Sometimes You Just Gotta Put the Stick Down and Walk Away

SOMETIMES YOU JUST GOTTA PUT THE STICK DOWN AND WALK AWAY

For our commercial-realtor friends, we highlight a case decided this month by our Appellate Division. It involves a lawyer-tenant who refused to vacate space he had rented based upon a “right of first refusal” clause in his original lease. After winding its way through the Chancery Division, non-binding arbitration, motion before the trial court and the Appellate Court, the plaintiff-lawyer was ordered to pay double rent for the months he unlawfully “held-over”, additional rent in the form of previously unbilled taxes, utilities, CAM and insurance plus the landlord’s legal fees/costs which had totaled almost $33,000.00 prior to reaching the Appellate Division. There are lessons to be learned here.

The lawsuit arose out of a commercial lease agreement entered into by parties in November 1994. Plaintiff is a lawyer who requested that the defendants-landlords advise him when additional space became available in the building. The lease agreement included a right of first refusal for such space.

Over the twelve-year tenancy, space became available but the landlords never offered tenant a right of first refusal, nor did tenant pursue the landlords for additional space during the tenancy. The tenant exercised all of his renewal options, the last of which expired on November 30, 1999. Thereafter, the lease was changed in writing to a year-to-year lease with the “exact terms and conditions of the old lease” applicable to the one-year extensions. The final lease extension expired on November 30, 2003 and the landlords advised the tenant that they intended to lease the space to someone else. The tenant then agreed to a month-to-month tenancy and the landlords agreed not to raise the rent during the month-to-month tenancy.

On January 30, 2006, the landlords asked the tenant to sign a “notice of termination/mutual release/notice to vacate” by May 1, 2006. The tenant declined to sign the notice. On April 10, 2006, however, the tenant notified the landlords that its failure to extend the right of first refusal for available space “estopped [them] from compelling [the tenant] to vacate.”

On April 13, 2006, the landlords sent the tenant five invoices for additional rent due, totaling $4,020.06. These invoices were for increases in real estate taxes from the previous five (5) years. On April 20, 2006, the landlords sent additional invoices totaling $6,127.56, for increases in utilities, maintenance and other building costs.

The tenant then filed suit in the Chancery Division, General Equity Part, seeking to enjoin the May 1 notice to vacate. On May 11, 2006, the Chancery Division denied the request for injunctive relief and found that the right of first refusal expired when plaintiff became a month-to-month tenant. The landlords counterclaimed, seeking possession of plaintiff’s leased space, enhanced rent pursuant to N.J.S.A.2A:42-6, additional rent and counsel fees. The parties entered a consent order on June 13, 2006, whereby the tenant agreed to vacate the space by June 30, 2006. On February 13, 2007, the matter was transferred to the Law Division and ultimately referred to arbitration on the damages claims in June 2007.

The arbitrator rejected the landlords’ claim for additional rent, counsel fees and costs. The landlords were awarded a total of $3,500 as double rent for the months of May and June 2006 and $700 in legal fees.

The landlords demanded a trial but before that occurred, both parties asked the trial court to decide who was right based upon written submissions. The Law Division entered an order awarding the landlords $3,500 plus interest in double rent, $11,068.96 plus interest in additional rent and $32,908 in counsel fees and costs. The court appended a statement of reasons in which it stated:

The court can find no reason why [the plaintiff-tenant] could have logically had a good faith belief that…the lease entitled him to legally holdover…assuming arguendo that he did still have the right of first refusal, the right to expand is not equivalent to a right to holdover…

The court further noted with respect to additional rent, that the lease was not ambiguous and “the [l]andlord’s failure to exercise any right under the lease is not to be deemed to be a waiver or relinquishment of any rights and that those rights are cumulative and may be exercised in full force.” The court wasn’t bothered by the fact that the landlords did not make a claim for these additional rents until plaintiff brought suit, describing it as “of no moment”. The lawyer-tenant’s appeal followed this decision.

The Appellate Division:
(1) Found nothing in the record to suggest that tenant ever sought to increase his leasehold or that landlords breached their duty. The tenant’s counsel acknowledged that the landlords informed plaintiff in writing about additional space, but counsel could not recall whether the tenant ever made a written demand for additional space. Accordingly, the tenant was not entitled to any damages or specific performance on the right of first refusal.

(2) Determined that the question with respect to the additional rent charges was whether the landlords were required to bill the tenant when it incurred the charges. The tenant argued that the lease “clearly indicates” that additional rent was to be charged when it became due. The landlords maintained that its claim for six years retroactive additional rent was permissible because the lease (a) permitted these charges and (b) included a paragraph which indicated that the landlords do not waive any rights they did not previously assert.

The court observed that the landlords charged plaintiff additional rent on January 12, 2000, for increases in real estate taxes during 1999. They did not, however, bill plaintiff for additional rent for the years 2000 through 2005 until April 2006. After carefully reviewing the record, the court was convinced that the landlords waived their entitlement to additional rent from 2000 to 2004 because they did not bill the tenant for those charges when they were incurred. They further determined that the April 2006 billing was warranted for the 2005-2006 additional rent, because it was billed within a reasonable time of defendants’ incurring those charges. Consequently, the amount of additional rent was reduced to $3,620.83, plus pre and post-judgment interest, representing additional rent for 2005-2006.

The court went on the note that “a tenant who willfully holds over may be subject to the “double rent” penalty pursuant to N.J.S.A. 2A:42-6. A holdover tenant can avoid the double rent penalty only if his reason for holding over is “honest” and “bona-fide”. “’A tenant cannot relive himself by the mere statement that he believed he had a right to hold the premises. He must furnish reasons sufficient to induce a jury or court hearing the case to believe he had a right to remain in possession.’” The Appellate Court concluded that the Law Division’s findings on this point were supported by substantial credible evidence and relevant law and, thus, did not disturb the award of double rent.

The Appellate Court then addressed the claim for attorney fees and costs, noting that “each party is generally required to pay its own attorneys’ fees under the “American Rule” but, “there are several exceptions to this rule”. Here the lease expressly provided for plaintiff to pay defendants’ legal fees in the event of a breach. Thus, the court left intact the $33,000 plus award entered by the trial court. An application for additional fees and costs resulting from the appeal is sure to follow, likely increasing the tenant’s “loss” to well beyond $50,000.

So…in hindsight we see instances (some might call them opportunities) where the tenant had the option of vacating the premises without paying anything and later when “calling it quits” would have been a wise choice. Perhaps this is one of those situations which can best be summed up by the title to this article: Sometimes you just gotta put the stick down and walk away. Alternatively, this may be an instance where cooler heads may have prevailed in a dispute resolution setting such as mediation and/or binding arbitration.

AVOID THE RUNAWAY TRAIN

The above seems to be a prime example of a case which, once started, could not be derailed, resulting in a significant investment of time and money for everyone involved. However, there are ways to avoid such “runaway trains”.

A well-drafted lease which mandates alternative dispute resolution (ADR) such as mediation or binding arbitration would have allowed the parties to sidestep the vagaries of the courts, saved time (the case appears to have taken 2 years) and money (plaintiff will be paying over $33,000 for the landlords lawyer plus his own lawyer’s fees). We believe ADR clauses should be considered in every contract after consultation with legal counsel about the pros/cons of such provisions.

-Dan Posternock

***The information included in this newsletter is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.