Caseflicks

Supreme Court of New Jersey • 1990

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

579 A.2d 288 | 121 N.J. 196 | 1990 N.J. LEXIS 105

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Takeaway

In short, this case replaced New Jersey's categorical bar on running commercial noncompetition covenants with a fact-sensitive reasonableness test, while requiring proof that a public subsidy of a private supermarket serves a controlled public purpose.

Background

Davidson Bros. operated supermarkets on George Street and Elizabeth Street in New Brunswick. It sold the unprofitable George Street property to D. Katz & Sons in 1980, but each recorded deed imposed a forty-year restriction: the property could not be used as a supermarket or supermarket-type grocery store. The deeds stated that the restriction was a covenant running with the land. Davidson alleged that Katz paid a lower price because of the restriction and that closing the George Street store made its Elizabeth Street store profitable.

In 1986, after downtown residents had spent years without a nearby full-service market, the New Brunswick Housing Authority bought the George Street property from Katz with actual notice of the covenant. The Authority leased the site to C-Town for five years at one dollar per year, conditioned on C-Town's operation of a supermarket and its commitment to make $10,000 in exterior improvements. Davidson sued, seeking to enforce the noncompetition covenant and challenging the lease as an unconstitutional gift of public property.

The Chancery Division denied Davidson's summary-judgment motion and later granted summary judgment to defendants. Relying on Brewer v. Marshall & Cheeseman, it held that the covenant could not bind successors because a noncompetition covenant did not touch and concern the land. It also upheld the lease under the public-purpose doctrine. The Appellate Division affirmed, reasoning instead that the covenant's benefit did not touch and concern Davidson's Elizabeth Street property because the restricted parcel was too small relative to the relevant market area. The Supreme Court granted certification.

Issues

Issue #1

Whether a recorded commercial deed covenant barring operation of a supermarket may bind a successor who purchased the burdened property with actual notice of the restriction.

Holding

Yes, potentially. The Court overruled Brewer's categorical rule against running noncompetition covenants and held that enforceability depends on the covenant's reasonableness, not rigid application of the touch-and-concern doctrine alone.

Reasoning

Brewer had treated all noncompetition covenants as personal obligations that could not run with the land. The Court found that categorical rule inconsistent with modern servitudes law and with more recent New Jersey decisions enforcing commercial land-use restrictions against successors. A purchaser should not automatically escape a recorded restriction simply by taking title from the original covenantor.

The Court retained touch and concern as a relevant consideration, but rejected it as the exclusive or pivotal test. The proper inquiry is whether the restriction is reasonable in light of modern commercial conditions, the parties' legitimate interests, and the public consequences of enforcement.

A court assessing reasonableness should consider: the parties' intent and lawful purpose when they made the covenant; whether it affected the consideration exchanged; whether its terms are clear; whether it was written, recorded, and known to the later purchaser; whether its geographic scope and duration are reasonable; whether it creates an unreasonable restraint of trade or monopoly; whether it harms the public interest; and whether changed circumstances have made it unreasonable.

The covenant's burden plainly touched and concerned the George Street property because it directly limited the property's use. The Court also rejected the Appellate Division's conclusion that the covenant could not benefit the Elizabeth Street property merely because the restricted parcel represented less than one-half acre of a much larger market area. Limiting nearby competition could enhance the use and value of the Elizabeth Street supermarket, particularly if Davidson could prove that its profits increased after the George Street location closed.

The existing record did not establish whether the covenant was reasonable when made or whether the needs of downtown New Brunswick and later circumstances made enforcement unreasonable. Those inquiries were fact-sensitive, and the affidavits concerning residents' need for a supermarket were too general to resolve them on summary judgment. The case therefore required a plenary hearing on enforceability and on the appropriate relief, which could include damages rather than an injunction if public welfare considerations warranted that remedy.

Issue #2

Whether the Housing Authority's one-dollar-per-year lease of the property to C-Town for supermarket use was an unconstitutional gift of public property under Article VIII, section 3 of the New Jersey Constitution.

Holding

The record was insufficient to decide. The Court remanded for determination whether the arrangement served a public purpose and whether the Authority used sufficiently controlled and justifiable means to achieve it.

Reasoning

The constitutional provisions prohibit public entities from donating public money or property for private use. Under Roe v. Kervick, an arrangement involving a private entity may nevertheless be valid if it serves a public purpose—benefiting the community and directly related to governmental functions—and the private party is sufficiently controlled as the means of accomplishing that purpose.

A supermarket may conceivably serve a legitimate public objective in an urban-renewal area by improving residents' access to food and making publicly financed housing more livable. The fact that C-Town would receive a private benefit would not itself invalidate the lease if the supermarket was a controlled instrumentality for accomplishing a legitimate governmental end.

But the record contained only broad, conclusory affidavits asserting that low- and middle-income downtown residents lacked transportation and had no convenient affordable grocery option. More specific evidence was needed to establish the extent of the need and whether operating a supermarket was a qualifying public purpose in these circumstances.

The lease also lacked the detailed contractual restrictions and public controls that had supported the arrangement in Roe. A public entity need not receive fair market value if it is pursuing a public purpose through adequately controlled means, but the record did not show that C-Town's use of the property was sufficiently limited and supervised to satisfy that standard.

Concurrences

Justice Pollock

Reasoning

Justice Pollock agreed that the judgment should be reversed and remanded, and Justice Clifford joined his opinion. He maintained, however, that the majority unnecessarily merged two distinct questions: the contractual validity of the covenant between Davidson and Katz, and the property-law question whether the covenant could be enforced against successors with notice.

In his view, the covenant was already enforceable. The original parties expressly intended it to run with the land; it was written and recorded; the Authority and C-Town had actual notice; and it touched and concerned both parcels. The restriction burdened the George Street property by limiting its use and benefited the Elizabeth Street property by protecting it from a nearby competing supermarket.

Justice Pollock would assess the covenant's validity between the original parties chiefly by its scope, duration, and compliance with public policy. This restriction covered only a single one-half-acre parcel, did not establish a monopoly, and was reasonable at least during Davidson's potentially thirty-year leasehold term at the Elizabeth Street site. Nothing in the record showed that it was an unreasonable restraint of trade when executed.

He objected to treating public interest and changed circumstances as grounds to invalidate an otherwise valid covenant against successors with notice. Those considerations, he reasoned, belong to the equitable choice of remedy. A court should not erase a property right because it prefers the result that would follow from nonenforcement.

The suitable remand question, in his view, was whether Davidson should receive damages rather than an injunction. An injunction would protect the covenant but could deprive downtown residents of a needed supermarket. Damages would compensate Davidson while allowing C-Town to remain open, achieving both commercial fairness and the public benefit without forcing the Housing Authority to commence a separate condemnation proceeding.