Commercial Landlord-Tenant—Provision on Eviction Held to Be "Unconscionable"—Purchaser Had Failed to Conduct Due Diligence by Reviewing Existing Lease

The current owner of a building (owner) commenced a commercial holdover proceeding against a tenant. The owner alleged that the tenant is a month-to-month tenant pursuant to an oral tenancy. The owner had terminated the tenancy on Oct. 31, 2011 by a notice dated Sept. 16, 2011. The tenant countered that "it is not a month to month tenant" and that "it has a valid lease dated February 26, 2010 ['lease'], entered into between…(prior owner) and…(tenant). The lease had a 10-year term, with two five-year options to renew through Feb. 28, 2030. The lease was executed by the prior owner and his brother, the president and owner of the tenant. The owner attacked the validity of the lease on several grounds including paragraph 14, which stated in full:

Owner shall have no right to terminate this…Lease for any reason whatsoever, including but not limited to nonpayment of rent and additional rent or for breach of any covenant of this…Lease, and shall have no reason to recover possession of the Premises until such time as this…Lease expires by its own terms, and Owner expressly waives any and all right to regain possession of the Premises, whether by self-help, summary or other special proceeding, dispossess proceeding, ejectment, eviction, or other action or remedy. Owner's sole remedy against Tenant shall be to commence a plenary action to recover damages or unpaid rent and additional rent and to enforce any judgment so obtained, but nothing contained herein shall be deemed to give Owner the right to levy on this Agreement of Lease, the Premises or any portion thereof, or on Tenant's interest therein in Owner's efforts to enforce or collect any such judgment. It is expressly understood and agreed Owner is prohibited, among other things, from resorting to summary proceedings under Article 7 of the New York Real Property Actions and Proceedings Law (or any successor statute) to recover possession of the Premises for any purpose.

The owner also argued that certain additional provisions were also part of a fraudulent scheme between the prior owner and his brother. The rent remained the same during the period from March 2010 through February 2015; the rent remain the same between March 2015 and February 2020 (at a somewhat higher amount); the tenant was permitted to make alterations or improvements to the interior without the landlord's consent; the landlord was responsible for maintenance and repair both structural and nonstructural for the building; the landlord had unlimited liability to the tenant for loss of income; diminution in the value of the leasehold to tenant, consequential damages, loss of profits and injunctive relief; and the tenant could assign or sublet without consent of the landlord. The lease was never recorded with the Nassau County Clerk.

In the fall of 2010, the owner had discussed purchasing the building with the prior owner. The owner intended to build a hotel or housing for college students. The owner claimed that the prior owner was told about such plans, but the prior owner denied such allegation. The owner had entered into a contract of sale with the prior owner. The contract was executed on behalf of the owner by the owner's attorney. The contract provided that the purchasers represented that they had examined the premises and that the seller had made no representations or warranties and the purchasers agreed to accept the premises "as is," subject to all tenancies. The contract also embodied typical merger and integration provisions. Additionally, the contract did not require the prior owner to provide copies of any leases regarding the commercial tenants, nor did the contract make the closing contingent on the provision of such leases. Thus, the owner purchased the property "as is" subject to the tenancies.

The owner's attorney testified that it was not his responsibility to review the leases. The owner testified that it was the attorney's responsibility to obtain the leases. The owner knew of the tenancy, "but never inquired with [tenant] about its lease."

The court found that the owner failed to exercise due diligence by obtaining a copy of the tenant's lease. Since the owner never made "proper inquiry concerning [the tenant's] lease even though it knew that [the tenant] occupied the premises," the owner was "estopped from trying to void the [tenant's] lease."

The court further explained that "a lease for a term exceeding three years is a conveyance which may be recorded…." However, "an unrecorded conveyance is void only as against a subsequent good faith purchaser for value…. Moreover, '[a]ctual possession of real estate is sufficient notice…to all the world, of the existence of any right which the person in possession is able to establish'…."

The court rejected the owner's assertion that "when a party takes a conveyance of property…occupied by numerous tenants, it would be inconvenient and difficult for him to ascertain the rights or interests that are claimed by all or any of them." The court emphasized that "[a]ctual possession of real estate is sufficient notice to a person proposing to take a mortgage on the property, and to all the world of the existence of any right which the person in possession is able to establish."

Thus, the court held that the owner had taken the premises subject to the lease and failure to provide the lease was not fraud. However, the court found that the lease "was contrived to provide an unfair advantage for [tenant]. Paragraph 14, which blocks any eviction of [tenant] and restricts [owner's] rights against [tenant], is unconscionable." Therefore, the court held that such clause was unenforceable on the grounds that it unconscionable.

The court explained that when a court finds that a lease or any clause of a lease is unconscionable at the time it was made, the court may refuse to enforce the lease, enforce the remainder of the lease without the unconscionable clause or limit the application of any unconscionable clause as to avoid any unconscionable result. Here, the court found that the "no-eviction" clause was unconscionable.

Comment: John P. Sheridan of Herrick Feinstein, who specializes in landlord-tenant law, opined that a non-eviction provision in a commercial lease, negotiated by commercial parties (who are usually represented by counsel), is similar to a provision whereby a landlord grants a tenant a life estate, i.e., both such provisions should be enforceable, absent fraud or some other similar legal infirmity that would render a contract invalid.

In the subject case, the court rejected the fraud claim because there had been no evidence that the seller had made a fraudulent representation and the purchaser with knowledge of the subject tenancy, had failed to request a copy and review of the lease.

On occasion, landlords will sign "sweetheart" leases with friends or relatives. Sometimes, a "sweetheart" term in a lease is a result of a tenant making some kind of up front payment to the landlord. This is precisely why it is important that a purchaser of a tenanted property insist upon reviewing any existing leases. Some purchasers have found that a tenant was given, e.g., a no rent increase guarantee, a very long-term lease, or even a right of first refusal to purchase the building.

ATN Fulton v. Deep Dale Grocery, LT-006376-11, NYLJ 1202593157488, at *1 (Dist., NA, Decided Feb. 21, 2013), Fairgrieve, J.

Court Rejects "Exploitation" Claim Under the Fair Housing Act

The plaintiffs commenced an action alleging that a village and property owner (owners) violated the Fair Housing Act, 42 U.S.C. §§3601 (FHA). The defendants had moved for summary judgment. The court had denied the village's motion in its entirety, but had granted the owners' motion and dismissed the claims against them in their entirety. The plaintiffs thereafter moved to amend their complaint to add "an Exploitation Claim, under [the FHA]…against the [owners]…." The court denied the plaintiffs' motion.

The plaintiffs are "low-income Latinos" and are former residents of an apartment building, which is located in the village (building). The owners owned the building from 1999 until July 2006. "As of 2004, the majority of the Building's tenants were Latino. The area surrounding the [building] had 'a Latino population of 56.2 percent' and is the only area in the Village that 'does not have a majority White population.'" The plaintiffs alleged that "[i]n 2000, the 54 units at [the building] represented 37 percent of all affordable 'very low income' housing in the Village," and none of those 54 units were vacant at that time.

Between 1999 and 2004, "the Village '…expressed an interest in redeveloping'…the [building] and its surrounding area." The village proposed "condemning the area and selling it to [the owners] who would then redevelop it into a residential condominium complex and commercial area." In April 2000, the owners "received a 'Public Notice' and an Acquisition Map, pursuant to New York Eminent Domain Law, and a letter from the Village Clerk," which advised the owners that the village planned to take title to the building. The plaintiffs alleged that as a result of the threat of condemnation, which apparently never actually occurred, "[the owners] 'stopped making capital improvements' to the [building]."

The plaintiffs asserted that the threat of condemnation "eliminated market competition and the resulting condemnation blight[]" permitted the owners "to charge excessive rents for housing in substandard condition." The plaintiffs claimed that while they lived in their apartments, the apartments were "'unfit for human habitation and [exhibited conditions] dangerous to life, health and safety,' including mold, vermin, …leaks, defective windows, rotting wood, intermittent interruptions in heat, electricity, and hot water, and defective toilets and bathtubs." The plaintiffs further alleged that the building's common areas also had many serious defective conditions. Additionally, the plaintiffs alleged that despite the foregoing, "'the Village issued only 17 summonses…for violations of the Village Code'" (Code) between 1999 and 2004.

The plaintiffs had raised a claim under FHA §3604(b) for the first time in the summary judgment opposition papers. The plaintiffs had asserted a claim under the "exploitation theory of discrimination" and alleged that the owners "had taken 'unfair advantage of members of a protected class in a racially segregated housing market by assessing charges for services and conditions in excess of fair market value.'" The plaintiffs now sought in the subject motion, permission to amend the amended complaint to add the exploitation claim under FHA §3604(b).

The FHA makes it unlawful "[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin." The plaintiffs argued that an "Exploitation Claim" exists when "as a result of racial segregation, dual housing markets exist," and the defendants "take advantage of this situation by demanding prices and terms unreasonably in excess of fair market value because of the plaintiffs' race."

The plaintiffs alleged that "a segregated housing market existed in the Village…that resulted in 'Hispanics liv[ing] in a highly-concentrated pocket community around [the Building],'" that "the rents Plaintiffs paid to the [owners] were in excess of fair market value because the [owners] failed to provide and maintain each apartment in its warranted habitable condition," and that the threat of condemnation of the building, "the Village's inadequate code enforcement, the lack of alternative affordable housing, and the Plaintiffs' lack of sophistication created a non-competitive market allowing the [owners] to exploit the Hispanic rental market in the Village."

The U.S. Court of Appeals for the Seventh Circuit had opined that the plaintiffs can state an exploitation claim under §1982 if they allege that "as a result of racial residential segregation dual housing markets exist" and defendants "took advantage of this situation by demanding prices and terms unreasonably in excess of prices and terms available to white citizens for comparable housing."

However, the Seventh Circuit exploitation theory was made pursuant to 42 USC §1982­—not the FHA. The plaintiffs had cited "no authority to demonstrate that the Second Circuit even recognizes an 'exploitation theory' of liability under any statute." The court's own research had "not uncovered any decisions from courts by or within the Second Circuit adopting this theory…or otherwise applying the reasoning and rationale of the Seventh Circuit."

However, even if the exploitation theory of liability applied to claims made pursuant to the FHA and the Second Circuit does or would recognize such theory, the court found that the proposed amendment was futile because the plaintiffs' allegations are "insufficient to plead an exploitation claim." In addition to the plaintiffs alleging that "as a result of racial residential segregation dual housing markets exist" and that the owners "took advantage of this situation by demanding prices and terms unreasonably in excess of prices and terms available to white citizens for comparable housing," the plaintiffs must "show 'how [those] allegedly unreasonable prices could have been maintained against the presumably reasonable prices of the competition.'"

Here, the plaintiffs "failed to present an 'economically credible explanation of how an exploiter can stay in business charging above-market prices.'" Although the plaintiffs could have possibly alleged that the owners "had a sufficient market share to shelter [it] from the pressures of competition," the plaintiffs did not make such allegation. Rather, the plaintiffs alleged that "a lack of affordable alternative housing forced them to stay in the Building despite its 'deplorable conditions.'"

The plaintiffs never alleged how the owners could have charged higher prices or demanded more restrictive terms than their competitors in the subject location. The court opined that the plaintiffs' allegations that the "language and cultural barriers made it difficult for the Plaintiffs to complain about the conditions they were living in" were different than the facts cited by a prior court decision upon which the plaintiffs relied.

Moreover, the allegations that the village's threat of condemnation and inadequate enforcement of the code created a distorted market went to the existence of dual housing markets, but did not explain how the owners could have in fact charged higher prices or demanded more restrictive terms than their competitors.

Accordingly, the court denied that the plaintiffs' motion to amend the complaint to assert "a so-called 'exploitation claim'" as futile. In sum, the plaintiffs had failed to explain why the exploitation theory is applicable to FHA claims made in the Second Circuit and failed to sufficiently allege an "economically credible explanation of how an exploiter can stay in business charging above-market prices."

Rivera v. Village of Farmingdale, 06 CV 2613, NYLJ 1202589224554, at *1 (EDNY, Decided Feb. 19, 2013), District Judge Hurley.

Landlord-Tenant—Personal Injury Claim Arising From Bedbugs Reinstated—Court Dismissed Claims for Negligent Infliction of Emotional Distress and Punitive Damages

The Appellate Division, First Department reinstated a personal injury claim by a tenant who had moved into a "bedbug-infested" apartment. The court explained that "testimonial and documentary evidence" supported the tenant's claim that "there was a bedbug infestation in the apartment and that she sustained bedbug bites. The absence of any medical treatment for the bites, while significant to the value of the damages sought, does not mandate dismissing the claim for personal injury damages as a matter of law…."

The court, however, found that the plaintiff had failed to demonstrate that the landlord's "failure to maintain the property in a reasonably safe condition unreasonably endangered her physical safety or caused her to fear for her safety so as to sustain the claim for negligent infliction of emotional distress…."

Moreover, the court held that the landlord's "leasing of the apartment to plaintiff while aware of a bedbug history does not rise to the level of outrageous conduct required to sustain a claim for infliction of emotional distress, especially since at the time this case was filed there was no legal obligation for landlords to give a prospective tenant notice of bedbug infestation history (Administrative Code of City of NY §27-2018.1) and [landlord] had been treating the condition before plaintiff moved in."

Additionally, the court found that "in renting the apartment [landlord] was not 'morally culpable, or…actuated by evil and reprehensible motives' so as to warrant punitive damages…. Nor did [landlord] engage in pervasive or grave misconduct of a quasi-criminal nature affecting the public in general…."

Bour v. 259 Bleecker LLC, 313109/10, NYLJ 1202593595176, at *1 (App. Div., 1st, Decided March 12, 2013), Before: Mazzarelli, J.P., Acosta, Freedman, Richter, Gische, JJ.

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