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Y-Two, Inc. v. Dailey

A-3083-04T5 (N.J. Super. App. Div. 2006) (Unpublished)

LEASES; MERGER—The doctrine of merger is not to be applied rigidly and mechanically as it was under common law; it should not be applied where a tenant who take an assignment of its landlord’s interest in the lease never intended a merger to take place.

In connection with the sale of a marina, the original owner retained a reversionary right in certain “long term boat slip leases.” The marina, prior to the sale, had entered into a number of pre-paid long term leases expiring in 2077. As a result, they produced no current income for the marina because the rent had already been collected in advance. According to the terms of the reversion, “pon the expiration of any long term lease, or termination thereof for any reason, the rights associated with said lease(s), and the revenues thereafter generated by said boat slip, shall revert to the Grantor and the Grantee. The revenues shall be divided equally by the Grantor and Grantee, after deduction for real estate taxes, common area maintenance and repair reserves.” Several years after the marina was sold, as a settlement of litigation between the new owner and the holder of eight of the long-term leases, the tenant assigned all of its right, title, and interest under those leases to the marina. The marina also took assignments from individuals holding two other long-term leases. It then executed new leases, but the leasehold terms did not extend beyond the original date in 2077. Faced with this set of facts, the original owner “contended its reversionary rights under the deed language [set forth earlier] entitled it to share in the rental payments [the marina] received as a result of [those] new leases.” It cited the common law of merger, i.e., “whenever a greater estate and a lesser estate coincide in the same person without any intermediate estate, the lesser estate merges into the greater.” The Appellate Division acknowledged this to be a proper statement of the common law doctrine of merger, but also recognized that “the doctrine of merger is not favored in equity and is never allowed unless for special reasons and to promote the intention of the parties. The doctrine of merger of estates is not to be applied rigidly and mechanically as it was in common law.” The Court, after reviewing the record below was satisfied that the lower court “was entirely correct in rejecting [the original owner’s] contention about merger.” It believed that the buyer never intended such merger to occur when it took an assignment of the long term leases. Further, it did not find the actions of the marina to be unfair to the original owner. In its view, the original owner “received, at the time the initial long-term leases were executed, full payment for their use through 2077. The actions of [the marina] did not deprive [the original owner] of any of its contractual rights.” It took note that when the leases actual terminated in 2077 the seller would “be entitled to an equal share in the revenues then generated.”

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