Commercial Landlord-Tenant—Defendant’s Late Notice of Lease Renewal Excused on Equitable Grounds—Loss of Retailers’ Good Will Could Constitute a Forfeiture

The Appellate Division, First Department explained that “[t]he law generally exacts a high price for failure to comply with the precise language of a contract….” However, “in some situations, principles of equity have softened the often harsh results of common-law rules of strict contract construction. These equitable principles, such as the doctrine of substantial performance, import the concept of fundamental fairness to the context of contract-dispute litigation. One equitable construct that has been used to protect parties from the harsh results of strict contract construction is the principle underlying this appeal, that equity will intervene to avoid a forfeiture.”

The trial court had exercised its equitable power to excuse “the lateness of a commercial tenant’s notice to the landlord of its intent to renew a lease.” The issue on appeal was “whether this exercise of equitable authority was proper, given that the tenant did not prove that it made substantial improvements in anticipation of continued occupancy.”

A well known retail tenant had operated a store at the subject premises since 1994. The lease expired on Jan. 31, 2011. However, the lease gave the tenant the option of “two five-year renewal terms, the first of which was to be exercised no later than January 31, 2010.” The tenant’s controller had failed to calendar the exercise date and the tenant therefore failed to exercise the option to renew until Feb. 4, 2010, when it e-mailed and sent by fax a letter incorrectly dated Jan. 30, 2010. The landlord rejected the late exercise of the renewal option by letter dated Feb. 5, 2010, in which it stated that the purported renewal letter had been fraudulently backdated and had not delivered “in the manner prescribed by the lease.” The tenant thereafter sent its renewal letter in the manner prescribed by the lease on Feb. 9, 2010.

Two days later, the landlord commenced the subject action, seeking a declaration that the tenant “had failed to timely renew the lease, that the renewal option was terminated, and that the lease would expire on January 31, 2011.” The tenant sought a declaration that it had effectively exercised its renewal option. The court found that “the [tenant] was entitled to equitable relief under J.N.A. Realty Corp. v. Cross Bay Chelsea (42 NY2d 392 [1977]),” and excused “the lateness of [the tenant's] exercise of its renewal option.” The landlord appealed.

Generally, “when a contract requires written notice to be given within a specified time, the notice is ineffective unless it is received within that time….” However, equity “will relieve a tenant from a failure to timely exercise an option in a lease to renew or purchase if (1) the tenant in good faith made substantial improvements to the premises and would otherwise suffer a forfeiture, (2) the tenant’s delay was the result of an excusable default, and (3) the landlord was not prejudiced by the delay….”

Here, the four-day delay in providing the notice required by the lease “did not prejudice the landlord.” Although the landlord characterized “the backdating of the renewal letter as fraudulent conduct,” the record supported the trial court’s rejection of that conclusion. Although the tenant’s renewal letter, prepared on Feb. 4, 2010, was incorrectly dated Jan. 30, 2010, the tenant “never claimed that its exercise of its renewal option was timely, based on the date of the letter.” In fact, “the option renewal letter was e-mailed with a cover page dated February 4, 2010, and the fax…sheet was time-stamped February 4, 2010.” Additionally, the tenant’s controller who prepared the letter “provided a credible explanation for the error.”

The Appellate Division found that “the misdating was not prompted by either bad faith or an intent to defraud, and that the four-day delay was an honest mistake.” The “more difficult issue” was whether the tenant “established the type of forfeiture for which equitable relief is appropriate under the rule articulated in J.N.A. Realty.

“[E]quity does not generally intervene when a party fails to timely exercise a contractual option, because ‘the loss of the option does not ordinarily result in the forfeiture of any vested rights’….” An “option itself does not create any interest in the property, and no rights accrue until the condition precedent has been met by giving notice within the time specified. However, while options such as stock options or options to buy goods do not create a vested interest in the property so that the loss of the property may be treated as a forfeiture, lease renewal options are different. Equity may intervene where a tenant in possession of premises under an existing lease neglects to timely exercise a renewal option, because ‘he might suffer a forfeiture if he has made valuable improvements on the property.’”

Here, there was no support in the record for the trial court’s finding that that the tenant had made alterations that included “tearing down walls…and customizing the space to its needs.” The tenant’s CEO had testified only as to painting and the “inability to undertake flooring work due to leaking at the premises.” Moreover, testimony indicated that “the premises were ‘highly improved when [the tenant] took it.’” Even if the tenant had removed walls at the start of the lease in 1994, such improvement had been made “too long ago to justify equitable relief under J.N.A. Realty.” Improvements made early in the lease may have “already been amortized and depreciated by the time of the attempted renewal” and the tenant may have “reaped the benefit of any initial expenditure.”

However, “the Court of Appeals has authorized equitable relief against untimely renewal where there was no indication that substantial improvements had been made.” Relief could be granted “‘to preserve the tenant’s interest in a long-standing location for a retail business’ because this is an important part of the good will of that enterprise, [and thus] the tenant stands to lose a substantial and valuable asset’….”

The premises had been “successful and popular,” and the tenant had been unable to find alternative space. Moreover, it would take “most of a year to open the new store.” The record showed that the tenant’s store “had garnered substantial goodwill in its approximately 15 years at the location, which goodwill was a valuable asset that would be damaged by its ouster from the premises.” A forfeiture “need not be based solely on substantial improvements; equity may intervene to protect against the forfeiture of the substantial and valuable asset of the business’s goodwill.”

Here, “the store’s 114 employees would lose their jobs…if the store were to close and no alternate location was available.” The tenant’s controller had made a mistake in failing to calendar the renewal deadline and there was no “credible evidence” that the tenant had unclean hands. Additionally, the location was one of the tenant’s strongest retail locations and the landlord had not demonstrated that it would be prejudiced. The court emphasized that “[b]y its nature, equitable relief must always depend on the facts of the particular case and not on hypotheticals….” and held that the subject facts justified equitable relief and affirmed.

135 E. 57th St. LLC v. Daffy’s Inc., 101857/10, NYLJ 1202533417094, at *1 (App. Div., 1st, Decided Nov. 22, 2011), before Saxe, J.P., D. Friedman, Moskowitz, Freedman, Richter, JJ. Decision by Saxe, J.P. All concur.

Co-Ops—Shareholder’s Asthma and Allergies Justified Refusal to Follow Co-Op’s Demand That Shareholder Remove Air Conditioner—Discrimination Under Federal Fair Housing Amendment Act, State and City Anti-Discrimination Statutes

Three years after the plaintiffs moved into a cooperative apartment, they installed an air conditioner “through an opening they created in an interior wall of the apartment to the exterior brick wall of the building.” The cooperative corporation (co-op) thereafter sent a notice stating that the shareholder had breached the proprietary lease (lease) and the house rules. The notice cited the failure to remove the air conditioner “which extended and protruded from the wall of the building.”

The plaintiffs thereafter commenced the subject action, alleging that one plaintiff suffered from “an extremely allergic health problem, requiring her to have purified air, and necessitating the use of an air conditioner,” i.e., absent the air conditioner, the plaintiff had “difficulty breathing and engaging in the activities of daily living.”

The plaintiffs asserted that the co-op had violated “the Federal Fair Housing Amendments Act of 1988 (FHAA) (42 USC §3601 et seq.) and committed an unfair housing practice by discriminating against her on the basis of her physical impairment, and by proposing to evict her based upon her physical impairment.” The plaintiffs also alleged the co-op was depriving the plaintiffs of their “quiet enjoyment of the premises.” The plaintiffs sought a declaration that the air conditioner did not violate the house rules or constituted a de minimus violation thereof and because of the plaintiff’s medical needs, could not constitute a basis for eviction. The plaintiffs cited “the FHAA, the New York State Human Rights Law” (Executive Law Art. 15), and the NYC “Human Rights Law (NYC Admin. Code §8-101, et seq.).”

The co-op counterclaimed for a mandatory injunction to compel the removal of the air conditioner and to restore the premises to the original condition, for damages to the property and trespass and damages based upon “exclusion from the apartment and unauthorized improvement….”

A Judicial Hearing Officer (JHO) had found that the air conditioner “protrudes slightly over a terrace, which is part of the leased premises,” and that the air conditioner installation was without permission of the co-op board (board). The lease bars any alterations without the prior consent of the co-op. There are house rules that relate to “air conditioning, construction or additions on a terrace and procedures and technical requirements to be observed before and during any work performed.” The plaintiffs did not comply with such requirements.

However, the co-op failed to demonstrate that these violations “caused any substantial damage or losses to the building or its other residents, other than an opening in the wall for the air conditioner, or that the air conditioner was visible or audible to other residents.” The co-op failed to provide evidence that any residents had complained about the air conditioner and the opening in the wall “apparently can be easily restored” when the air conditioner is removed.

The plaintiff with the physical ailment is 86-years-old and has “asthma, severe chronic allergies to dust, pollen and air borne allergens, manifested by severe headaches, coughing, sneezing difficulty breathing and pain.” The JHO found that the type of filtration used in the heating and cooling units was “insufficient to provide the type of filtration provided” by the subject air conditioner “which use improves [plaintiff's] medical condition and is medically necessary for her to enjoy the use of her residence.”

The co-op disputed whether the plaintiff had a “disabling condition” and whether the air conditioner “is medically necessary to alleviate, or avoid, the negative effects of [plaintiff's] alleged disability.” The co-op further asserted that the plaintiffs had failed to show that they had “asked for, and were refused, a reasonable accommodation,” or that the co-op was aware of the plaintiff’s “alleged disability but nevertheless made no accommodation.” The co-op also cited the business judgment rule.

The court found that the JHO’s findings were substantially supported by the record and that at least one board member, had been informed of the plaintiff’s medical condition and need for the use of an air conditioner. Additionally, the court agreed with the JHO’s conclusion that the co-op’s action constituted unlawful discriminatory acts, and such acts were not protected under the business judgment rule. The court also found that since the lease did not vest the co-op with a right to recover attorney’s fees, there was no reciprocal entitlement afforded by Real Property Law §234, which could be the basis for an award of attorney’s fees to the plaintiffs.

The NYS Human Rights Law provides for attorney’s fees “only in cases alleging housing discrimination….” The plaintiffs had not made a claim pursuant to Executive Law §297 or §298 in their complaint and raised the violation of Executive Law Article 15 only as an affirmative defense. Since the action had not been commenced under Executive Law §287 or 298, and because the NYS “Human Rights Law does not otherwise provide for an award of attorney’s fees,” the court held that plaintiffs may not recover attorney’s fees pursuant to Executive Law §297(10). Further, since the plaintiffs had not commenced their action pursuant to the NYC Human Rights Law, but had only raised such statute as an affirmative defense, the court denied attorney’s fees under NYC Admin. Code §8-502(f). The court then explained that in its discretion, it may award reasonable attorney’s fees and costs to a prevailing party pursuant to 42 USC §3613(c)(2).

Since the plaintiffs were entitled to a judgment against the co-op “providing declaratory and injunctive relief and dismissal of the affirmative defenses and counterclaims asserted by defendant Co-op….,” the court held that the plaintiffs were “prevailing parties within the meaning of the FHAA,” and directed plaintiffs’ counsel to submit an affirmation setting forth the legal services rendered and the hours expended.

Feldman v. The Cryder House, Inc., 16570/2006, NYLJ 1202534602602, at *1 (Sup., QU, Decided Nov. 16, 2011), Schulman, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.