As a Landlord to the State of New Jersey, What You Don’t Know Can Hurt You!

  • Published: October 5, 2004
  • By Jamile Drew

Leasing property to the state of New Jersey may seem like the ideal situation to landlords for many reasons. First, most state agencies are fairly stable and therefore provide a reliable source of rental income. Second, there is little reason to worry that a state agency will break a lease in the middle of the night and disappear. Generally, you can always locate a state agency or hold the state liable for its agencies’ contractual obligations. However, renting to the state should not automatically be categorized as a steady flow of income. Before leasing property to a state agency, there are a few things that a landlord should know. The state, unlike a private citizen or company, is afforded a unique subset of protections under the law.

One such protection is the Contractual Liability Act, N.J.S.A. 59:13-1 et seq. This Act significantly limits the time period in which a landlord may file a breach of contract claim against a state tenant. The clock begins to run on the day the claim accrues. A landlord has ninety days from the day the claim accrues to serve a notice of claim upon the state. The notice of claim must contain certain specific information which is set forth in the Act. If the landlord fails to file the notice of claim within the specified period, the landlord is deemed to have waived its right to sue. This very issue was addressed recently by the Appellate Division in Barrick v. State of New Jersey, et al., A-1848-03T5 (App. Div. 2004).

In Barrick, landlords Matthew and Doris Barrick leased property to the New Jersey Department of Treasury’s Division of Property Management and Construction from 1985 to 2004. The lease contained a tax escalation clause which provided that in the event taxes for any lease year exceeded the tax base, the state was to pay a pro rata share of the increase as additional rent for the lease year. The taxes for the property exceeded the tax base each year from 1985 to 2002. However, the landlords did not seek reimbursement from the state for the tax increases until 2002 when they issued a written request for the total tax increases incurred from 1985 to 2002. The state refused to pay the tax increases on the basis that the Barricks waived their right to reimbursement under the Contractual Liability Act. The Barricks then filed a breach of contract action against the state. The landlords asserted that they were entitled to the tax increases from 1985 to 2002 pursuant to the tax escalation clause of the lease. In response, the state argued that the Barricks’ claim was time barred pursuant to the Contractual Liability Act because the landlords failed to file a notice of claim within ninety days after the cause of action accrued. The lower court ruled that the state was barred from asserting the Contractual Liability Act as a defense and the state appealed.

On appeal, the Appellate Division reviewed the tax escalation clause of the lease and determined that the provision required the state to reimburse the Barricks for tax increases on a yearly basis. The Court concluded that the provision in effect created an installment contract under which the Barricks were required to seek reimbursement for tax increases at the end of each tax year. The Court determined that the Barricks’ reimbursement claims from 1985 to 2002 accrued on the days they received their annual tax bill and that the Barricks should have filed a notice of claim with the state within ninety days of receiving their tax bills. It concluded that the Barricks forfeited their reimbursement claims each year from 1985 to 2002 because they failed to file notices of claim upon the state within the prescribed ninety day period. The Court noted that the lease agreement, which was prepared by the state’s representative, did not provide a method by which the landlords could make a claim for tax reimbursement and therefore contributed to the landlords’ delay in filing their claims. As a result, the Court permitted the Barricks to file a late notice of claim for the 2002-03 tax year, but barred them from seeking reimbursement for all prior years.

There is a very important lesson to learn from the Barrick case and that is as a landlord, you must always be aware of the limitations of the Contractual Liability Act when entering into rental agreements with the state. Generally, there is a designated time period in which a cause of action may be filed against a state tenant. Once the time period expires, a landlord may lose its right to file the action forever. In addition, more often then not it is a state representative that drafts the lease agreement as was the case in Barrick. Therefore, it is up to the landlord, with the assistance of counsel, to ensure that the landlord’s rights are adequately protected by the lease’s terms. It is also imperative for a landlord to be knowledgeable about the various limitation periods for filing claims against a state tenant. Knowledge is power, and as a landlord to the state, what you don’t know can hurt you!