Landlord & Tenant

AppTerm, 2^nd & 11^th Districts

(memorandum opinion).

In landlord's holdover proceeding, tenant appealed from the Supreme Court's award of possession to landlord. The Appellate Term reversed and dismissed the petition, holding that a stipulation entered into between tenant and prior landlord was binding on current landlord.

In a proceeding brought by prior landlord, that landlord contended that the subject apartment was not rent-controlled because it had been owner-occupied for more than a year before tenant took possession. After a trial court judgment for landlord and a reversal by the Appellate Term, which ordered a new trial, the parties settled that dispute on terms which provided that tenants would be 'deemed new rent stabilized tenants, entitled to all rights of the Rent Stabilization Laws, including renewal leases.' The stipulation also provided that the then-landlord would not seek to recover possession for his personal use, but that this provision would not apply to good-faith purchasers. Then after acquiring the building, current landlord brought the instant holdover proceeding, contending that tenants were not protected by the rent regulation laws, and were not, therefore, entitled to a renewal lease. Civil Court awarded possession to landlord.

In reversing, the Appellate Term held that renewal covenants bind successors even if the original covenant does not expressly provide that it is binding on assigns. Moreover, the court noted that, in light of the express language exempting subsequent purchasers from the obligation not to seek recover from personal use, the parties did contemplate that the remainder of the agreement, including the renewal covenant, would be binding on successors. The court emphasized that landlord never denied actual notice of the covenant, and that, in any event, tenant's possession constituted constructive notice of the rights of the possessor.

Tenant-Assignee Entitled to Rely on Estoppel Certificate

J.R.K. Franklin, LLC v. 164 East 87^th Street LLC

NYLJ 4/3/06, p. 25, col. 5

AppDiv, First Dept

(memorandum opinion)

On tenant's motion for a Yellowstone injunction, tenant appealed from a Supreme Court order denying tenant's motion as moot and granting lessor's cross-motion for summary judgment declaring that a storage structure erected by tenant constituted a violation of the lease. The Appellate Division reversed and declared that, in light of an estoppel certificate signed by landlord, tenant's refusal to remove the structure did not constitute a lease violation.

In 2003, tenant purchased and took an assignment of a ground lease on the premises. At that time, a 1-story storage structure was attached to the rear of the hotel premises. Before taking the assignment, tenant demanded an estoppel certificate from ground lessor, by the terms of which ground lessor represented that '[t]o the best knowledge of Ground Lessor, there is no existing default by Ground Lessee in the performance and observance of Ground Lessee's obligations under the Ground Lease ' ' The certificate also recited that lessor knew of no event which, with the giving of notice of passage of time, would constitute a default by the ground lessee. Nevertheless, in May 2005, ground lessor notified tenant that it was in default of its lease by virtue of the structure, which landlord represented that it had discovered 2 months earlier. Lessor's notice indicated that the lease would be cancelled in 30 days unless the structure was removed. Tenant then sought a Yellowstone injunction to prevent termination of the lease pending resolution of the dispute, but the Supreme Court denied the injunction and granted summary judgment to ground lessor. Tenant appealed.

In reversing, the Appellate Division concluded that the Supreme Court had erred by failing to enforce the estoppel certificate. The court noted that the offending structure is visible from lessor's adjacent place of business, and that the lease provides lessor with a right of entry. On these facts, lessor could not represent in the estoppel certificate that there was no existing default at the time the certificate was issued, and then seek to terminate the lease based on a condition that existed at the time the certificate was issued. Moreover, the court found no evidence to support an inference that tenant knew the representation in the estoppel certificate to be false. As a result, tenant was entitled to a declaration that the structure did not constitute a default.

COMMENT

When a mortgagor executes an estoppel certificate to mortgagee's assignee, the certificate will not be enforceable against mortgagor if assignee accepted the mortgage knowing of a falsity in the certificate, or mortgagor executed the certificate under duress. Hammelburger v. Foursome Inn Corp., 54 N.Y.2d 580. In Hammelburger, mortgagor executed a mortgage to secure a loan. Before mortgagee assigned the mortgage, mortgagor drafted an estoppel certificate
disclaiming all defenses to the mortgage, although subsequent evidence indicated that mortgagor might have signed the certificate under duress. Upon default, mortgagor disclaimed liability on the mortgage, alleging that the mortgage was usurious. The court stated that although an estoppel certificate will generally bar the person who executes it from asserting any defense not raised in the certificate, if in this case, mortgagor can prove that assignees assumed the mortgage knowing that it was usurious, or that the mortgagor executed the certificate under duress, the certificate will not be enforceable if the mortgage was in fact usurious. The court remanded to the trial court to determine whether the mortgage was usurious, the extent, if any, to which assignees' knew of the alleged usury when they assumed the mortgage, and duress.

Courts have extended the Hammel-burger rule from the mortgage context to the landlord-tenant context. Thus, New York courts are reluctant to enforce estoppel certificates where recipient assumed a lease knowing of a falsity in the certificate. In Bush Realty Associates v. A.M. Cosmetics, Inc., 2 A.D.3d 270, the court refused to enforce landlord's estoppel certificate which conflicted with certain lease terms because of evidence that recipient-assignee may have accepted the lease with knowledge of the conflict. In Bush Realty, landlord's calculation of the cost of living increase in the estoppel certificate was based on a formula that contradicted the cost of living adjustment clause in the lease. Similarly, in Won's Cards, Inc. v Samsondale/ Haverstraw Equities, Ltd., 165 A.D.2d 157, the court denied summary judgment to an assignee who had relied on an estoppel certificate prepared by tenant, because assignee failed to prove that it did not know about tenant's misrepresentations when assignee assumed the lease. In Won's Cards, a shopping mall tenant executed an estoppel certificate to landlord-assignee in which tenant represented that landlord was not in default under any provision of the lease even though tenant knew landlord was in breach of the exclusive use provision of tenant's lease. When tenant sued assignee for breaching the lease, the court acknowledged tenant's knowing misrepresentations, yet denied summary judgment to assignee because any allegation that assignee was not aware of landlord's breach when it assumed the lease was 'noticeably absent' from assignee's affidavit.

When read together, Bush Realty and Won's Cards indicate that courts will not consider the knowledge of the person who executed an estoppel certificate when deciding whether to enforce the certificate. In Bush Realty, where there was no evidence that landlord knew of the conflict between the certificate and the lease, the court refused to enforce the certificate because recipient may have known of the conflict. In Won's Cards, the fact that tenant deliberately executed a false certificate did not warrant summary judgment for assignee; instead, the court's focus was on the assignee's knowledge of landlord's breach.

Estoppel certificates shield recipient-assignee from future liability on the lease due to recipient's good faith uncertainty regarding potential grounds for a lawsuit when recipient assumes the lease. Thus, it is reasonable that courts have focused on whether the recipient of the certificate, as opposed to the one who executes it, knew of a falsity in the certificate. If recipient was not aware of its potential liability on the lease, then it is appropriate that courts honor recipient's good faith reliance on the certificate. In contrast, when the recipient is not uncertain about its liability, the reasons for enforcing estoppel certificates become less compelling.

Commercial Landlord Not Obligated to Secure Certificate Of Occupancy

Rivera v. JRJ Land Property Corp.

NYLJ 3/30/06, p. 25, col. 6

AppDiv, First Dept

(memorandum opinion)

In an action by commercial tenant for fraudulent inducement and for breaches of contract, and the warranties of habitability and quiet enjoyment, landlord appealed from Supreme Court's denial of its motion to dismiss for failure to state a cause of action. The Appellate Division reversed and granted the motion, holding that tenant had not identified a lease provision imposing on landlord the obligation to obtain a certificate of occupancy relating to tenant's use of the premises.

Landlord and tenant first entered into a lease for the premises in 1994, and tenant has used the premises as an automobile repair shop since that time. The parties renewed the lease in 2000, and the renewal lease provides that the premises are to be used as an 'Auto Repair Shop.' The certificate of occupancy for the premises, however, limits use to light manufacturing. Tenant contends that he had tried to obtain a license for the shop in 1994, but failed because of the certificate of occupancy. Tenant also testified that he has had to close the shop on numerous occasions to avoid the police, and that before entering into the renewal lease, he hired an architect to reconfigure the space to enable him to obtain a proper certificate of occupancy. Nevertheless, in 2001, tenant brought this action seeking damages, rescission, and restitution. Supreme Court denied landlord's motion to dismiss. Landlord appealed.

In reversing, the Appellate Division noted that the lease provided that tenant would comply with all future and present laws of every government, and would not occupy the premises 'in violation of ' the certificate of occupancy issued for the building of which the demised premises are a part.' In light of tenant's failure to identify any lease provision to support the claim that landlord was obligated to obtain a certificate of occupancy permitting operation as a repair shop, the court held that tenant had not stated a cause of action for breach of contract. The court also dismissed the fraudulent inducement claim, noting that tenant had not established a material false representation on which it had relied to its detriment. The court then dismissed the warranty of habitability claim because the warranty applies only to residential premises, and the quiet enjoyment claim because tenant has remained in full possession of the premises.

Nonpayment Proceeding Does Not Vitiate Holdover Proceeding

Corastor Holding Co., Inc. v.

Mastny (I)

NYLJ 3/17/06, p. 26, col. 4

AppTerm, 2^nd & 11^th Districts

(memorandum opinion)

In landlord's summary holdover proceeding, tenant moved to dismiss
landlord's appeal from Civil Court's award of summary judgment to tenant. The Appellate Term denied tenant's motion, holding that landlord's subsequent nonpayment proceeding did not constitute an election of remedies, and did not vitiate landlord's right to appeal.

Landlord brought the instant holdover proceeding predicated on termination of tenant's alleged month-to-month tenancy. Tenant contended that his loft unit was protected either by the Emergency Tenant Protection Act or by the Loft Law (Multiple Dwelling Law, art. 7-C). Civil Court initially granted summary judgment to tenant on the ground that the apartment was rent-stabilized, but subsequently concluded that the unit was protected under the Loft Law. After Civil Court's award of summary judgment to tenant but before perfecting its appeal, landlord brought a nonpayment proceeding against tenant, contending that the apartment was protected by the Loft Law, that landlord was in compliance with the Loft Law, and that landlord was entitled to 5 years' rent arrears. While the nonpayment proceeding was pending, landlord appealed Civil Court's order in the holdover proceeding, and tenant moved to dismiss the appeal on the ground that by bringing the nonpayment proceeding, landlord had elected its remedy and vitiated the notice of termination.

In denying tenant's motion, the Appellate Term conceded that there are circumstances in which service of a rent demand or commencement of a nonpayment proceeding would vitiate a termination notice and preclude landlord from maintaining a holdover proceeding. The court noted, however, that in this case, landlord had prosecuted the holdover proceeding to completion before commencing the nonpayment proceeding, and held that landlord was entitled to commence the nonpayment proceeding in reliance on the court's adjudication. The court held that landlord's commencement of a nonpayment proceeding could not be construed as a waiver or abandonment of its right to pursue the holdover proceeding.

COMMENT

Tenants frequently attempt to dismiss a holdover proceeding by asserting that landlord's demand or collection of rent is inconsistent with the landlord's assertion that the lease was terminated. RPAPL 711(1) clearly states that collecting rent after commencing a holdover proceeding does not vitiate the proceeding. However, when a landlord commences a non-payment proceeding while a holdover proceeding is pending, some, but not all courts have held that the holdover proceeding must be dismissed. Thus, in Ansonia Associates v. Pearlstein, 122 Misc. 2d 566, the court held that commencement of a non-payment proceeding is inconsistent with a holdover proceeding and requires dismissal of the holdover proceeding. The court reasoned that a holdover proceeding evinces an intent to terminate a tenancy while a non-payment proceeding evinces an intent to revive the tenancy. Therefore, the court vacated the holdover proceeding because the subsequent non-payment proceeding had reaffirmed the tenancy.

By contrast, in United Artists Corpora-tion v. 731 Seventh Avenue, 75 Misc. 2d 717, the court held that the landlord's commencement of a non-payment proceeding while a holdover action was pending did not affect the holdover proceeding. The landlord served a notice of termination to the tenant alleging several breaches of the lease and commenced a holdover proceeding. The trial court dismissed the landlord's action and the landlord appealed. In the interim, the tenant ceased to pay rent and the landlord brought a non-payment proceeding. The court permitted the non-payment proceeding to continue without adversely affecting the holdover proceeding. The court reasoned that if the statute permits the landlord to receive the rent without adversely affecting the proceeding certainly he should be entitled to demand the rent. To hold otherwise, the court reasoned, would frustrate the intention of the statute.

Tenant Fails to Show Loft Law Coverage

Corastor Holding Co., Inc. v. Mastny (II)

NYLJ 3/17/06, p. 27, col. 1

AppTerm, 2^nd & 11^th Districts

(memorandum opinion)

In landlord's summary holdover proceeding, landlord appealed from Civil Court's grant of summary judgment to tenant. The Appellate Term reversed and denied the motion, holding that tenant had failed to make a sufficient showing that the subject apartment was covered by the Loft Law.

Tenant took possession of the subject loft unit in 1995. At that time, the unit was not registered with the Loft Board (although other units in the building were registered), and tenant, acting with the benefit of counsel, executed a waiver of any rights under the Loft Law. Tenant then installed residential fixtures and furnishings, with the permission of landlord's predecessor. In 1997, landlord amended its Interim Multiple Dwelling (IMD) registration to include the subject unit. In that same year, tenant stopped paying rent. Landlord subsequently served a notice purporting to terminate tenant's month-to-month tenancy, and then brought this holdover proceeding. Tenant sought summary judgment, claiming protection under the Emer-gency Tenant Protection Act (ETPA) and the Loft Law. Civil Court granted tenant's motion, ultimately holding that tenant was protected by the Loft Law, and concluding, by analogy to the Rent Stabilization Law, that tenant's waiver of rights under the Loft Law was unenforceable. Landlord appealed.

In reversing, the Appellate Term started by noting that the subject building is located in an M-1 zoning district, which does not permit residential use. As a result, the building became subject to the Loft Law by virtue of the 1987 amendment (MDL sec. 281(4)). Regulations enacted pursuant to that statute required registration of units before Sept. 25, 1987. In light of these regulations, the court questioned whether the unit could be subject to the Loft Law first, because tenant never demonstrated when a new or amended IMD registration was issued following registration of his unit, and second, because tenant had not demonstrated residential use of the apartment during the statutory 'window period'. The court went on to hold that landlord's statement in the petition that the unit was subject to the Loft Law was not a judicial admission, but a misstatement of the legal status of the apartment, subject to correction because tenant had demonstrated no prejudice. As a result, the court, noting that tenant has not paid rent since 1997, concluded that tenant was not entitled to summary judgment. The court did not decide whether tenant's waiver was enforceable, but noted that the Loft Law has a provision dealing with waivers. The court also concluded that tenant's claim to coverage under the ETPA failed because the Court of Appeals has made it clear that illegal loft conversions not subject to the Loft Law are not subject to the ETPA. (Wolinsky v. Kee Yip Realty, 2 NY3d 487).

Consistent Acceptance of Late Payment of Rent Waives Right to Proceed on Guarantee

Madison Avenue Leasehold, LLC v. Madison Bentley Associates LLC

NYLJ 3/20/06, p. 18, col. 1

AppDiv, First Dept

(4-1 decision; opinion by Tom, J; dissenting opinion by McGuire, J.)

In landlord's action against lessee and guarantors for breach of a lease, landlord appealed from Supreme Court's award of summary judgment dismissing the complaint against guarantors. The Appellate Division affirmed, holding that landlord's consistent acceptance of late rent payments waived any right to proceed on the guarantee.

Landlord and tenant entered into a 10-year lease of commercial premises to begin on June 15, 2000. Tenant's principals guaranteed payment of rent for the first 3 years of the lease. The guarantee provided that the guarantors' obligations would end on the third anniversary of the lease's commencement date if 'Tenant shall not have been in monetary default under the Lease at any time during the first three (3) years of the Lease.' A rider to the lease required tenant to pay rent on the first day of each calendar month. The 'Default' provision of the lease, however, provided that landlord could serve a three-day notice of cancellation if tenant shall not have 'diligently commenced curing such default' within a 20-day period. Tenant often paid rent after the first day of each month, but before the expiration of the 20-day period. Landlord accepted these payments without protest. Then, shortly after expiration of the 3-year guarantee period, tenant stopped paying rent altogether and vacated the premises. Landlord brought this action, seeking to hold the guarantors liable on the guarantee, contending that late payments of rent during the 3-year period constituted defaults that triggered the guarantors' obligation. Supreme Court awarded summary judgment to the guarantors, holding that landlord had waived any late payments, and that the three-year guarantee period expired without any default. Landlord appealed.

In affirming, the Appellate Division majority held that a landlord who repeatedly waives a condition of performance is required to give notice that the waiver has been withdrawn before demanding strict compliance. Here, landlord never gave tenant notice that timely payment would be required, so landlord could not insist that tenant's failure to strictly comply with the time requirement constituted default. Moreover, the court held that landlord could not proceed separately against the guarantor because the guarantee could not take effect if there had been no default by the principal obligor.

Justice McGuire, dissenting, argued that the lease agreement distinguished sharply between the existence of default and the consequences resulting from default. That is, he argued, the lease did not permit landlord to serve a three-day notice so long as rent was paid within 20 days, but the lease nevertheless labeled failure to pay rent on time as a default. That default, in his view, triggered the guarantor's obligation. Notice to the tenant, in his view, was irrelevant because the lease prevented landlord from taking action against the tenant until 20 days had expired.

COMMENT

In Madison, the court held that landlord was barred from bringing an action separately against the guarantor because the guarantee could not take effect absent a default by the principal obligor. While the dissent argued that the guarantor's liability was broader than the liability of the primary obligor, no prior case law addresses the argument. However, frequently, the guarantor challenges a landlord's attempt to enforce the guarantor's liability, where the landlord could have brought suit against tenant, but chose not to.

Unless a guarantee agreement specifies otherwise, courts hold that in the event of a default, an obligee can bring an action directly against the guarantor without first proceeding against the tenant. Courts often refer to the guarantee as a guarantee of payment. Thus, in L.W.R.L. Co. v. Risman, 48 Misc.2d 390, the court held that a landlord could recover from tenant's guarantor without any prior attempt to collect from the tenant. When tenant defaulted and landlord filed an action against the guarantor, the court rejected guarantor's argument that landlord was required to exhaust remedies against the tenant. The court relied on language in the guarantee agreement provided that the guarantor would pay the rent upon default of the tenant and held that a landlord cannot be compelled to bring in the principal obligor as a defendant, unless the guarantee expressly provides, as a condition precedent to liability on the guarantor, that the tenant must be a made a party to any action on the undertaking. In L.W.R.L, no such language was included in the guarantee.

The court in L.W.R.L. indicated, in dictum, that if the guarantee had been a guarantee of collection, rather than of payment, the landlord would be required to proceed against the tenant before seeking payment from the guarantor. But there must be language in the guarantee agreement itself in order to qualify as a guaranty of collection.

Renewal Covenant Binds Successor Landlord

K.C. Carrano v. Castro

NYLJ 4/12/06, p. 25, col. 6

AppTerm, 2^nd & 11^th Districts

(memorandum opinion).

In landlord's holdover proceeding, tenant appealed from the Supreme Court's award of possession to landlord. The Appellate Term reversed and dismissed the petition, holding that a stipulation entered into between tenant and prior landlord was binding on current landlord.

In a proceeding brought by prior landlord, that landlord contended that the subject apartment was not rent-controlled because it had been owner-occupied for more than a year before tenant took possession. After a trial court judgment for landlord and a reversal by the Appellate Term, which ordered a new trial, the parties settled that dispute on terms which provided that tenants would be 'deemed new rent stabilized tenants, entitled to all rights of the Rent Stabilization Laws, including renewal leases.' The stipulation also provided that the then-landlord would not seek to recover possession for his personal use, but that this provision would not apply to good-faith purchasers. Then after acquiring the building, current landlord brought the instant holdover proceeding, contending that tenants were not protected by the rent regulation laws, and were not, therefore, entitled to a renewal lease. Civil Court awarded possession to landlord.

In reversing, the Appellate Term held that renewal covenants bind successors even if the original covenant does not expressly provide that it is binding on assigns. Moreover, the court noted that, in light of the express language exempting subsequent purchasers from the obligation not to seek recover from personal use, the parties did contemplate that the remainder of the agreement, including the renewal covenant, would be binding on successors. The court emphasized that landlord never denied actual notice of the covenant, and that, in any event, tenant's possession constituted constructive notice of the rights of the possessor.

Tenant-Assignee Entitled to Rely on Estoppel Certificate

J.R.K. Franklin, LLC v. 164 East 87^th Street LLC

NYLJ 4/3/06, p. 25, col. 5

AppDiv, First Dept

(memorandum opinion)

On tenant's motion for a Yellowstone injunction, tenant appealed from a Supreme Court order denying tenant's motion as moot and granting lessor's cross-motion for summary judgment declaring that a storage structure erected by tenant constituted a violation of the lease. The Appellate Division reversed and declared that, in light of an estoppel certificate signed by landlord, tenant's refusal to remove the structure did not constitute a lease violation.

In 2003, tenant purchased and took an assignment of a ground lease on the premises. At that time, a 1-story storage structure was attached to the rear of the hotel premises. Before taking the assignment, tenant demanded an estoppel certificate from ground lessor, by the terms of which ground lessor represented that '[t]o the best knowledge of Ground Lessor, there is no existing default by Ground Lessee in the performance and observance of Ground Lessee's obligations under the Ground Lease ' ' The certificate also recited that lessor knew of no event which, with the giving of notice of passage of time, would constitute a default by the ground lessee. Nevertheless, in May 2005, ground lessor notified tenant that it was in default of its lease by virtue of the structure, which landlord represented that it had discovered 2 months earlier. Lessor's notice indicated that the lease would be cancelled in 30 days unless the structure was removed. Tenant then sought a Yellowstone injunction to prevent termination of the lease pending resolution of the dispute, but the Supreme Court denied the injunction and granted summary judgment to ground lessor. Tenant appealed.

In reversing, the Appellate Division concluded that the Supreme Court had erred by failing to enforce the estoppel certificate. The court noted that the offending structure is visible from lessor's adjacent place of business, and that the lease provides lessor with a right of entry. On these facts, lessor could not represent in the estoppel certificate that there was no existing default at the time the certificate was issued, and then seek to terminate the lease based on a condition that existed at the time the certificate was issued. Moreover, the court found no evidence to support an inference that tenant knew the representation in the estoppel certificate to be false. As a result, tenant was entitled to a declaration that the structure did not constitute a default.

COMMENT

When a mortgagor executes an estoppel certificate to mortgagee's assignee, the certificate will not be enforceable against mortgagor if assignee accepted the mortgage knowing of a falsity in the certificate, or mortgagor executed the certificate under duress. Hammelburger v. Foursome Inn Corp., 54 N.Y.2d 580. In Hammelburger, mortgagor executed a mortgage to secure a loan. Before mortgagee assigned the mortgage, mortgagor drafted an estoppel certificate
disclaiming all defenses to the mortgage, although subsequent evidence indicated that mortgagor might have signed the certificate under duress. Upon default, mortgagor disclaimed liability on the mortgage, alleging that the mortgage was usurious. The court stated that although an estoppel certificate will generally bar the person who executes it from asserting any defense not raised in the certificate, if in this case, mortgagor can prove that assignees assumed the mortgage knowing that it was usurious, or that the mortgagor executed the certificate under duress, the certificate will not be enforceable if the mortgage was in fact usurious. The court remanded to the trial court to determine whether the mortgage was usurious, the extent, if any, to which assignees' knew of the alleged usury when they assumed the mortgage, and duress.

Courts have extended the Hammel-burger rule from the mortgage context to the landlord-tenant context. Thus, New York courts are reluctant to enforce estoppel certificates where recipient assumed a lease knowing of a falsity in the certificate. In Bush Realty Associates v. A.M. Cosmetics, Inc., 2 A.D.3d 270, the court refused to enforce landlord's estoppel certificate which conflicted with certain lease terms because of evidence that recipient-assignee may have accepted the lease with knowledge of the conflict. In Bush Realty, landlord's calculation of the cost of living increase in the estoppel certificate was based on a formula that contradicted the cost of living adjustment clause in the lease. Similarly, in Won's Cards, Inc. v Samsondale/ Haverstraw Equities, Ltd., 165 A.D.2d 157, the court denied summary judgment to an assignee who had relied on an estoppel certificate prepared by tenant, because assignee failed to prove that it did not know about tenant's misrepresentations when assignee assumed the lease. In Won's Cards, a shopping mall tenant executed an estoppel certificate to landlord-assignee in which tenant represented that landlord was not in default under any provision of the lease even though tenant knew landlord was in breach of the exclusive use provision of tenant's lease. When tenant sued assignee for breaching the lease, the court acknowledged tenant's knowing misrepresentations, yet denied summary judgment to assignee because any allegation that assignee was not aware of landlord's breach when it assumed the lease was 'noticeably absent' from assignee's affidavit.

When read together, Bush Realty and Won's Cards indicate that courts will not consider the knowledge of the person who executed an estoppel certificate when deciding whether to enforce the certificate. In Bush Realty, where there was no evidence that landlord knew of the conflict between the certificate and the lease, the court refused to enforce the certificate because recipient may have known of the conflict. In Won's Cards, the fact that tenant deliberately executed a false certificate did not warrant summary judgment for assignee; instead, the court's focus was on the assignee's knowledge of landlord's breach.

Estoppel certificates shield recipient-assignee from future liability on the lease due to recipient's good faith uncertainty regarding potential grounds for a lawsuit when recipient assumes the lease. Thus, it is reasonable that courts have focused on whether the recipient of the certificate, as opposed to the one who executes it, knew of a falsity in the certificate. If recipient was not aware of its potential liability on the lease, then it is appropriate that courts honor recipient's good faith reliance on the certificate. In contrast, when the recipient is not uncertain about its liability, the reasons for enforcing estoppel certificates become less compelling.

Commercial Landlord Not Obligated to Secure Certificate Of Occupancy

Rivera v. JRJ Land Property Corp.

NYLJ 3/30/06, p. 25, col. 6

AppDiv, First Dept

(memorandum opinion)

In an action by commercial tenant for fraudulent inducement and for breaches of contract, and the warranties of habitability and quiet enjoyment, landlord appealed from Supreme Court's denial of its motion to dismiss for failure to state a cause of action. The Appellate Division reversed and granted the motion, holding that tenant had not identified a lease provision imposing on landlord the obligation to obtain a certificate of occupancy relating to tenant's use of the premises.

Landlord and tenant first entered into a lease for the premises in 1994, and tenant has used the premises as an automobile repair shop since that time. The parties renewed the lease in 2000, and the renewal lease provides that the premises are to be used as an 'Auto Repair Shop.' The certificate of occupancy for the premises, however, limits use to light manufacturing. Tenant contends that he had tried to obtain a license for the shop in 1994, but failed because of the certificate of occupancy. Tenant also testified that he has had to close the shop on numerous occasions to avoid the police, and that before entering into the renewal lease, he hired an architect to reconfigure the space to enable him to obtain a proper certificate of occupancy. Nevertheless, in 2001, tenant brought this action seeking damages, rescission, and restitution. Supreme Court denied landlord's motion to dismiss. Landlord appealed.

In reversing, the Appellate Division noted that the lease provided that tenant would comply with all future and present laws of every government, and would not occupy the premises 'in violation of ' the certificate of occupancy issued for the building of which the demised premises are a part.' In light of tenant's failure to identify any lease provision to support the claim that landlord was obligated to obtain a certificate of occupancy permitting operation as a repair shop, the court held that tenant had not stated a cause of action for breach of contract. The court also dismissed the fraudulent inducement claim, noting that tenant had not established a material false representation on which it had relied to its detriment. The court then dismissed the warranty of habitability claim because the warranty applies only to residential premises, and the quiet enjoyment claim because tenant has remained in full possession of the premises.

Nonpayment Proceeding Does Not Vitiate Holdover Proceeding

Corastor Holding Co., Inc. v.

Mastny (I)

NYLJ 3/17/06, p. 26, col. 4

AppTerm, 2^nd & 11^th Districts

(memorandum opinion)

In landlord's summary holdover proceeding, tenant moved to dismiss
landlord's appeal from Civil Court's award of summary judgment to tenant. The Appellate Term denied tenant's motion, holding that landlord's subsequent nonpayment proceeding did not constitute an election of remedies, and did not vitiate landlord's right to appeal.

Landlord brought the instant holdover proceeding predicated on termination of tenant's alleged month-to-month tenancy. Tenant contended that his loft unit was protected either by the Emergency Tenant Protection Act or by the Loft Law (Multiple Dwelling Law, art. 7-C). Civil Court initially granted summary judgment to tenant on the ground that the apartment was rent-stabilized, but subsequently concluded that the unit was protected under the Loft Law. After Civil Court's award of summary judgment to tenant but before perfecting its appeal, landlord brought a nonpayment proceeding against tenant, contending that the apartment was protected by the Loft Law, that landlord was in compliance with the Loft Law, and that landlord was entitled to 5 years' rent arrears. While the nonpayment proceeding was pending, landlord appealed Civil Court's order in the holdover proceeding, and tenant moved to dismiss the appeal on the ground that by bringing the nonpayment proceeding, landlord had elected its remedy and vitiated the notice of termination.

In denying tenant's motion, the Appellate Term conceded that there are circumstances in which service of a rent demand or commencement of a nonpayment proceeding would vitiate a termination notice and preclude landlord from maintaining a holdover proceeding. The court noted, however, that in this case, landlord had prosecuted the holdover proceeding to completion before commencing the nonpayment proceeding, and held that landlord was entitled to commence the nonpayment proceeding in reliance on the court's adjudication. The court held that landlord's commencement of a nonpayment proceeding could not be construed as a waiver or abandonment of its right to pursue the holdover proceeding.

COMMENT

Tenants frequently attempt to dismiss a holdover proceeding by asserting that landlord's demand or collection of rent is inconsistent with the landlord's assertion that the lease was terminated. RPAPL 711(1) clearly states that collecting rent after commencing a holdover proceeding does not vitiate the proceeding. However, when a landlord commences a non-payment proceeding while a holdover proceeding is pending, some, but not all courts have held that the holdover proceeding must be dismissed. Thus, in Ansonia Associates v. Pearlstein, 122 Misc. 2d 566, the court held that commencement of a non-payment proceeding is inconsistent with a holdover proceeding and requires dismissal of the holdover proceeding. The court reasoned that a holdover proceeding evinces an intent to terminate a tenancy while a non-payment proceeding evinces an intent to revive the tenancy. Therefore, the court vacated the holdover proceeding because the subsequent non-payment proceeding had reaffirmed the tenancy.

By contrast, in United Artists Corpora-tion v. 731 Seventh Avenue, 75 Misc. 2d 717, the court held that the landlord's commencement of a non-payment proceeding while a holdover action was pending did not affect the holdover proceeding. The landlord served a notice of termination to the tenant alleging several breaches of the lease and commenced a holdover proceeding. The trial court dismissed the landlord's action and the landlord appealed. In the interim, the tenant ceased to pay rent and the landlord brought a non-payment proceeding. The court permitted the non-payment proceeding to continue without adversely affecting the holdover proceeding. The court reasoned that if the statute permits the landlord to receive the rent without adversely affecting the proceeding certainly he should be entitled to demand the rent. To hold otherwise, the court reasoned, would frustrate the intention of the statute.

Tenant Fails to Show Loft Law Coverage

Corastor Holding Co., Inc. v. Mastny (II)

NYLJ 3/17/06, p. 27, col. 1

AppTerm, 2^nd & 11^th Districts

(memorandum opinion)

In landlord's summary holdover proceeding, landlord appealed from Civil Court's grant of summary judgment to tenant. The Appellate Term reversed and denied the motion, holding that tenant had failed to make a sufficient showing that the subject apartment was covered by the Loft Law.

Tenant took possession of the subject loft unit in 1995. At that time, the unit was not registered with the Loft Board (although other units in the building were registered), and tenant, acting with the benefit of counsel, executed a waiver of any rights under the Loft Law. Tenant then installed residential fixtures and furnishings, with the permission of landlord's predecessor. In 1997, landlord amended its Interim Multiple Dwelling (IMD) registration to include the subject unit. In that same year, tenant stopped paying rent. Landlord subsequently served a notice purporting to terminate tenant's month-to-month tenancy, and then brought this holdover proceeding. Tenant sought summary judgment, claiming protection under the Emer-gency Tenant Protection Act (ETPA) and the Loft Law. Civil Court granted tenant's motion, ultimately holding that tenant was protected by the Loft Law, and concluding, by analogy to the Rent Stabilization Law, that tenant's waiver of rights under the Loft Law was unenforceable. Landlord appealed.

In reversing, the Appellate Term started by noting that the subject building is located in an M-1 zoning district, which does not permit residential use. As a result, the building became subject to the Loft Law by virtue of the 1987 amendment (MDL sec. 281(4)). Regulations enacted pursuant to that statute required registration of units before Sept. 25, 1987. In light of these regulations, the court questioned whether the unit could be subject to the Loft Law first, because tenant never demonstrated when a new or amended IMD registration was issued following registration of his unit, and second, because tenant had not demonstrated residential use of the apartment during the statutory 'window period'. The court went on to hold that landlord's statement in the petition that the unit was subject to the Loft Law was not a judicial admission, but a misstatement of the legal status of the apartment, subject to correction because tenant had demonstrated no prejudice. As a result, the court, noting that tenant has not paid rent since 1997, concluded that tenant was not entitled to summary judgment. The court did not decide whether tenant's waiver was enforceable, but noted that the Loft Law has a provision dealing with waivers. The court also concluded that tenant's claim to coverage under the ETPA failed because the Court of Appeals has made it clear that illegal loft conversions not subject to the Loft Law are not subject to the ETPA. ( Wolinsky v. Kee Yip Realty , 2 NY3d 487).

Consistent Acceptance of Late Payment of Rent Waives Right to Proceed on Guarantee

Madison Avenue Leasehold, LLC v. Madison Bentley Associates LLC

NYLJ 3/20/06, p. 18, col. 1

AppDiv, First Dept

(4-1 decision; opinion by Tom, J; dissenting opinion by McGuire, J.)

In landlord's action against lessee and guarantors for breach of a lease, landlord appealed from Supreme Court's award of summary judgment dismissing the complaint against guarantors. The Appellate Division affirmed, holding that landlord's consistent acceptance of late rent payments waived any right to proceed on the guarantee.

Landlord and tenant entered into a 10-year lease of commercial premises to begin on June 15, 2000. Tenant's principals guaranteed payment of rent for the first 3 years of the lease. The guarantee provided that the guarantors' obligations would end on the third anniversary of the lease's commencement date if 'Tenant shall not have been in monetary default under the Lease at any time during the first three (3) years of the Lease.' A rider to the lease required tenant to pay rent on the first day of each calendar month. The 'Default' provision of the lease, however, provided that landlord could serve a three-day notice of cancellation if tenant shall not have 'diligently commenced curing such default' within a 20-day period. Tenant often paid rent after the first day of each month, but before the expiration of the 20-day period. Landlord accepted these payments without protest. Then, shortly after expiration of the 3-year guarantee period, tenant stopped paying rent altogether and vacated the premises. Landlord brought this action, seeking to hold the guarantors liable on the guarantee, contending that late payments of rent during the 3-year period constituted defaults that triggered the guarantors' obligation. Supreme Court awarded summary judgment to the guarantors, holding that landlord had waived any late payments, and that the three-year guarantee period expired without any default. Landlord appealed.

In affirming, the Appellate Division majority held that a landlord who repeatedly waives a condition of performance is required to give notice that the waiver has been withdrawn before demanding strict compliance. Here, landlord never gave tenant notice that timely payment would be required, so landlord could not insist that tenant's failure to strictly comply with the time requirement constituted default. Moreover, the court held that landlord could not proceed separately against the guarantor because the guarantee could not take effect if there had been no default by the principal obligor.

Justice McGuire, dissenting, argued that the lease agreement distinguished sharply between the existence of default and the consequences resulting from default. That is, he argued, the lease did not permit landlord to serve a three-day notice so long as rent was paid within 20 days, but the lease nevertheless labeled failure to pay rent on time as a default. That default, in his view, triggered the guarantor's obligation. Notice to the tenant, in his view, was irrelevant because the lease prevented landlord from taking action against the tenant until 20 days had expired.

COMMENT

In Madison, the court held that landlord was barred from bringing an action separately against the guarantor because the guarantee could not take effect absent a default by the principal obligor. While the dissent argued that the guarantor's liability was broader than the liability of the primary obligor, no prior case law addresses the argument. However, frequently, the guarantor challenges a landlord's attempt to enforce the guarantor's liability, where the landlord could have brought suit against tenant, but chose not to.

Unless a guarantee agreement specifies otherwise, courts hold that in the event of a default, an obligee can bring an action directly against the guarantor without first proceeding against the tenant. Courts often refer to the guarantee as a guarantee of payment. Thus, in L.W.R.L. Co. v. Risman, 48 Misc.2d 390, the court held that a landlord could recover from tenant's guarantor without any prior attempt to collect from the tenant. When tenant defaulted and landlord filed an action against the guarantor, the court rejected guarantor's argument that landlord was required to exhaust remedies against the tenant. The court relied on language in the guarantee agreement provided that the guarantor would pay the rent upon default of the tenant and held that a landlord cannot be compelled to bring in the principal obligor as a defendant, unless the guarantee expressly provides, as a condition precedent to liability on the guarantor, that the tenant must be a made a party to any action on the undertaking. In L.W.R.L, no such language was included in the guarantee.

The court in L.W.R.L. indicated, in dictum, that if the guarantee had been a guarantee of collection, rather than of payment, the landlord would be required to proceed against the tenant before seeking payment from the guarantor. But there must be language in the guarantee agreement itself in order to qualify as a guaranty of collection.