Scott E. Mollen

Commercial Landlord-Tenant Tenant Forfeited $1 Million “Vacate Fee” When Tenant Failed to Vacate On/Or Before a “Time of the Essence” Vacate Date, By Four or Five Days

A defendant and third-party plaintiff landlord moved pursuant to CPLR 3212, to dismiss an amended complaint. The landlord also moved for declaratory judgments that “plaintiff is not entitled to the $1 million surrender fee,” “directing the escrow agent to release the escrow to landlord” and as against a guarantor, “declaring that the obligation to pay $200,000 is due” and for “an inquest on attorney fees.” The plaintiff commercial tenant (deli) and its guarantor moved “for summary judgment in the deli’s favor” and “dismissing the third party complaint against…the guarantor.”

This decision involved a breach of contract action. The landlord had agreed to pay the deli “$1 million in exchange for surrendering the premises on Dec. 1, 2016.” The agreement embodied “time of the essence” language. It was “undisputed that deli vacated after December 2, 2016.”

The deli had “purchased a lease” between the prior landlord and the prior tenant. That lease was to expire Jun. 2014 and the demised premises included the basement and first floor commercial space, wherein the deli was to operate a delicatessen. The deli alleged that in Nov. 2011, the prior owner and the prior tenant agreed in writing, to extend the lease to May 2024. In Feb. 2014, the prior owner had sued its managing agent for “fraud and…and mismanaging landlord’s leases.” Although the deli had not been accused of wrongdoing, the prior owner had named the deli as a defendant and sought a declaration that the deli’s lease was invalid. The parties settled the 2014 action with a surrender agreement, pursuant to which the deli agreed to accept $1 million “in exchange for vacating and surrendering the lease on December 1, 2016.”

The deli received the first part of a Termination Payment of $200,000 on Mar. 14, 2016. The deli asserted that “it ended its business on November 16, 2016,” but had “continued to sell inventory.” On Nov. 28, 2016, the deli asked the landlord, in writing, for more time to dismantle refrigeration equipment. The landlord did not respond. The landlord delivered a written Failure to Surrender Notice on Dec. 2, 2016. The deli admitted that it surrendered the premises in “broom clean condition after December 3, 2016.” The deli’s president and guarantor of the surrender agreement, asserted that the deli surrendered the premises on Dec. 5, 2016. The landlord’s managing agent (agent), stated that he had “received the keys on December 6.” The submitted “receipts” demonstrating that deli operated after the termination date and “photos of property removal from the premises on December 5, 2016.”

The surrender agreement provided:

If deli fails to timely comply with its obligation to surrender the Premises…, then (i) Owner shall no objection to pay to deli any portion of the Termination Fee, (ii) deli shall refund…the First Termination Payment within three (3) business days after Owner’s demand therefor, and (iii) Escrow Agent shall return to Owner the Second Termination Payment within three (3) business days after Owner’s demand therefor.

…. Paragraphs 5(a) and 12(c) state that “time is of the essence.”

The court explained that “fundamental rules of contract construction require strict enforcement of the surrender agreement, a stipulation settling litigation.” “Strict enforcement of the parties’ stipulation…is warranted based upon the principle that the parties to a civil dispute are free to chart their own litigation course.… Enforcement of the stipulation also serves the interest of efficiency in the final resolution of this dispute.” The court further noted that “[w]here a contract contains a time is of the essence provision, the parties’ strict compliance is required and failure constitutes a material breach.… Commercial certainty is paramount, particularly in real property transactions.”

The deli attempted to justify its delay by citing “a ‘two week delay of the deposit of the Second Termination Payment.’” The landlord was to wire $800,000 to the escrow agent by Nov. 1, 2016. However, the escrow agent failed to timely provide wire instructions and the surrender agreement provided that “such a contingency would not change the termination date.” The landlord had deposited the $800,000 with the escrow agent on Nov. 16, 2016, two weeks prior to the time that payment was due on Dec. 1, 2016.

The deli contended that the time of the essence clause was an “unenforceable penalty” and “not valid liquidated damages.” The court held that judicial precedent involving liquidated damages was inapplicable to the subject facts. The court explained that “[l]iquidated damages constitute the compensation which, the parties have agreed, should be paid in order to satisfy any loss or injury flowing from a breach of contract.” The court believed that the deli confused “forfeiture with its ‘contracted-for financial consequence of the tenants’ own failure to do that which they promised to do.” Here, the deli continued to operate for days after the termination date.

Additionally, the guarantee required the guarantor to promptly refund payment of the first termination payment, if the tenant had failed to timely vacate the premises. Since the guarantor failed to make such payment, the court held that pursuant to the Settlement Agreement, the guarantor was responsible for such payment, together with “reasonable attorneys’ fees, charges, expenses and all reasonable costs incurred in the enforcement of the surrender agreement.”

Comment: Michael Berengarten of Herrick, Feinstein, attorney for the defendants/third-party plaintiff, stated that this decision reaffirms that courts will enforce the strict terms of surrender agreements which include “time of the essence” language. Berengarten advised that the case was subsequently settled.

154-7th Ave. Chelsea, Inc. v. Ballaghaderreen, Sup. Ct., N.Y. Co., Commercial Pt., Index No. 650516/2017, decided Mar. 27, 2018, Masley, J.


Commercial Landlord-Tenant—Use Provisions—Parties’ Pattern of Conduct Demonstrated Modification That Was Unequivocally Referable to Alleged Oral Modification—Non-Waiver Provision Does Not Necessarily Bar Evidence of Waiver

 

A landlord appealed from a judgment of the Civil Court which had been entered following “a nonjury trial, in favor of tenant dismissing the petition in a holdover summary proceeding.”

The tenant had signed a commercial lease with the landlord’s predecessor. The lease required the tenant, “who is not a doctor,” to use the premises “as a doctor’s office.” The lease barred “assigning or subletting without landlord’s prior written consent” and embodied “non-waiver and merger clauses.” After the lease was executed, the tenant renovated the premises by adding three consulting rooms, and “sublet the space to three mental health practitioners, who have continuously occupied the premises.”

The tenant explained that, since 2001, he has rented commercial suites from the predecessor landlord, through its principal (“A”). The subject lease was “the seventh such commercial lease entered into between the parties.” In each of the prior leases, the tenant renovated space and sublet it to “doctors or psychologists,” with “A”’s approval. “A” confirmed that he knew that the tenant was neither a doctor nor a health care practitioner, and that the tenant had entered into each of the seven prior leases “with the intention of subletting the demised space.” “A” described the tenant “as a business person who leased space and then sublet the space for profit.”

With respect to the subject lease, “A” confirmed that he knew that the tenant “intended to sublet the space to others; tenant, in fact did so; [‘A’] consented to and approved of tenant’s actions, as he had done in the past; and accepted rent from tenant.”

The present landlord bought the subject building in December 2012. In Jun. 2013, the landlord served a notice to cure, alleging that the “tenant had sublet and/or assigned the space in violation of the lease.” The landlord thereafter commenced a holdover proceeding. Following a trial, the Civil Court dismissed the petition. The Appellate Term (court) affirmed.

The court gave “due deference” to the Civil Court’s findings of fact and credibility and found “no basis to disturb the trial court’s determination.” The court opined that “the evidence supports Civil Court’s finding that ‘over the course of a decade’ tenant was engaged as a ‘business man’ who would rent ‘. . . commercial suites owned’ by the prior landlord and ‘sublet them to various mental health professionals;’ that tenant would sign the leases with the ‘express purpose usage to be that of a “doctor’s office,’” despite landlord’s knowledge that tenant would not occupy the space himself, as he was not a medical doctor, and that he ‘was merely facilitating a scenario to allow various medical professionals to share commercial space.’”

The court explained that although the subject 20-year commercial lease required the landlord’s written consent for subletting, the evidence established that the prior landlord had “‘clearly understood’ that tenant was ‘never going to occupy’ the…premises but was again going to sublet and that ‘from the beginning of lease in April 2007 until the building was sold to the current owner, in December 2012, [the former landlord] collected rent from [tenant] without any objection that [tenant] was not occupying the premises, but was instead subletting without any written permission.’” The court found that the tenant “demonstrated ‘sufficient indicia that the reasonable expectations of both parties under the original lease were supplanted by subsequent actions.’”

The court further held that “the existence of a nonwaiver clause does not in itself preclude waiver of a contract clause….” Here, “[t]he original parties to the lease, by mutual agreement, disregarded the nonwaiver clause, since there was a ‘pattern of business conduct,’ confirming the modification which was ‘unequivocally referable to the oral modification’….” Finally, the court noted that the “landlord, as successor in interest, was bound by the prior owner’s waiver of any objection to subletting….” Thus, the court affirmed.

Franpearl LLC v. Orenstein, App. Tm. 1st Dep’t, Index No. 570667/17 decided Mar. 29, 2018, Ling-Cohan, J.P., Gonzalez, Edmead, JJ. All concur.


Article 78 Proceeding—NYC Dep’t of Housing, Preservation and Development (HPD) determination notice Cancelling 421-a Tax Benefits Invalid—Notice Sent to Owner, But Never Sent to Owner’s Attorney Who Had Appeared in the Matter—Owner Sought Tax Benefits for Condominiums, but Operated Properties as Rental Buildings

This decision involved a petition to annul a determination notice issued by NYC Dep’t of Housing, Preservation and Development (HPD), which found that the petitioner owner (owner) was in violation of the 421-a tax exemption program. The court granted the petition on the grounds that HPD had sent the determination notice, only to the owner, at a time when HPD knew that the owner was represented by counsel and even though such “critical document” embodied a “‘short time period to cure’ a purported violation.”

The owner had applied for 421-a Partial Tax Exemption Program benefits, describing “the properties as a condominium project.” The project was completed in Oct. 2010 and on Nov. 29, 2010, the owner applied for a Final Certificate of Eligibility for 421-a benefits. HPD asserted that it had sent numerous notices to an owner’s representative (not an attorney), indicating that the application was incomplete.

In 2015, the NYS Attorney General (AG) began investigating properties that sought “421-a tax benefits as condominiums but were instead operating as rentals without complying with the rental unit requirements under the 421-a regulations.” Owners seeking 421-a benefits for rental buildings must register such units with the NYS Dep’t of Housing and Community Renewal (DHCR). The owner’s buildings had “initially sought tax benefits as condominiums,” but allegedly “were improperly operating rental buildings.” In Jan. 2016, HPD mailed to the owner a Notice of Impending Revocation.

In Feb. 2016, the owner’s attorney (Attorney) had confirmed to HPD that the owner received the Jan. 2016 notice and believed it was incorrect. The Attorney “asked HPD to withdraw the…revocation notice.” HPD responded by sending a Final Application Checklist to the Attorney, “stating that [owner’s] Final Certificate of Eligibility application was incomplete.” HPD sent another Checklist to the Attorney which “highlighted HPD’s conclusion that [owner] had abandoned the condo plan” and needed to “send in the documents required for a rental project.” HPD claimed that it had not received a response to its requested check list and it issued a determination notice on July 22, 2016.

The determination notice advised the owner that it had violated the 421-a by not registering its apartments with DHCR. The determination notice was dated July 22, 2016 and cited an Aug. 21, 2016 deadline to cure the violation. HPD asserted that it mailed the determination notice to the owner and had received no response. HPD thereafter advised the NYC Department of Finance (DOF) “to revoke the tax exemption benefits.” DOF increased the taxable assessment from about $200,000 to over $2 million, retroactively for the tax years 2011 through 2016.

In December 2016, HPD had forwarded a copy of the determination notice to the Attorney. The Attorney claimed that “this was the first time he knew about this notice.” The owner had commenced the subject Art. 78 proceeding to annul HPD’s and the DOF’s withdrawal of tax benefits “on the ground that HPD’s actions violated due process.” The owner contended that although HPD knew that the owner was represented by its attorney, HPD mailed the determination notice only to the owner. The owner’s “members” denied that they had received the determination notice.

The respondents argued that the owner had been “provided with multiple opportunities” to cure the violations before the 421-a benefits had been revoked and HPD had “provided adequate notice to [owner].” The respondents also noted that “HPD’s rules do not require service on an attorney.”

The court found that HPD’s failure to serve the determination notice upon the Attorney was arbitrary and capricious and justified vacating the determination notice, “as well as the…revocation of [owner’s] tax benefits.” The court stated that “[o]nce a party chooses to be represented by counsel in an action or proceeding, whether administrative or judicial, the attorney is deemed to act as his agent in all respects relevant to the proceeding. Thus, any documents, particularly those purporting to have legal effect on the proceeding, should be served on the attorney.” “This is not simply a matter of courtesy and fairness; it is the traditional and accepted practice which has been all but universally codified.”

Since HPD had numerous written communications with the Attorney, the court thought that it made “absolutely no sense why HPD would send the determination notice to only [owner]. HPD clearly knew that [the Attorney] was representing [owner]…and, for some unknown reason, did not send him a copy of a critical document—a decision that gave [owner] a short time period to cure the purported violation.” The court opined that it did “not matter that HPD’s rules may not require HPD to serve [owner’s] attorney because HPD’s own conduct evidences that it should have sent it to [owner’s] attorney.”

The court did not suggest that HPD had failed to send the determination notice to the Attorney “as part of some litigation strategy.” However, the court did “not want to create an incentive for government agencies to use this tactic to gain an advantage. “Not informing a party’s attorney creates the possibility that an important notice will be missed and that actions will be rendered on default.” That conduct violates “principles of fairness and due process where an attorney has been hired to handle a matter.” By “[h]iring an attorney,” the owner took this matter “seriously” and “a lot of money was at stake because [owner’s] tax assessment was increased nearly $2 million.”

The court acknowledged that “the claims by [owner’s] members…that they never received the determination notice strain all credulity.” However, such fact was “not dispositive because HPD had already established a course of conduct to communicate with [owner] through its attorney….” Thus, the court held that HPD’s failure “to send the determination notice to the [owner’s] attorney was arbitrary and capricious,…the subsequent revocation of [owner’s] tax benefits by DOF must…be vacated” and the owner must be given another opportunity to cure the purported violation. HPD was permitted to serve another determination notice, provided that the Attorney is served. The court’s decision was predicated on due process considerations and it made no finding with respect to the merits.

The Grand 73 LLC v. N.Y.C. Hous. Pres. & Dev., Sup. Ct., N.Y. Co., Index No. 153157/2017, decided March 19, 2018, Bluth, J.

Scott E. Mollen is a partner at Herrick, Feinstein.