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City of Cape May v. Dash

A-1613-06T1 (N.J. Super. App. Div. 2008) (Unpublished)

LEASES; MUNICIPALITIES — A municipality can terminate a lease at anytime, even after years and years have passed, if the lease was void from its inception, such as by reason of not having been advertised for public bidding or if the lease term exceeds a statutory limit.

In 1951, a municipality leased a parcel of beach front property to two tenants. The lease was for ninety-nine years, at $150 per year. It also required the tenants to pay municipal real estate taxes. Within one year, the tenants constructed a commercial building which functioned as a snack bar and a gift shop. This was permitted by the Lease. About twenty-three years into the lease term, one of tenants, who was a municipal official at the time the lease was executed, transferred his interest to the other tenant. Twenty-four years later, two prospective buyers took over operation of the snack stand from their aunt and uncle who had been operating the snack bar since the beginning. The two buyers, brothers, later purchased the remaining tenant’s interest in the lease and subsequently subleased the snack bar portion of the property.

Nearly ten years following their purchase, the municipality informed the brothers that the lease’s validity was in question. Following failed negotiations between the municipality and the brothers, the municipality sought to evict them on the grounds that the lease was void ab initio (from its inception). The municipality also sought mense profits, an estimated average of rental profits earned by the brothers. The brothers counterclaimed for a declaration that the lease was valid and for damages against the municipality. They also brought a third-party claim for equitable relief from the remaining tenant, their seller, in the event that the municipality prevailed and the lease was terminated.

The lower court granted summary judgment in favor of the municipality and declared that the lease was void from its inception because there was no public bidding and because the ninety-nine year lease exceeded the five-year statutory limit for such a lease. The lower court alternatively found that if the lease was not void from its inception, it was still voidable fifty years after its inception and that the voiding of the lease under such conditions was not subject to equitable estoppel. It denied the municipality’s claim for mense profits due to the brothers’ reliance on the lease’s validity and the municipality’s long delay in bringing the action. The brothers’ third-party claims against the prior tenant, its seller, were denied.

On appeal by the buyers, the Appellate Division held that the ninety-nine year term resulted from an irregular exercise of the municipality’s allowable power to lease property, but held that it was not completely beyond the municipality’s power to have entered into a lease for municipal owned property. The Court, however, agreed with the municipality that it was beyond the municipality’s jurisdiction to enter into the lease without having advertised the lease for public bidding and that as a result, the lease was void from its inception. According to the Court, the purpose of the bidding statutes is to benefit taxpayers and to protect against favoritism and corruption. Noting the blatant disregard for the five-year statutory limit and that one of the two original tenants was a municipal official, the Court found that the failure to bid was a fatal defect and that the lease was void from its inception.

On the municipality’s cross-appeal for the lower court’s denial of mense profits, the Court pointed out that such damages could have been offset by improvements that were made to the property. The Court found that the lower court properly weighed the equities in favor of the brothers and affirmed the lower court’s findings that the value of the improvements made by the brothers exceeded the net rental value earned by the property for the six preceding years, the allowable time period in which such profits were recoverable. The Court also affirmed the lower court’s denial of the buyers’ claims against the remaining tenant. It took note of the expenses incurred by the brothers, the amount of time that they had to profit from the property, and the low rent, As such, the Court concluded that any mistake made by the parties did not result in such an inequity that would have supported their damages claims against their prior tenant, their seller. Thus, all of the lower court’s findings were affirmed.

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