Skip to main content

Jay Dad Associates, L.L.C. v. C&G Management Corp.

A-6190-06T2 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS — Environmental remediation is not akin to repair and therefore a need for remediation would not trigger the normal risk of loss provision in a real property contract.

A purchase agreement for a building included a provision for a lease to a tenant chosen by the buyer. Prior to closing, the buyer gave a deposit and the tenant took occupancy. The tenant’s deposit, plus the first month’s rent, were deposited with the buyer, but the check bounced and the tenant and seller-owner ended up in litigation. By the closing date, the seller claimed that its buyer had defaulted. In response, the buyer asserted that there were outstanding conditions that needed to be met, including the removal of underground storage tanks, the correction of fire violations, delivery of a certificate of occupancy from the municipality, and obtaining final approval from the New Jersey Department of Environmental Protection (DEP). The buyer eventually agreed to a closing date subject to the municipal zoning violations. It agreed to remediate the property in turn for a credit at closing. The seller later reinstated the non-payment of rent eviction action against the tenant. The tenant was evicted, but the seller could not collect on the judgment because the tenant was bankrupt, the fact of which counsel for the buyer had been aware. The seller also discovered the need to satisfy further environmental requirements to be met. In response, the buyer said it could not close until DEP approval was obtained since this was needed for financing.

The buyer sued for specific performance and the seller brought a counterclaim for rescission and made fraud allegations. After an unsuccessful attempt at mediation, the seller cancelled the contract and both parties moved for summary judgment. The lower court found that the risk of loss provision in the agreement between the parties allowed the seller to cancel when the environmental remediation costs exceeded ten percent of the purchase price. It also found that the buyer could not get specific performance because it failed to disclose the tenant’s bankruptcy in a timely manner. In essence, it didn’t have “clean hands.”

On appeal, the buyer argued that environmental harm. It also argued that remediation could not be defined as repairs, thus triggering the risk of loss provision. Those arguments were rejected. The Appellate Division, in agreement with the lower court, found that the environmental conditions discovered between the date of the agreement and the closing date constituted damage under the risk of loss provision of the agreement. It pointed out that the intention of the risk of loss provision was to address such circumstance that would make the transaction unprofitable for the buyer. The Court also agreed with the lower court that the buyer was not entitled to specific performance because it failed to demonstrate that performance of the agreement would have produced an equitable result given the finding of unclean hands for not disclosing the tenant’s bankruptcy. It further pointed out that a party seeking such relief must be found to have acted fairly and equitably and that while the buyer had no legal obligation to disclose the tenant’s bankruptcy to the property owner, under the principles of equity under which it sought relief, the lower court properly denied the buyer’s request for specific performance. Based on its findings and conclusions, the Court affirmed the lower court’s decision to rescind the contract in favor of the seller and to deny specific performance of the contract to the buyer.

66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 •