Landlords Tighten Your Leases: Commercial Tenant Appeals Judgments of Possession Based on Square Footage Discrepancy and Language of the “As Is” Clause

by Scott Reid

Thomas Onder
Shareholder, Stark & Stark

When was the last time you reviewed and updated your lease? Now might not be a bad time to tighten language and ensure you have the best defenses to avoid costly litigation in the wake of the recent Appellate Division ruling in Bejoray Inc. v. Academy House Child Development Center, A-5161-12T3.

On Oct. 16, the Appellate Division granted a tenant’s appeal to transfer a non-payment eviction matter to the law division, causing further delay and litigation expense for a landlord. The case held that a tenant’s request to transfer an eviction matter, when it asserted claims for negligent misrepresentation and breach of contract for damages and rescission of the lease, should have been granted. This case is very important for commercial landlords in New Jersey as it raises a number of issues that should be addressed prior to proceeding with an eviction action, including ensuring your lease clauses provide you the most protection and that you and your counsel understand tenant’s defenses ahead of time.

In Bejoray, landlord and tenant had entered into a five-year commercial lease. The monthly rent was $15,000 at commencement, but increased 3 percent every year. The lease provided an “as is” paragraph that acknowledged that the tenant inspected and examined the premises prior to executing the lease. Further, the lease’s terms included that the retail space comprised approximately 3,800 square feet on the ground and approximately 7,400 square feet below ground, providing a total square footage of about 11,200 square feet.

In January 2013, the tenant discovered plans that revealed that the square footage was approximately 9,600 square feet, about a 15 percent difference in the amount represented in the lease. After attempting to contact the landlord’s attorney with no response, the tenant’s attorney advised that the tenant would only pay $13,000 of the $15,000 in rent due and deposit the difference into court. Approximately a week later, the landlord advised that it had retained an architect to determine the square footage was actually 12,100 square feet, about 900 square feet more than indicated in the lease.

In March 2013, landlord filed a complaint seeking possession based on non-payment for February and March. The tenant filed a motion to transfer the action to the Law Division with a verified answer and counterclaims, alleging breach of lease and negligent misrepresentation, seeking compensatory damages of about $29,000, punitive damages, counsel fees, as well as rescission of the lease.

At trial, the court denied the motion to transfer the matter. The court concluded that the tenant’s concerns could be resolved by examining the lease and the “as is” provision. A judgment of possession was then entered in favor of the landlord.

On appeal, the tenant claimed that the trial court erred to transfer the matter because the issues were complex and not amenable to adjudication in a summary proceeding. The Appellate Division noted nine factors as guidelines to be used when determining a transfer to law division, citing Morocco v. Felton, 112 NJ Super. 226, 235 (Law Div. 1970). Among the factors are the complexity of issues presented and whether discovery or other pretrial procedures are necessary or appropriate.

Here, the Appellate Division held that parties each retained an expert concerning the issue of square footage and each expert held significantly different views. Further, the Appellate Division held that tenant made affirmative claims for damages, as well as rescission of the contract. The Appellate Court held that a claim for rescission was “…more than a defense or avoidance by the tenant”. As such, the Appellate Division vacated the judgment for possession and remanded the matter to the law division.

Interestingly, nowhere in the opinion does it provide whether the tenant actually posted the difference in the funds into court. Although the opinion references that the tenant advised landlord prior to the eviction action that it would post the funds into court, nowhere in the opinion does it provide that the tenant actually did that. The trial judge in this matter could have simply required the tenant post the difference into court, if it thought that the tenant was just making frivolous defenses, and either transfer the matter to the law division and/or heard the matter with expert testimony. Additionally, nowhere in the opinion does it provide whether the court actually heard testimony from the two experts concerning the square footage. Had the court required the tenant to post the monies into court and then carry the matter for hearing at the court convenience, the court could have adjudicated the substance of whether the defenses were in fact correct.

For landlords, this ruling is very important. First, ensuring that your lease clauses can prevent such a scenario is essential. For instance, a clause that stated parties agree to deem the size of the premises as a certain number of square feet and that the tenant agrees to any changes in the square footage as determined by the landlord’s architect in the sole discretion of the landlord’s architect could have avoided this entire situation. Further, the clause could also state that in the event that the landlord’s architect determines that the size is larger, the tenant will thereafter pay increased minimums and additional rent as determined by the landlord, but in no event will the tenant be permitted to reduce any minimum rent or additional rent or have any other rights or remedies if the size is smaller.

Second, prior to going to file on any matter, it is recommended that the landlord and their counsel thoroughly understand the defenses being asserted by a tenant and have the appropriate responses ready to present to the tenants’ defense. For instance, in this matter, questions arise of whether the landlord had its retained expert provide a short expert report and/or whether the landlord’s counsel requested to exclude any net opinion asserted by the tenant? Having issues like this addressed in the record is vital to ensuring that such an appeal can be adequately defended. Strategizing with knowledgeable legal counsel on how to properly prepare for a commercial eviction trial and enforce your rights as a commercial landlord is essential to ensuring the best outcome and limiting an appeal.

— Thomas Onder is a shareholder and member of Stark & Stark’s Commercial, Retail and Industrial Real Estate Group. He litigates commercial eviction and enforcement matters regularly in the Tri-State area, and writes on commercial real estate issues. He can be reached at (609) 219-7458 or by emailing [email protected].

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