PER CURIAM.
Defendant West NY Suites, L.L.C., appeals from the Law Division's judgment following a bench trial finding it liable on a breach of contract claim brought by plaintiff 5907 Boulevard, L.L.C., and awarding damages and attorney's fees. We affirm.
In summary form, the parties entered into a contract for the sale of an apartment building from plaintiff to defendant with the intention that the property be converted to condominiums. After plaintiff did all it could to effectuate registration of the property with the State as condominiums, defendant refused to cooperate in producing required documents and allowing transfer of the deed into its name — the only two steps required before the property could be registered. Defendant took the position that the contract required plaintiff to obtain the registration before the closing, even though this was impossible given the structure of the deal. Defendant also claimed that plaintiff failed to prove that all the rents being charged for the apartments were lawful, thus excusing defendant's obligation to purchase the property. The trial court concluded otherwise. It ruled for plaintiff on its breach of contract claim and awarded liquidated damages and attorney's fees in accordance with provisions of the contract.
Having reviewed the record and considered defendant's arguments, we agree with the Law Division's conclusions and find no basis to disturb its rulings.
The evidence at the trial showed the following. On June 5, 2008, defendant entered into a contract with plaintiff to purchase a forty-five-unit apartment building in West New York, which was to be converted into condominiums. The contract documents consisted of a "Contract for Sale of Real Estate," prepared by plaintiff's attorney, and a "Rider to Contract for Sale of Real Estate," prepared by defendant's attorney following many hours of negotiations. The contract made closing contingent on approval of the conversion to condominiums by the State Department of Community Affairs (DCA). Plaintiff was to "complet[e] all requirements to obtain a [condominium] registration," at its "sole cost and expense." Closing was set for sixty days from the "Final DCA Condominium Registration of the Property."
The contract also provided for a due diligence period, during which defendant could cancel the contract for any reason. Additionally, if the condominium registration was not obtained within one year of the end of the due diligence period, defendant could terminate the contract at its option. If defendant failed to purchase the property for another reason, amounting to breach of the contract, the agreement provided for liquidated damages to be paid to plaintiff. By changes made at defendant's insistence in the rider, the liquidated damages were fixed at $100,000 payable to plaintiff if defendant breached the contract before issuance of the condominium registration.
On July 2, 2008, defendant's attorney sent a letter to plaintiff's attorney with a spreadsheet detailing rent increases in the building's apartments. The letter requested that plaintiff "advise as to the steps taken to achieve the increased rents" because defendant was concerned about compliance with West New York's rent control laws. The parties met with their respective attorneys on July 30, 2008, to discuss the rent increases and other issues. The result was a two-page handwritten amendment to the contract.
Among other changes, the handwritten amendment extended the due diligence period until July 31, 2008 (the next day), reduced the purchase price to $4,950,000, and, in the letter's paragraph 6, required plaintiff to "provide documentation [to defendant] to substantiate rental increases at the property." Further on the issue of rent increases, the handwritten modification of the contract provided in its paragraph 4:
Following these additions to the contract, an email from defendant's attorney dated the next day stated that "[a] condition of the amendment and payment of the balance of the deposit is the timely delivery to my office of the documents required by paragraph 6 of the amendment." After follow-up emails were exchanged, plaintiff's attorney sent to defendant on August 20, 2008, what he represented was "the entire rent registration package" for the building. Included in the package were rent registration statements plaintiff had filed with the Town of West New York and a number of resolutions from the West New York Rent Control Board approving rent increases. Not included, however, were resolutions for seven apartments that defendant suspected had rent "increases beyond the annual increases permitted by the municipality." Defendant's attorney requested resolutions for those seven units in an email sent on August 22, 2008. More emails and letters between the attorneys were exchanged, but plaintiff could not find any other rent control documents. Testifying as a fact witness at trial, plaintiff's attorney confirmed that plaintiff never found any resolutions approving rent increases for the seven units.
Beginning on April 8, 2009, correspondence between counsel turned to the subject of registration of the condominium conversion. Plaintiff's attorney stated that plaintiff had taken all the necessary steps to obtain registration from the DCA, with the "only items remaining" being the disclosure by defendant of its ownership interest and an updated title report in defendant's name. Counsel's letter also referenced a conference call the parties had with DCA, indicating that the final registration would be issued once the deed was in defendant's name. A memo from DCA was attached to the letter indicating these remaining deficiencies. At the trial, a DCA representative testified that a deed in the sponsor's name was required before DCA would issue a final registration, but that many preliminary steps in the process toward registration could be completed before the deed was executed and received by DCA.
Despite plaintiff's having completed the preliminary steps to register the property, defendant refused to close on the sale. Defendant's attorney listed reasons on April 28, 2009, for refusing to close, including that plaintiff had not obtained final registration of the condominium as the contract required, and that plaintiff had failed to "substantiate the rent increases" in the seven units mentioned above. Plaintiff's response accused defendant of bad faith and repeated its understanding that the final condominium registration would be issued after "the Deed was transferred." It also indicated that defendant had failed to disclose its ownership structure, and had "failed to provide the Escrow Agreement required by the DCA." The DCA witness at trial confirmed that condominium registration could not issue until the DCA received an escrow agreement and a deed in defendant's name.
After further correspondence of counsel did not resolve the dispute, plaintiff filed its complaint on May 21, 2009, originally in the Chancery Division. Amended pleadings were subsequently filed, and the case was transferred to the Law Division.
By letter dated August 19, 2009, defendant asserted that plaintiff had not obtained DCA registration within twelve months after the due diligence period expired on July 31, 2008, and so, defendant was "exercis[ing] its option to terminate the Contract." On September 30, 2009, DCA rejected the condominium conversion plan because of the absence of a deed in the sponsor's name and a valid escrow agreement.
After hearing this evidence at the trial, the Law Division held that defendant breached the contract by failing to cooperate in obtaining the condominium registration, and that its breach was not excused by a material breach of the contract by plaintiff in failing to substantiate rent increases for all forty-five apartments. In accordance with the liquidated damages provision of the contract, the court awarded $100,000 to plaintiff, and in accordance with the attorney fee-shifting provision of the contract, it awarded an additional $115,349.44 to plaintiff for its attorney's fees and litigation expenses.
Defendant's appeal presents the following main issues for our consideration:
In addressing these issues, we apply well-established standards of review to a judgment after a bench trial. We defer to the trial court's factual findings.
We must also consider general principles of law that apply to a dispute about the interpretation and application of contract terms. Interpretation of a contract is a question of law.
Unambiguous language controls the rights and obligations of the parties, even if it was unwise in hindsight. The court will not make a "more sensible contract than the one" the parties made for themselves.
A contract is ambiguous if its terms are "susceptible to at least two reasonable alternative interpretations,"
Even where the language of the contract is clear on its face, courts may determine its meaning by looking to extrinsic evidence, such as "the situation of the parties, the attendant circumstances, and the objects they were . . . striving to attain."
Defendant has narrowed its primary argument on appeal with respect to its liability for breach of contract. It no longer argues that it had a right to cancel the contract because of plaintiff's failure to obtain condominium registration before the closing. Instead, defendant seeks to excuse its cancelation of the contract by asserting that plaintiff breached the contract when it failed to provide documents to show it had lawfully increased the rent in all forty-five units of the building. Nevertheless, defendant's cancellation letter also relied on plaintiff's failure to obtain DCA registration, and a discussion of that issue will help explain the full nature of the dispute.
The interpretive difficulty arose from the provisions of the contract that required a final DCA condominium registration to be issued before the closing. The contract provided that "[c]losing shall be sixty (60) days from the date of Final DCA Condominium Registration of the Property." Given that the structure of the deal also required defendant to be the "sponsor" of the condominium registration, and the DCA required a deed in the sponsor's name before issuing a final registration, literal compliance with these provisions was impossible. Under the contract, closing was to occur after registration, but the DCA required the closing to occur before registration. The parties drafted themselves into a chicken and egg problem.
Plaintiff's attorney testified that, in his experience, an arrangement in which the buyer would be the sponsor was a "bit unusual," and that it prompted the attorneys to arrange a conference call with DCA. That call established that the contract could be performed, but that title would have to be in the buyer's name before the registration could issue.
The conflicting contract provisions did not reflect the underlying intention of the parties and made the contract as written ambiguous. The rider did, however, indicate that the parties intended to cooperate in obtaining the condominium registration, and that the registration was crucial to the deal. The interpretation that best effectuated the parties' intent required defendant to close on the sale once plaintiff had accomplished everything in the registration process within its power, which did not include transfer of the deed prior to closing. At the closing, the deed would be issued in defendant's name, and the final condominium registration could be completed. The trial court reasonably adopted such an interpretation of the contract. Because defendant admittedly failed to cooperate in providing the necessary documentation to allow plaintiff to effectuate DCA registration, the court correctly concluded that defendant materially breached the contract.
But the conclusion that defendant breached does not end the matter. Defendant excuses its breach by arguing that plaintiff's failure to provide proof that the rents it charged were legal was also a material breach that permitted defendant to refuse to perform its end of the bargain and eventually to cancel the contract.
Two paragraphs of the handwritten "First Amendment to the Contract of Sale" are relevant. Paragraph six stated plaintiff would "provide documentation to substantiate rental increases at the property." Paragraph four stated that plaintiff and Seth Martin, individually as plaintiff's owner, would indemnify defendant for any losses caused by rent control violations "for the period prior to the closing of title." Plaintiff did not provide documentation to substantiate rent increases for seven of the forty-five units, but it stood by its promise to indemnify defendant if defendant incurred any losses because of violations of rent control ordinances that had occurred before the closing.
Every failure to perform as required by a contract, even a small failure, is a breach that gives rise to a claim for damages.
The Restatement, which New Jersey courts apply in this context, offers five factors to aid in determining whether a breach is material:
The key question is whether the breach affected the ultimate goal of the contract only tangentially, or whether it "went to the essence of the contract."
In light of these factors, we find no error in the trial court's conclusion that plaintiff's breach in failing to provide documents to substantiate rent increases in seven units — if in fact a breach — was not a material breach of the contract. There was no evidence that plaintiff made less than a good faith effort to obtain the rent resolutions that defendant sought. As the trial court found, they did not exist.
The essence of the contract was the sale of a condominium-form building, and so, the level and legality of the rents were relevant only in the interim period until the condominium units could be sold. Not only did defendant show no losses at the time of required performance of the contract of sale, but, had any losses to defendant emerged, defendant could have recouped them from plaintiff. The indemnification provision of paragraph four ensured defendant that plaintiff and its owner personally would be liable for pre-closing rent violations. It even provided a source of payment to defendant in the form of offsets from Martin's "consulting fee" from the sale.
The trial court's holding that the failure to provide seven rent resolutions was not a material breach that undermined the deal was supported by substantial evidence, including the specific provisions of the contract negotiated and modified by the parties and their attorneys.
Thus, defendant's failure to cooperate by nominating an escrow agent and assisting in obtaining the condominium registration was a breach of its obligations under the contract, and it was not excused by any material breach of the contract by plaintiff. Defendant did not have a right to cancel the contract. It is liable to plaintiff for its breach in canceling without justification.
Defendant contends, next, that the liquidated damages clause of the contract was not enforceable in the circumstances of this case. We disagree.
The parties negotiated separate liquidated damages clauses applicable in the event of default by each. In the rider prepared by defendant's attorney, the liquidated damages clause in favor of plaintiff was modified to state:
The enforceability of a liquidated damages clause is a question of law over which we exercise plenary review.
Defendant contends the quoted clause is unenforceable because it constitutes a penalty for breach of contract. Since the purpose of contract damages is to compensate, a provision fixing the measure of damages in the event of breach will not be enforced if it is so large as to amount to a penalty.
However, "liquidated damages save[] the time of courts, juries, parties and witnesses and reduce[] the expense of litigation."
Defendant argues that plaintiff actually suffered no damages when plaintiff canceled the contract. It cites
As to the second requirement of an enforceable liquidated damages clause — actual damages that are difficult to estimate — defendant argues that the testimony at trial did not demonstrate any effort to estimate what the damages might be in the event of a breach by one party or the other. If all the potential damages that plaintiff would suffer were either known or could be easily estimated, then a liquidated damages clause may be unreasonable. But defendant gives short shrift to potential damages to which plaintiff was exposed that could not be forecast. For example, once the property was under contract, plaintiff was at the mercy of a volatile real estate market. The parties had no way of predicting what the months following the mid-2008 contract signing would bring, and a liquidated damages clause limited each party's exposure to market fluctuations. Further, as Seth Martin explained at trial, it was very difficult to estimate up front what repairs would have to be done in order to get a green card and a certificate of occupancy. Martin testified that a "crew of workers have to go into 45 different apartments" to assess repair requirements. A liquidated damages clause was an efficient and reasonable solution to predicting or estimating such expenses and losses.
This case is similar to
The parties in this case stood in comparable bargaining positions, and each had considerable experience negotiating real estate deals. Their decision to streamline the process of calculating damages for breach is entitled to a presumption of reasonableness. Defendant failed to meet its burden of proving that the clause it helped to draft was an excessive penalty. The clause was a reasonable approximation of plaintiff's damages, whether viewed at the execution of the contract or at the time of the breach,
Defendant raises two further points that are related to the enforceability of the liquidated damages clause. He argues that the trial judge erred in taking judicial notice of the "depressed state" of the real estate market and that invoices submitted by plaintiff to substantiate its claims of damages were improperly admitted.
The first point arises from comments made during the direct examination of Seth Martin. After defendant objected to Martin's testimony that he chose not to relist the property because the market was in a "very depressed state," the court said: "The fact that the market is in a very depressed state is something the court could virtually take judicial notice of." This notion resurfaced in the court's decision:
The court's observation of the decline in the real estate market was helpful to establish the fact that plaintiff was exposed to significant risk should the sale not occur and that plaintiff's damages could not easily be estimated.
Judicial notice of the general state of the economy is hardly unprecedented.
As to the admissibility of the invoices, defendant's hearsay argument fares no better. The invoices were for work charged to plaintiff 5907 Blvd. by CarlaNicole Properties, LLC, an entity also owned by Seth Martin. Plaintiff also offered in evidence a check from plaintiff to CarlaNicole for $70,204.52 in payment of the invoices. Martin testified that the invoices were prepared by an employee of CarlaNicole, and defendant objected on the grounds that the preparer of the invoices was not available for cross-examination.
Contrary to defendant's assertion at trial and on appeal, there is no requirement that the preparer's testimony establish the necessary foundational facts for application of the business records exception to the hearsay rule,
In sum, the liquidated damages clause was enforceable, and the trial court did not rely on inadmissible foundation evidence to reach that conclusion. The court properly awarded plaintiff liquidated damages of $100,000 in accordance with the contract.
Defendant contends that, because plaintiff made no attempt to sell the property after the contract fell through, it failed to mitigate its damages and therefore cannot establish a claim for damages caused by defendant.
Defendant is correct to observe that the aggrieved party claiming a breach of contract has a "duty to take reasonable steps to mitigate damages."
Here, defendant offered no evidence to show that plaintiff could have mitigated its damages by placing the property back on the market and selling it to another buyer. Seth Martin testified that he did not attempt to sell the property after defendant terminated the contract because the market would have only allowed selling it at a loss, and that it was more profitable to continue operating the property as an apartment building. Defendant had the burden of proving that Martin's decision was unreasonable. Because defendant offered no evidence on the point, the trial court correctly rejected its mitigation argument.
Finally, we discern no error in the trial court's award of attorney's fees to plaintiff.
The contract provided parallel provisions for the recovery of attorney's fees by both plaintiff and defendant in the event of litigation arising from breach of the contract. Plaintiff was clearly the prevailing party, entitling it under the contract to recover its reasonable attorney's fees and expenses.
Plaintiff's attorneys initially requested $141,240.83 in fees and costs. This figure included 139.6 hours billed at a rate of $200 per hour for attorney Richard Seltzer, and 299 hours billed at a rate of $350 per hour for attorney Bradley Wilson, who was hired as special litigation counsel so that Seltzer could participate in the trial as a fact witness. After finding both attorneys' hourly rates to be reasonable, the trial court examined in detail the hours each charged. The court excluded some "repetitious" time for conferences between the attorneys and between an attorney and the client, as well as for trial preparation. Further, the court reduced the number of hours billed for attendance at three trial calls. Finally, the court did not permit Seltzer to recover fees for the time he spent testifying at trial as a fact witness. The court thus reduced the reimbursable hours and awarded $115,349.44.
We find insufficient merit in defendant's arguments pertaining to the fee award to warrant extensive discussion in a written opinion.
Affirmed.