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Grabowsky v. Bangz Beauty Center, Inc.

A-2967-08T3 (N.J. Super. App. Div. 2010) (Unpublished)

LEASES —Where a landlord and tenant never included a basement or mezzanine areas in arriving at rent figures during the initial term of the lease, those areas should not be used when calculating the fair market rental for the premises at the time of a renewal.

A tenant entered into the first of three leases with a landlord’s predecessor in interest to occupy certain commercial property. Under the first lease, the tenant occupied the first floor for a period of five years. The rent increased annually at a rate of five percent. Attached to the lease was a rider with a renewal option and a holdover clause wherein the tenant would pay 125% of the prior rent should they stay beyond the term. The renewal option was for five years upon giving notice of such intent. The renewed rent was to be set at the prevailing rental value and would increase annually by five percent on each anniversary date. To exercise this renewal, the tenant could not be in breach of any term of the lease and had to have fully and timely satisfied its obligations under the lease.

More than a year after the first lease was executed, both parties signed an amendment and modification of the first floor lease. The amendment contemplated a five percent annual increase for the remaining term (at a higher base monthly rate), and modified the renewal term to require that the renewal be negotiated to reflect the then current market value, and then increase annually by five percent. At the same time, the parties entered into a second lease for the tenant to occupy the second floor. This lease was for a term of eight years and six months. It contained an identical holdover provision as that in the first lease, and contained an identical renewal rent calculation as the first lease amendment.

The parties later amended the second floor lease to reflect a different measurement of the premises (a decrease of square footage, but an additional suite on the second floor), as well as a lower monthly rent. The terms of the second floor lease’s renewal clause were ratified.

At a later point, the tenant was substituted into a third lease to occupy a portion of the same commercial property. This lease was for three years, provided for an annual increase of four percent, contained identical holdover and renewal provisions, and notably made the tenant liable for one percent of any increase in real estate taxes on the entire property during the lease term.

Shortly thereafter, the tenant, at its own expense, dissembled part of the ceiling above the first floor and constructed a mezzanine. None of the written leases were amended to include this mezzanine area. Throughout the various leases’ terms, the tenant operated a hair salon on the first floor and the mezzanine level, and a spa on the second floor of the building. It also began to use a portion of the basement area for storage and eventually for laundering towels. The basement area was never specifically included in any of the leases or the amendments.

Approximately four months before all three leases expired, the current landlord purchased the entire property. A month later, the tenant exercised all of its five year renewal options. When the leases expired, the tenant paid the holdover rate, and attempted to negotiate a market value rent for the renewal term. The new landlord wanted to calculate a new rent based on the inclusion of the basement and mezzanine. Negotiations failed.

The landlord sued for additional rents, and demanded possession of the premises. The tenant alleged the landlord breached its obligation to negotiate, in good faith, a market rental rate for the renewal option. The landlord testified that rents were below market when it purchased the property, and that its expert’s calculations accounted for a loss of use in common areas in the building, as well as the cost of taxes. The landlord’s expert also relied on comparable properties owned by the landlord. The tenant’s calculation expert relied on comparables, all but one on a street proximate to the subject premises.

The lower court held that the tenant had properly exercised its renewal option. It found both parties’ calculations established a range. The court declined to include the mezzanine and the basement areas in arriving at the first floor figure, because neither area was included in the rent calculations under the leases. It reasoned that the landlord, at any point, could have ejected the tenant from either area. The court valued the second floor area at less than the first floor area because it had no access to an elevator. It further set an amount owed to the landlord, and then offset it by the tenant’s payments after all three leases expired. On a post-trial motion, the court accounted for a five percent escalation under the first and second floor leases, except for an area under the second floor that it found was governed by a fixed rent term under a later amendment to the third lease.

The Appellate Division affirmed the lower court’s findings, but for issues relating to the mezzanine area. The Court affirmed the lower court’s exclusion of real estate taxes in valuation of rent under the first and second floor leases, as no real estate term was ever provided for under those leases. The Court also affirmed the lower court’s omission of the basement area from valuation, as the landlords’ own expert did not include the basement square footage within his dimensional calculations. However, as to the mezzanine, the Court observed that both parties’ experts agreed the square footage of the mezzanine was part of the leasehold, and they included the mezzanine’s area in their numerical calculations. The Court remanded the issue of mezzanine valuation to the lower court, based upon the record and on appropriate credibility determinations.

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