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PSI Summit Hospital, Inc. v. Corporate Park Associates

A-1693-06T3 (N.J. Super. App. Div. 2008) (Unpublished)

CONTRACTS; LIQUIDATED DAMAGES — Where a contract provides that a party is to receive return of its deposit when it obtains all necessary approvals or, in the alternative, the deposit is to be forfeited if the agreement is terminated because the party making the deposit breached it, then where it is contemplated that there are circumstances under which the deposit is to be returned there is no such breach even though the approvals may not have been obtained or be obtainable.

A hospital that specialized in psychiatric care was informed by its landlord that the property at which the hospital leased space was to be sold. The buyer of the property had plans to build residential housing, but allowed the hospital to remain prior to construction. The hospital then entered negotiations with a property owner for the relocation of its facility. The parties entered into a lease. It was contingent on the hospital obtaining all necessary municipal and governmental approvals and variances since the some of the hospital’s activities were not considered permitted uses according to the municipal code. The hospital could terminate the lease if, after making a good faith effort, it did not obtain all of the necessary approvals for its facility by a specific date. The agreement also required the hospital to deposit roughly $100,000 per month in an account, the accumulation of which was to be released to the hospital when all of the necessary approvals were obtained or to the property owner if the lease was terminated as a result of a breach on the hospital’s part.

After agreeing to a three month extension for the hospital to obtain the necessary approvals, the property owner refused to negotiate a further six-month extension while the hospital’s application for a certificate of need was still pending. The process was being delayed because the hospital encountered difficulties in obtaining the certificate of need. After failing to get an extension of the lease for its current property, the hospital entered into a purchase agreement for the property where its facility was currently located from the contract buyer of the property owner. The hospital then terminated its lease and withdrew its application for a certificate of need.

The hospital and the property owner each sued the other party. The hospital sought return of the monies it deposited under lease and the property owner sought to keep the deposit monies based on its allegation that the hospital had breached the lease. The actions were consolidated. The lower court disagreed with the property owner, holding that the certificate of need was a necessary governmental approval under the lease. The lower court also found that the hospital exercised good faith and acted diligently in its pursuit of the certificate of need. It held that the hospital had rightfully terminated the lease when it was apparent that it wasn’t going to obtain the certificate of need or an additional time extension. Thus, the lower court awarded the deposit to the hospital.

On appeal, the Appellate Division agreed with the lower court that a certificate of need was part of the lease contingency because it was a governmental approval. It pointed out that the lease required approvals for both the site plan and the intended use, and that a certificate of need was required by state law for the construction or expansion of a health care facility. The Court disagreed with the property owner that the lease was ambiguous as to whether lease captions were encompassed by the contingency rider and pointed out that the terms of a contract were only considered ambiguous if there were at least two reasonable interpretations of the language according to the ordinary meaning of the words. It added that a party to a contract cannot point to ambiguous contract language to avoid being held accountable to the contract’s terms when its own interpretation is contrary to the plain language used. The Court also agreed with the lower court that since the language of the lease was not ambiguous, it was unnecessary to subpoena two of the attorneys for the hospital to determine the meaning of the lease’s terms.

The Appellate Division, in agreement with the lower court, found that the hospital acted diligently and with good faith in its attempt to obtain a certificate of need and that the property owner had waived its right to bring such claims based on the hospital’s attempts to satisfy the contingencies during the extension period when it agreed to the three month extension. It also agreed with the lower court’s finding that the hospital acted reasonably by negotiating for, and subsequently purchasing, the property where its facility then existed and in terminating the lease with the property owner. The Court found that the liquidated damages portion of the lease, which allowed the property owner to keep the deposit in the event the hospital breached the lease indicated that the parties contemplated that there were circumstances under which the lease could have been rightly terminated. It affirmed the lower court’s findings that the certificate of need was included in the lease’s requirement that all necessary municipal and governmental approvals were to be obtained and that the hospital acted diligently in its attempt to obtain the certificate of need.

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