COMMERCIAL REALTY ENTERPRISES, L.L.C. v. STAPLES THE OFFICE SUPERSTORE EAST, INC.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3964-04T53964-04T5

COMMERCIAL REALTY ENTERPRISES, L.L.C.,

Plaintiff-Appellant,

v.

STAPLES THE OFFICE SUPERSTORE

EAST, INC.,

Defendant-Respondent.

________________________________________________________________

 

Argued January 18, 2006 - Decided February 8, 2006

Before Judges Collester, Lisa and S.L. Reisner.

On appeal from the Superior Court of New Jersey, Law Division, Bergen County, L-308-05.

Richard L. Zucker argued the cause for appellant (Lasser Hochman, attorneys; Mr. Zucker, on the brief).

Frederick W. Alworth argued the cause for respondent (Gibbons, Del Deo, Dolan, Griffinger & Vecchione, attorneys; Mr. Alworth, of counsel and on the brief; Geoffrey A. North, on the brief).

PER CURIAM

This appeal requires a determination of the scope of an arbitration provision in a commercial lease. The trial judge found the arbitration clause sufficiently broad to cover the claim by the landlord, Commercial Realty Enterprises, L.L.C. (CRE), against its tenant, Staples the Office Superstore East, Inc. (Staples), for sums CRE claimed it was owed by Staples pursuant to another lease provision resulting from a sublease by Staples to another party of a portion of the leased premises. Thus, the trial judge granted Staples' motion to dismiss CRE's complaint and referred the dispute to arbitration. At the same time, the judge denied CRE's motion to enjoin the arbitration proceeding. CRE appeals from the orders, arguing that the judge erred in finding the arbitration clause applicable to the monetary claims it asserted against Staples in its complaint. We agree with CRE and reverse.

CRE and Staples are successors in interest to the parties that originally entered into the lease in 1971. The demised premises consisted of a portion of a shopping center. The initial term was twenty years. The original lease did not contain an arbitration clause. In 1972, 1973 and 1974, predecessors in interest to the present parties entered into the first, second and third amendments to the lease, respectively. The first and third amendments are not germane to the dispute now before us. The second amendment, dated July 12, 1973, added, among other provisions, the arbitration clause that is at the heart of the dispute.

Article 44 of the original lease was entitled "MISCELLANEOUS," and contained Sections 44.01 through 44.04. The second amendment to the lease contained a provision that added two sections to Article 44. One, Section 44.05, was the arbitration clause. In its entirety, the new Section 44.05 was as follows:

If either Lessor or Lessee defaults in making any payment to or for the benefit of the other (whether required by this Lease or otherwise) or in the performance of any other obligation imposed on it by this Lease, and shall not cure such default within thirty (30) days after written notice thereof (or, if the default requires more than thirty (30) days to be cured, if the defaulting party does not begin to cure the default within that period and then diligently prosecute the cure to completion), then the aggrieved party (without waiving any claim of breach or for damages) at any time thereafter may make such payment or cure such other default for the account of the defaulting party and if the aggrieved party is the Lessee, Lessee shall, pending a final decision of the arbitrator, have all of the rights of offset and deduction as may be otherwise provided in the Lease. If necessary to protect the interest of either party in the Shopping Center or the demised premises, or to prevent injury to persons or damage to property, either party may cure default by the other prior to expiration of the waiting period aforesaid, but only after telegraphic or written notice to the other party.

If the defaulting party shall not agree to reimburse the other for any amount paid or contractual liability incurred by the other in the exercise of its rights under the immediately preceding paragraph within three (3) days following the receipt of a bill therefor from the other, then the dispute over the amount thereof, or over the question of whether or not the defaulting party in fact should pay such amount, shall be settled by arbitration in New Jersey in accordance with the laws of the State of New Jersey by a single arbitrator to be appointed by the Chief Judge of the Superior Court of Bergen County for the State of New Jersey within fifteen (15) days after the date on which the defaulting party shall have sent to the other written notice of its unwillingness to pay such bill without arbitration. The other party shall send such notice within ten (10) days of the date of its receipt of such bill and its failure to do so shall be, and be deemed to be, for all purposes, its agreement to pay such bill. Such arbitration, if necessary, shall be conducted in accordance with the rules of the American Arbitration Association and the final decision of the arbitrator shall be binding upon the parties hereto and may be entered and enforced in any court of competent jurisdiction. Within ten (10) days after the date on which the final decision of the arbitrator shall be made, and if the decision requires the defaulting party to pay a sum of money, the defaulting party shall reimburse the other for any amount set forth in such a decision. Lessee's payments hereunder shall be made as part of the next installment of rent coming due after Lessee's receipt of Lessor's bill for such payment. Any amount due to Lessee hereunder, if not offset previously as is otherwise permitted under this Lease (and nothing herein contained shall be construed or interpreted to affect any rights of Lessee to offset as may be otherwise provided elsewhere in this Lease nor shall Lessee's rights and remedies be limited to offset subsequent to the final decision of the arbitrator in its favor), may be offset against all payments due to Lessor under this Lease until Lessee has been reimbursed fully.

Article 7 of the original lease, entitled "PARKING AND OTHER COMMON AREAS," generally provides that the landlord is responsible for maintaining in a good state of repair all common areas of the entire shopping center. Section 7.04 specifies a remedy available to the tenant if the landlord defaults in its obligation. It provides:

7.04 If Lessor shall fail to keep, maintain or repair the Common Facilities, and such failure shall continue for thirty (30) days after written notice thereof (or such shorter period as shall be necessitated by the nature of the default, or no notice and grace if the condition shall constitute an emergency), then Lessee may cure such default at the expense of Lessor and, after written notice to any mortgagee, deduct the reasonable cost thereof from the next succeeding installment(s) of rent becoming due hereunder.

Article 12 of the original lease, entitled "REPAIRS," allocates the responsibility for certain repairs to the demised premises specifically covered by the lease between the landlord and tenant. Section 12.06 provides the remedy available to either party if the other party fails to make required repairs. It states:

12.06 If either party shall fail to make (or shall commence to make but shall fail diligently to prosecute) such repairs, changes or replacements, as the case may be, which it is required to make in accordance with the provisions of this Article 12, after twenty (20) days written notice of the necessity therefor (or of such failure), the other party may perform all of the same at the expense of the defaulting party. In the case of default by Lessee, said expense shall be paid as additional rental with the next succeeding installment of rent; in the case of default by Lessor, said expense may, after written notice to any mortgagee, be deducted from the next succeeding installment(s) of rent becoming due hereunder. Emergency repairs, if Lessor's responsibility hereunder, may be made by Lessee without notice to Lessor and the cost of such repairs, may, after notice to any mortgagee, be deducted by Lessee from the next succeeding installment(s) of rent due hereunder.

The second amendment to the lease contained provisions expressly making the new Section 44.05 applicable to these repair sections. Specifically, one section of the second amendment to the lease stated: "There shall be added at the end of Section 7.04 the words 'subject however to the provisions of Section 44.05 of this Lease.'" Another section of the second amendment to the lease stated: "The first sentence of Section 12.06 of the Lease shall be modified by commencing the first sentence with the words 'Subject, in all respects, to the provisions of Section 44.05 of this Lease . . . ,' immediately preceding the words 'If Either Party' in the first line thereof."

The monetary dispute that is the subject of contention between the parties derives from the fourth amendment to the lease, which was entered into on May 2, 1994 between CRE, which was by that time the landlord, and Staples' predecessor in interest as the tenant. It added a provision that provided that in the event the tenant sublets the demised premises the tenant would be obligated to pay the landlord additional sums as follows:

Lessee shall pay to Lessor within ten (10) days of receipt (i) twenty-five percent (25%) of the rental income received by Lessee in excess of the Annual Minimum Rental and (ii) twenty-five percent (25%) of any profit earned by Lessee over the term of the lease which profit is generated from Sublessee's payment of common area charges or percentage rent.

Contemporaneously with the execution of the fourth amendment to the lease, Staples' predecessor tenant sublet a portion of the demised premises to another party. Staples became the tenant in 1998, acquiring the status of its immediate predecessor as both a tenant of CRE and a sub-landlord of the sub-tenant.

In 2000, CRE and Staples entered into a fifth amendment to the lease, in which, among other things, the parties "ratified and confirmed" the fourth amendment to the lease.

By letter of September 21, 2004, CRE's attorney corresponded with Staples, demanding money that CRE claimed to be due under the twenty-five percent formula of the fourth amendment to the lease. According to its calculations, CRE claimed it was entitled to a total amount of $155,086. By letter of September 29, 2004, Staples replied, denying that it owed CRE any sum. Through counsel, the parties attempted to resolve the dispute, and Staples delivered to its attorney a check in the amount of $155,086, which Staples' attorney deposited in an escrow account.

Efforts at a negotiated resolution failed. On January 13, 2005, CRE filed its complaint in the Law Division seeking monetary damages from Staples for its alleged breach of the fourth amendment to the lease. Staples did not file an answer, but filed a Demand for Arbitration with the American Arbitration Association on February 22, 2005. At the same time, it filed a motion in the Law Division to dismiss the complaint pursuant to Rule 4:6-2(e) or for summary judgment pursuant to Rule 4:46-1. On March 7, 2005, CRE filed a cross-motion to enjoin the arbitration proceeding and for a determination that the controversy between the parties was not subject to arbitration. The parties filed statements of undisputed material facts pursuant to Rule 4:46-2. The matter was treated as cross-motions for summary judgment. At oral argument on April 1, 2005, both parties agreed that the issue should be resolved as a matter of law, with the disposition controlled by the court's interpretation of the contract provisions.

The judge recognized the strong public policy favoring arbitration and the liberal construction to be applied to contracts in favor of arbitration, but he also recognized the requirement to construe the contract as written and the judicial obligation "to try to ascertain what the parties themselves agree[d] to." The judge then determined: "In this case we have language that on its face subjects all disputes relating to lessor or lessee defaults in making any payment or in the performance of any other obligation subject to arbitration. And viewed just that clause in itself it is unambiguously inclusive of this particular dispute and perhaps every conceivable dispute under the lease."

The judge was of the view that the arguments presented by both parties provided plausible and rational interpretations of the arbitration clause and, in those circumstances, the public policy favoring arbitration and a liberal construction of contractual provisions to provide for arbitration compelled him to adopt the broad construction urged by CRE. He therefore held that the dispute was subject to arbitration, and entered orders granting CRE's motion and denying Staples' motion.

Upon appellate review of summary judgment, we review the matter de novo and apply the same standards as the trail court in determining whether summary judgment was properly granted. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). The legal principles that guide our determination in this case are well settled and not in dispute between the parties. New Jersey has a strong public policy favoring arbitration. Keppler v. Terhune, 88 N.J. Super. 455, 461 (App. Div. 1965). "An arbitration agreement is to be construed according to the usual methods of contract interpretation whereby a mutual, reasonable and meaningful design is sought from the language used by the parties and maximum effect is given to their intention." Brick Twp. Mun. Utils. Auth. v. Diversified R. B. & T. Constr. Co., 171 N.J. Super. 397, 402 (App. Div. 1979). If an agreement can reasonably be interpreted to compel the parties to submit to arbitration, that liberal construction should prevail. J. Baranello & Sons, Inc. v. City of Paterson, 168 N.J. Super. 502, 507 (App. Div.), certif. denied, 81 N.J. 340 (1979).

The mere insertion of an arbitration clause in an agreement does not necessarily subject all disputes under the agreement to arbitration. The particular language of the arbitration clause and its relationship to other contract provisions must be analyzed. The scope of the arbitration provision is governed by the agreement of the parties. Young v. Prudential Ins. Co. of Am., Inc., 297 N.J. Super. 605, 617 (App. Div.), certif. denied, 149 N.J. 408 (1997). Courts may not rewrite a contract to broaden the scope of arbitration. Yale Materials Handling Corp. v. White Storage & Retreival Sys., Inc., 240 N.J. Super. 370, 374 (App. Div. 1990). Thus, notwithstanding the policy favoring a liberal construction of arbitration provision, "it is equally true that the duty to arbitrate, and the scope of arbitration, are dependent solely on the parties' agreement." Cohen v. Allstate Ins. Co., 231 N.J. Super. 97, 101 (App. Div.), certif. denied, 117 N.J. 87 (1989).

CRE argues that the arbitration clause in Section 44.05 pertains only to a limited category of disputes, namely those in which one party has defaulted in an obligation, as a result of which the other has expended money to cure the problem and demanded reimbursement, but the defaulting party has refused to reimburse. CRE argues that the plain language of Section 44.05 requires such a construction, and that the construction is bolstered by the cognate provisions in the fourth amendment to the lease, which expressly made Section 44.05 applicable to Sections 7.04 and 12.06, the repair provisions, which contain cure and reimbursement remedies. CRE further argues that the language of Section 44.05 simply makes no sense and cannot apply except where one party has made a payment because of the alleged default by the other party and then demanded reimbursement, which is refused.

Staples, on the other hand, relies upon the all-inclusive language in the first portion of the first paragraph of Section 44.05. It argues that the second paragraph of Section 44.05 renders all disputes encompassed within that broad language to arbitration.

We agree with CRE. Stripped of surplus verbiage, as applied to the controversy between the parties in this case, the two paragraphs of Section 44.05 say this in pertinent part:

If . . . Lessee defaults in making any payment to or for the benefit of [Lessor] . . . and shall not cure such default within thirty (30) days after written notice . . . , then the aggrieved party [i.e. Lessor] . . . may make such payment . . . for the account of the defaulting party [i.e. the Lessee] . . . .

If the defaulting party [i.e. Lessee] shall not agree to reimburse the other [i.e. Lessor] for any amount paid . . . by the other [i.e. Lessor] in the exercise of its rights under the immediately preceeding paragraph within three (3) days following the receipt of a bill therefor from the other [i.e. Lessor], then the dispute over the amount thereof, or over the question of whether or not the defaulting party in fact should pay such amount, shall be settled by arbitration . . . .

The first paragraph cannot apply in this situation. CRE contends that Staples is in default for failing to make additional rent payments due by virtue of the sublease. CRE demanded payment, which was not made by Staples. However, this is not the kind of situation where the aggrieved party, CRE, could make a payment to cure the other parties' default and then demand reimbursement.

The second paragraph of Section 44.05 is equally inapplicable. There has been no demand for reimbursement and thus no default by Staples in failing to reimburse CRE. CRE did not exercise any rights under the first paragraph and did not send Staples a bill for money it paid to cure a default by Staples.

The plain language of Section 44.05, which makes it impossible to apply to a dispute such as that between the parties here, is consistent with the corresponding provisions of the second amendment to the lease which expressly made Section 44.05 applicable to the repair sections of the lease. That these provisions were all part of an integrated amendment to the lease signals a strong likelihood that those are the situations contemplated by the parties to fall within the scope of the arbitration clause. CRE sums it up this way: "It is not the position of CRE that the arbitration provision only applies to disputes over payments for repairs made to the premises, although this might very well be the most common scenario where the clause would be triggered. Rather, the sole and limited purpose of the arbitration clause was to deal with the circumstance where one party cures a default by the other party." We agree.

The public policy favoring arbitration that encourages a liberal construction of arbitration provisions in contracts cannot override the agreement actually entered into between the parties. We do not find plausible the construction urged by Staples. It requires a juxtaposition of the "if" clause of the first paragraph of Section 44.05 with the "then" clause of the second paragraph. This disjointed reading distorts the plain meaning of the provision. The first paragraph, when its "if" and "then" clauses are read together, provides that if there is a breach then the aggrieved party may cure by making payment. The "if" and "then" clauses of the second paragraph provide that if the defaulting party refuses to reimburse after the aggrieved party has exercised its cure rights under the first paragraph, then the dispute will be settled by arbitration. This scheme defines a limited class of disputes that the parties have agreed to resolve by arbitration. A contrary interpretation would constitute a re-writing of the contract.

Finally, had the parties intended that all monetary disputes between them would be resolved by arbitration, we trust they would have inserted a simple provision to that effect. If that was their intent, the rather complex and lengthy provisions of Section 44.05 would not have been necessary.

Accordingly, we reverse the trial court orders entered on April 1, 2005. The complaint shall be reinstated and the arbitration shall not proceed. We remand for further proceedings in the Law Division.

 
Reversed and remanded.

We are informed by counsel that the funds remain on deposit in counsel's escrow account.

(continued)

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A-3964-04T5

February 8, 2006