In a recent ground-breaking decision, the New Jersey Tax Court in AHS Hospital Corp., d/b/a Morristown Memorial Hospital v. Town of Morristown shattered the previous near incontestability of the tax exemption that has shielded nonprofit hospitals from local property tax obligations for over 100 years.  In response, the New Jersey Legislature, in conjunction with the New Jersey Hospital Association, quickly joined forces in an attempt to formulate a “fix” and alleviate the resulting great uncertainty that has left municipalities and nonprofit hospitals clamoring for answers.

The resulting bi-partisan supported fix, embodied by Bill No. 3299 (approved early this year) was sent to the Governor’s desk for signing with just days left in the recently completed legislative session.  Unfortunately, due to the fast track of this legislation, the late submission of the bill for consideration to the Governor’s office, claims of constitutional infirmity swirling, the Governor, not having been afforded adequate time for fair comment, instead allowed the time to lapse for taking action on the bill.  As a result, the bill was killed by virtue of the Governor’s pocket veto.

The import of this failed bill is that while it worked to attempt to reaffirm the longstanding exemption applicable to nonprofit hospital property, it also, in a controversial twist, declared that even those portions of the hospital that were being utilized for, or supporting, for-profit medical activities, should be exempted from taxation.  By attempting to continue the exemption, even for components deemed unquestionably “for-profit” by the tax court in the AHS Hospital case, this bill worked to effectively strip away the host municipality’s ability to effectively contest the applicability of the exemption.  In return, however, the Legislature attempted to create a special “Community Service Contribution” obligation that was to be borne by the hospital in lieu of paying taxes.  This contemplated Community Service Contribution was championed by the sponsors as being readily calculable and serving to remove the need for costly litigation to determine what, if any, portions of the hospital should remain exempt.  The funds received by the municipality through this “contribution” obligation in turn would have been earmarked to offset local expenses and financial hardships created by the presence of these typically large facilities that introduce thousands of patients, employees, professionals and associated vehicular activity into the community.  The failed bill therefore, although controversial, appeared to strike a reasonable balance between stakeholders, affording both hospitals and municipalities benefits that were left to chance in the unstable environment created in the aftermath of the recent tax court decision.

The killed bill would have required non-profit acute care hospitals to pay a Community Service Contribution equal to $2.50 a day for each licensed hospital bed at the exempt acute care facility.  In addition, satellite emergency care facilities of acute care hospitals would have been required to contribute $250 a day for each such facility.  These mandatory contributions were to have been made in equal quarterly installments and, as in the case of tax payments, payable on February 1, May 1, August 1 and November 1 of each year.  These new obligations were to also have been treated the same as other local tax obligations from an enforcement perspective (i.e., the same penalties for late payments and exposure to municipal lien foreclosure actions would apply in the event defaults).

The proposed legislation also dictated that 5% of these contribution payments were to be paid to the County.  Such fund sharing would not otherwise have been required in the traditional payments made in lieu of taxes (so-called “PILOT” payment) setting.  As a result, the failed bill also afforded county officials some measure of comfort and pre-empted any claims that counties were being unfairly ignored.

This failed legislation further afforded the subject hospitals and satellite emergency care facilities an opportunity to seek relief from these Community Service Contributions obligations where the facility was able to demonstrate that it: 1) had a negative operating margin in the prior tax year; 2) was not in full compliance with the financial terms of any bond covenants, 3) was in financial distress, or 4) was at risk of being in financial distress.

The present impasse however occasioned by the pocket veto continues an environment of uncertainty that will undoubtedly foster a spike in tax court actions to determine the scope and applicability of the hospital tax exemption.  Consequently, the question that remains is not if, but when, some refashioning of this proposed legislation will find its way back to the desk of the Governor for adoption.

The Third Circuit Court of Appeals issued a precedential opinion last week when it ruled that a New Jersey real estate developer had standing to pursue antitrust claims against the owner of a nearby ShopRite who engaged in anti-competitive activities designed at blocking the developer from bringing a Wegmans to its property.

In the case of Hanover 3201 Realty, LLC v. Village Supermarkets, Inc., et al., a developer, Hanover 3201 Realty, LLC (“Hanover Realty”), signed a contract with Wegmans to develop a full-service supermarket at its Hanover, New Jersey property.  The contract required Hanover Realty to secure all necessary governmental permits and approvals within two years, otherwise Wegmans could walk.  Soon thereafter, Village Supermarkets, Inc. (“Village”), the proprietor of a ShopRite supermarket in Hanover (in addition to two dozen others throughout New Jersey), took actions purportedly aimed at frustrating Hanover Realty’s efforts to obtain all requisite government approvals.  Such actions included: (i) filing an appeal with the New Jersey Department of Environmental Protection (“DEP”) concerning a flood hazard area permit that had been awarded to Hanover Realty, (ii) challenging a wetlands permit already awarded by the DEP to Hanover Realty, (iii) filing an objection with the New Jersey Department of Transportation suggesting that Hanover Realty, on top of making certain improvements to the intersection near the proposed Wegmans, should be compelled to construct an extensive highway overpass near the project, and (iv) commencing a state court lawsuit to nullify a rezoning approval Hanover Realty had obtained from Hanover Township in order to use the property for retail purposes.  These acts, all of which were either largely denied or rejected by the respective administrative or judicial authorities, led Hanover Realty to file a federal lawsuit alleging that the efforts of Village (along with its wholly-owned subsidiary that owns the ShopRite site) were anti-competitive shams designed for no other purpose than to unfairly block its efforts to bring Wegmans to that market space.

After the District Court first dismissed the suit, Hanover Realty appealed and the Third Circuit Court of Appeals reversed in part, holding that Hanover Realty’s injuries were “inextricably intertwined” with the noted anti-competitive conduct, and Hanover Realty thus met the legal standard for asserting a valid antitrust claim.  The Third Circuit found that the end goal of the misconduct was designed to injure Wegmans by keeping them out of the market.  In doing so, Hanover Realty, the party tasked with obtaining all necessary permits and approvals, was targeted by the sham petitions and was forced to unnecessarily incur substantial attorneys’ fees, costs and delays in its development plans.  While the Third Circuit limited its holding to allow Hanover Realty to pursue anti-monopolization claims in the market for full-service supermarkets (and not including the market for full-service supermarket rental space because the parties were not deemed “competitors” in that space), the Court also determined that the wrongful activities triggered the “sham exception” to the Noerr-Pennington doctrine, which ordinarily affords broad immunity from liability to those who petition the government for redress of their grievances.  The Court found that the anti-competitive activities that were intentionally lodged with no purpose other than to thwart Hanover Realty’s development activities with Wegmans were substantial enough to overcome this otherwise widely-applied privilege.

Whether or not Hanover Realty’s claims ultimately prove successful in the lawsuit, the Third Circuit’s ruling carries a meaningful warning for commercial landlords and tenants seeking to block the entry of a competitor in its market space.  Any such efforts must be strategically and tactfully employed with a legitimate purpose, in contrast to the borderline frivolous legal and administrative challenges from Village and ShopRite against Hanover Realty and Wegmans.  Though these types of anti-competition claims are still somewhat of a rare species in the commercial real estate arena, the Hanover Realty decision will certainly provide frustrated developers and landlords with another ace in their sleeve to fight against existing competitors trying to remain the only game in town.

On October 21, 2015, the New Jersey Appellate Division affirmed a trial court ruling that a South Jersey landlord did not violate a coffee-related exclusivity provision in its lease with Starbucks when it subsequently rented space in the same strip mall to McDonald’s – another purveyor of coffee products.

In Delco LLC v. Starbucks Corporation, Delco, the owner-operator of a shopping center in Rio Grande, New Jersey had rented space to Starbucks.  The Starbucks lease contained an exclusivity clause that essentially barred any other tenant at that shopping center from selling coffee, espresso and tea drinks.  However, an exception to this provision was allocated for “any tenant . . . occupying twenty thousand contiguous square feet or more . . . and operating under a single trade name.”  Starbucks’ coffee exclusive at the shopping center became an issue when Delco sought to bring in McDonald’s as a tenant, and Starbucks voiced an objection.  Though there was no question that McDonald’s sells coffee and tea at its fast food restaurants, Delco envisioned leasing 40,000 square feet of contiguous space to McDonald’s – more than twice the size needed to satisfy the exception to the exclusivity provision under the Starbucks lease.  Based upon the clear and unambiguous lease language, the Appellate Division summarily affirmed the trial court’s determination that Starbucks’ objection to the McDonald’s lease lacked any merit, and that Delco was also entitled to attorneys’ fees.

While the Starbucks decision did not establish new law, it is an invaluable reminder for commercial landlords and tenants to carefully negotiate all lease terms, including exclusivity provisions.  Particularly on the tenant side, if a party to a lease is concerned about being “the only game in town” – such as Starbucks being the only tenant selling coffee products at a shopping center – then that party must cautiously negotiate and craft the terms that are ultimately memorialized in the governing lease documents.

An amendment to the Executive Law of New York State modifying the Uniform Fire Prevention and Building Code became effective on June 27, 2015, which now requires owners of existing commercial buildings to install carbon monoxide alarms or detection equipment in every commercial building and restaurant that: (i) contains any carbon monoxide source (including any garage or any other motor-vehicle-related occupancy); and/or (ii) is attached to a garage; and/or (iii) is attached to any other motor-vehicle-related occupancy.  These requirements apply without regard to whether a commercial building is an existing commercial building or a new commercial building and without regard to whether a commercial building has been offered for sale.  Carbon monoxide detection is not required in a commercial building that is: (a) classified, in its entirety, in Storage Group S or Utility and Miscellaneous Group U under chapter 3 of the 2010 Building Code of New York State; (b) occupied only occasionally and only for building or equipment maintenance; and (c) a canopy (as defined in the 2010 Fire Code of New York State).

An “existing commercial building” is a commercial building that was constructed prior to December 31, 2015. A commercial building is deemed to have been constructed prior to December 31, 2015, and deemed to be an existing commercial building, if: (i) the original construction of such commercial building was completed prior to December 31, 2015; or (ii) the complete application for the building permit for the original construction of such commercial building was filed prior to December 31, 2015.  Mixed use buildings are also subject to this new requirement.

Carbon monoxide detection must be provided in each story of a building or “detection zone” in a building in which at least one of three triggering conditions exists, which include the presence of any carbon monoxide source (which include any appliance or equipment that may emit carbon monoxide, such as fuel fired furnaces and boilers; space heaters with pilot lights or open flames; kerosene heaters; wood stoves; fireplaces; and stoves, ovens, dryers, water heaters and refrigerators that use gas or liquid fuel), garages, and other motor vehicle related occupancies.  If a detection zone is not within a “classroom” (which is broadly defined to include a place where classes are taught; or a room that is occupied or capable of being occupied by 6 or more persons (including students and teachers) at any one time), carbon monoxide protection is not required if: (i) such detection zone has ambient conditions that would, under normal conditions and with all required ventilation and exhaust systems installed and operating properly, activate the carbon monoxide detection devices that otherwise would be required in a detection zone, and an alternative safety plan for the building has been approved by the applicable governmental agency; or (ii) such detection zone is open (without sidewalls or drops) on 50% or more of its perimeter, and there is no occupiable area within such detection zone that is not open on at least 50% of its perimeter.

The NY State Fire Prevention and Building Code Council is responsible for developing criteria setting forth the manufacture, design and installation standards for these alarms and detection equipment.

Commercial building owners are being encouraged to install detection equipment in their buildings as quickly as practicable during a “transition period” between the effective date (June 27, 2015) and June 27, 2016.  An owner will not be in violation during this transition period if it can provide to the applicable municipal agency a written statement certifying that the owner is making a good faith attempt to install detection equipment as quickly as practicable.  The detection equipment must be fully installed and operational by the end of the transition period (June 27, 2016).

The New Jersey Constitution provides for taking of blighted property for the purposes of development, redevelopment or to clear such property of blight. In a split decision rendered on March 23, 2015, the New Jersey Supreme Court affirmed the City of Hackensack’s designation of two blocks of land as “blighted and in need of redevelopment,” a move that some legal experts believe, marks a significant shift in the Court’s mind-set that cuts back on governmental limits on eminent domain. The affected blocks, comprised of five contiguous lots of mixed commercial and residential uses, contained derelict buildings that the Hackensack Planning Board in 2008 designated as blighted and “in need of redevelopment”. The plaintiff landowners filed a complaint in the Superior Court, arguing that their properties were improperly classified as in need of redevelopment because they did not meet the constitutional standard for blight as set forth in prior New Jersey case law. The Superior Court rejected that argument in favor of the City, while the Appellate Division reversed for the plaintiffs, paving the way for the Supreme Court to once again review the constitutionality under New Jersey law of blight determinations made by a municipality. Ultimately, the Supreme Court determined that “so long as the blight determination is supported by substantial evidence in the record, a court is bound to affirm that determination,” concluding that substantial evidence in the record supported the Hackensack Planning Board’s findings. The Supreme Court, in dicta, affirmed the constitutionality of the standard for blight set forth in the Blighted Area Clause of the New Jersey Constitution. The Supreme Court also affirmed the deferential standard of review to the municipal decision–making for areas in need or redevelopment. Accordingly, “a presumption of validity” applies to a municipality’s designation of blight, and if supported by “substantial evidence” in the record creates an uphill battle for property owners challenging such designations. According to Ronald Chen, acting Dean of the Rutgers School of Law, “the ruling gives the Legislature a lot of latitude for what constitutes blight” and may make it more difficult for property owners to fight a blight designation in the future.