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The Mall at IV Group Properties, LLC v. LRHC Paramus, N.J., Inc.

A-582-02T2 (N.J. Super. App. Div. 2003) (Unpublished)

LEASES; FORECLOSURE—A tenant being named in a foreclosure action does not constitute a breach of a Landlord’s covenant of quiet enjoyment to the tenant when the tenant has the right to attorn to the foreclosing mortgagee.

A health club signed a long term lease at a shopping center. Its lease was guaranteed, on a sliding scale basis, by a related entity. The property was threatened with foreclosure and there were a number of related ownership changes on the landlord’s side of the transaction, including changes related to a bankruptcy filing. A mortgage foreclosure proceeding was initiated against the landlord and the tenant was joined in the proceeding. “The foreclosure matter did not proceed to final judgment. It was eventually dismissed for lack of prosecution… .” About a year before the tenant was joined in the foreclosure proceeding, it stopped paying rent. Nonetheless, “[i]t continued to occupy the premises until shortly after it was served with the amended foreclosure complaint.” It then vacated the building with fifteen years remaining on the lease. The space remained vacant for a significant period of time. Ultimately, after substantial renovations were made for a new tenant, the landlord began receiving rent again (from the new tenant) two and one-half years after the health club stopped paying its rent. The landlord sued the health club for unpaid rent and sued the guarantor as well.

The tenant testified that conditions at the premises deteriorated after it moved in. It gave a number of examples. The lower court, however, believed testimony offered for the landlord “that there was no record of any complaints being received about the condition of the premises and that the records indicated it was maintained in good condition.” Consequently, the lower court found in favor of the landlord. Unfortunately for the landlord, the lower court only granted a judgment for unpaid rent through the date upon which the tenant vacated the premises. Its theory was that the health club’s “vacation of the premises was a ‘de facto’ settlement of the landlord’s claim for rent and that joining [the health club and guarantor] as parties to the foreclosure action was a breach of the covenants of quiet enjoyment and of good faith and fair dealing because it represented one step in a conscious attempt to ‘demall’ the premises and remove [the health club] as a tenant.”

The Appellate Division gave no deference to the lower court’s legal conclusions. It felt that the lower court “erred when it treated the joinder of defendants to the foreclosure action as a breach, relieving [the health club] of is obligations under its lease. Rather, [the health club and its guarantor] were necessary parties to the foreclosure action. ... Thus, contrary to the conclusion of the trial court, joining these defendants to the foreclosure action was not analogous to instituting a dispossess action.” Further, if the tenant was concerned that it was joined so as to permit its removal, “it could have attorned to the mortgagor under [an applicable article] of its lease.” Under New Jersey case law, “a tenant may attorn to a mortgagee or foreclosure purchaser in order to avoid ejectment and to stay in possession of the leased premises.” Also, the tenant vacating the premises was a unilateral action on its part. A settlement requires “concurrence of at least two contending parties.” Here, the landlord never acquiesced in the abandonment. Further, the Appellate Division found nothing in the record to support the theory that the various landlords were seeking to “demall,” the shopping center.

The lower court concluded that the landlord met its duty to mitigate its damages. That conclusion was not challenged on appeal. Consequently, the Appellate Division pointed out that the landlord was entitled to the full amount of rent due until the time when the new tenant commenced paying rent. The lease also obligated the tenant to pay expenses. “Those expenses, however, must be reasonable in amount and reasonably related to the [tenant’s] breach.” Because the lower court made no findings in either regard, the matter was remanded to the lower court to determine the proper amount of damages to which the landlord was entitled.

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