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Commercial Landlord-Tenant – Equity Will Not Revive Tenancy Where Tenant Failed to Exercise Renewal Option and Lease Has Already Expired – Implied Agreement – Real Property Law �232-c This case involved a commercial holdover proceeding. The owner claimed that the premises were held under a “monthly hiring.” The owner had served a 30-day notice which purported to terminate the tenancy as of Jan. 31, 2006. The tenants argued they held the premises pursuant to a written lease that does not expire until July 2010. The tenants moved for summary dismissal of the petition. The court denied the motion. The parties had entered into a lease in August 2002, with a three-year term which was to expire on July 31, 2005. The lease contained an option to renew for a period of five years provided that the tenants give the owner 180 days notice in writing by certified mail-return receipt requested, of their intention to renew the option. The tenants never gave the owner written notice of their intention to renew the lease. After expiration of the lease, the tenants submitted a rent check for $1,800, the amount of rent which was stated in their lease. The tenants testified that during the first month of the extension period, the owner demanded the “increased” rent, pursuant to a schedule of rents for the renewal term. Such a schedule provided for a monthly rent of $1,863 for the period Aug. 1, 2005 through July 31, 2006. The tenants asserted that in September 2005, the tenants had paid $1,926 to the owner, representing the “increased rent” for September and the balance owed for August. In October, November and December, the tenants paid and the owner accepted rent of $1,863. Although the tenants tendered rent payments for January, February and March 2006, the owner refused them. The owner’s affidavit did not address tenants’ evidence that they had paid rent and rent had been accepted for five months after the expiration of the lease, at the amount specified in the first year of the renewal term. The tenants argued that “equitable considerations require that their failure to provide notice of renewal be excused, and that the Lease be deemed renewed in accordance with its terms.” The tenants cited improvements to their space at a cost of at least $10,000, in order to, inter alia, “customize the space for our use as a music school.” The tenants also argued that by the owner’s demand and acceptance of rent at the renewal rate, the owner had waived notice of renewal. The court rejected the equitable consideration and waiver arguments. However, the court held that the tenants may “attempt to establish an express or implied agreement that would entitle them to an additional term, but a trial will be required for that purpose.” The court explained:
Any right a tenant has to renew a lease is governed by the terms of the agreement . . . . It is a settled principle of law that a notice exercising an option is ineffective if it is not given within the time specified . . .
Nonetheless, “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.” The court then explained that an “excusable default” in exercising an option to renew may result through “inadvertence or an honest mistake” or negligence. In determining whether a tenant would suffer a forfeiture, courts will consider “not only improvements made by the tenant to the premises, but also the tenant’s ‘goodwill . . . with the community and its customer base.’” With few exceptions, “equity has intervened to preserve the leasehold only when notice of the renewal has been given late, but before expiration of the lease term.” The court concluded that equitable considerations cannot “revive a lease that has expired by its terms in the absence of required notice.” The court emphasized that when a lease expires based on a conditional limitation because the tenant failed to cure a breach within the time specified in the lease, courts are “powerless to revive the expired lease.” The court noted that Yellowstone injunctions may not be granted where a cure period has already expired. The court further noted that as a tenant may seek a Yellowstone injunction to toll the running of a cure period, a tenant may seek a permanent injunction tolling its time to exercise the renewal option in its lease. The court then stated that it does not appear that “any published decision that expressly addresses the clear implication of Yellowstone and its progeny when equity is invoked to revive a lease that has expired by its terms in the absence of a notice to renew.” Chock Full O’Nuts Corp. v. NRP LLC 1 , 11 AD3d 385 (1st Dept. 2004) held that “resort to equity after the lease had expired was necessarily unavailing.” No triable issues had been raised as to whether there were equitable grounds. Bart-Rich Enterprises, Inc. v. Boyce-Canandaigua, Inc. , 8 AD3d 1119 (4th Dept. 2004) held that a tenant who had never provided written notice and did not allege that the landlord had waived such requirement, is not entitled to equitable relief. However, the court found some cases where equitable considerations supported a renewal of a lease, notwithstanding the lease expiration, where “the lease itself failed to specify a time or method for exercising the option . . . or the lease was ambiguous as to when the notice was to be given, and the court does not clearly hold that the notice was given after expiration.” Since the subject lease clearly specified a time and manner for providing a notice of renewal, and such notice was not given before expiration, the court concluded that “equitable considerations cannot serve to revive and renew [the] tenancy.” With respect to the waiver argument, the court explained:
A lessee, who enters into possession of demised premises under a lease for a fixed term with the privilege of extending it by giving notice to the lessor, and continues in possession after the fixed term has expired, paying the rent thereafter as it becomes due, thereby elects to exercise the option for an extension of the term, although no express notice of such election is given . . . . In such a lease the requirement of a written notice may be waived by the parties and a waiver will be implied when the lessee remains in possession and pays the rent to the lessor.
The court cited an early case that held that when an owner accepts rent for several months, absent proof of any other understanding between the parties, it is “presumed that the lease was renewed for another year at the same terms.” Notwithstanding the “landlord-oriented rationale of the waiver rule and its consistency with the landlord-favorable common law holdover rule, at least two trial courts . . . have applied the waiver doctrine at the instance of tenants seeking to hold the landlord to the renewal term.” However, in one case, the lease did not specify when and how the tenant should give notice and the renewal paragraph was ambiguous and in the other case, the owner did not have the right to grant the renewal when the time arrived for the tenant to exercise the option when the owner had promised to extend the term if it had obtained the right to do so. The court then noted that under Real Property Law (RPL) �232-c, the common-law holdover rule was changed by preventing an owner from exercising its common law option to declare a new term of longer than one month where there is a holdover tenancy. The court explained that the most recent appellate authority indicates that when a lease expires in the absence of a notice to renew prior to expiration, the “nature and duration of the tenancy resulting from continued possession, and payment and acceptance of rent, is to be determined within the contours of Real Property Law �232-c.” The tenants did not contend that they had expressly agreed to renewal of the lease and the court found that there was no compelling evidence of an implied agreement to extend the lease. The tenants had not established “prime facie that their tenancy is other than month-to-month.” Since a month-to-month tenancy pursuant to RPL �232-c continues on the terms of the expired lease, the owner’s request for a repair required by the lease likewise does not compel the conclusion that the lease has been renewed. The lease provided that if the tenant remained in possession beyond the expiration date, and if the lease was not renewed or a new lease was not entered into, a month-to-month tenancy would result upon the terms set forth in the lease, except that the rent is to be modified pursuant to the rider attached to the lease. The court found that there was no evidence of any discussion concerning renewal, either before or after expiration of the lease. The tenants had not explained why they did not provide timely notice of renewal. The owner did not explain why it demanded rent at the renewal rate. The court then noted that even though equitable considerations cannot revive the lease for the renewal term, they are relevant to a determination as to the period of time the tenants may remain in the premises. Moreover, the “factors that would support equitable assessment also provide a context for the parties’ words and actions, providing insight into what they could, and should, have reasonably understood.” The court set the matter down for a trial as to whether there was an express or implied agreement. James Pinto Photography, Ltd. v. Sheppard L&T , New York Law Journal, Aug. 11, 2006, p. 23, col. 1, Civ. Ct., Kings Co., Battaglia, J. Land Use – New York City Department of Buildings May Require Proof That Building Will Be Used for School Dormitory – Community Facilities – Unprecedented Action Is Not Necessarily Arbitrary or Capricious – Community Pressure An owner commenced an Art. 78 proceeding to annul a decision by the city Board of Standards and Appeals (BSA), which affirmed the denial by the city of the city’s Department of Buildings (DOB) of an owner’s application for building permits (permits) for a 19-story residential building located within an R7-2 zoning district. The DOB had held that the owner failed to adequately demonstrate that the proposed building would be used as a “college or school student dormitory,” as set forth in the city’s Zoning Resolution (ZR). The owner had purchased the property from the city at auction. A deed restriction limited the use of the property to “[c]ommunity facility use as such use is defined in the [ZR] as existing on the date of the auction.” The ZR lists the following as “community facilities”:
(1) college or universities; (2) college or school student dormitories and fraternity or sorority houses; (3) domiciliary care facilities for adults; (4) libraries, museums or noncommercial art galleries; (5) monasteries, convents or novitiates; (6) nonprofit hospital staff dwellings; and (7) nursing homes and health-related facilities.
The court explained that “‘all community facilities’ are institutional-type uses viewed as necessary or beneficial to the larger community.” The floor area ratio (FAR) for a Use Group 2 residence is 3.44 and such building must accommodate off-street parking for half of its units. In contrast, the maximum FAR for a “community facility” is 6.5, which permits a much bigger building to be built on the zoning lot and the “community facility” need not provide off-street parking. The owner had applied for permits from the DOB to construct a “college or school student dormitory.” The owner claimed that it intended to rent to students from different schools and colleges. The individual units would include one or more bedrooms, a living room, a bathroom and a kitchen. The DOB was not persuaded that the owner had substantiated the proposed building’s use as a “college or student dormitory.” The owner argued that the student use was required by the deed restriction, the apartment designs were consistent with the student dormitory use and the DOB did not have a right to require the owner to prove that the use stated in its application will occur. The DOB required that the owner demonstrate a “institutional nexus.” The DOB asked the owner to provide a “deed or lease from a school,” stating that “without a deed or lease with an educational institution, the Department is not satisfied that a dormitory use is being established.” During this time, the DOB proposed Rule 51-01, which provided, inter alia, that no permit will be issued to create a student dormitory absent documents submitted to DOB which establish, generally speaking, “a nexus with an educational institution, and a restrictive declaration that the facility shall only be used as a student dormitory, as classified under Use Group 3 of the [ZR].” A statement of basis and purpose explained that the proposed rule was “intended to codify the department’s current practice of requiring a ‘dormitory to have an institutional nexus to a school(s).’” The owner contended that the proposed rule was “illegal and beyond DOB’s power.” However, the owner argued that it could comply with the proposed rule by entering into a 10-year lease with a nonprofit entity chartered for the benefit of participating educational institutions (NFP). The NFP’s initial board of directors was to consist of a lawyer, an accountant (each of whom had no apparent connection with an educational institution), and someone identified as being a director of housing and residential life from Pace University. The owner offered to submit a draft of its 10-year lease with the NFP and offered to amend the NFP’s bylaws to require a board of directors consisting solely of members appointed by participating educational institutions. The DOB rejected such proposal as speculative, since the proposal provided no assurance that one or more educational institutions would operate a dormitory at the premises. The owner thereafter appealed to the BSA. Proposed Rule 51-01 became effective June 20, 2005. The BSA denied the appeal and the owner commenced the subject Art. 78 proceeding. The owner argued that it is entitled to permits as-of-right since the proposed building would constitute a “community facility” under ZR Use Group 3. The BSA asserted that the proposed rule does not apply to the owner’s application, the owner’s application was reviewed under standard DOB practices and the proposed rule merely codified the pre-existing practice of requiring an institutional nexus. The owner argued that requiring an “institutional nexus” in the work permit application is “unprecedented” since no other project has ever been required to meet such standard. The court noted that whether an agency decision is “unprecedented” does not establish that an agency has acted arbitrarily or capriciously. The DOB and the BSA had reasoned:
if there was no requirement of institutional control, any private party could build UG2 residences and market them to students from any school, negating the presumed beneficial effect for a specific community-based education and thus for the community as a whole, and resulting in an unjustified financial windfall (in terms of developable floor area) for the private developer.
The court said that such an approach was neither arbitrary nor capricious. Since layouts and floor plans of school dormitories may resemble plans for residential apartments and rental units, “it is reasonable for DOB to articulate criteria to differentiate UG2 residences that simply target a student rental market from UG3 college or school student dormitories.” The Court also observed that the ZR referred to “college or school” student dormitories and therefore speaks in terms of use by an educational institution, “as opposed to a use generally for housing for students.” The owner further argued that the DOB is an enforcement entity and it may cancel the building’s certificate of occupancy (C of O) if the owner later fails to comply with the UG3 use. The court explained that the law does not require that the agency grant a permit for a nonconforming use and then wait until the owner constructs a building of a larger scale and bulk than would otherwise be permitted for a conforming use and then take action. The court noted that once erected, the building could not be “unbuilt” without “great expense” and its impact on the neighborhood cannot be undone. Moreover, students residing in the building may be forced to relocate at an “inopportune time” if the building’s C of O were later revoked. The court then said that the community facility restriction in the deed was not a substitute for the permit process and the owner, like most every other applicant, must prove entitlement to a permit. “The availability of other remedies for the City in the event of petitioner’s breach, such as revoking the building’s certificate of occupancy, does not diminish DOB’s responsibility to vet the permit application.” The court then said that the owner’s proffer of the NFP did not establish an institutional nexus, i.e. the petitioner did not establish that the housing would be “operated by an entity whose sole interests reflect the required institutional nexus.” The court also found that the DOB’s insistence on a long term lease to establish an institutional nexus was not irrational. Additionally, the court rejected the owner’s argument that the DOB was adding a condition to the ZR and “usurping the legislative function.” The court explained that an agency “may adopt a regulation that goes beyond the text of the enabling legislation so as to ‘fill in the interstices in the legislative product.’” The ZR did not define “college or school dormitory.” The court believed that the DOB had authority to “adopt criteria that reflected its reasonable interpretation of the meaning of ‘college or school student dormitory’ as having an institutional nexus.” The owner had also argued that the city had taken an inconsistent position in litigation relating to the site and should be judicially estopped. A city official had represented to a court that the owner had “‘credibly and rationally explained that he could not specify an exact use [of the property] until he was able to further inspect the property and formulate plans with prospective partners or contractors,’ but that she “‘found this to be a reasonable position and thus concluded that [petitioner] properly established the requisite good faith intent to comply with the community use restriction.’” The court explained that the city’s “belief, prior to the sale and prior to petitioner’s specific proposal for the site, that petitioner intended in good faith to fulfill its duty to build a ‘community facility’ is not inconsistent with the City’s position here.” Rather, the city’s view, after vetting the owner’s plans, is that petitioner “did not live up to the City’s expectations.” Thus, the city did not take “conflicting or contradictory positions in the two litigations” and there can therefore be no estoppel. The court then rejected owner’s argument that the “DOB bowed to community pressure” and thereby acted arbitrarily and capriciously. The court explained: “[n]o principle of law forbids a public agency from considering input from community residents or organizations.” Further, “public participation helps open a window on the decision-making process that can affect the future course of a community’s development.” The court concluded that the owner had failed to demonstrate that the DOB lacked a rational basis for refusing to grant the permits without adequate proof of an institutional nexus between the proposed dormitory and a known school, or a nonprofit entity representing such school and the BSA’s decision was neither arbitrary nor capricious. 9th & 10th Street LLC v. Board of Standards and Appeals of the City of New York , New York Law Journal, Aug. 9, 2006, p. 23, col. 1, Sup. Ct., N.Y. Co., Stallman. J. Foreclosure – Defendant Fails to Proffer Substantive Opposition to Plaintiffs’ Right to Judgment of Foreclosure Sale – ‘Speculative and Generalized Statements’ – Loan Documents Authorized Appointment of a Receiver Without Notice to Borrower-Attorney’s Fees The plaintiffs moved, in a foreclosure action, for confirmation of a referee’s report and a judgment of foreclosure and sale. The defendant claimed that the affirmation of regularity by plaintiffs’ counsel “is highly irregular” and must be rejected. The court found that defense counsel’s affirmation and the defendant’s affidavit in opposition were “rife with speculative and generalized statements, while failing to proffer any substantive opposition to plaintiffs’ right to a judgment of foreclosure and sale.” Therefore, the court granted the plaintiffs’ motion. Plaintiffs’ counsel, in her affirmation of regularity, explained that the plaintiffs had, through the city Department of Housing Preservation and Development (HPD) extended loans to the defendant to rehabilitate her multifamily apartment building. The loans were structured as building loans so that during construction the defendant was not required to make any payments. Upon completion of construction, the defendant was to convert the loans to permanent financing, hire a managing agent for the building and apply for a J-51 tax exemption. The defendant defaulted on all of these obligations and made no payments toward repayment of the loans, despite having a fully rehabilitated apartment building. Previously, the court granted the plaintiffs’ motion for summary judgment. The court believed that the defendant’s affidavit was nothing more than a recital of the same argument that she had made in opposition to the plaintiffs’ motion for summary judgment, with respect to her perceived problems with the rehabilitation of the premises. The court believed that the defendant’s main objection to the instant motion was the appointment of a receiver without notice to the defendant. The court explained that the defendant was not entitled to notice of the motion to appoint a receiver, according to the loan mortgage documents. The defendant’s counsel had further argued that there was no provision in the mortgage for the payment of attorney’s fees. The court found such assertion to be “disingenuous.” Although the mortgage itself did not provide for attorney’s fees, the note was signed by the defendant, incorporated the mortgage by reference and provides that if the defendant defaulted, the defendant agreed to pay all “costs and expenses (including reasonable attorney’s fees and legal expenses) in enforcing this note, except to the extent prohibited to applicable law.” Additionally, the court noted that the defendant had failed to comply with prior court orders directing compliance with the receiver’s demand for turnover of about $38,000, which had admittedly been collected by the defendant and turnover of security deposits and documents necessary for the receiver to file a J-51 application. The court had previously directed that any application to the court by the defendant for future relief address the defendant’s failure to comply with the foregoing directives of the court. Nowhere in the defense affirmation in opposition did the defendant address her failure to comply with such directives. Accordingly, the court held that neither the defendant nor her attorney had set forth any grounds to defeat the plaintiffs’ entitlement to a foreclosure and sale. Thus, the court granted the plaintiffs’ motion to confirm the referee’s report for a judgment of foreclosure and sale. Neighborhood Housing Services of New York City Inc. v. Reid , New York Law Journal, Aug. 10, 2006, p. 23, col. 3, Sup. Ct., Kings Co., Schack, J. Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.

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