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CIT Communications Finance Corporation v. Microbilt Corporation

A-1491-09T1 (N.J. Super. App. Div. 2011) (Unpublished)

LEASES; GOOD FAITH AND FAIR DEALING — Where a party has an obligation to return leased equipment at the end of the lease’s term, it may not be liable for post-termination equipment rent for the period while it waits for the leasing company to furnish a delivery address for the equipment.

A corporation entered into a five year lease for telecommunications equipment. The lease called for monthly payments and a 5% late charge if any payment was made more than ten days after its due date. A defaulting party was required to pay all costs incurred by the other to enforce its rights under the lease, including reasonable attorneys’ fees. The lease also provided for a fair market value purchase option that could be exercised if there was no default, and at least 30 days’ written notice was given before the end of the original term. If the equipment was not purchased, the equipment had to be returned or the lease would automatically renew for successive monthly periods until the equipment was returned.

The lessee defaulted in its lease payments. So, the parties entered into a forbearance agreement under which the lessee was to make increased monthly payments through the original lease term, and then have the option to purchase the equipment for fair value or return it to the finance company. The lessee was current in its lease obligations through the end of the original lease term, but neither returned nor purchased the equipment at the end of the term, and made only one lease payment after the end of the term. The lessor sued for the past-due lease payments, late charges, and counsel fees.

The lower court found for the lessor, holding that the lessee had entered into an agreement while attempting to negotiate the purchase price after the original term ended, and retained possession of the equipment for nineteen months without making lease payments. The lower court awarded damages to cover the nineteen months, plus late charges, and counsel fees.

On appeal to the Appellate Division, the lessee argued that the forbearance agreement had negated the automatic renewal provision in the lease. The Court rejected this argument, finding the forbearance agreement did not change the automatic lease renewal under the original agreement. The forbearance agreement stated it was made without prejudice to, and made with full reservation of, the finance company’s rights under the lease. The Court, however, remanded the matter on the issue of damages, finding the lower court had erred in its calculation of damages over the entire period during which lease payments were withheld. It felt that the finance company’s failure to furnish a delivery address for the equipment tolled damages until the address was provided six months after when it was requested. The Court also held that the finance company did not breach any implied covenant of good faith and fair dealing relating to the negotiations for the purchase of the equipment, as the finance company had no obligation under the agreement to engage in purchase price negotiations.

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