Scott E. Mollen
Scott E. Mollen ()

Foreclosures—Condominiums—Lender’s Blanket Mortgage was a “First Mortgage” and Entitled to Priority Over Condominium’s Lien for Unpaid Common Charges—RPL §339-z

A plaintiff lender sought to foreclose on a consolidated mortgage which encumbered three residential units and a commercial garage unit in a condominium building. The defendant condominium sponsor (sponsor) and owner of the mortgaged units had defaulted on the mortgage. The defendant Board of Managers (board) counterclaimed and cross-claimed to foreclose a statutory lien for unpaid common charges. Each party sought summary judgment, claiming that they were “entitled to priority over the other lien under New York’s Condominium Act, RPL §§339-d-339-kk.” The court granted the plaintiff’s motion for summary judgment and denied the board’s motion for summary judgment.

In September 2007, a lender had extended a loan to the sponsor, secured by a mortgage on five residential units and a commercial garage unit. The mortgage had been consolidated with three prior recorded mortgages given to the sponsor. The consolidated mortgage was recorded on Nov. 27, 2007. The plaintiff had acquired the subject loan by assignment, on July 21, 2010. On Aug. 13, 2009, the board “recorded liens for unpaid common charges on three of the five residential units and the garage.” RPL §339-z provides that “[t]he board of managers,…, shall have a lien on each unit for the unpaid common charges thereof, together with interest thereon, prior to all liens except only…(ii) all sums unpaid on a first mortgage of record….”

The issue was the plaintiff’s mortgage “an unpaid first mortgage of record,” as the term is used in RPL §339-z, “but otherwise undefined in the Condominium Act.” The board argued that the plaintiff’s mortgage was “not a first mortgage because it is a blanket mortgage that was not for the purchase of a unit.”

The court explained, inter alia, that “[a]bsent a controlling statutory definition, the court must construe the statutory terms according to their usual and commonly understood meaning.” If statutory terms are unambiguous, courts will “give effect to that plain meaning, as a statute’s express terms are the best indicator of legislative intent.”

RPL §339-z did not embody “any limitation to mortgages for the purchase of units.” The Condominium Act addresses blanket mortgages, but did not prohibit a blanket mortgage from being a first mortgage. The court reasoned that if the Legislature had intended “to limit first mortgages to…mortgages given for the purchase of condominium units or to exclude blanket mortgages from first mortgages of record,” “the statutes would have so provided.”

Judicial precedent defined “a first mortgage of record as the earliest recorded mortgage.” Since the term “first mortgage of record” in the Condominium Act constituted “legislation in derogation of the common law,” it “must be construed strictly.” Moreover, “[t]he legislature’s expression most indicative of its intent, its unambiguous statutory terms, leaves no reason to resort to statutory construction.”

However, the court believed that the policies behind the Condominium Act supported the court’s conclusion. The court reasoned that giving priority to an unpaid mortgage recorded prior to an unpaid lien for common charges, whether the mortgage is for the purchase of a unit or not, “provides an incentive to banks to extend mortgages for the purchase of units.” The court could not “conceive of how limiting first mortgages to purchase money mortgages would discourage sponsors from retaining units” and opined that even if RPL §339-z’s legislative terms and intent required reading such statute together with related federal statutes in order to construe the state statute, the result would not change.

Additionally, the condominium’s by-laws did not invalidate the subject first mortgage on the grounds that the mortgage was given to a sponsor, rather than a unit owner. The by-laws permit unit owners to give first mortgages, but do not bar a sponsor from also giving a first mortgage. The by-laws did not expressly define a “unit owner.” They provided, inter alia, that “various business entities, including a limited liability company like the sponsor…, may own units….” The by-laws also permit the sponsor to vote as a unit owner.

The court noted that to interpret the by-laws as “excluding the sponsor from the definition of a unit owner actually would leave the Board…completely bereft of the remedy they seek, as By-Laws…obligate only unit owners to pay common charges.” Thus, the court held that the sponsor was a unit owner that could give a first mortgage and foreclosure of the plaintiff’s mortgage lien extinguished the board’s lien.

The board contended that even if the plaintiff held a first mortgage, “only the initial mortgage, not any mortgages consolidated with it, are entitled to priority over the lien for common charges.” The court stated that “[s]ince the consolidation and recording of [the consolidated mortgage] acquired by plaintiff predated its acquisition or other involvement, as well as the recording of the [board's] lien for common charges, plaintiff’s lien based on that single mortgage retains the same priority as when that mortgage was recorded.”

The court rejected the board’s argument that since “the payment of taxes on the mortgaged units was [sponsor's] obligation, plaintiff’s payment of these taxes was voluntary” and therefore, such monies should not be “added to the mortgage debt that is superior to the [board's] lien.” The plaintiff had voluntarily paid the taxes “to protect its and the Board’s interest in the property against penalties that would be a lien with priority over both their interests.” The plaintiff could “recover the tax payments from the owner through equitable subrogation, but the mortgage also entitles plaintiff to add the payments to the mortgage debt.” Thus, the board’s lien “is subordinate to plaintiff’s mortgage because it is a first mortgage of record, not because plaintiff is entitled to recover the mortgage debt from the Board through equitable subrogation.”

Accordingly, the court granted summary judgment of foreclosure to the plaintiff and extinguished the board’s lien for common charges, except to the extent that surplus proceeds remained.

AMT CADC Venture v. 455 CPW, 810109/2011, NYLJ 1202626669728, at *1 (Sup., NY, Decided Oct. 30, 2013), Billings, J.

Commercial Landlord-Tenant—Tenant Failed to Timely Exercise Option to Renew—Improvements Were Not Based on Exercise of the Option—No Substantial Loss of Good Will

The petitioner had commenced a holdover proceeding to terminate the alleged month-to-month tenancy of the prime commercial tenant (tenant) and the undertenant. The premises were used as a dental office. The tenant asserted as affirmative defenses, inter alia, improper service of process, that an option to renew (option) had been properly exercised without objection by the petitioner, the petitioner waived any defects in the exercise of the option by accepting rent prior to and subsequent to the termination notice and equitable estoppel. The respondents defended the summary proceeding instead of commencing an action in the Supreme Court for declaratory and injunctive relief. The Civil Court and the Housing Part of the Civil Court “may entertain equitable defenses in a summary proceeding.”

The subtenant argued, inter alia, partial constructive eviction. It counterclaimed for negligent operation of a boiler, asserted a waiver defense based on acceptance of rent, claimed that there was “no prejudice to the landlord,” and asserted a third party beneficiary claim based on the wrongful rejection of the option by the petitioner. The subtenant also cross claimed against the prime tenant for breach of contract and “for the failure to properly exercise the option to renew.”

The primary lease contained a renewal option for an additional 25-year period that was to be exercised “no later than sixty (60) days prior to the expiration date.” The sublease provided for five successive five year renewals that had to be exercised in writing by the subtenant “no later than ninety (90) days prior to the expiration of the term of the sublease currently in effect.”

The tenant had moved to dismiss on the grounds that the option had been properly exercised, “albeit, untimely.” The tenant testified, inter alia, that a new building boiler had created “excessive heat in the subject unit” and that the excessive heat “caused irreparable harm to the subtenant and his dental equipment.” The tenant alleged that she had to spend $20,000 to repair such condition and that “this proceeding is retaliatory” because of the boiler incident.

The tenant had testified that the option paragraph had been excluded from the copy of the lease which had been given to her by her husband’s attorney. She claimed that she did not see any reference to the option. The option paragraph was a footnote in the lease. The tenant testified that once she was advised that she had not timely exercised the option, she promptly exercised the option. The tenant also testified that although the petitioner had returned her rent checks, she had returned all of the checks to the petitioner and all of those checks had been cashed.

The tenant had exercised the option on May 17, 2010. The petitioner asserted that the option had to be exercised on or before June 30, 2009. The tenant had acknowledged that her husband had told her about the option, but she claimed that “she did not know how to exercise the option.” Additionally, the tenant had sent the notice purporting to exercise the option to law firm “A.” The tenant had never paid rent to “A” and knew that “A” was “not the law firm retained by the [petitioner] for business purposes.” Rather, “A” was “the eviction” law firm.

The tenant stated that she thought she had the right to rent the space to the subtenant and that her husband had spent over $160,000.00 in the premises over the first five years of the lease. However, “no documentary evidence was presented to substantiate this claim.” The tenant asserted that she had paid rent from 2009 to 2012 and the petitioner had “waived any rights to evict her by the acceptance of her rent.”

The subtenant testified that he was not aware of any issues as to the tenant’s option and he had timely exercised his five year options. The subtenant acknowledged that although he did not see the option provision in the master lease, “he did notice…an asterisk on the document,” but had “ignored it.”

Appellate authority holds that “the task for determining whether a tenant shall be relieved of a default in exercising an option is threefold. The tenant must show (1) that the default was excusable; (2) that the default will result in a substantial forfeiture by the tenant; and (3) that the landlord would not be prejudiced….” Additionally, when a contract requires written notice “to be given within a specified time period, the notice is ineffective unless it is received within that time….”

However, equity will relieve a forfeiture “where a forfeiture would result from the tenant’s neglect or inadvertent” and the landlord would not suffer prejudice. Equity will not intervene, however, “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 right’….” This is because “the option itself does not create an interest in the property, and no rights accrued until the condition precedent has been met by giving notice within the time period specified.”

Courts have held that tenants would not suffer a forfeiture where their investment had “already been amortized and depreciated by the time of the attempted renewal.” In such case, the tenant had already “reaped the benefit of all initial expenditures,” and therefore, would not suffer a forfeiture.

The court explained that the salient issues were “whether the default is excusable, whether the failure to renew the lease would result in a forfeiture of a substantial loss, whether the ‘improvements’ at the subject premises were made with intent to renew the lease, whether the subject premises should be recognized as an equitable interest that should be protected as a ‘longstanding location’ for the dental office or is an important part of the goodwill of that office to warrant protection against forfeiture….”

The evidence did not indicate that “the Petitioner knowingly and intentionally waived the rights to object to the alleged lease extension,” by accepting rent. The landlord’s intention was evidenced by the commencement of a holdover proceeding, “the rejection of the rent after notice of the expiration of the lease” and the notice of the expiration of the lease. “[T]he tendered rent had not been the increased rent amount due under the lease extension” and had only been accepted in court after the court ordered the payment of use and occupancy.

Moreover, the omission of the option in the copy provided to the tenant was based on an error “presumably made by a member of the staff” of her husband’s attorney’s office. The court found that the lease option provisions were “complete, clear and unambiguous on their face” and would be “enforced according to the plain meaning of their terms,” with an exception. Here, the option exercise was approximately 16 months late. The court emphasized “an option to renew must be timely, definite, unequivocable and strictly in compliance with the terms of the lease….” Here, the exercise of the option was “ineffective” since it was untimely.

Additionally, exercise of the option was sent to the landlord’s eviction attorney, rather than the landlord and/or the agent. “All rent payments were made to the Petitioner, all of her legal inquiries were made to the Petitioner’s office, all notices were from the Petitioner except the holdover notice of petition and petition, and the rejection of her rent were all made by the Petitioner and/or the Petitioner’s…agent.” Moreover, there was no evidence that “a limited power of attorney or other notice from the Petitioner was provided to her that granted either of their attorneys authorization to accept service of the option to renew.”

The court opined that “it would be a hard stretch…to find that this default was excusable.” Here, the failure to timely exercise the option could not be deemed attributable to “mere inadvertence or ‘venial inattention.’” The court held that the failure to exercise the option to the proper party was “fatal and inexcusable.”

Even if the default was “excusable,” the “non-renewal of the lease” did not create “a substantial loss to the tenant.” Assuming that the alleged investment was made “at the inception of the tenancy in 1984,” the improvements were made approximately 30 years ago and the tenant had “recouped her and her husband’s investment capital during the term of the lease and the value of the investment capital has depreciated over the course of the lease.” The $20,000 to repair the boiler was expended by the tenant for “protecting her source of income” and “not for the purposes of renewing the lease” and such expenditure was “a ‘repair’ and not an ‘improvement.’” Moreover, those expenditures had been made before the lease expired, not after the lease had expired.

The subtenant had made no improvements and had only cited the tenant’s improvements, as well as the excessive heat problem. Thus, neither respondent “could claim any improvements in anticipation of the lease renewal.” Absent evidence that either respondent had made substantial leasehold improvements, the tenant had “not shown an ‘equitable interest’ that would warrant the invocation of any ‘equitable remedies’ to protect against forfeiture.”

Late option exercise cases that recognized the loss of good will involved retail businesses. The court did not believe that the dental office was the equivalent of a retail business that relied on its location and its “customers in the community.” The subtenant had two other dental offices. The subject office could “not be characterized as a ‘unique commercial commodity’” and was located in a building that contained over 122 residential apartments. There was no evidence that the residents used the particular “dental office as opposed to another dental office or that there would be any substantial loss in goodwill” if the dentist had to change locations. There was no evidence that this particular dental office had “any widespread name recognition at this particular location.” There was no evidence that employees would lose their jobs if this location were closed or that there was no other alternate location available.

The court then noted that “[t]he landlord’s inability to consummate another lease is prejudicial in and of itself.” The petitioner could increase the rental and was a co-op that had “limited resources and would not be considered ‘high end.’” The subtenant had not exercised the option to renew under the master lease agreement. Thus, the court held that the tenant was “not relieved of consequences of the untimely renewal notice.” Accordingly, the court held that the petitioner was entitled to a final judgment of possession.

Comment: This decision incorporates a substantial review of case law relating to the late exercise of options.

149-05 Owners v. IRA Phillips, 51616/11, NYLJ 1202629494966, at *1 (Civ. QU, Decided Oct. 31, 2013), Thompson, J.

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