(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
(A-36-96)
Argued October 22, l996 -- Decided June 4, l997
PER CURIAM
The issue in this appeal is whether, in a foreclosure action brought by a mortgagee on a non-recourse purchase-money mortgage, the defaulting mortgagor is entitled to enforce a release provision
covering a portion of the mortgaged property.
Cranbury Associates, L.P. (“Cranbury”) is the developer-mortgagor of a 249 acre farm in Cranbury,
New Jersey, formerly owned by Edward Simonson. Cranbury exercised its right to purchase the subject
property after having paid $180,000 in option payments to Simonson to secure the right to purchase the
subject property. Cranbury paid ten percent of the total purchase price, as required by the option
agreement, with a credit for the option payments already made. Cranbury's note for the remainder of the
purchase price was secured by a non-recourse purchase-money mortgage in favor of Simonson.
The mortgage contained a typical developer's release entitling the borrower to a release of
unspecified property from the mortgage lien on payment of release consideration under a predetermined
formula. In addition thereto, the mortgage contained another release provision, which entitled the borrower
to the release of 20.4 acres from the lien of the mortgage without payment of release consideration. The
20.4 acres subject to this additional release provision equates with the payments made by Cranbury towards
the purchase of the entire property.
Cranbury defaulted on the note, and Simonson brought suit to recover the property. Cranbury
counter-claimed for the release of 20.4 acres of the property pursuant to the additional release provision.
The Chancery Division granted Simonson's motion for summary judgment, but held that Cranbury was
entitled to the value of 20.4 acres of the property.
The Appellate Division affirmed the judgment of the Chancery Division in an unreported decision,
rejecting Simonson's argument that the absence of default was a condition precedent to Cranbury's exercise
of the release provision, as well as its argument that an approved subdivision or development plan was a
condition precedent to the exercise of the release provision.
The Supreme Court granted Simonson's petition for certification.
HELD: The judgment of the Appellate Division is affirmed substantially for the reasons expressed in the
opinion below. The mortgage agreement evidences the parties' intention that Cranbury acquired the right to
obtain the release at any time of 20.4 acres from the lien of the mortgage given to Simonson, and to
condition that right would have defeated the probable intention of the parties that Cranbury should recover
property equal to its initial investment.
JUSTICE STEIN wrote a separate dissenting opinion in which JUSTICES O'HERN and
GARIBALDI join. Justice Stein considered the record uninformative and ambiguous concerning the question
whether the parties had intended that the right to release of the property would survive a default in the note
secured by the mortgage. Rather, he viewed the purpose of the provision for the 20.4 acre release as nothing
more than a mechanism to facilitate the mortgagor's development of the subdivision, which should not be
enforced because the mortgagor's default prevents the performance of the very obligation in consideration
for which the release was granted. Justice Stein considered the Court's misperception of the purpose of the
release clause to result in a totally unjustified windfall for the mortgagor.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, and COLEMAN join in the
Court's majority opinion. JUSTICE STEIN filed a separate dissenting opinion in which JUSTICES
O'HERN and GARIBALDI join.
SUPREME COURT OF NEW JERSEY
A-
36 September Term 1996
EDWARD SIMONSON AND SIMONSON FAMILY
ASSOCIATES, L.P.,
Plaintiffs-Appellants,
v.
Z CRANBURY ASSOCIATES, LIMITED
PARTNERSHIP, a Delaware Limited
Partnership,
Defendant-Respondent.
Argued October 22, 1996 -- Decided June 4, 1997
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at N.J. Super. (1996).
William D. Grand argued the cause for
appellants (Greenbaum, Rowe, Smith, Ravin &
Davis, attorneys; Mr. Grand and Gary K.
Wolinetz, on the briefs).
Avrom J. Gold argued the cause for respondent
(Mandelbaum, Salsburg, Gold, Lazris, Discenza
& Steinberg, attorneys).
PER CURIAM
The issue on this appeal is whether, in a foreclosure action
brought by a mortgagee on a non-recourse purchase-money mortgage,
the defaulting mortgagor is entitled to enforce a release
provision covering a portion of the mortgaged property.
The subject property is a 249 acre farm in Cranbury, New
Jersey. After the developer-mortgagor, Cranbury Associates, L.P.
(Cranbury), had paid $180,000 in option payments to secure the
right to purchase the property, owned by mortgagee Edward
Simonson (Simonson),See footnote 1 Cranbury exercised its right to purchase
the property. Cranbury paid ten percent of the $6,723,891
purchase price, as required by the option agreement, with a
credit for the $180,000 in option payments previously made.
Thus, Cranbury paid $490,000, bringing its total investment in
the property up to $670,000. Cranbury's note for the remainder
of the purchase price was secured by a non-recourse purchase-money mortgage in favor of Simonson.
The mortgage contained the typical developer's release
provision:
3.A. Releases from the lien of this Mortgage
shall be obtained for the number of acres of
property for which a release from the lien of
this Mortgage is sought upon payment of a sum
equal to the product of the following
formula:
(Number of acres sought to be released) x
(1.25) x ($27,000/acre)
The mortgage also contained an additional release provision:
Notwithstanding the foregoing, at any time
upon Borrower's request, from and after the
date hereof Borrower shall be entitled to the
release from the lien of this Mortgage of
20.4 acres without payment of release
consideration . . . .
The 20.4 acres subject to this additional release provision
equates with the $670,000 in payments made by Cranbury towards
the purchase of the entire property.
Cranbury defaulted on the note, and Simonson brought suit to
recover the property in November 1990. Cranbury counter-claimed
for the release of 20.4 acres of the property pursuant to the
additional release provision. The Chancery Division granted
Simonson's motion for summary judgment, but held that Cranbury
was entitled to the value of 20.4 acres of the property.
The Appellate Division affirmed the judgment of the Chancery
Division. ___ N.J. Super. ___ (1997). The court rejected
Simonson's argument that the absence of default was a condition
precedent to Cranbury's exercise of the release provision. The
court also rejected Simonson's argument that an approved
subdivision or development plan was a condition precedent to the
exercise of the release provision.
We granted Simonson's petition for certification,
144 N.J. 379 (1996), and affirm substantially for the reasons set forth in
the Appellate Division opinion. We add only the following
comments in light of the dissent.
As noted by the Appellate Division, and implicitly
recognized by the dissent, the interpretation of the release
provision at issue in this case is dependent primarily on the
intent of the parties. Krosnowski v. Krosnowski,
22 N.J. 376,
386 (1956). The general purpose of the agreement must guide a
court's interpretation of its particular terms. Id. at 387.
The Appellate Division properly understood that the
particular release provision at issue in this litigation was
intended to assure the mortgagor some return on its investment of
approximately $700,000 toward the purchase of the $6.7 million
farm. __ N.J. Super. at __. As noted above, there are actually
two release provisions in the mortgage: the typical developer's
release provision, and the additional release provision
pertaining to the 20.4 acres. Typical release provisions usually
are intended to permit the developer to obtain releases for
specific parcels of mortgaged property, so that the developer-mortgagor may transfer clean title to the ultimate purchasers and
so that the developer-mortgagor can generate revenues to fund the
continuing development of the property. The provision pertaining
to the 20.4 acres, however, does not contemplate a developed
parcel to be sold as part of the development; on the contrary, it
is intended to address a different and relatively unique
situation.
The dissent erroneously fails to distinguish between the two
release provisions contained in the agreement, and analyzes the
relevant, contested release provision as if it were the more
typical developer's release provision. Post at __-__ (slip op.
at 8-22). The dissent correctly perceives that continued
development of the remainder of the tract subject to the mortgage
is part of the consideration for the typical developer's release
provision. Post at __ (slip op. at 18). In respect of that type
of provision, a defaulting mortgagor would not be permitted to
obtain a release because the mortgagor's default goes to the very
consideration for the provision itself.
However, it is clear that continued development of the
property does not make up any part of the consideration for the
provision at issue on this appeal. To condition the release
provision on the absence of default would be tantamount to
reading the provision out of the agreement altogether, because
absent default on the note, Cranbury would own the property
outright and thus have no need for a release pertaining to only
20.4 acres. Instead, the provision essentially memorialized the
fact that Cranbury already had purchased the 20.4 acres, and that
the mortgage lien did not apply to that amount of the property
from the date that Cranbury exercised the option. As properly
found by the Appellate Division, __ N.J. Super. at __, there was
substantial credible evidence before the trial court sufficient
to enable it to come to that conclusion. Rova Farms Resort, Inc.
v. Investors Ins. Co.,
65 N.J. 474, 483-84 (1974).
The Appellate Division also properly concluded that the
mortgagor was not required to obtain subdivision approval prior
to its exercise of the release provision. Although the contract
could be interpreted literally to impose such a requirement, see
post at __ - __ (slip op. at 25-28), a contract should not be
construed literally so as to defeat the probable intention of the
parties; rather, "particular words or clauses may be qualified by
the context and given the meaning that comports with the probable
intention." West Caldwell v. Caldwell,
26 N.J. 9, 25 (1958).
Because the intent of the release provision was to protect the
mortgagor's investment risk, it would frustrate the intent of the
parties to require further that the mortgagor obtain subdivision
approval before realizing the benefit of its bargained-for
security. A more reasonable interpretation of the provision,
consistent with the intent of the parties and the purpose of the
agreement, would be to require an approved subdivision or
development plan only when release is sought pursuant to the
typical developer's release provision contained in the agreement.
Although summary judgment is usually inappropriate when
factually-sensitive issues such as intent are present, the courts
below properly found that, based on the overall purpose of the
contract, there was no genuine issue as to the parties' intent in
respect of the release provision. Brill v. Guardian Life Ins.
Co.,
142 N.J. 520 (1995). Thus, summary judgment was appropriate
in the present case.
The judgment of the Appellate Division therefore is
affirmed.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, and
COLEMAN join in the Court's majority opinion. JUSTICE STEIN
filed a separate dissenting opinion in which JUSTICES O'HERN and
GARIBALDI join.
SUPREME COURT OF NEW JERSEY
A-
36 September Term 1996
EDWARD SIMONSON AND SIMONSON FAMILY
ASSOCIATES, L.P.,
Plaintiffs-Appellants,
v.
Z CRANBURY ASSOCIATES, LIMITED
PARTNERSHIP, a Delaware Limited
Partnership,
Defendant-Respondent.
STEIN, J. dissenting
The critical issue posed by this appeal is whether a
developer who defaults on payments due on a purchase money note
secured by a nonrecourse mortgage on the residential tract to be
developed is entitled to enforce, by way of counterclaim in a
foreclosure action, a partial-release provision in the mortgage
entitling the developer to the release of acreage having a value
substantially equivalent to the down payment at closing. An
oversimplified statement of the issue is whether the mortgagor's
default in payments due on the underlying note relieves the
mortgagee of its obligation to honor the release provision.
The lower courts concluded that the apparent intention of
the parties was that the right to the release of 20.4 acres was
perfected as of the closing of title, the release having been
bargained for by the mortgagor as the rough equivalent of the
down payment of $670,000 made at closing. The record, however,
is uninformative and ambiguous concerning whether the parties
intended that the right to release of the property would survive
a default in the note secured by the mortgage. At oral argument,
we were informed specifically by counsel for the mortgagor that
the parties had never entered into negotiations concerning that
question, although he argued that the plain language of the
mortgage supported the mortgagor's right to a release
notwithstanding the default in the note.
The Court is content to affirm the judgment of the Appellate
Division which, in turn, affirmed the Chancery Division's
determination that the mortgagor's right to the release of 20.4
acres was not defeated by the subsequent default. The Court
apparently views the question presented as fact-sensitive, and
has elected to affirm substantially on the basis of the opinion
below. The Court additionally suggests that that result is
required because the "additional release provision" in question
is unrelated to the continued development of the property. The
Court concedes that continued development is the purpose of the
general release provision and acknowledges that that provision
could not be enforced in the event of an intervening default.
Ante at ___ (slip op. at 4).
The Court's characterization of the "additional release
provision" as one "intended to assure the mortgagor some return
on its investment of approximately $700,000," ante at ___ (slip
op. at 4), is naive. The sole purpose of the "additional release
provision," as with the general release provision in the
mortgage, was to improve the builder's cash flow in order to
facilitate development of the subdivision. The 20.4 acre
release, after subdivision approval, would allow the builder to
sell lots in that parcel free and clear of the mortgage and
generate funds for future mortgage payments and additional
construction.
Read in context, what the Court characterizes as an
"additional release provision" is actually a subpart of the
general provision governing releases. The first sentence of
Paragraph (3)(A) -- what the Court calls "the typical
developer's release provision" -- sets out the ratio of acres to
be released to payments made on the note. The second sentence of
Paragraph (3)(A) -- what the Court calls "an additional release
provision" -- provides that the borrower is entitled to the
release of 20.4 acres without further consideration, and also
that the borrower is entitled to releases for access roads,
utilities and other easements "as may be credited against the
release consideration . . . ." It is clear that the second
sentence is intended to specify how the general principles set
out in the first sentence will be applied to the one-time down
payment, on the one hand, and to any special one-time releases,
on the other. There is no implication that the underlying
purpose of the 20.4 acre release provision is in any way unique.
Neither is the inclusion in the mortgage agreement of a
provision for a partial release based on the down payment
unusual. Partial release provisions frequently provide for down
payments to be credited towards the monetary consideration
required for those releases. The fact that the requirement of
monetary consideration is satisfied with a down-payment credit
does not suggest that other, nonmonetary, conditions on releases
are thereby nullified. See infra at ___ (slip op. at 14-15).
Unquestionably, the only purpose for the 20.4 acre release
provision was to facilitate the mortgagor's development of the
subdivision. Because the mortgagor's default prevents the
performance of the very obligation in consideration for which the
20.4 acre release clause was granted, the release clause should
not be enforced. The Court's unfortunate misperception of the
purpose of the release clause results in a totally unjustified
windfall for the mortgagor.
In my view, the interrelationship between the release
provision and the subsequent default on the underlying note
presents an issue of substantial importance. I would reverse the
judgment below and hold that the right to a partial release
explicitly was conditioned on approval of the proposed
subdivision, and that, in the absence of express language in the
mortgage providing that the right to a partial release of
mortgaged property survives the mortgagor's default, the
mortgagee is not obligated to honor the release provision after
default.
Petitioners, Edward Simonson and Simonson Family Associates,
L.P. (Simonson) own a farm consisting of approximately 249 acres
in Cranbury, New Jersey. That farm is at the northeast corner of
the intersection formed by Cranbury Neck Road and George Davidson
Road. Defendant, Z Cranbury Associates Limited Partnership
(Cranbury) is a developer whose principal, Lawrence Zirinsky, was
an experienced and highly successful developer; Zirinsky is now
deceased.
In the 1980's, the climate for residential development in
Cranbury was favorable although Cranbury's zoning ordinances
mandated a minimum lot size of six acres. Developers, realtors,
and residents of Cranbury made considerable efforts to persuade
local officials to reduce the required lot size to two or three
acres. It was anticipated that their efforts would be successful
and that the zoning laws would be changed.
On June 17, 1982, Simonson entered into an option agreement
with Cranbury, a real estate developer. Cranbury paid $10,000 in
exchange for a one-year option to purchase the farm for
$5,380,500. The proposed payment schedule if the option were
exercised called for a payment of 10" of the purchase price in
cash or certified check at the time of the exercise of the
option, with the balance payable pursuant to a purchase money
mortgage. The option agreement gave Cranbury the right to extend
the option to buy for two additional twelve-month periods, at
$10,000 for each extension. Cranbury exercised both of those
extensions, paying Simonson a total of $30,000 in option
payments.
On June 17, 1985, Simonson and Cranbury executed an option
extension agreement, which extended the option to buy for an
additional one-year period. For that extension Cranbury was
required to pay $50,000. Once again, the agreement gave Cranbury
the right to extend the option to buy for two additional twelve
month periods. This time, however, the exercise of each
extension would cost Cranbury $50,000. Once again, Cranbury
exercised both available options, paying an additional $100,000.
Thus, Cranbury paid Simonson a total of $180,000 between 1982 and
1988 solely to maintain its option to purchase the farm.
Although the minimum lot requirements were never changed,
Cranbury exercised its option to buy the farm on June 24, 1988.
Cranbury planned to subdivide and develop the property. The
total cost was $6,723,891 and defendant paid $490,000 at the
closing, amounting approximately to the difference between ten
percent of the purchase price and the $180,000 in option payments
that were credited against the price of the farm. Simonson took
a note from Cranbury for the remainder of the purchase price
($6,051,502), to be repaid in ten annual installments of
$605,150.19. The note was secured by a mortgage covering all of
the property.
The Rider to the mortgage agreement contains a partial-release provision that reads in relevant part as follows:
3. A. Releases from the lien of this
Mortgage shall be obtained for the number of
acres of property for which a release from
the lien of this Mortgage is sought upon
payment of a sum equal to the product of the
following formula:
(Number of acres sought to be
released) x (1.25) x ($27,000/acre)
Notwithstanding the foregoing, at any
time upon Borrower's request, from and after
the date hereof Borrower shall be entitled to
the release from the lien of this Mortgage of
20.4 acres without payment of release
consideration, and in addition at any time on
Borrower's request and without payment of
additional release consideration, such
acreage as Borrower shall require for
construction of access roads and installation
of utilities and such other easements as may
be credited against the release consideration
to be paid hereunder all amounts paid in
reduction of the principal amount of the Note
which this Mortgage secures.
B. No such release shall leave any of
the Property remaining subject to the lien of
this Mortgage landlocked or without access to
a publicly dedicated road. As a condition to
the grant of any such release, Lender shall
have the right to require easements for
ingress, egress and utilities necessary for
the development of the property remaining
under the lien of this Mortgage. Such
easements shall include easements for ingress
and egress and for both public and private
utilities. Said releases shall be prepared
by Borrower and submitted to Lender, prior to
the execution of same by Lender, for Lender's
review. Borrower shall bear the sole cost
and expense of preparation and recordation of
said releases and shall also pay to Lender's
attorney its review fee up to $100 for review
of said release document.
C. All acreage to be released shall be contiguous and shall contain a reasonable
proportion of roadway frontage, open space
and "green belt" areas. Lender may reserve
in any release documents given to Borrower
the right of ingress and egress in any access
roads or any roadways then in construction or
thereafter to be built by Borrower, its
successors and assigns, as well as retaining
for Lender and its successors and assigns,
the right to connect at Lender's sole cost
and expense to any utility then or thereafter
passing through, over or upon the lands to be
released by Lender to Borrower.
D. No portion of the mortgaged premises
shall be released from the lien of this
Mortgage unless it is legally transferable as
an entity separate from the remainder of the
mortgaged premises in accordance with a
legally effective subdivision or approved
development plan.
On May 10, 1989, approximately one month prior to the due
date of Cranbury's first mortgage payment, Dan Murphy, a lawyer
who is Edward Simonson's personal friend and real estate advisor,
wrote to Lawrence Zirinsky. In that letter, Dan Murphy reminded
Zirinsky of the upcoming due date. Murphy further stated:
. . . Under the terms of the note and
mortgage you are entitled to a release of
certain lands from the lien of the mortgage.
If, at this time, you have determined the
parcel to be released, please send me a
sketch so the release documents can be
prepared. If, on the other hand, you have
not selected a specific parcel for release,
we will be happy to acknowledge an
appropriate release credit at any future
date.
Cranbury had difficulty paying Simonson. In June 1989, Cranbury paid Simonson $100,000 for a one-year extension of the date on which the first payment on the note and mortgage was due.
By the time that one-year extension expired, Zirinsky had passed
away, the township's zoning had not changed, Cranbury had not
commenced any development on the land, and the property values in
the area had plummeted. Cranbury failed to pay any real estate
taxes on the farm, and defaulted on its promissory note.
Simonson filed a complaint in foreclosure in November 1990,
to which Cranbury asserted by counterclaim its right to obtain
the unconditional release of 20.4 acres from the mortgage
pursuant to Paragraph (3)(A) of the Rider to the mortgage. In
November or December of 1991, according to counsel for Cranbury,
Cranbury filed an application for minor subdivision of a certain
20.4 acres of the farm with the municipal planning board.
Prior to trial, both parties moved for summary judgment.
The trial court granted summary judgment of foreclosure on the
entire tract to Simonson. Although the court denied Cranbury's
motion for summary judgment on its counterclaim, it concluded
that Cranbury was entitled to receive the value of the 20.4 acres
covered by the release provision.
The trial court rejected Simonson's argument that Cranbury
had failed to satisfy a condition precedent to the release
provision, namely the existence of a legally effective
subdivision plan. The court found no evidence that the parties
had intended the subdivision requirement in Paragraph 3D of the
Rider to serve as a condition precedent to the provision for
release of 20.4 acres without further payment. The court
rejected Simonson's additional argument that its duty to honor
the release provision had been excused by Cranbury's default on
the mortgage. The court nevertheless concluded that defendant
had not been entitled to the "unusually" valuable 20.4 acres that
it had selected for release. After an admeasurement hearing to
fix an appropriate value for 20.4 acres, the court entered
judgment on Cranbury's counterclaim for $463,521.77.
In an unpublished opinion, the Appellate Division affirmed.
That court concluded that the record supported the trial court's
determination that Cranbury had acquired an enforceable right to
the 20.4 acres before it had defaulted on the note and that that
right had survived the default. The Appellate Division also
rejected Simonson's renewed contention that defendant's failure
to obtain a legally effective subdivision plan had amounted to
the failure of a condition precedent.
We granted Simonson's petition for certification.
144 N.J. 379 (1996).
In general, a party who breaches a contractual covenant is
not entitled to the other party's performance of a mutually
dependent covenant. That basic principle of contract law has
been incorporated in the Restatement (Second) of Contracts § 237
(1981):
[I]t is a condition of each party's remaining
duties to render performances to be exchanged
under an exchange of promises that there be
no uncured material failure by the other
party to render any such performance due at
an earlier time.
As stated by this Court: "When there is a breach of a material
term of an agreement, the non-breaching party is relieved of its
obligations under the agreement." Nolan v. Lee Ho,
120 N.J. 465,
472 (1990); see Ross Sys. v. Linden Dari-Delite, Inc.,
35 N.J. 329, 341 (1961); Frank Stamato & Co. v. Borough of Lodi,
4 N.J. 14, 21 (1950). Therefore, when in a counterclaim to a
foreclosure action a defaulting mortgagor seeks enforcement of
its rights under a partial-release provision, the court must
inquire whether the mortgagee's promise to grant releases is
dependent or independent of the mortgagor's promises under the
mortgage agreement. If the promises are dependent, the
mortgagee's obligation to grant partial releases does not survive
the mortgagor's default.
Courts in most jurisdictions have treated that question as
one of contract interpretation, turning on the language used in
the agreement and the circumstances of the transaction as a
whole. See J.R. Kempler, Annotation, Construction of Provision
in Real-Estate Mortgage, Land Contract, or Other Security
Instrument for Release of Separate Parcels of Land as Payments
Are Made,
41 A.L.R.3d 7, 67 (1972 & Supp.);
55 Am. Jur. 2d
Mortgages § 417 (1996). New Jersey cases are in accord. See
Ventnor Inv. & Realty Co. v. Record Dev. Co.
79 N.J. Eq. 103, 105
(Ch. 1911) ("I think it unnecessary to attempt to define any
general rule to control cases of this class. As it is clearly
within the power of a mortgagor and mortgagee to covenant that
releases may be procured by the vendees of the mortgagor and that
such releases may be procured by purchasers after default in the
payment of the mortgage has occurred, it necessarily follows that
the result of every controversy of this nature must be largely
dependent upon the special circumstance of the case."). As in
the interpretation of other types of contracts, where the
language of the agreement is not conclusive, the court's inquiry
necessarily focuses on the surrounding circumstances and the
reasonable purposes and expectations of the parties. See Tessmar
v. Grosner,
23 N.J. 193, 201 (1957). "Terms will be implied in a
contract where the parties must have intended them because they
are necessary to give business efficacy to the contract as
written." New Jersey Bank v. Palladino,
77 N.J. 33, 46 (1978).
New Jersey courts have been reluctant to interpret partial-release provisions as independent of the mortgagor's obligations
where such an interpretation would benefit the defaulting
mortgagor to the detriment of the mortgagee's security. For
example, in Goldman South Brunswick v. Stern,
265 N.J. Super. 489, 493 (App. Div. 1993), the Appellate Division agreed with the
trial court's reasoning that "the mortgage was an executory
contract and once defendants breached the contract by their
failure to pay principal and interest payments, it would be
unfair to permit defendants to continue to receive benefits by
way of release of units of land." Earlier courts have invoked
the general principle that "where the mortgagor is in default,
there can be no obligation on the mortgagee to release any part
of the mortgaged tract." Chatsworth Estates Co. of N.J. v.
Chatsworth Estates Co. of N.Y.,
121 A. 517, 517-18 (Ch. 1923).
Courts have also recognized that "[t]he equity the [mortgagor]
had in the mortgaged premises, after condition broken, was an
equity of redemption from the mortgage debt -- not an equity to
compel a release that might impair the mortgagee's security."
Avon-by-the-Sea Land and Improvement Co. v. Finn,
56 N.J. Eq. 805, 807 (E. & A. 1898); see also Gillies v. Dyer,
93 N.J. Eq. 348, 350 (Ch. 1922), ("[O]n default, the right of complainants to
foreclose the mortgage was absolute, and the release clause . . .
lost its operative effect."), aff'd,
93 N.J. Eq. 635 (E. & A.
1922).
Although the interpretation of partial-release provisions
has often been treated as fact-sensitive, courts in other
jurisdictions frequently have reached similar conclusions. See,
e.g., Toole-Tietzen & Co. v. Colorado River Dev. Co.,
38 F.2d 850, 852 (S.D. Cal. 1930) ("[I]f we call into use equitable
principles, it would seem inescapable that the special release
conditions in favor of the mortgagor be deemed reciprocal with
the obligation imposed upon him to fully perform those acts which
he contracted to do in favor of the opposite party."); Rolfes v.
O'Connor,
844 P.2d 1330, 1333 (Colo. Ct. App. 1992) ("[Defendant]
argues, therefore, that, because plaintiff has committed a
serious breach of the obligations assumed by him under the
promissory note and deed of trust and has not offered to make
plaintiff whole with respect to the transaction, equity will not
aid him. We agree."); Gerber v. Karr,
189 A.2d 353, 355 (Md.
1963) ("[A]bsent an agreement in the mortgage to the contrary, a
mortgagor cannot call for a partial release after defaulting on
his obligations under the mortgage."); Clarke v. Cowan,
92 N.E. 474, 476 (Mass. 1910) ("[The partial-release provision] was, we
think, a privilege to be exercised before the mortgage debt
became due according to the terms of the mortgage."); First Trust
& Sav. Bank v. Bitter Root Valley Irrig. Co.,
251 F. 320, 323 (D.
Mont. 1918) ("Certainly [the mortgagor] is in no position to
compel the trust deed trustees to perform provisions of the said
deed for its benefit; it refusing performance of its dependent
covenants of said deed for the said trustees' benefit.");
Clason's Point Land Co. v. Schwartz,
262 N.Y.S. 756, 759-60 (App.
Div. 1933) ("The release clause is not to be viewed as
independent of the mortgagor's covenants. The various provisions
of the mortgage must here be construed together as dependent
stipulations."). But see, e.g., Burroughs v. Garner, 405 A.2d
301, 306-09 (Md. Ct. Spec. App. 1979); Eichorn v. Lunn,
816 P.2d 1226, 1229 (Wash. Ct. App. 1991); cf. Eldridge v. Burns,
142 Cal.
Rptr. 845, 856, 865, 872-73 (Ct. App. 1978) (holding that money
damages may be available to defaulting mortgagor for value of
releases although specific enforcement of releases is not);
Cochran v. Teasley,
236 S.E.2d 635, 637 (Ga. 1977) (same).
It should be noted that courts do not necessarily
distinguish between partial releases based on future payments and
partial releases based on payments already made. See Goldman,
supra, 265 N.J. Super. at 491-93 (holding mortgagor not entitled
after default to enforce provision for releases proportionate to
down payment); see also, e.g., Empress Homes v. Levin,
201 So.2d 475, 477 (Fla. 1967) (holding mortgagor not entitled after
default to enforce provision calling for partial releases
"without additional consideration"); Moriello v. Matrix
Production & Realty, Ltd.,
385 N.Y.S.2d 391, 392 (App. Div. 1976)
(holding mortgagor not entitled after default to enforce
provision requiring partial release without consideration beyond
down payment); Clason's Point, supra, 262 N.Y.S. at 757-60
(holding mortgagor not entitled to exercise release provision
where releases were partially paid but not demanded before
default); Fulton v. Jones,
153 N.Y.S. 87, 89 (App. Div. 1915)
("Assuming that there was a sufficient tender, and that it was
kept good, I am of opinion that the privilege of obtaining a
release was lost by the failure to duly demand it before default
in payment of the principal."). But see Conley v. Poway Land &
Inv. Co.,
42 Cal. Rptr. 636, 640 (Ct. App. 1965).
Cases in which courts determined that the mortgagee's
promise to grant partial releases was dependent on the
mortgagor's obligations under the mortgage -- and thus that the
right to releases did not survive default -- can be explained by
the underlying purpose of partial-release provisions. As
recognized by prior New Jersey case law, partial-release
provisions in mortgage agreements are generally understood as
"intended to permit the mortgagor-developer to release from the
lien of the mortgage portions of the tract that were subdivided and readied for sale." Romano v. Washington Tp. Assocs., 184 N.J. Super. 320, 323 (App. Div. 1982). It is also well understood that parties contemplate that "`the grant of releases [will] be followed by the sale of homes which [will] generate monies to be used to pay the Mortgage.'" Goldman, supra, 265 N.J. Super. at 494; see also Bitter Root Valley, supra, 251 F. at 322-23 ("The trust deed contemplated a going concern selling lands, paying bond installments, and keeping all its contracts with the trust deed trustees and purchasers of lands."); Harada v. Burns, 445 P.2d 376, 379 (Haw. 1968) ("[T]he very existence of the release clause in the mortgage agreement supports the inference that its purpose was to facilitate the sale and conveyance of clear title to parcels of the land subject to the mortgage in order to generate funds which could be used to reduce the remaining indebtedness."); 29 New Jersey Practice § 149, at 686 (Roger A. Cunningham & Saul Tischler) (1975) ("[T]he release provision usually aims only at the release of portions of the mortgaged land upon payment of specified sums of money -- often in contemplation of the sale of the mortgaged land in parcels by a real estate subdivider-developer."). Thus, part of the consideration for the mortgagee's promise to grant partial releases is the mortgagor's promise to continue development of the land and make future payments on the mortgage note. When the mortgagor no longer has any hope or intention of fulfilling these obligations, the purpose underlying the release provision is
extinguished. In such situations, courts may conclude that the
parties intended that the promises be dependent and that the
obligation to grant releases ends on the mortgagor's default.
Many cases in which courts have come to the opposite
conclusion can be explained as exceptions to the general rule.
For example, New Jersey courts have granted counterclaims in
foreclosure actions based on partial release provisions where the
mortgagor had tendered payment previous to default and the
mortgagee had wrongfully refused to grant the release. See
Bleyer v. Veeder,
119 N.J. Eq. 398, 407 (Ch. 1936); Bruen v.
Spannhake,
118 N.J. Eq. 134, 141 (Ch. 1935); see also Park Inv. &
Dev. Co. v. Vanderzee Bros. Bldg. Co.,
119 N.J. Eq. 1, 2-3 (Ch.
1935) (holding mortgagor entitled to partial releases where
mortgagor had paid over three-quarters of mortgage principal and
where parties disputed whether mortgagor had sought releases
prior to default). A functional rationale for these rulings is
that the mortgagee's refusal to grant the release may have
precipitated the default.
Most New Jersey cases holding that the promise to grant
partial releases was not dependent on the mortgagor's obligations
have involved partial-release provisions exercised by purchasers
of single subdivided lots from the original mortgagor-developer
rather than release provisions exercised by the original
mortgagor-developer. Courts have generally interpreted that type
of provision to survive default on the part of the mortgagor, at
least where the sale to the purchaser occurred before default.
See Ventnor, supra, 79 N.J. Eq. at 107. Those courts recognized
that, in regard to the loan as a whole, a mortgage agreement
providing a third-party purchaser with the right to exercise a
partial-release provision does "not attempt to create the
relation of debtor and creditor between the grantees of the
mortgagor and the mortgagee." Hall v. Home Bldg. Co.,
56 N.J.
Eq. 304, 306 (Ch. 1897). Instead, courts have interpreted that
type of agreement as "practically [having] the effect of
distributing the mortgage through the tract, very much as if a
separate mortgage was given on every [lot sold by the
mortgagor]." Harris v. Pearsall,
83 N.J. Eq. 472, 473 (Ch.
1914); see also Van Arsdale v. Gorenflo,
93 N.J. Eq. 486, 489 (E.
& A. 1922) (holding that even where sale was made after mortgagor
defaulted on interest payments but before bond was due, purchaser
from mortgagor had right to exercise release provision); Hagaman
v. Frederick,
109 N.J. Eq. 288, 290 (Ch. 1931) (holding that
builder who took title to two houses in satisfaction of payment
due from successor mortgagor-developer was entitled to enforce
release clause in mortgage after default); Malba Terrace Corp. v.
Portaupeck Properties, Inc.,
105 N.J. Eq. 453, 456 (Ch. 1930)
(holding that purchaser from mortgagor who made demand for
release after maturity of mortgage but before commencement of
suit for foreclosure was entitled to release).
Similarly, in other jurisdictions, many of the cases holding
that a partial-release provision survived default have been cases
in which the benefit of the provision was claimed by a third-party purchaser. See, e.g. Norris v. Schwartz,
153 So. 910, 910
(Fla. 1934); Vawter v. Crafts,
42 N.W. 483, 485 (Minn. 1889);
Rosenberg v. General Realty Serv.,
247 N.Y.S. 461, 464 (App. Div.
1931); White v. Tegnell,
206 S.W. 213, 215 (Tex. Civ. App. 1918).
Some courts explicitly have held that purchasers from the
original mortgagor may have the right to enforce a partial-release provision after default, or even after foreclosure
proceedings have begun, although the original mortgagor does not.
See Bitter Root Valley Irrig., supra, 251 F. at 323; Chrisman v.
Hay,
43 F. 552, 554-55 (C.C.S.D. Iowa 1890). Somewhat analogous
are cases involving joint mortgagors where the mortgage agreement
provided that specified individually-owned lots would be released
in consideration of set payments. See American Net & Twine Co.
v. Githens,
57 N.J. Eq. 539, 541 (Ch. 1898) (distinguishing case
where lots to be released were individually owned from case where
lots were part of a single tract owned by mortgagor); Horne v.
Payne,
586 S.W.2d 101, 103 (Tenn. 1979) (holding that joint
mortgagor who was not personally liable for note was entitled,
after maker of note defaulted, to enforce provision for release
of separate parcel to which she had title, where release
provision specified payment necessary for release of her
individual parcel).
The critical distinction between partial-release provisions
intended to be exercised by individual owners of separate parcels
and those intended to be exercised by mortgagor-developers of
large tracts lies in the underlying purpose of the releases.
Where the parties intend that the release provision be exercised
by the individual owner of the lot to be released, the release
payment functions as full consideration for a complete and final
discharge of that person's obligation; in that case, the purpose
of the partial-release provision is effectuated by enforcing it,
even after default. Where the parties intend that the release
provision be exercised by a developer, then consideration for the
release is not only the release payment, but also the continued
development of the property and repayment of the mortgage note by
the mortgagor. In such cases, the partial-release provision no
longer serves its purpose after default.
New Jersey courts have recognized that the continuing
development of the land by the mortgagor is an important element
of the mortgagee's security in the typical mortgage agreement
that includes a partial-release provision to be exercised by a
mortgagor-developer, and have relied on that recognition in
explaining why particular partial-release provisions should be
considered to be personal to the original mortgagor. In Dimeo v.
Ellenstein,
106 N.J. Eq. 298 (Ch. 1930), the original mortgagors
had conveyed the plot to a corporation that subsequently conveyed
it to another corporation. Id. at 299. The new owner sought and
tendered payment for partial releases under a provision in the
original mortgage agreement. The mortgagee refused and, after
the mortgage fell due, filed for foreclosure. The court held:
The covenant is circumscribed and the reason
for restricting it to the mortgagors is well
illustrated by the present effort of the [new
owner] to withdraw the more valuable of the
security, leaving the dregs out of which to
make the balance of the purchase money. It
emphasizes why the mortgagees chose to deal
only with the mortgagors, for they would be
stimulated to further improve the land to
realize the mortgage money and so discharge
themselves of their bond obligation; an urge
that would be absent in their assigns. This,
plus confidence in their mortgagors'
integrity, it is fair to presume, was part
inducement to release to the mortgagors and
negatives an intention to deal with the
mortgagors' assigns, who, as in this case,
would have no responsibility.
Because the mortgagee's security was based in part on the ongoing relationship between mortgagor and mortgagee, the court determined that the parties would not have intended that the right to exercise the partial-release provision would extend to subsequent purchasers. See also Squier v. Shepard, 38 N.J. Eq. 331, 333-34 (Ch. 1884) (holding that benefit of release provision did not inure to purchasers from mortgagor because mortgagee did not originally intend to bind himself according to actions taken by parties other than original mortgagor).
In Romano, supra, the Appellate Division relied in part on Dimeo to hold that the successor to the original mortgagor was not entitled after default to enforce a release provision in the mortgage, even where the stated consideration for release was the previously made down payment. 184 N.J. Super. at 323. Shortly after the purchase money mortgage had been entered into, the corporate mortgagor conveyed the land to its principals in partnership and formally dissolved, leaving the mortgagee essentially with a nonrecourse mortgage. Id. at 321. The
successor mortgagor partnership defaulted on the mortgage, the
mortgagee foreclosed, and the partnership counterclaimed for
partial releases. Id. at 322. Although the mortgage agreement
expressly provided that the mortgagor was entitled to release of
20.37 acres, at its election, without further payments, the
Appellate Division held that under the circumstances the
partnership was not entitled to the release. The court stated:
The record here shows, as the trial
judge found, that the covenant was intended
to permit the mortgagor-developer to release
from the lien of the mortgage portions of the
tract that were subdivided and readied for
sale. That development never eventuated; yet
at the same time the principals of [the
original mortgagor corporation] had
effectively deprived plaintiffs of any
recourse on the bond by transferring the
entire tract to themselves as partners and
dissolving the mortgagor corporation. Thus,
upon the aborting of the development plans
and after default on the mortgage and the
commencement of the foreclosure action,
plaintiffs found themselves faced with an
"election" by those same principals, now in
partnership, to release what is conceded to
be the best part of the tract, leaving
plaintiffs with both their security impaired
and without recourse under the bond for any
deficiency. We find that the covenant cannot
fairly be read to authorize its exercise by
[successor mortgagor partnership] under these
circumstances.
As in Dimeo, the court's analysis of the parties' intent under
the mortgage agreement relied heavily on the importance of the
continued development of the land by the mortgagor to the
mortgagee's security.
The courts in Romano and Dimeo were apparently influenced by
the fact that the mortgagor's conveyance effectively converted
the mortgage into a nonrecourse instrument. In Goldman, supra,
the Appellate Division extended the reasoning in Romano and Dimeo
to hold that, where the mortgage is originally nonrecourse, a
partial-release provision based on the down payment is not
enforceable after default, even by the original mortgagor. 265
N.J. Super. at 494-96. That mortgage agreement provided that, on
demand by the mortgagor, the mortgagee would release a portion of
the property in consideration of the down payment made at
closing. Id. at 491. At the time the mortgagors defaulted they
had demanded release of only a part of the acreage equivalent to
the down payment under the stated formula. The mortgagee filed
for foreclosure and the mortgagor counterclaimed, seeking
specific performance of the release provision. Id. at 492-93.
The trial court granted summary judgment to the mortgagee. Id.
at 493. The Appellate Division affirmed, finding that the
opposite outcome would "make no economic sense and produce an
unjust result." Id. at 494.
The Goldman panel endorsed Romano's analysis of the purpose
of this type of partial-release provision:
In Romano, the court looked to the context
and purpose of the release clause and found
that in the context of the proposed
construction of a residential development, it
was contemplated that the consideration for
the release clause would be continued
development and payment of the mortgage loan.
The court found that where the mortgagor
ceased construction of units and made it
impossible for the mortgagee to obtain
mortgage payments as it contemplated, it
would be unfair to compel the mortgagee to
comply with the release clause to a grantee.
The Appellate Division also emphasized that enforcement of the
release provision would leave the mortgagee without remedy
because the mortgage was nonrecourse in nature. Id. at 494-96.
The Appellate Division concluded its opinion with an appeal to
the equities of the case, quoting the trial judge:
To start with I have one side who has not
breached and another side who has. I mean
that may be an oversimplification but that is
the true fact here and he who has not
breached is going to be damaged and he who
has breached is going to walk away with a
certain amount of property free and clear.
That just doesn't make any sense to me.
The Appellate Division distinguished the case on appeal from Goldman, supra, based on the presumed intent of the parties. In my view, that distinction finds no support in this record. The language of the Simonson/Cranbury mortgage does not speak to the operation of the release provisions in case of Cranbury's default. Moreover, Simonson testified that he had never discussed the partial-release provisions with Cranbury, and Zirinsky passed away before suit was initiated. Zirinsky's associate testified that Zirinsky had sought the release provision concerning the 20.4 acres so that he would retain some
benefit if he "walked away" from the deal in the future.
However, even that second-hand statement does not necessarily
address the situation that ultimately arose, where Cranbury
"walked away" before even obtaining a legal subdivision or making
a single payment on the mortgage. At oral argument, counsel for
Cranbury conceded that the parties had never negotiated the
question whether the release provision would survive a default of
the mortgage. Therefore, I can not agree that substantial
credible evidence exists to support the finding that the
Cranbury/Simonson agreement encompassed the understanding that at
closing Cranbury acquired a right to partial releases that would
survive despite Cranbury's default. See Rova Farms Resort, Inc.
v. Investors Ins. Co. of Am.,
65 N.J. 474, 484 (1974).
Because the parties failed to express any agreement
regarding the effect of default on the operation of the release
provisions, the court was required to supply this term as a
matter of contract construction; the principle question is what
rule best effectuates the business purposes and reasonable
expectations of the parties. See Palladino, supra, 77 N.J. at
46. I believe that the best rule is one that is consistent with
Goldman -- that, in the absence of a contract provision to the
contrary, a nonrecourse mortgagor who is in default ordinarily
has no right to partial releases, whether or not those releases
are based on payments already made. See Goldman, supra, 265 N.J.
Super. at 493-94. The rationale for that rule of construction
was also expressed by Goldman: The purpose of typical partial-release provisions contained in mortgages given to residential
developers is to facilitate the sale of individual lots in order
that the developer may continue to pay the note and finance
further development; when the development comes to a halt, the
partial-release clause no longer serves its intended purpose, and
the mortgagor should no longer be entitled to exercise it.
This case demonstrates the good sense of that rule. The
Simonson/Cranbury nonrecourse purchase money mortgage agreement
was clearly based on the premise that the mortgagor would be
engaged in an ongoing process of developing the mortgaged land
and thereby paying off the mortgage. The parties conceded at
oral argument that they shared that understanding and intent.
Further evidence that the purpose of the release clause was to
facilitate implementation of the development plan can be found in
the provisions in the mortgage agreement limiting the right to
releases. First, the agreement specifically provided that no
portion of the mortgaged land would be released from the lien
unless it could be conveyed as a separate lot under an approved
subdivision. The agreement also required that any releases would
not leave the remainder of the property "landlocked," that any
releases be contiguous, and that any releases contain "a
reasonable proportion of roadway frontage, open space and `green
belt' areas." In addition, the mortgagor covenanted that it
would "not alienate substantial or material `development rights
or credits' from all or any part of the Property to the effect
that the Property would lose substantial or material ability to
have improvements developed thereon, . . ." Those provisions
were apparently intended to ensure that any releases would not
disproportionately impair the mortgagee's remaining security.
Those provisions also demonstrate that a crucial component of the
mortgagee's security was the ongoing development of the land.
Simonson has consistently argued that under the agreement an
approved subdivision was a precondition to any release and that
one reason Cranbury's counterclaim must fail is that that
precondition was never satisfied. The Chancery Division found
that the requirement of a subdivision did not extend to the
provision for the release of 20.4 acres with no further payment.
The Appellate Division agreed. That conclusion is flawed.
Paragraph (3)(A) of the Rider to the mortgage agreement contains
the release provisions. The first sentence provides for releases
according to a formula based on payments. The second sentence
provides for, "at any time upon Borrower's request," release of
20.4 acres "without payment of release consideration" and for
release of land for access roads and other construction needs.
Paragraphs (3)(B), (C) and (D) provide restrictions on the
releases. In particular, paragraph (3)(D) provides:
No portion of the mortgaged premises shall be
released from the lien of this Mortgage
unless it is legally transferable as an
entity separate from the remainder of the
mortgaged premises in accordance with a
legally effective subdivision or approved
development plan.
Neither the literal language nor the sentence or paragraph structure of the mortgage suggests that the restriction in
Paragraph (3)(D) applies to some releases and not to others. The
letter from Dan Murphy suggesting that the release would be
forthcoming if Cranbury submitted a sketch is not dispositive
because Murphy's authority is questionable and the letter itself
is internally inconsistent.
The broad logic of the agreement compels the same conclusion
as the language. Most importantly, the immediate release of the
20.4 acres from the lien of the mortgage would not have benefited
Cranbury because Cranbury would not have been permitted to
develop or separately convey that parcel without an approved
subdivision. See N.J.S.A. 40:55D-55 (prohibiting conveyances of
property not lawfully subdivided). Also, from the perspective of
the Simonson's security, the precondition of a valid subdivision
plan guaranteed that three important goals would be achieved
before that security would be diminished by the granting of any
release. First, by obtaining subdivision approval, Cranbury
would have taken the first crucial step towards implementing the
development, thus enhancing its ability to repay the purchase
money mortgage. Second, as noted by counsel at oral argument,
the value of the remaining property would have been increased
substantially by virtue of the approval of the subdivision.
Third, because the township undoubtedly would have needed
approximately one year to review and approve a major subdivision
-- it is unlikely that a planning board would approve a minor
subdivision for a portion of the tract if a major subdivision
were pending -- Simonson would have been assured of at least one
annual payment on the mortgage. Without the precondition, on the
other hand, Simonson would have left itself vulnerable to
precisely the outcome that Cranbury attempted to achieve:
Cranbury defaulted without making a single payment on the
mortgage and then claimed the right to an exceptionally valuable
20.4 acre parcel that had yet to be subdivided. If Cranbury's
initial claim had been enforced, title to the land would not have
been clear until the minor subdivision was obtained, and Simonson
would have, in the end, been deprived of the most valuable
portion of its property with nothing more than the option
payments to show for several years in which the property had been
tied up post-closing. Moreover, the property declined markedly
in value during that period.
The Chancery Division recognized the unfairness of such an
outcome when it held that Cranbury was not entitled to delay the
foreclosure or to choose the most valuable 20.4 acres, and ruled
that Cranbury's claim was limited to the average value of 20.4
acres of the property. That result, however, was only marginally
preferable to Cranbury's proposal. Under that court's
disposition, not only has Simonson lost the benefit of its
bargain with Cranbury on the sale of the land and the opportunity
to recoup its losses by otherwise disposing of the property while
it was subject to foreclosure and then admeasurement proceedings,
but Simonson is now actually assessed with a sizable judgment
against it. Ironically, Simonson does not have the ability to
satisfy that judgment by selling off a portion of the land
without first obtaining a subdivision.
In summary, under the Cranbury/Simonson agreement, the right
to the release did not vest at the closing: the achievement of
an approved subdivision plan was a precondition to that right.
When Cranbury defaulted, it had not obtained a subdivision and
therefore the right to the release had not in any sense accrued.
Moreover, by defaulting on the mortgage, Cranbury breached its
obligations not only to pay the mortgage when due but also to
subdivide and develop the Simonson property, the very obligations
in exchange for which the promise to grant partial releases had
been given. In the absence of any contract provision to the
contrary, that default should be presumed to be a "breach of a
material term of an agreement," such that "the non-breaching
party is relieved of its obligations under the agreement."
Nolan, supra, 120 N.J. at 472.
I would reverse the judgement of the Appellate Division.
Justices O'Hern and Garibaldi join in this dissent.
Footnote: 1 Title to the subject property was transferred from Edward Simonson to Simonson Family Associates, L.P., during the course of this litigation.