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Verizon New Jersey, Inc. v. One Washington Park Urban Renewal Association

A-1507-08T2 (N.J. Super. App. Div. 2010) (Unpublished)

CONTRACTS; ATTORNEYS FEES — When an award of attorney’s fees is contractually authorized, the award does not mechanically encompass the full fee charged, but is limited to what is reasonable under the circumstances; therefore, an initial question to be answered in determining whether a given counsel fee award is reasonable is whether the party seeking the fee prevailed in the litigation.

A landlord and tenant entered into a written lease agreement. Specifically, the landlord agreed to lease ninety-four percent of an office building to the tenant for a term of twenty years. Under the lease, the tenant, in addition to paying base rent, was to pay ninety-four percent of the building’s operating or escalation expenses. Disputes arose whether certain expenditures were operating expenses or were capital improvements (which would not be the tenant’s responsibility). Also, the landlord was obligated under the lease to provide the tenant with timely written statements of projected and final escalation expenses for each year of the lease term. The landlord didn’t provide estimates of the expenses for several calendar years, and made late submissions for other years, contributing to the dispute over what was owed. Because the disparity in the amounts each side claimed due was significant, the tenant became concerned that it would forfeit the legal right to claim that it had made overpayments for certain years. Therefore, it filed a declaratory judgment action seeking a judicial accounting of any amounts due.

At trial, the landlord did not offer any expert proof as to its claimed damages; instead, it relied on testimony from a landlord witness that a tenant representative, during a meeting, allegedly admitted that the tenant owed approximately $400,000 in escalation expenses. At the close of the landlord’s case, the tenant moved for judgment and stipulated that it owed the landlord $81,122 in escalations as identified by its auditor. The lower court reserved decision on the motion, and directed that the tenant present its case. The tenant’s accountant, relying on the audit report and other significant invoices and financial records, testified to a lesser owed amount to the landlord – $69,973.

The parties also disputed whether certain items should have been removed from the building. Under the agreement, the tenant was required to return the building to its prior state once it vacated its space. The landlord submitted a list of 150 items to be removed, and the tenant challenged 41 of them as improvements to the building that the tenant was not obligated to remove. The landlord relied on the tenant’s former contractor’s estimate which categorized a list of items to be removed at a cost of $1,939,133. At trial, the tenant testified that the figure its own contractor had sent to it put it into “sticker shock” and it never considered the estimate acceptable. It then created a spreadsheet identifying the items it considered to be improvements and hired its own expert to challenge the earlier estimate from its own contractor. Prior to departing the building, the tenant removed all of the items it considered personal property. The landlord did not perform any of the allegedly essential restoration work. Instead, it entered into a contract to sell the building at a price less than its value when it had refinanced the property six years earlier. The landlord conceded that the sale price was affected by the need for a quick sale, as well as the building’s 95 percent vacancy rate.

At trial, the landlord was twice precluded from presenting expert testimony as to its restoration damages. Following trial, the lower court awarded the landlord $81,000 on its claim for escalation damages under the terms of the lease agreement. The lower court denied the landlord’s claim for restoration damages. It entered a separate order awarding the landlord $107,762 in counsel fees. This was the full amount requested.

On appeal, the landlord argued the lower court erred in requiring it, rather than the tenant, to present its proofs first, erred in precluding the testimony of its expert on restoration damages, and erred in failing to declare a mistrial following the testimony of another of its damage experts. In its cross-appeal, the tenant asserted the lower court erred in its damages award, and that the counsel fee award to the landlord was unwarranted.

The Appellate Division affirmed the damage award but remanded to the lower court on the issue of counsel fees. The Court held that the lower court did not err in ordering the landlord to present its case first. Because the landlord was the party seeking damages, it had the initial burden of demonstrating what it believed it was owed through the production of invoices and expert testimony. The landlord was the party with better access to proofs of the escalation claim since the escalations were its own claimed operating expenses. The landlord was not prejudiced and the Court found no abuse of this discretion by the lower court.

The Court dismissed the landlord’s contention that the lower court should have declared a mistrial following the testimony of its subpoenaed restoration damage witnesses. The restoration damage witnesses, a general contractor father and daughter, testified at trial that they had advised the landlord they were not experts, and had only submitted a courtesy bid utilizing dreamed up prices which the daughter did not anticipate would be accepted by the landlord. The daughter testified that she was just a general office worker and had she known the bid would used against the tenant, she would not have submitted anything as her company had no desire to damage its longstanding relationship with the tenant. Counsel for the landlord did not move for a mistrial at the lower court level, did not dispute the lower court finding that the father could not be compelled to serve as an expert, and made no argument that the daughter qualified as an expert. The Court said that the landlord chose not to engage a new expert when told six months prior to trial that the restoration damage witnesses would not be experts in the case, and so it found no manifest injustice. The Court also affirmed the lower court’s finding that another restoration witness could not offer necessary expert testimony relating to his estimate of a fair and reasonable restoration amount because he was not listed an expert witness in answers to interrogatories. If permitted as an expert, the Court felt this would put the tenant at a disadvantage by not having been able to depose that witness or have its own expert address the merits of the estimate.

The Court also dismissed the landlord’s claim on appeal that the lower court erred in concluding that it failed to establish its claim for restoration damages. The Court said in cases involving injury to real property, damages may be measured by the diminution in value of the property or by the cost to repair the property. As noted earlier, the witness who prepared the estimate for the tenant (and which the tenant rejected) was disallowed from testifying as an expert’s estimate, as to the reasonableness and the Court said the tenant’s feeling of “sticker shock” and hiring of its own expert to challenge the estimate was evidence that it did not adopt that estimate as fair and reasonable. Alternatively, the landlord argued that the lower sale price of the building represented proof of damages. The Court dismissed that argument, finding the landlord failed to support this allegation with lay witness testimony of an earlier building valuation that was based upon a refinance, and by the landlord’s own admission that a quick sale and near total vacancy influenced the sale price.

The Court next addressed the issue of escalation damages. The landlord contended the lower court erred in failing to award escalation damages of either $400,000 or $650,000. The tenant argued that the lower court erred in awarding $81,000 based on a stipulation by the tenant pursuant to a motion for judgment at the close of the landlord’s proofs. The Court rejected both arguments. It held the lower court reasonably relied upon the expert testimony offered by the tenant’s accountant in calculating the court’s award of escalation damages. The Court cited testimony that the accountant had reviewed numerous documents in preparing his report, including an earlier audit, the lease, its amendments, and the financial statements prepared by the landlord’s accountants. The Court also found that the lower court reasonably relied upon the accountant’s “judgment call” when the landlord failed to present proofs of its escalation expenses for certain periods of time.

Lastly, the Court held the lower court erred in its award of counsel fees to the landlord. The Court said that when an award of fees is contractually authorized, the award does not mechanically encompass the full fee charged, but is limited to what is reasonable under the circumstances. An initial question to be answered in determining if a counsel fee award is reasonable is whether the party seeking the fee prevailed in the litigation. The Court agreed with the tenant that the lower court, in awarding the full counsel fees requested by the landlord, did not account for the landlord’s limited success in its escalation fee award and its failure to prevail on its restoration fee claim. The Court ordered a remand on this issue and was of the view that, at the very least, the fees related to the failed restoration fee claim had to be reduced and that the lower court had to be mindful of the landlord’s limited recovery of its escalation claim.

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