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Garden State Nursing Home, Inc. v. North Grove Properties, LLC

Superior Court of New Jersey, Appellate Division

October 1, 2013

GARDEN STATE NURSING HOME, INC., Plaintiff-Respondent,
v.
NORTH GROVE PROPERTIES, LLC, Defendant-Appellant, and UNION CENTER NATIONAL BANK, Intervenor-Appellant.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued telephonically September 12, 2013

On appeal from the Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-33-11.

Peter R. Bray argued the cause for appellants (Gruen & Goldstein, attorneys for North Grove Properties, LLC and Bray and Bray, LLC, attorneys for Union Center National Bank; Samuel D. Bornstein and Mr. Bray, on the joint brief).

R. James Kravitz argued the cause for respondent (Fox Rothschild, LLP, attorneys; Jonathan D. Weiner, of counsel; Mr. Kravitz and Steven J. Link, on the brief).

Before Judges Parrillo, Harris, and Guadagno.

PER CURIAM

This dispute —— revolving around the ownership of an exemption to the certificate of need requirement under the Health Care Facilities Planning Act (the Planning Act), N.J.S.A. 26:2H-1 to -26, commonly referred to as bed rights —— is mainly between the landlord and tenant of property that has been used as a nursing home for more than forty years. After a bench trial, defendant North Grove Properties, LLC (North Grove) and intervenor Union Center National Bank (Union Center) appeal from an August 24, 2012 Chancery Division judgment that, among other things, declared plaintiff Garden State Nursing Home, Inc. (Garden State) "to be the owner of the 'Bed Rights.'" We affirm.

I.

Garden State is presently the tenant of North Grove, which owns real property on North Grove Street in East Orange. Since 1972, Garden State has operated a nursing home at the locale, presently known as New Grove Manor, [1] comprised of approximately 195 licensed beds. The property was previously a ramshackle hotel owned by Phillip and Naomi Kruvant (collectively, the Kruvants). On January 12, 1971, Garden State entered into a twenty-year lease with the Kruvants.[2] The principals involved in the negotiation of the lease are now deceased.

The lease describes the property as "the land, together with the buildings to be rehabilitated and improvements to be rehabilitated and erected thereon." For definitional purposes, the lease refers to the "Demised Premises" as including the foregoing, plus the "building service, furniture, furnishings, fixtures, and equipment to be installed therein by [the Kruvants] or any legal entity in which [the Kruvants are] a participant."

The Kruvants agreed to construct a 195-bed nursing home on the property, at their "own cost, risk and expense." The lease required the Kruvants to provide and install certain furniture, furnishings, fixtures, and equipment. Garden State was responsible for repair, maintenance, and replacement, as well as obligated to provide certain additional furniture, furnishings, fixtures, and equipment "necessary and/or proper for the operation of a nursing home with full qualification for [M]edicare and other governmental approval." All of the furniture, furnishings, fixtures, and equipment would become the property of the Kruvants at the end of the initial lease term or sooner, in the event of termination due to default.

The lease provided that Garden State "shall be organized and operated exclusively for the purposes of operating the Demised Premises and for no other purposes unrelated thereto." The lease further required Garden State to occupy and use the Demised Premises as a

propriety nursing home and/or . . . a health care or health related or extended care facility, senior citizens' home, home for adults or any institution caring for or catering to the sick, aged, infirm, disabled or to any other class of people unable fully to take care of themselves without some assistance or supervision, and for no other purpose.

The lease reflected that the role of the Kruvants —— who were real estate developers with no experience in the operation of nursing homes —— was limited to the construction of the physical plant and had nothing to do with the licensing and operation of the nursing home:

Except as to the completion of the physical structure as required herein, the Lessee shall have the total responsibility for satisfying all requirements and procuring all necessary approvals, permits and other operations documents pertaining to the prospective or actual operation of the premises as a nursing home or other use permitted hereunder.

The lease also commanded that if "Lessor shall be entitled to reenter the premises and take possession thereof, Lessee shall itself and through its employees provide Lessor with every assistance during the transition to enable the premises to continue in operation and to serve the occupants thereof and provide for their safety, comfort, and welfare." Additionally, the lease provided:

Lessee shall be entitled to finance any furniture, furnishings, equipment or other personalty not required to be installed or replaced by it under the terms of this lease in such manner as it sees fit and to remove any such items during the lease term at the end thereof. All of the items required to be installed or replaced by the Lessee . . . shall, at the end of the initial lease term, become the property of the Lessor and shall be left on the premises at such time as the Lessee shall vacate the premises. In the event such termination shall occur sooner by virtue of any default on the part of the Lessee of any of the terms, covenants and conditions contained in this lease, all the said furniture, furnishings, fixtures and equipment on the premises shall, if not leased, thereupon be and become the sole and exclusive property of the Lessor without any representation or claim by way of compensation therefor, or otherwise, on the part of the Lessee.

On the date the lease was executed, only a license issued by the Department of Institutions and Agencies was required to establish and operate a nursing home. See N.J.S.A. 30:11-1. Five months later, the Planning Act was enacted into law. P.L. 1971, c. 136. The Planning Act transferred dominion and control over nursing homes (and other health care facilities) from the Department of Institutions and Agencies to the Department of Health, presently known as the Department of Health and Senior Services (DHSS). The Planning Act

radically altered the extent of regulation and control over health care facilities and services. Among other things[, ] the [Planning] Act required procurement of a certificate of need for construction or expansion of a health care facility or for institution of new health care services. N.J.S.A. 26:2H-7.
[Paul Kimball Hosp. v. Brick Twp. Hosp., 86 N.J. 429, 437 (1981).]

A certificate of need was not required for New Grove Manor, and its 195-bed license was issued on August 28, 1972. Because of this timing, New Grove Manor has been exempt from the certificate of need requirement that is otherwise imposed by the Planning Act for such a health care facility.

According to the trial testimony, the DHSS has not issued a certificate of need for the establishment of a new nursing home anywhere in the State for over twenty years. Given the certificate of need moratorium, the right to apply to the DHSS for a license to operate a nursing home at a particular location, became an intangible —— albeit valuable —— property right, which the nursing home industry calls bed rights.[3]

The lease was amended twice, in 1980 and 2007. The amendments did not refer to bed rights.

In 2008, the property, together with improvements, was conveyed to North Grove. North Grove financed the acquisition, in part, with a $2, 850, 000 mortgage loan from Union Center. The contract and conveyancing instruments were utterly silent regarding bed rights. According to the attorney who represented the Kruvants in this transaction, this was a sale of real estate and not a sale of a nursing home business.

The date North Grove laid claim to the bed rights is a matter of disputed testimony. According to Garden State's witnesses, shortly after North Grove became the landlord, its principal, Gershon Alexander requested that Garden State renew its lease and acknowledged that "the beds are yours and if you go out I will remain, like, without nothing." After several meetings without agreement on a lease renewal, Alexander stated that "somebody told me I might own the beds." Alexander denied the statements attributed to him and claimed to have concluded that he owned the intangible rights associated with the business from the start of the lease. However, in one email message to his attorney just prior to North Grove's purchase, Alexander stated, "we are buying a rent roll, " and never mentioned bed rights or other intangibles as being purchased from the Kruvants.

Ultimately, the parties were unable to agree to a renewal of the lease, and on February 7, 2011, Garden State filed a declaratory judgment action seeking a judicial decree that it is the exclusive owner of the bed rights. North Grove responded, by counterclaim, with its own demand for declaratory relief, which pursued a judicial imprimatur for its ownership of the bed rights. Union Center secured leave to intervene, and filed a counterclaim seeking a declaration that the bed rights are a property interest associated with the real property, and cannot be transferred by Garden State.

A four-day bench trial ensued. After consideration of the documentary and testimonial evidence, the trial court entered judgment in favor of Garden State. Declaring the tenant to be the ultimate owner of the bed rights, the court reasoned that although the parties' lease was silent on the subject, Garden State's ownership of the nursing home business included the intangible bed rights. Finding that neither the lease language nor the conduct of the parties supported the view that the landlord owned the right —— reversionary or otherwise —— to continue to operate a nursing home after the lease expired, Garden State remained vested with the power to apply for a new license to operate elsewhere. Thus, Garden State owned and retained the exemption to the certificate of need requirement under the Planning Act. In summary, the trial court determined the following:

This court's reading of the sparse case law presented does not mandate that absent contrary language in the lease, the rights to the beds belong to the property owner. The fact that the Lease is silent on this point merely is a reflection of the times, and no more. . . . [T]he state of the law was such that at the end of the Lease, the landlord could have used, leased or sold the subject property as a nursing home. Likewise, Garden State could have reasonably believed that it could own and operate a nursing home at another location.
In arguing for the irrefutable proposition that a contract should be construed in accordance with the law at the time of its entry, North Grove apparently reasons that it must be granted the right to continue the nursing home business that pre-[certificate of need] law afforded. That argument must fail where there is no evidence that the former owner/landlord bargained for or intended such a result. More importantly, there is absolutely nothing to indicate that when North Grove purchased the premises in 2008 —— long after the legal landscape had undergone a drastic change for nursing homes —— that it took any steps to protect its purported business rights. It is a legitimate inference that it did so only after the renewal of Garden State's lease appeared unlikely, thus depriving the landlord of a revenue stream unless it fortuitously found a new tenant with a [certificate of need].
It is reasonable to conclude that [Alexander's] cavalier treatment of the beds at closing, and his failure to document his alleged purchase of intangible rights is because such rights were never contemplated as part of the sale from the Kruvants. The notion came to Alexander after the fact when it suited his business needs, as a form of leverage in his efforts to extract a long-term extension from Garden State.

This appeal followed.

II.

Our scope of review in this appeal is well established:

We are bound to defer to the trial court's factual findings, as long as they are supported by adequate, substantial and credible evidence. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974). In a case in which the trial judge also sat as the trier of fact, we are precluded from disturbing the trial judge's factual findings and legal conclusions, "'unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]'" Seidman v. Clifton Sav. Bank, 205 N.J. 150, 169 (2011) (alteration in original) (quoting Ex rel Johnson, 194 N.J. 276, 284 (2008)).
We are also bound to defer to the trial judge's findings that are "substantially influenced by his opportunity to hear and see the witnesses and to have the 'feel' of the case, which a reviewing court cannot enjoy." State v. Locurto, 157 N.J. 463, 471 (1999) (quoting State v. Johnson, 42 N.J. 146, 161-62 (1964)). However, we do not owe any deference to the legal conclusions reached by the trial court, because our review of the law is de novo. Borough of Harvey Cedars v. Karan, [214] N.J. [384], [401] (2013) [] (citing Manalapan Realty v. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995)).

[Adler v. SAVE, N.J. Super., (App. Div. 2013) (slip op. at 28-29).]

In light of the overwhelming evidence that the lease did not reserve the intangible (and at the time, unknowable) bed rights to the landlord, [4] we are in accord with the conclusions of the Chancery judge. The Kruvants were never involved in the nursing home business. They had neither experience nor an interest in taking over the care of 195 individuals when the lease with Garden State expired. To the contrary, if by dint of a pre-expiry default, the landlord was obliged "to reenter the premises and take possession thereof, " then it was contemplated that the landlord would be enabled to have "the premises . . . continue in operation and serve the occupants thereof and provide for their safety, comfort, and welfare." At the end of the lease, however, no such landlord-sponsored continuation was permitted.

Furthermore, the trial evidence supported the reasonable conclusion that bed rights had their genesis, for the most part, when the DHSS implemented its moratorium on certificates of need. Thus, because the parties (including the Kruvants) had opportunities to address the allocation of this valuable property right, but neglected to do so during the two-decades that the regulatory standstill has been in effect, it is logical and fair to conclude that the tenant maintained end-of-lease dominion and control over the Planning Act's exemption for a certificate of need. Based upon this record, we cannot say that the Chancery judge's findings and conclusions are "so wide of the mark that a mistake must have been made." N.J. Div. of Youth & Family Servs. v. M.M., 189 N.J. 261, 279 (2007).

Affirmed.


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