Landlord & Tenant

Court of Appeals

(Opinion by Ciparick, J.)

Opposing a tenant's action against current landlord to recover the amount of an award against a prior landlord in a fair market rent appeal (FMRA), landlord appealed from the Appellate Division's award of summary judgment to tenant. The Court of Appeals reversed, holding that a current landlord cannot be held liable for an FMRA when landlord did not collect any of the overcharges and did not participate in the FMRA.

Rent-stabilized tenants signed a lease in 1985 setting their monthly rent at $775. Six years later, tenants brought a FMRA against the then-landlord. In 1993, the Division of Housing and Community Renewal (DHCR) determined that the fair market rent at the inception of the lease was $434.34, and that tenant was due a refund of $37,480.05. Landlord filed a petition for administrative review (PAR), but current landlord acquired the building in 1995, before the PAR was decided. Current landlord had no notice of the FMRA award, and no lien had been filed against the building in conjunction with the award. Although the FMRA was denied in 1997, tenant never collected the amount of the award from the prior landlord. Instead, tenant brought this action against the current landlord to collect the amount of the award. Supreme Court denied summary judgment motions by both parties, but the Appellate Division reversed and awarded summary judgment to tenant, concluding that a current successor landlord is generally entitled to recover overcharges collected by a predecessor. Landlord appealed.

In reversing, the Court of Appeals distinguished overcharge proceedings from FMRAs. The court noted that the Rent Stabilization Code provides explicitly that “a current owner shall be responsible for all overcharge penalties, including penalties based upon overcharges collected by any prior owner” (9 NYCRR sec, 2526.1[f][2][i]), but provides expressly that the provisions of the overcharge section shall not apply to FMRAs. Moreover, the court cited DHCR's own policy statements providing that a current owner is liable for rents determined to be excessive in an FMRA only when the current owner had an opportunity to participate in the FMRA process. Here, current landlord had no opportunity to participate and was not, therefore, liable. The court emphasized that in this case there was no evidence that the transfer to current landlord was anything other than an arm's-length transaction, and that tenant had pleaded no fraud claim. As a result, current landlord was entitled to summary judgment dismissing the complaint.

Lease Renewal Option Does Not Violate Rule Against Perpetuities

Deer Cross Shopping, LLC v. Stop& Shop Supermarket Co.

NYLJ 12/3/03, p. 22, col. 1

Supreme Ct., N.Y. Cty

(Cahn, J.)

Landlord sought summary judgment in its action to declare void a lease renewal option and covenants restricting landlord in leasing other stores in the subject shopping center. The court denied landlord's summary judgment motion, holding that the option did not violate the Rule Against Perpetuities and that the enforcement of the covenants was not unreasonable as a matter of law.

Tenant's predecessor leased the premises from landlord's predecessor for a 25-year term that expired on Nov. 30, 1999. The lease granted tenant three successive 10-year renewal terms, provided that tenant gave landlord notice at least 11 months before commencement of the renewal period. The lease also required landlord to give tenant notice if tenant failed to timely exercise the renewal option. Tenant would then be entitled to renew within 60 days. If, however, landlord did not timely provide the required notice, the term of the lease would be automatically extended until 60 days after landlord did give the notice. Landlord contended that this option provision violates the Rule Against Perpetuities. In addition, because tenant planned to operate the premises as a supermarket, the lease prohibited landlord from renting other space in the shopping center, or any space within 2 miles of the premises, as a supermarket. The lease did not obligate tenant to operate the leased space as a supermarket, and tenant has ceased using the space as a supermarket, but operates a supermarket less than 2 miles from the shopping center. Landlord contends that it is no longer reasonable to enforce the covenant.

Tenant exercised the first extension option in November 2000. Landlord then brought this declaratory judgment action. In denying landlord's summary judgment motion, the court first rejected the Rule Against Perpetuities claim. The court noted that options appurtenant to a lease are generally exempted from the Rule if the options are not exercisable after expiration of the lease. Landlord in this case argued that the 60-day extension provision made it possible for the option to be exercised after the expiration of the original lease, but the court observed that landlord's failure to give notice would automatically extend the original lease period, so that the option would necessarily be exercised within the original lease period., avoiding any perpetuities problem. The court then rejected landlord's argument that, as a matter of law, enforcement of the covenant would violate the parties' intentions. The court noted tenant's argument that it had a valid business reason to enforce the restrictive covenant because of its supermarket located within 2 miles of the shopping center.

Current Landlord Not Responsible for Predecessor's FMRA Overcharges

Fullan v. 142 East 27th Street Associates

NYLJ 12/23/03, p. 19, col. 4

Court of Appeals

(Opinion by Ciparick, J.)

Opposing a tenant's action against current landlord to recover the amount of an award against a prior landlord in a fair market rent appeal (FMRA), landlord appealed from the Appellate Division's award of summary judgment to tenant. The Court of Appeals reversed, holding that a current landlord cannot be held liable for an FMRA when landlord did not collect any of the overcharges and did not participate in the FMRA.

Rent-stabilized tenants signed a lease in 1985 setting their monthly rent at $775. Six years later, tenants brought a FMRA against the then-landlord. In 1993, the Division of Housing and Community Renewal (DHCR) determined that the fair market rent at the inception of the lease was $434.34, and that tenant was due a refund of $37,480.05. Landlord filed a petition for administrative review (PAR), but current landlord acquired the building in 1995, before the PAR was decided. Current landlord had no notice of the FMRA award, and no lien had been filed against the building in conjunction with the award. Although the FMRA was denied in 1997, tenant never collected the amount of the award from the prior landlord. Instead, tenant brought this action against the current landlord to collect the amount of the award. Supreme Court denied summary judgment motions by both parties, but the Appellate Division reversed and awarded summary judgment to tenant, concluding that a current successor landlord is generally entitled to recover overcharges collected by a predecessor. Landlord appealed.

In reversing, the Court of Appeals distinguished overcharge proceedings from FMRAs. The court noted that the Rent Stabilization Code provides explicitly that “a current owner shall be responsible for all overcharge penalties, including penalties based upon overcharges collected by any prior owner” (9 NYCRR sec, 2526.1[f][2][i]), but provides expressly that the provisions of the overcharge section shall not apply to FMRAs. Moreover, the court cited DHCR's own policy statements providing that a current owner is liable for rents determined to be excessive in an FMRA only when the current owner had an opportunity to participate in the FMRA process. Here, current landlord had no opportunity to participate and was not, therefore, liable. The court emphasized that in this case there was no evidence that the transfer to current landlord was anything other than an arm's-length transaction, and that tenant had pleaded no fraud claim. As a result, current landlord was entitled to summary judgment dismissing the complaint.

Lease Renewal Option Does Not Violate Rule Against Perpetuities

Deer Cross Shopping, LLC v. Stop& Shop Supermarket Co.

NYLJ 12/3/03, p. 22, col. 1

Supreme Ct., N.Y. Cty

(Cahn, J.)

Landlord sought summary judgment in its action to declare void a lease renewal option and covenants restricting landlord in leasing other stores in the subject shopping center. The court denied landlord's summary judgment motion, holding that the option did not violate the Rule Against Perpetuities and that the enforcement of the covenants was not unreasonable as a matter of law.

Tenant's predecessor leased the premises from landlord's predecessor for a 25-year term that expired on Nov. 30, 1999. The lease granted tenant three successive 10-year renewal terms, provided that tenant gave landlord notice at least 11 months before commencement of the renewal period. The lease also required landlord to give tenant notice if tenant failed to timely exercise the renewal option. Tenant would then be entitled to renew within 60 days. If, however, landlord did not timely provide the required notice, the term of the lease would be automatically extended until 60 days after landlord did give the notice. Landlord contended that this option provision violates the Rule Against Perpetuities. In addition, because tenant planned to operate the premises as a supermarket, the lease prohibited landlord from renting other space in the shopping center, or any space within 2 miles of the premises, as a supermarket. The lease did not obligate tenant to operate the leased space as a supermarket, and tenant has ceased using the space as a supermarket, but operates a supermarket less than 2 miles from the shopping center. Landlord contends that it is no longer reasonable to enforce the covenant.

Tenant exercised the first extension option in November 2000. Landlord then brought this declaratory judgment action. In denying landlord's summary judgment motion, the court first rejected the Rule Against Perpetuities claim. The court noted that options appurtenant to a lease are generally exempted from the Rule if the options are not exercisable after expiration of the lease. Landlord in this case argued that the 60-day extension provision made it possible for the option to be exercised after the expiration of the original lease, but the court observed that landlord's failure to give notice would automatically extend the original lease period, so that the option would necessarily be exercised within the original lease period., avoiding any perpetuities problem. The court then rejected landlord's argument that, as a matter of law, enforcement of the covenant would violate the parties' intentions. The court noted tenant's argument that it had a valid business reason to enforce the restrictive covenant because of its supermarket located within 2 miles of the shopping center.