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Woroco, Inc. v. Elgohail

A-1778-97T2 (N.J. Super. App. Div. 1999) (Unpublished)

LEASES; DRAFTING; ARBITRATION—An ambiguously drafted lease clause that would not otherwise be given effect can be enforced if the parties agree to arbitrate the issue, and an arbitrator may resolve the ambiguity by reconciling its contradictory elements.

A commercial lease for gasoline station service bays contained a renewal provision. An essential term of that provision read as follows: “further provided that the LANDLORD and TENANT shall reach agreement as to the amount of fixed rent to be charged for the Option Period taking into consideration increases in the Consumer Price Index and real estate taxes. The factors to be considered shall also include current market value and nothing herein shall be construed as creating any obligation upon the LANDLORD to set specific fixed rent nor the right for any third party to arbitrate or intervene with regard thereto.”

When the parties discussed renewal, no agreement could be reached. In the eviction action that followed, the parties stipulated that the lower court judge would “call” the rent. Thereupon, the lower court judge, after a hearing, fixed the rent by averaging the rent that would result if only the Consumer Price Index were considered with the rent that resulted only if the tax increase was considered, and with the fair market value rent as established by testimony during the hearing. The landlord appealed from that decision.

The Appellate Division, in its ruling, pointed out the basic principle of contract law that an agreement, in order to be enforceable, must state its essential terms with sufficient definiteness for them to be readily ascertainable. It held that the renewal clause did not permit the rent to be readily ascertainable since it was apparent that the three factors to be taken into account were incompatible. In addition, the Court pointed out that the renewal clause clearly provided that if the parties were unable to agree on a renewal rent, no one else was empowered to fix the amount. For those reasons, the Appellate Division viewed the clause as nothing more than an agreement to negotiate in good faith. Further, nothing in the record suggested that the landlord’s position was not taken in good faith. Consequently, if there were nothing else for it to consider, the Court would have viewed the renewal clause as illusory and concluded that if the parties failed to agree, that would be the end of the tenancy. Here however, the Court noted that the parties stipulated that they were “simply asking the [lower court] to make the call on [the rent].” Consequently, the Court construed that stipulation as asking the lower court to act as an arbitrator, subject to the customary rules governing arbitration awards. As such, the lower court’s fixing of the renewal rent would be properly deemed to be a non-reviewable arbitration award. On the other hand, the Court recognized that the parties’ stipulation could also be subject to the interpretation that it constituted a waiver of the non-intervention provision of the renewal clause, thereby authorizing the lower court to do judicial fact-finding, based on the evidence, as to what a fair renewal rent would be under the standards set forth in the agreement. As a result, the Appellate Division was satisfied that the lower court’s inclusion of the Consumer Price Index and the tax increase, in light of the essentially incompatible current market value standard, was a fair reading of the clause and a reasonable reconciliation of its contradictory elements.


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