Davidson Bros., Inc. v. D. Katz & Sons, Inc.

• Decision Date: 26 July 1990
• Docket Number: C-T
• Citation: 579 A.2d 288,121 N.J. 196
• Parties: DAVIDSON BROS., INC., a New Jersey Corporation, Plaintiff-Appellant, v. D. KATZ & SONS, INC., a New Jersey Corporation; City of New Brunswick, a Municipal Corporation;own, a Division of Krasdale Foods, Inc., a New York Corporation, and New Brunswick Housing Authority, a Body Corporate and Politic, Defendants-Respondents.
• Court: New Jersey Supreme Court

Page 196

121 N.J. 196

579 A.2d 288

DAVIDSON BROS., INC., a New Jersey Corporation, Plaintiff-Appellant, v. D. KATZ & SONS, INC., a New Jersey Corporation; City of New

Brunswick, a Municipal Corporation; C-Town, a Division of

Krasdale Foods, Inc., a New York Corporation, and New

Brunswick Housing Authority, a Body Corporate and Politic,

Defendants-Respondents.

Supreme Court of New Jersey.

Argued Sept. 25, 1989.

Decided July 26, 1990.

Sheppard A. Guryan, for plaintiff-appellant (Lasser, Hochman, Marcus, Guryan and Kuskin, attorneys; Bruce H. Snyder, Roseland, on the brief).

Arthur L. Phillips, New Brunswick, for defendant-respondent D. Katz & Sons, Inc., a New Jersey Corp.

Linda K. Anderson, Asst. City Atty., for defendant-respondent City of New Brunswick, a Mun. Corp. (William J. Hamilton, Jr., City Atty., attorney).

Mary M. Cheh, for defendant-respondent C-Town, a Div. of Krasdale Foods, Inc., a New York Corp. (George J. Otlowski, Jr., Perth Amboy, attorney).

Robert J. Lecky, for defendant-respondent New Brunswick Housing Authority, a Body Corporate and Political (Stamberger & Lecky, New Brunswick, attorneys).

The opinion of the Court was delivered by

GARIBALDI, J.

This case presents two issues. The first is whether a restrictive covenant in a deed, providing that the property shall not be used as a supermarket or grocery store, is enforceable against the original covenantor's successor, a subsequent purchaser with actual notice of the covenant. The second is whether an alleged rent-free lease of lands by a public entity to a private corporation for use as a supermarket constitutes a gift of public property in violation of the New Jersey Constitution of 1947, article eight, section three, paragraphs two and three.

I

The facts are not in dispute. Prior to September 1980 plaintiff, Davidson Bros., Inc., along with Irisondra, Inc., a related corporation, owned certain premises located at 263-271 George Street and 30 Morris Street in New Brunswick (the "George Street" property). Plaintiff operated a supermarket on that property for approximately seven to eight months. The store operated at a loss allegedly because of competing business from plaintiff's other store, located two miles away (the "Elizabeth Street" property). Consequently, plaintiff and Irisondra conveyed, by separate deeds, the George Street property to defendant D. Katz & Sons, Inc., with a restrictive covenant not to operate a supermarket on the premises. Specifically, each deed contained the following covenant:

The lands and premises described herein and conveyed hereby are conveyed subject to the restriction that said lands and premises shall not be used as and for a supermarket or grocery store of a supermarket type, however designated, for a period of forty (40) years from the date of this deed. This restriction shall be a covenant attached to and running with the lands.

The deeds were duly recorded in Middlesex County Clerk's office on September 10, 1980. According to plaintiff's complaint, its operation of both stores resulted in losses in both stores. Plaintiff alleges that after the closure of the George Street store, its Elizabeth Street store increased in sales by twenty percent and became profitable. Plaintiff held a leasehold interest in the Elizabeth Street property, which commenced in 1978 for a period of twenty years, plus two renewal terms of five years.

According to defendants New Brunswick Housing Authority (the "Authority") and City of New Brunswick (the "City"), the closure of the George Street store did not benefit the residents of downtown New Brunswick. Defendants allege that many of the residents who lived two blocks away from the George Street store in multi-family and senior-citizen housing units were forced to take public transportation and taxis to the Elizabeth Street store because there were no other markets in downtown New Brunswick, save for two high-priced convenience stores.

The residents requested the aid of the City and the Authority in attracting a new food retailer to this urban-renewal area. For six years, those efforts were unsuccessful. Finally, in 1986, an executive of C-Town, a division of a supermarket chain, approached representatives of New Brunswick about securing financial help from the City to build a supermarket.

Despite its actual notice of the covenant the Authority, on October 23, 1986, purchased the George Street property from Katz for $450,000, and agreed to lease from Katz at an annual net rent of $19,800.00, the adjacent land at 263-265 George Street for use as a parking lot. The Authority invited proposals for the lease of the property to use as a supermarket. C-Town was the only party to submit a proposal at a public auction. The proposal provided for an aggregate rent of one dollar per year during the five-year lease term with an agreement to make $10,000 in improvements to the exterior of the building and land. The Authority accepted the proposal in 1987. All the defendants in this case had actual notice of the restrictions contained in the deed and of plaintiff's intent to enforce the same. Not only were the deeds recorded but the contract of sale between Katz and the Housing Authority specifically referred to the restrictive covenant and the pending action.

Plaintiff filed this action in the Chancery Division against defendants D. Katz & Sons, Inc., the City of New Brunswick, and C-Town. The first count of the complaint requested a declaratory judgment that the noncompetition covenant was binding on all subsequent owners of the George Street property. The second count requested an injunction against defendant City of New Brunswick from leasing the George Street property on any basis that would constitute a gift to a private party in violation of the state constitution. Both counts sought compensatory and punitive damages. That complaint was then amended to include defendant the New Brunswick Housing Authority.

Plaintiff moved for summary judgment, to which defendants responded by submitting three affidavits, one from Agnes Scott, President of the New Brunswick Home Tenants Council; one from Richard M. Keefe, Executive Director of the Housing and Urban Development Authority of New Brunswick; and one from Frank R. Nero, Director of the Department of Policy and Economic Development for New Brunswick, all alleging the need for a supermarket in the area of George Street.

The trial court denied plaintiff's motion and held, in an unreported opinion, that the covenant was unenforceable, relying on Brewer v. Marshall & Cheeseman, 19 N.J.Eq. 537 (E. & A.1868). That case held that the burden of a covenant will not run with the land and therefore bind a successor unless the covenant "affects the physical use of the land itself." This view "effectively stifles any possibility of covenants relating to competition," 5 R. Powell & P. Rohan, Powell on Real Property § 675, 60-108 (rev. ed. 1989). (5 Powell ). Although the Brewer decision was an old case, (1868), the trial court was satisfied that it was still controlling and found that the covenant was unenforceable because it did not "touch and concern" the land. Additionally, the trial court noted that the enforcement of non-competition covenants is contrary to a longstanding public policy. However, the trial court observed that the determination of whether the covenant was reasonable and consistent with public policy would require a factual hearing and could not be made in a motion for summary judgment.

The trial court also held that the rent-free lease between the Authority and C-Town did not violate the New Jersey Constitution of 1947, article eight, section three, paragraphs two and three. The court found that the lease was valid inasmuch as it furthered a "public purpose" as defined by a two-part test set forth in Roe v. Kervick, 42 N.J. 191, 207, 199 A.2d 834 (1964).

After the court denied plaintiff's motion for summary judgment, defendants moved for summary judgment, which was granted. Plaintiff appealed, and in an unreported opinion, the Appellate Division affirmed the trial court's judgment. For purposes of its decision the Appellate Division assumed that Brewer was not applicable, that noncompetitive covenants may run with the land in appropriate cases, that a leasehold interest in land is a sufficient interest to enforce a covenant, that two miles between the burdened and benefitted properties does not itself prevent a covenant from being enforced, and that the George Street store would impair the profitability of the Elizabeth Street store. Although the Appellate Division found "some merit" to plaintiff's argument that Brewer v. Marshall, supra, 19 N.J.Eq. 537, no longer represented the current law in New Jersey, the court held that the covenant was unenforceable against a subsequent grantee because the benefit did not "touch and concern" plaintiff's Elizabeth Street property. Specifically, the court reasoned that because the covenant restricted such a comparatively small portion of the market area, less than one-half an acre, and did not impair the use of the other 2,000 acres in the market circle from which the Elizabeth store draws its clientele, the covenant did not enhance the value of the retained estate, and therefore, as a matter of law, would not bind a subsequent purchaser. In contrast to the trial court's decision, the Appellate Division's rationale was premised on the failure of the benefit of the covenant to run, not of the burden.

The Appellate Division also affirmed the trial court's judgment that the rent-free lease was constitutionally valid, substantially for the reasons expressed by the trial court.

We granted plaintiff's petition for certification. 113 N.J. 655, 552 A.2d 177 (1988).

II

A. Genesis and Development of Covenants Regarding the Use of Property

Covenants regarding property uses have historical roots in the courts of both law and equity. The English common-law courts first...