Commercial Landlord-Tenant—Landlord Alleged That Tenant Failed to Meet Obligation to Restore Property to Useable and Marketable Condition and the Cost Thereof Will Be Approximately $200 Million

A plaintiff landlord appealed from a trial court decision which granted the defendant tenant’s (The Salvation Army’s) motion to dismiss the complaint. The tenant had entered into a lease for the use of a hotel, “as a Tier II homeless facility pursuant to a parallel services agreement” (SA) with the Department of Homeless Services (DHS) and the City of New York. The tenant’s obligations under the lease were funded by and through the SA.

A majority opinion of the Appellate Division (court) found that during its tenancy, the tenant had “failed to take the most basic steps to maintain the facility in a safe and sanitary condition, as a result of which the property deteriorated precipitously. The comptroller’s office determined that maintenance of the property was so totally ignored that the property suffered extensive water infiltration and damage, peeling paint, contaminated carpeting, leaking fixtures, damaged appliances and infestations of roaches, mice, bedbugs and other vermin.” When the tenant vacated the property, it left “an uninhabitable building, rife with code violations, structural problems, water damage and mold.”

The lease stated that it was entered into “solely in order to enable Tenant to fulfill its obligations to [DHS] under the [SA].” The lease could be terminated if “the City terminated the [SA], provided that [the tenant] gave 30 days written notice, paid [the landlord] a $10 million early termination fee, and restored [the property] to ‘the same condition in which the leased premises was at the commencement of th[e] lease.’” The lease also required the tenant “to maintain the premises in ‘good and safe condition and repair, and fit to be used for their intended use…except for ordinary wear and tear,’ and to ‘take every other action, at Tenant’s sole cost and expense, reasonably necessary or appropriate for the preservation and safety of the leased premises.’” The lease also provided that if DHS “failed to pay amounts owing pursuant to the [SA], [the tenant] would ‘use commercially reasonable efforts to enforce its rights against [DHS] under the [SA] or otherwise, and Landlord agrees to fully reimburse Tenant for all of its costs in any such enforcement action. The same provision limited [the tenant's] liability to amounts paid pursuant to the [SA].”

In September 2005, the landlord notified the tenant “that the express conditions precedent to effective termination of the lease had yet to be satisfied, including payment of the termination fee and repairs and restoration necessary to return [the property] to its pre-lease condition.” However, the tenant “did nothing to ensure that DHS or the City paid for the restoration of the property, as the City was obligated to do per the terms of the [SA], prior to its expiration.” The city ultimately paid the $10,000,000 early termination fee to the landlord as required by the lease and that amount was no longer an issue. The tenant had taken “no action to obtain the funding necessary from DHS or the City or otherwise to enforce or preserve its rights under the [SA]. As a result, DHS and the City are no longer obligated to repay [the tenant] for expenses relating to the property’s restoration, since the [SA] provides that any claim against the City or DHS must be interposed within six months after termination of the [SA] or accrual of the cause of action.” The property is “presently uninhabitable” and the landlord contends that “it will cost approximately $200 million to restore the property to a usable and marketable condition.”

The court found that the landlord had “sufficiently pleaded a cause of action for breach of the lease.” The tenant had not disputed that it had failed to return the property “to its pre-lease condition upon termination,” in violation of the lease. Moreover, the tenant had agreed “to ‘use commercially reasonable efforts’ to ensure that funds necessary to meet its obligations are provided by DHS and the City pursuant to the [SA].” The court explained that “[t]he parties’ intent, as reflected in the lease, was to impose on [the tenant] the obligation to take all commercially reasonable steps, including seeking funds to which it was entitled under the [SA]…to satisfy its obligation to restore the property to pre-lease condition.”

The court believed that “[t]o read the lease in any other way would render meaningless” the lease’s requirement that the tenant “‘use commercially reasonable efforts’ to ensure payment, contrary to established precepts of construction.” Courts are to construe agreements “so as to give full meaning and effect to the material provisions” and “[a] reading of the contract should not render any portion meaningless.” “[A] contract should be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.” The court reasoned that the clause requiring the tenant to make commercially reasonable efforts to make sure that the landlord received the benefit of its bargain “was included for the…purpose of ensuring that [the tenant] would enforce its rights under the [SA] so as to meet its obligations to [the landlord] under the lease.”

A dissenting opinion cited a lease provision which limited damages to amounts paid by DHS and the City pursuant to the SA and reasoned “that since no amounts had been so paid, [the tenant] has no liability.” The majority countered that “no amounts had been paid under the [SA] precisely because [the tenant] failed to ‘use commercially reasonable efforts’ as it was obligated to do under the terms of the parties’ lease.” The court opined that “the contractual limitation on liability was obviously predicated upon [the tenant's] having fulfilled its contractual duty to use commercially reasonable efforts to secure payments from DHS pursuant to the [SA].”

The court believed that to “‘decouple’ the limitation of liability from the provision requiring that [the tenant] use commercially reasonable efforts would render the latter an illusory promise.” The court believed that the two clauses were intended to be read together and that “only if [the tenant] used commercially reasonable efforts to obtain payment pursuant to the [SA]” could it take advantage of the provision limiting its liability to such payments. Moreover, “ such exculpatory provisions are to be strictly construed against the party seeking exemption fromliability.”

The majority believed that “the dissent’s proposed reading of the contract not only eviscerates the provision requiring [the tenant] to use ‘commercially reasonable efforts,’ but grants [the tenant] the benefit of the concurrent limitation on liability, frustrating the manifest purpose of the contract and essentially rewarding [the tenant] for its bad behavior.” The court believed that based on the subject record, triable issues of fact exists as to whether the tenant had used “commercially reasonable efforts to obtain the payments to which it was entitled under the [SA].” Until such issue is determined, the tenant “cannot avail itself of a contractual limitation of liability intended for its benefit.” The court further stated that “the dissent’s reading of the lease is contrary to its plain language and improperly renders meaningless the provision requiring [the tenant] to act in a commercially reasonable manner to ensure the City made payments owing pursuant to the [SA].”

The court additionally stated that “the dissent’s interpretation—absolving [the tenant] from liability where it failed to take any steps, let alone commercially reasonable ones, to ensure it received monies from the City pursuant to the [SA]—allows [the tenant] to breach its obligations under the lease with impunity.”

Since the breach of the implied covenant of good faith and fair dealing claim was based on the same allegations, the court found that it was duplicative and had been properly dismissed. Accordingly, the court reversed and remanded the matter for further proceedings.

The dissenting opinion asserted that the tenant had paid the landlord “the full amount that it is entitled to receive under the…lease agreement.” The dissent noted, inter alia, that “‘damages for breaches of any [lease] covenant,’ was limited to the amounts that [the tenant] received from DHS pursuant to the [SA] or otherwise.” The tenant’s other assets “were ‘expressly [excluded].’” The dissent also noted that the tenant could terminate the lease if DHS had terminated the SA, provided that the tenant paid the landlord a “variable fee based on the date of termination and restored the Hotel to its pre-lease condition.” The dissent asserted that although “the lease contained a covenant by [the tenant] to restore the Hotel to its pre-lease condition,” the lease limited the tenant’s “liability to monies received from DHS.” The SA permitted, inter alia, “DHS to terminate it without cause if termination was deemed to be in the City’s best interest, and in that event the only payment DHS was required to make was the lease termination fee.”

After DHS had terminated the SA and the tenant terminated the lease, DHS had paid the tenant “$10 million, which was the specified termination fee under the lease, and [the tenant] paid that amount to [the landlord].”

The dissent reasoned that the landlord’s claim had been properly dismissed because “[w]hen read together, the limitations on both [the tenant's] liability to [the landlord] pursuant to the lease and DHS’s and the City’s obligations under the [SA] preclude the cause of action.” Even if the property had deteriorated while the tenant had been in possession and there was a failure to restore the property, the dissent opined that the plaintiffs “could not recover more for damages than the $10 million termination fee plaintiffs had already received because of the explicit limitation on damages contained in the lease.”

The dissent further reasoned that the tenant could not be held liable “for not trying to obtain the cost of restoring the Hotel from DHS.” The dissent did not believe that the “commercially reasonable efforts” provision was applicable here because the tenant “did not have any right to recover post-termination restoration costs from DHS.” The dissent stated that the SA, which the landlord itself had negotiated directly with DHS, had “explicitly limited DHS’s payment obligations to the $10 million fee, and plaintiffs do not identify any other source of a right to recover from DHS.” The dissent stated that “the majority’s statement that the City was ‘obligated’ to pay for the Hotel restoration ‘per the terms of the [SA]‘ is factually incorrect as there is no such provision in that contract.” Additionally, the dissent believed that the majority “overlooks the plain language of the contracts” and that “[u]nder the lease, [the tenant] only had to seek recovery from DHS if it had any right to recovery.” The dissent further stated that “[i]f, for example, DHS had failed to pay [the tenant] amounts due under the [SA] like the $10 million termination fee or the pre-termination rent, [the tenant] would have been obligated to use commercially reasonable efforts to enforce its right against DHS to receive those payments.”

Finally, the dissent asserted that because the breach of the implied covenant of good faith and fair dealing claim relied on an implied obligation that was in conflict with the explicit terms of the contracts, such claim had been properly dismissed.

JFK Holding v. City of New York, 6756, NYLJ 1202562441923, at *1 (App. Div., 1st, Decided July 3, 2012) Before: David B. Saxe, J.P., David Friedman, James M. Catterson, Helen E. Freedman, Sallie Manzanet-Daniels, JJ. Decision by Manzanet-Daniels, J. All concur except Friedman and Freedman, JJ., who dissent in an Opinion by Freedman, J.

Commercial Landlord-Tenant—Tenant Failed to Comply With the Lease Surrender Provision—Guarantor Remained Liable for the Tenant’s Obligations

A plaintiff (landlord) commenced an action to recover rent due under a commercial lease guaranteed by the defendant. The landlord had moved for summary judgment and dismissal of the defendant’s counterclaim for return of the tenant’s security deposit.

The lease had provided for a ten year term which ended July 31, 2017. The defendant had signed the lease “in his capacity as the principal of the tenant corporation” and had also “personally guaranteed the tenant’s obligations under the lease, including payments, ‘until the date that there shall have been delivered to the Owner a surrender instrument confirming that the leased premises are vacant, broom clean, free of occupants and free of Tenant and any other party claiming rights of occupancy. Upon delivery of such an instrument and provided that it is accurate, the obligations of the Principals shall cease as to any future obligations of the tenant under the lease arising after the delivery date….”

On Dec. 26, 2009, the tenant moved out of the premises. The tenant had paid rent through and including the month of December 2009 and no rent has been paid since. The tenant had not provided the landlord with “a ‘surrender instrument’ in accordance with…the lease.” The landlord thereafter commenced a summary holdover proceeding and had secured a final judgment of possession upon the tenant’s default. On or about May 24, 2010, the City Marshall took possession of the premises.

The landlord thereafter commenced the instant action against the defendant to enforce the guaranty. The complaint alleged that the premises had not been relet to another tenant and that rent was currently due and owing for the months of January 2010 through May 2011. The landlord also sought reasonable attorney fees.

The defendant asserted affirmative defenses of fraud and misrepresentation, that the plaintiff had waived the “surrender instrument” requirement and that the landlord had breached the contract, failed to state a cause of action and had unclean hands. The defendant also asserted accord and satisfaction and that he had “personally surrendered possession and keys to the leased premises to the building super on December 26, 2009….”

The landlord had moved for summary judgment. The court found that the landlord had established a prima facie entitlement to judgment as a matter of law on defendant’s personal guaranty. The defendant had conceded that the landlord had never been provided with a surrender instrument. The defendant nevertheless argued that his obligations under the guaranty “ceased when he ‘surrendered possession of the premises’ on December 26, 2009, by moving out and delivering the keys to the building ‘super,’ as ‘instructed by plaintiff.’” The defendant asserted that in September 2009, he had informed the landlord that he would be vacating the premises before Dec. 30, 2009, the landlord had acknowledged such request and the landlord had instructed the defendant to contact the building’s super and to cooperate with the super to show the leased premises to potential tenants. The defendant alleged that he had provided such cooperation and the super had told the defendant to leave the keys with him. The defendant stated that “under the direction of the plaintiff I personally surrendered possession and keys to the leased premises to the building ‘super’ on December 26, 2009.” However, the landlord had submitted “a copy of the superintendent’s ‘Move In/Move Out Ticket,’” which listed “12/26/09 as the ‘date ‘moved out,’” but noted “no keys to super.”

The court rejected the defendant’s argument, citing the “unambiguous language in the guaranty requiring the tenant to deliver an actual surrender instrument confirming that the ‘premises are vacant, broom clean, free of occupants, free of Tenant and any other party claiming rights of occupancy.’” Since it was undisputed that the landlord had never received such an instrument, the court held that “a ‘surrender’ within the meaning of the guaranty did not occur, and defendant’s liability under the guaranty [was] continuing.” The court emphasized that the terms of the guaranty were “unambiguous and it is undisputed that defendant guarantor failed to satisfy the conditions as required by the guaranty necessary to release him from liability.”

Thus, the court awarded judgment to the landlord for the rent due and owing under the lease for the months of January 2010 through May 2011. The court also dismissed the defendant’s counterclaim for return of the tenant’s security deposit. The tenant was not a party to this action. Such dismissal was without prejudice to the proper party asserting such claim in an appropriate proceeding. Since the landlord’s moving papers were “silent as to its claim for attorneys’ fees,” the court deemed such claim waived and dismissed.

Joseph P. Day Realty v. Srinivasan, 106159/11, NYLJ 1202563164349, at *1 (Sup., NY, Decided July 2, 2012), Madden, J.

Foreclosures—Lender Cannot Substitute Nunc Pro Tunc a Newly Signed Affidavit of Merit and Amount Due—Administrative Orders 548/2010 and 431/2011

This mortgage foreclosure involved “a novel and important issue regarding the legality of substituting nunc pro tunc a newly signed affidavit of merit and amount due ['Affidavit'] in place of the original affidavit after the latter was used by the mortgagee to obtain an order of reference and judgment of foreclosure and sale.” The plaintiff (lender) had moved for an order pursuant to CPLR §5019(a) and CPLR §2001 “requesting the court substitute an [Affidavit], nunc pro tunc, in place of the affidavit attached to the initial motion papers and validating the order of reference, as well as the judgment of foreclosure and sale, both previously granted by the court, and permitting [lender] to proceed to foreclosure sale.”

The lender had commenced a foreclosure action. After the defendant failed to appear, the lender moved for “an order of reference to appoint a referee to compute the amount due on the note.” In connection therewith, the lender submitted an Affidavit. The Affidavit was executed by the lender’s Foreclosure Manager (“A”), which purports to establish the amount that the defendant owed under the note. The court granted the lender’s application for an order of reference. A referee thereafter submitted a Referee’s report which indicated that the defendant owed $234,291.38 under the note. The lender thereafter moved for “an order confirming the referee’s report and for a judgment of foreclosure and sale.” The moving papers included the same affidavit of “A”. The court granted the lender’s application.

However, on Oct. 20, 2010, then NYS Chief Administrative Judge instituted Administrative Order 548/2010, applicable to residential foreclosure actions. Pursuant to such order, the lender’s counsel had to submit “an affirmation attesting to the accuracy of the documents and notarizations submitted to the court.” The new requirement was intended “to protect the integrity of the foreclosure process and prevent wrongful foreclosures….” Prior thereto, there had been substantial publicity involving “widespread deficiencies in notarization and ‘robosigning’ of supporting documents—in residential foreclosure filings in courts nationwide….”

On March 2, 2011, Administrative Order 431/2011 replaced Administrative Order 548/2010 nunc pro tunc to Nov. 18, 2010. The new order “enlarged the scope of counsel’s investigative duties under Administrative Order 548/2010.” Order 431/2011 required that:

the affirmation must be submitted at one of three stages: (I) for cases not filed as of Oct. 20, 2010, the affirmation is to be filed with the request for judicial intervention; (ii) for cases where a judgment of foreclosure and sale has not been entered, the affirmation must be submitted at the time of filing for an order of reference or judgment of foreclosure and sale; and (iii) for cases where a judgment of foreclosure and sale has been entered, but the property has not been sold, the affirmation is to be submitted at least five business days before the foreclosure auction.

In the instant case, the lender had obtained a judgment of foreclosure and sale before the issuance of Administrative Order 548/2010 and 431/2011. Therefore, the lender’s counsel was obligated “to submit the affirmation at least five business days before the foreclosure sale.”

While preparing for the foreclosure sale, the lender “attempted to comply with Administrative Order 431/2011 but was unable to do so.” The lender’s counsel explained that “[t]his firm was notified by its client that they cannot confirm the accuracy with regard to the execution and/or notarization of the [Affidavits]…and, therefore, the certification cannot be provided.” The attorney further stated that “while the [lender] cannot confirm the proper execution and/or notarization of said Affidavit, they have verified that the amounts set forth and that the claims set forth are true and accurate. In fact, the information contained in the Affidavit…mirrors that which is set forth in the Complaint.” The lender sought to remedy this “by submitting a new [Affidavit] in place of the original affidavit nunc pro tunc.” The lender argued that its application should be granted since “it would not prejudice a substantial right of any party as there is ‘no new material fact set forth in the Affidavit’ and ‘there is no dispute that the information set forth…is correct.’”

The new Affidavit eliminated the paragraph contained in the original Affidavit which provided that “deponent has reviewed the original note, mortgage, and if applicable, assignments of mortgage, kept in the regular course of business by thus institution. Deponent finds the same to be in proper form, duly executed and notarized where applicable, and mortgage tax paid there.” The proposed Affidavit was not executed by an officer of the lender, but by “B”, a vice president of a “servicer” company. “B” stated that the note executed by the defendant had since been transferred to the servicer by assignment. The proposed Affidavit did not contain a copy of the purported assignment and the servicer had not applied to be substituted as lender in this action.

CPLR §2001 provides in pertinent part that “[a]t any stage of an action, the court may permit a mistake, omission, defect, or irregularity to be corrected, upon such terms as may be just, or, if a substantial right of a party is not prejudiced, the mistake, omission, defect or irregularity shall be disregarded.” Further, CPLR §5019 permits a court to correct ministerial mistakes in judgments which do not affect a substantial right of any party.

The court noted that “[e]nsuring the accuracy of the documents submitted is imperative in any action as courts rely on the submissions of counsel throughout the adjudication process. The fact that the affirmation requirement is specific to residential foreclosure actions speaks to the importance of the ‘basic human [need]‘ at stake.”

Here, the lender obtained an order of reference and judgment of foreclosure and sale based upon the original Affidavit. “Without the court’s reliance on the accuracy of the information contained in that affidavit, [lender] would not have been granted an order of reference….” Moreover, “without the court’s reliance on the affidavit, [lender] would not have obtained a judgment of foreclosure and sale as the filing of a properly executed and notarized [Affidavit] is a condition precedent to the granting of a judgment of foreclosure and sale, not a mere irregularity.” Additionally, the initial affidavit stated that the “deponent makes this affidavit knowing that the Referee in this matter and the Court appointing the same will rely on the truth and veracity of the statements contained herein.”

The court found that the issuance of “the Order of Reference and Judgment of Foreclosure and Sale based upon a defective [Affidavit] affected a substantial right of defendants, namely their right to remain in their home.” The court reasoned that “[a]llowing [lender] to submit a new [Affidavit] at this late juncture, nunc pro tunc, runs contrary to the very purpose of the affirmation requirement.” Thus, the court denied the lender’s motion.

Since the lender could not comply with Administrative Order 431/2011, the court explained that the lender could not conduct a foreclosure sale. The court further noted that “[w]hile there is sparse case law regarding a mortgagee’s inability to comply with Administrative Order 431/2011, a number of recent decisions have addressed a mortgagee’s failure to comply with other requirements specific to residential foreclosure actions.” After reviewing such other cases, the court explained that “Administrative Order 431/2011 is not jurisdictional in nature.” At the earliest, “the affirmation is to be submitted with a request for judicial intervention and thus is not a mandatory condition precedent to commencing an action. Therefore, “a mortgagee’s inability to comply with Administrative Order 431/2011 does not require dismissal of the action.” The court concluded that it was “left to fashion its own remedy that is consistent with the purpose of Administrative Order 431/2011.” Accordingly, the court, on its own motion, vacated the order of reference, the referee’s report and the judgment of foreclosure and sale.

Litton Loan Servicing v. Polanco, 12162/2009, NYLJ 1202562920747, at *1 (Sup., OR, Decided June 29, 2012), Ecker, J.

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