the formula setting the "floor." Given the parties' performance, it is reasonable to conclude that they impliedly agreed to have the "floor" provision applied without the extra safeguard against a declining market that the "original cost" provision would have offered Harbor Creek.

As the trial judge determined, the separate paragraphs of 14.2.1(a) do not plainly address how the seventy-five percent of replacement cost — the "floor" — is to be used "in terms of the appraisal process generally." Harbor Creek contends that the agreement contemplates a two-step process: first, the value of the premises is determined by comparing the appraisers' respective market values and averaging the appropriate market values; then, the averaged market value from the first step is tested against the "floor." AtlantiCare contends that each appraiser's market value is tested against that appraiser's replacement cost "floor" at the outset, with the greater of the two being that appraiser's value for purposes of comparison and averaging. In other words, Harbor Creek would wait to apply the "floor" until after the average value is reached, whereas AtlantiCare would incorporate the "floor" into the average value by applying it at the outset. The judge concluded that AtlantiCare was correct.

Like most disputes, this one is best explained with reference to facts. While the precise numbers are not critical to the resolution of the issues, to illustrate the discussion we have summarized the values provided by the appraisers.[6]



Market Value

Replacement Cost

75% of Replacement

9 10&11

$2, 940, 000 $5, 575, 000

$3, 535, 000 $2, 651, 250

$6, 725, 000 $5, 043, 750[7]

Harbor Creek:


Market Value

Replacement Cost

75% of Replacement

9 10& 11

$3, 439, 000 $6, 561, 000$

$ 4, 690, 000 $10, 300, 000

$3, 498, 847[8]$7, 725, 000

The third appraiser:


Market Value

Replacement Cost

75% of Replacement

910& 11

$3, 215, 000 $5, 900, 000

$3, 538, 490 $6, 917, 276

$2, 653, 868 $5, 187, 958[9]

In the initial stage of the appraisal process — determining whether the values stated by the parties' appraisers were sufficiently close to permit determination of purchase price by averaging — the relationship between market value and replacement cost was immaterial because the parties' values were more than ten percent apart under either interpretation. As a result, the parties were able to determine that a third appraiser was needed without having to identify or confront the difference in their interpretations of the process.

The parties' disagreement about the relationship between the "floor" and market value appraisals only became apparent when their respective values were compared with the third appraiser's values. As previously discussed, 14.2.1(a) required an average of the third appraiser's value and the closest value assigned by a party's appraiser. With the exception of building 9, the parties' respective interpretations yielded the same result. For buildings 10 and 11, both of Harbor Creek's values were knocked out because the difference between them and the third appraiser's values were greater.

In the case of building 9, however, Harbor Creek's interpretation produces a value $249, 500 higher than AtlantiCare's interpretation. Applying AtlantiCare's approach, which the trial judge accepted, the value Harbor Creek's appraiser stated for seventy-five percent of replacement cost, $3, 498, 847, which was higher than that appraiser's value for the market value of building 9, $3, 439, 000, controlled. For AtlantiCare, the judge also used the highest value, $2, 940, 000 market value, stated by its appraiser. Comparing those values with the third appraiser's highest value, $3, 215, 000 market value, the judge averaged the two closest values — AtlantiCare's $2, 940, 000 market value and the third appraiser's $3, 215, 000 market value. In this instance, Harbor Creek's fair market value would have been closer to the third appraiser's fair market value than AtlantiCare's if the judge had not substituted Harbor Creek's higher replacement cost value.

Harbor Creek contends that the judge erred in following AtlantiCare's approach and submits that the court should have averaged the market values assigned by the third appraiser and its market value, which was closer to the third appraiser's than AtlantiCare's. In Harbor Creek's view, articulated in its reply brief, the "floor" against which this average would be assessed should have been determined by averaging the two closest values for seventy-five percent of replacement cost — AtlantiCare's value and the third appraiser's value. As that average "floor" would have been lower than fair market value, it would have been immaterial.

In our view, Judge Todd's interpretation of 14.2.1(a) is correct.[10] It is consistent with the plain meaning of the provision. Section 14.2.1(a) requires all three appraisers to "determine the value" of the premises. (Emphasis added). It also requires the appraisers to "determine the Replacement Cost, " and it provides that "the value of the Premises . . . shall not be less than . . . seventy-five (75%) percent of the Replacement Cost." (Emphasis added).

It is also consistent with the structure of 14.2.1(a). Contrary to Harbor Creek's claim, the paragraph addressing the "floor" is not a "self-contained unit" setting forth "a defining mechanism for determining a minimum price below which the price as determined in the first paragraph cannot go." Furthermore, by tying "replacement cost" to "value, " the paragraph Harbor Creek characterizes as "self-contained" implicitly links itself to the first paragraph. Indeed, Harbor Creek's explanation as to how the controlling "floor" is selected is based upon the process set forth in the first paragraph, not anything found in the second paragraph.

Finally, the judge's interpretation is consistent with the purpose of the "floor." It gives effect to the "floor" at every stage of the process. It is not at all clear to us how Harbor Creek's interpretation would give the "floor" any greater effect in any scenario. In actuality, Harbor Creek's complaint is that its appraiser's replacement cost for building 9 was given effect rather than being discarded as the outlying appraisal of replacement cost.

To apply 14.2.1(a) as Harbor Creek suggests, a court would be required to do more than supply a missing term, it would be required to rewrite the section and improve the contract — in effect, making the "floor" a "self-contained unit" for some purposes but not others. That is something courts do not do. See McMahon v. City of Newark, 195 N.J. 526, 545 (2008); Kupfersmith v. Del. Ins. Co., 84 N.J.L. 271, 275 (E. & A. 1913).

Harbor Creek presents an additional argument that warrants only brief discussion. It claims that the judge erred by failing to increase the third appraiser's market value for buildings 10 and 11 by adding back a five-percent brokerage commission that the third appraiser deducted. As previously noted, 14.2.1(a) provides little guidance for the appraisers. Its only direction was for the appraisers to "assume the Premises are subject to a lease with a remaining term of five (5) years with rent equal to the market rental value at the time of the appraisal, but shall disregard the Rent of the Premises and the rent payable pursuant to" the other lease agreement implicated in this action. Although the parties' appraisers may have assumed that they were to look at the "existing lease" for these buildings, which did not include a brokerage commission, nothing in 14.2.1(a) suggests such reference to the existing leases is required or encouraged. If anything, 14.2.1(a) distances itself from the existing leases for building 9 and buildings 10 and 11 by instructing the appraisers to disregard the rent payable under those leases.

We agree with the judge that any ambiguity left by the silence, viewed in light of the breadth of discretion and scant guidance given the appraisers by 14.2.1(a), is best understood as intended to leave the valuation to the expertise of the qualified appraisers, which they are expected to do in conformity with recognized practices and standards applied in valuing commercial property. Substantially for the reasons Judge Todd stated in his oral decision of February 29, 2012, we reject this argument.

Because Harbor Creek's arguments are unavailing, there is no reason to address an argument AtlantiCare presents as an alternate basis for affirming the judgment.


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