No. 1625 April Term, 1978, Appeal from Order of the Court of Common Pleas of Allegheny County, Civil Division, No. 206 April Term 1974.
Michael K. Wolf, Chicago, Illinois, for appellants.
Walter T. McGough, Pittsburgh, for appellees.
Spaeth, Hoffman and Van der Voort, JJ.
[ 283 Pa. Super. Page 520]
This is an appeal from an order dismissing appellants' action in assumpsit and rescinding the agreement of sale between appellants and appellees. The case was tried before a judge sitting without a jury.
Appellants are a group of investors from Chicago, Illinois, who own property in Orchard Park, New York, as a joint venture called Orchard Park Associates. Appellees are Frank Zappala, an attorney, and Frank Nascone, a real estate developer. Appellees used to own the Orchard Park property. On September 2, 1966, they agreed to sell it to one Jack Jacobs, who was acting as broker on behalf of one of appellants, David Spatz. Spatz later assigned the agreement of sale to Orchard Park Associates.
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Both appellants and appellees had extensive experience with real estate. Spatz testified that he had been making real estate investments since 1956. N.T. at 120. Zappala testified that he and Nascone became involved in real estate development in 1960 or 1961 when they formed the Maret Corporation. N.T. at 163. The business of Maret was to acquire land, negotiate leases of buildings to be built on the land, and arrange for the construction and financing of the buildings. N.T. at 163-164. Between 1960 and 1966, appellees either individually or as Maret developed six to eight sites with S.S. Kresge Company as the major tenant. N.T. at 168. In 1966 alone appellees acquired and sold at least four parcels of land on which S.S. Kresge stores, or K-Marts, were to be built.
One of these four parcels was the Orchard Park property. Before selling Spatz the Orchard Park property, appellees had sold two other of the four parcels to Spatz.*fn1 On January 3, 1966, Spatz purchased the K-Mart parcel in Altoona, Pennsylvania, for $1,550,062.50, payable by taking the property subject to a first mortgage in the amount of $1,300,000.00, and $250,062.50 in cash. Plaintiff's Exhibit 1. The cash figure was arrived at by capitalizing the projected annual net cash flow at 8.5%. In making this calculation, Maret estimated that the property would be assessed $20,000 per year in real estate taxes, and it agreed that if the taxes actually assessed in the first full year following completion and acceptance of the shopping plaza by Kresge exceeded $20,000, it would pay the difference between the actual assessment and $20,000, capitalized at 8.5%. On May 14, 1966, Spatz purchased the K-Mart parcel in Canton, Ohio, for $1,415,000, payable by taking the property subject to a first mortgage in the amount of $1,200,000, and $215,000 in cash. This agreement provided that if the real estate taxes
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assessed against the property in the first full year following completion and acceptance by Kresge exceeded $15,000, Maret would pay the difference between the actual assessment and $15,000, capitalized at 9.5%. Plaintiff's Exhibit 3.
In April 1966, Jacobs, who also acted on Spatz's behalf in the Altoona and Canton transactions, began negotiating with Zappala and Nascone with respect to the Orchard Park property. On April 28, Zappala prepared an estimate of the revenues and expenses that might be expected from the Orchard Park K-Mart. Plaintiff's Exhibit 19. The figure for "Gross Rent" was $162,000, while that for "Real Estate Taxes" was $20,000. Zappala testified that he arrived at the latter figure by talking to a local attorney and banker, N.T. 181, who did not break down their figures as to the respective taxes covered, N.T. at 192.
On May 23, 1966, Zappala and Nascone entered into a lease with Kresge for an unbuilt K-Mart. Plaintiff's Exhibit 17A. Kresge was to pay 1% of gross sales exceeding $6,046,500; at least $162,000 annually in gross rent; and for water, gas, and electricity furnished to the K-Mart, provided that Zappala and Nascone installed separate meters. Para. 16. Zappala and Nascone were to pay sewer charges on the property unless the charges were predicated on water consumption, in which case Kresge was to pay them. Para. 16. Finally, if Kresge decided to expand the K-Mart, it was required to reimburse Zappala and Nascone for any additional "real estate taxes" imposed on the property. Para. 15.
On July 20, Jacobs wrote Zappala that Zappala's April 28 estimate that the real estate taxes on the property would be $20,000 was too low and that the taxes might well be $30,000 a year. Such a tax expense would reduce the annual net cash flow to about $11,000, or a 5% return on the $200,000 Spatz expected to put up in cash. N.T. at 47. Anything less than a return of 10.4%, or roughly $21,000 on a $200,000 cash investment, was unacceptable to Spatz. N.T. at 48. Jacobs suggested to Zappala that he guarantee the taxes for the first full year as had been done in the Altoona and Canton agreements. Plaintiff's Exhibit 22. Upon receiving Jacob's
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letter, Zappala assured him that he "would protect us on taxes. We can rest assured that we had nothing to fear of any tax discrepancies." N.T. at 55. In the negotiations that followed, the parties worked out and agreed upon a tax guarantee provision similar to those found in the Altoona and Canton agreements. The parties did not, however, discuss which government charges would be considered taxes for the purpose of this guarantee. N.T. 63.
On September 2, Jacobs, acting as a nominee of Spatz, and Zappala and Nascone entered into an agreement of sale for the eventual transfer of the Orchard Park Property. Under the terms of the agreement, the sellers would supervise the construction of a K-Mart store in conformance with their lease obligation to K-Mart, and transfer the property to Jacobs after the completion of the store. The purchase price was $1,525,000, $1,325,000 of which was payable by taking title subject to a first mortgage in that amount, and the balance of $200,000 in cash. The agreement contained a provision designed to protect Jacobs against real estate taxes in excess of $20,000 per year, which read:*fn2
7. Purchase Price Adjustment -- Real Estate Taxes.
The Seller agrees that in the event the real estate taxes assessed against the K-Mart Parcel in the first full year following the date of completion of the Shopping Plaza and acceptance thereof by the S.S. Kresge Company, and its full assessment as a completed project and in the next succeeding three (3) years exceeds TWENTY
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THOUSAND DOLLARS ($20,000.00) per annum, Seller shall repay to Purchaser, the difference between each of such tax bills as annually assessed and the estimated figure of TWENTY THOUSAND DOLLARS ($20,000.00) when the tax for each of those years is due. In addition, after receipt of the fourth of the tax bills (the bill for the fourth of the years described hereinbefore), the difference between such fourth tax bill and the estimated figure of TWENTY THOUSAND DOLLARS ($20,000.00) capitalized at 10.4% shall be repaid by Seller to Purchaser when such tax is due.
The agreement contained no definition of what the term "Real Estate Taxes" meant.
After the Orchard Park agreement was executed, Zappala and Nascone consummated their purchase of the land described, procured the mortgage for and supervised the construction of the K-Mart store, and amended the lease with Kresge. On November 16, 1967, the K-Mart was completed and on January 22, 1968, Orchard Park Associates, which had in the meantime been assigned the agreement of sale, closed on the property. At the closing, Nascone and Zappala assigned to Orchard Park Associates the Kresge lease and an amendment increasing the minimum annual rental to $165,000.*fn3
Orchard Park Associates' tax liability for the land began in 1968, which was the first full year after the completion and acceptance of the shopping plaza. In October 1967, Spatz paid the school tax bill for 1967-68 in an amount of $5,081.72. In January 1968, Spatz paid the state, county, and town tax bill for 1968 in the amount of $8,088.30. The bill listed the following items:
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TAX EQUALIZATION PAYMENT ORDERED BY STATE
In September 1968, Spatz received and paid a school tax bill for 1968-69 in the amount of $13,548.70. The total 1968 taxes adjusted for the school tax*fn4 were $17,403.51.
On July 26, 1968, Zappala wrote to the assessor of the town of Orchard Park. The occasion for the letter was that Zappala had learned that the town had raised the assessment on the Orchard Park property from $100,000 to $331,250. Zappala stated that the new assessment would raise "real estate taxes" to approximately $35,000, which would reduce Orchard Park Associates' return on their investment to less than 7%. Plaintiff's Exhibit 39. The town of Orchard Park subsequently reduced the new assessment to $250,000. Plaintiff's Exhibit 40.
On February 6, 1969, Spatz paid the 1969 state, county, and town tax bill for $21,063.76. Plaintiff's Exhibit 18G. This bill listed the same items as had the 1968 bill. Knowing that the $20,000 base figure would thus be exceeded, Zappala attempted to negotiate a rental increase with Kresge. Plaintiff's Exhibit 44. Initially, Kresge was reluctant to agree to any increase, or to pay any of the items on the tax
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bill relating to sewer and water, since it considered that it was not obliged to pay these items under its lease because they were not submitted to it as utility bills but rather to Orchard Park Associates as a part of the tax bill. N.T. 186-187. Zappala, however, persisted, and, after Spatz informed him in September that the total adjusted taxes for 1969 would be $36,155.96 (the school tax for 1969-1970 was $16,635.71),*fn5 or $16,155.96 over the $20,000 base figure, Kresge agreed to a $10,000 increase in the rent and the lease was amended accordingly. Plaintiff's Exhibit 17C. On November 25, Spatz wrote to Zappala requesting that he send him a check for $13,655.97, which represented $16,155.96, the 1969 excess figure, minus a $2,499.99 credit for the rental increase that Zappala had procured. Plaintiff's Exhibit 52. Zappala did not answer this letter.
On January 15, 1970, Spatz forwarded to Zappala the 1970 state, county, and town tax bill for $24,072.14 and again requested that Zappala pay Orchard Park Associates the excess owed on the 1969 taxes. Plaintiff's Exhibit 55. Zappala did not answer this letter nor others that followed. Plaintiff's Exhibits 56, 57. On September 16, Spatz forwarded to Zappala the school tax bill for 1970-71, $20,723.86. He calculated that Zappala and Nascone owed Orchard Park Associates $12,750.92 for 1970 taxes,*fn6 and requested that Zappala pay Orchard Park Associates a total of $26,406.89 for the 1969 and 1970 taxes. Plaintiff's Exhibit 61. Zappala acknowledged the "bad news" about the 1970 taxes, but did not remit any money to Spatz. Plaintiff's Exhibit 62.
On January 15, 1971, Spatz forwarded to Zappala the state, county, and town tax bill for 1971, which was due February 15 and totaled $34,252.86. Plaintiff's Exhibits, 63, 18K. On January 18, Zappala wrote to an official in the
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Kresge Real Estate Department requesting a meeting with company executives to discuss the problems created by the unanticipated tax increases. In this letter Zappala stated:
The present operating position of the property is as follows: