Landlord & Tenant

Court of Appeals

(Opinion by Graffeo, J.)

In an action by landlord to collect on a personal guaranty, landlord appealed from the Appellate Division's affirmance of the Supreme Court's award of summary judgment to the guarantors. The Court of Appeals affirmed, holding that tenant's late payment of rent did not constitute 'monetary default' under the lease, and that the guaranty had therefore expired.

Landlord leased the subject premises to tenant for a ten-year term for operation of a Rolls Royce/Bentley dealership. At the same time, landlord obtained a guaranty from tenant's principals. By its terms, the guaranty was to terminate after three years if tenant had not been in 'monetary default' during those three years; if tenant had been in 'monetary default,' the guaranty would continue for the duration of the lease term. During the first three years of the lease, tenant routinely paid rent on a monthly basis, but paid late. Landlord never objected, and continued to accept the rent checks. A little more than three years into the lease, tenant met with landlord to seek a rent reduction, or to seek permission to sell other cars from the location. When landlord refused to reduce the rent, tenant vacated. Landlord then sought relief for breach of the lease, and also sought to enforce the guaranty. The Supreme Court granted summary judgment to guarantors, holding that landlord's acceptance of late rent waived any right to contend that late payment constituted monetary default, and the Appellate Division affirmed, also concluding that landlord's acceptance of late payments waived any right landlord might have had to claim that tenant was in monetary default. As a result, the guaranty had terminated. Landlord appealed.

In affirming, the Court of Appeals declined to rely on the waiver rationale. Instead, the court focused on use of the words 'monetary default' in the lease ' a document executed by the same principals as the guaranties. The lease provides that in the event of a default in payment of rent, landlord must notify tenant of the default, and tenant has seven days to cure after notice of default. If tenant does not cure, landlord may serve a three-day notice of cancellation. The lease also provides that the owner may not serve the three-day notice until owner has 'served a second notice of such monetary default, and such monetary default shall remain uncured for three (3) days after Owner shall have served such second notice.' The court construed this language to distinguish between defaults and monetary defaults, and to provide that no monetary default can occur until after landlord declares a default and initiates a cure period. Because, in this case, tenant's seven-day cure period was never triggered, tenant's late payment did not constitute a monetary default, and the guaranty terminated after three years.

Landlord May Recover Surcharge for Intercom System

Doyle v. Metropolitan Insurance and Annuity Co.

NYLJ 12/18/06, p. 31, col. 2

AppDiv, First Dept.

(memorandum opinion).

In tenants' action against landlord to recover past charges for intercom services and to enjoin future collection of charges for those services, tenants appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that the intercom was a utility service and a security service for which landowner was entitled to collect a surcharge from tenants.

In 1969, landlord installed an intercom system in the subject buildings. At the time, there was no question that landlord was entitled to charge tenants for the system. In 1974, the buildings became subject to the rent stabilization law and code. Tenant contended that the rent stabilization regulations do not authorize a separate charge for intercom services. Landlord, however, relied upon
' 2522.10 of the Rent Stabilization Code, which permits surcharges when landlord acts as a provider of a utility service, and ' 2520.6(r)(3)(I) and 2520.6(4)(4)(xi), which authorize separate charges for security services that were provided and separately charged on the base date. The intercom system installed by landlord used Verizon telephone wires, and enabled visitors to dial a three digit number that was integrated with each tenant's private telephone line. Landlord paid Verizon for this service, and imposed a fixed $6.50 monthly charge on each tenant.

On these facts, the court concluded that the intercom system, furnished and operated by Verizon, and designed to screen visitor access to the buildings, qualified both as a utility service and a security service within the meaning of the Rent Stabilization Code. As a result, landlord's separate charges were fully authorized.

Lease Precludes Subrogation Claim

One Beacon Ins. Co. v. French Institute Alliance Francais NYC

NYLJ 1/10/07, p. 22, col. 1

Supreme Ct., N.Y. Cty

(Lehner. J.)

Tenant's liability insurer brought this action against landlord as subrogee of tenant's claim that landlord's negligence caused damage to tenant's property. The court dismissed the claim, holding that the lease and the insurance policy precluded insurer from advancing the subrogation claim.

In addition to leasing space in the subject building to tenant, landlord occupied some of the space itself. On Jan. 23, 2005, a flood damaged tenant's premises, and insurer paid out more than $100,000 to cover tenant's losses. The insurer contends that these losses were due to a freeze-up in the sprinkler system that resulted from landlord's failure to maintain adequate heating in the premises. Landlord, however, claimed that the subrogation claim was barred because: 1) by the terms of the lease, landlord and tenant waived all rights of recovery against each other by 'any one claiming under each of them by subrogation or otherwise'; and 2) by the terms of tenant's insurance policy, tenant was entitled to waive subrogation rights prior to a loss to the covered property. Insurer agreed that these provisions would bar subrogation claims if landlord were only a landlord, bur argued that because landlord also occupied space in the building, the lease and policy provisions did not bar subrogation.

In dismissing the claim, the court acknowledged that insurer's position might have merit if the claims against landlord did not arise out of its position as landlord, as, for instance, if the flood resulted from landlord's failure to turn off a faucet in the neighboring premises it occupied. In this case, however, the alleged negligence resulted directly from landlord's obligation as landlord ' in particular, the obligation to maintain adequate heat. As a result, the court held that the anti-subrogation provisions in the lease and policy were applicable, and precluded the insurer from recovery.

Neighboring Tenant Not Third-Party Beneficiary of Lease Covenant

Hamawi Deli Inc. v. Psaras,

NYLJ 1/4/07, p. 24, col. 1

Supreme Ct., Nassau Cty

(Palmieri, J.)

In an action by commercial tenant against landlord and neighboring tenant for breach of tenant's lease, for breach of the neighboring tenant's lease, for tortious interference with contract, and for unfair competition, all parties moved for summary judgment. The court awarded summary judgment to landlord and neighboring tenant, holding that plaintiff tenant was not a third-party beneficiary of the covenants in the lease between landlord and neighboring tenant.

Neighboring tenant assumed a lease for its premises in 2000. The lease provided that tenant 'shall use and occupy demised premises for Gift Shop, Cards, Health & Beauty Aids, and for no other purpose.' A rider restricted landlord's right to lease space within the same shopping area to any other tenant who would carry greeting cards, gift-wrap paper, gift bows, or gift tags. In 2001, plaintiff tenant entered into a lease for neighboring space, on which it operated a take-out delicatessen. Plaintiff tenant's lease includes no covenant against competition by neighboring tenants. Subsequently, neighboring tenant began to sell beverages and food items that competed with plaintiff tenant's delicatessen business. Plaintiff tenant then stopped paying rent, and brought this action, contending that landlord had breached the terms of its lease, that both landlord and neighboring tenant had violated its rights as a third-party beneficiary of the covenant in the neighboring lease, and that neighboring tenant had committed tortious interference with contract and unfair competition.

In awarding summary judgment to landlord and neighboring tenant, the court rejected plaintiff tenant's argument that the lease restrictions in neighboring tenant's lease were intended for plaintiff tenant's benefit. The court noted that plaintiff tenant's own lease included no restriction on landlord's right to lease to tenants that would compete with plaintiff tenant's business, and contrasted plaintiff tenant's lease with neighboring tenant's lease ' which did include protection against competition. The court also concluded that neighboring tenant had engaged in no culpable conduct that would give rise to a claim for tortious interference with contract, and also concluded that sale of competing products did not constitute unfair competition.

COMMENT

A non-party to a deed or lease has standing to enforce a restrictive covenant as an intended beneficiary, even without privity of estate, when the deed or lease names the non-party as a beneficiary. Thus, in Zamiarski v. Kozial, 18 A.D.2d 297, the court held that neighbors could enforce a deed covenant as a third-party beneficiary when the deed to the restricted parcel required a 10 foot setback for the specific benefit of the neighbors who lived on the adjacent parcel. Similarly, in Benipal v. Herath, 251 A.D.2d 933, defendant Gill's lease with defendant landlord was modified to restrict Gill and his successors from the sale of 'Indian Fare' and Indian-style food in contemplation of non-competition with neighboring Indian restaurant owner Benipal. An agreement dissolving a pre-existing partnership between the two tenants provided explicitly that Gill (and his successors, and assigns) would not compete with Benipal. When defendant Herath, who subleased from Gill, nevertheless began selling similar food, the court ruled that Benipal was entitled to enforce the provision in the modified lease as an intended beneficiary.

Even when the deed does not expressly confer the right to enforce on a neighboring owner, the neighbor may enforce deed restrictions when the original grantor subdivided land and sold it to grantees with common restrictions on all of the parcels, thereby imposing a general scheme of development. The Court of Appeals articulated this equitable principle in Korn v. Campbell, 192 NY 490. More recently, the court applied the principle in Graham v. Beermunder, 93 A.D.2d 254. Neighbors sought to enforce a provision found in landowners' deed that restricted landowners from subdividing their parcel without written approval from the grantor or his successor. The provision was found in neighbors' deed as well as most of the deeds in the residential development the grantor had subdivided. Although the deeds did not explicitly state that the restriction was for the benefit of other grantees, the court held that neighbors were entitled to enforce the restriction because their parcel and landowners' parcel were part of a common plan of development, of which landowners had notice.

A party cannot enforce a deed restriction as a third-party beneficiary when there is neither an express provision naming the party as a beneficiary nor a common scheme. Thus, in Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, the Court of Appeals held that tenants were not entitled to enforce a covenant in an agreement between developer and the City of New York. A housing company had contracted with the City of New York to build an apartment building in an area zoned for low and moderate-income tenants under the Urban Renewal Plan the city adopted in 1964. Under the agreement between the housing company and the city, the housing company would keep the requirements of the plan in effect for 40 years from the approval of the plan. When the housing company sought to dissolve, a group of tenants brought an action to hold the housing company to the agreement. The court held that tenants lacked standing to enforce because they had not established that the contract was for their benefit. The Hamawi opinion relied on Mendel in holding that tenant lacked standing to enforce.

Parol Evidence Necessary to Clarify Option Scope

Great South Bay Family Medical Practice LLP v. Raynor

NYLJ 1/2/07, p. 37, col. 3

AppDiv, Second Dept

(memorandum opinion)

In an action by tenant for a judgment declaring that it is entitled to exercise an option to purchase real property free and clear of any easement, tenant appealed from the Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that parol evidence was necessary to clarify the parties' intent about the scope of the option.

In 2001, landlord and tenant entered into a lease agreement. A rider to the lease gave tenant an option to buy the building of which the leased premises were a part for $1,600,000. Landlord sent copies of the lease to tenant for signature. Before signing the copies, tenant inserted and initialed a handwritten modification indicating that the option included the 'existing parking lot.' Landlord then initialed tenant's modification, and handwrote below that modification that 'landlord reserved the right to use said parking lot during normal business hours of the funeral home adjacent thereto.' (The funeral home, which landlord owns, has used the parking lot for more than 20 years). Landlord executed the copies of the modified lease, and landlord's lawyer returned them to the tenant with a cover letter noting that the modification had been added after a conversation between landlord and tenant. The letter also asked tenant to initial the modification and sign the rider. Tenant signed the rider but did not initial the modification. Later, landlord granted an easement over the property for the use and benefit of the funeral home. Tenant then sought to exercise the option to purchase free of any easement in favor of the funeral home, and landlord refused to convey on those terms. Tenant then brought this action, and sought summary judgment.

In affirming the Supreme Court's denial of tenant's summary judgment motion, the Appellate Division concluded that the option, as modified by the parties' handwritten changes, was not a clear, complete, and unambiguous document. The court concluded that interpretation of the handwritten changes required the admission of parol evidence about the parties' intent regarding their respective rights to the parking lot. As a result, summary judgment was premature.

Late Payment of Rent Does Not Constitute Monetary Default Within Meaning of Guaranty Provision

Madison Avenue Leasehold, LLC v. Madison Bentley Associates LLC

NYLJ 12/20/06, p. 22, col. 1

Court of Appeals

(Opinion by Graffeo, J.)

In an action by landlord to collect on a personal guaranty, landlord appealed from the Appellate Division's affirmance of the Supreme Court's award of summary judgment to the guarantors. The Court of Appeals affirmed, holding that tenant's late payment of rent did not constitute 'monetary default' under the lease, and that the guaranty had therefore expired.

Landlord leased the subject premises to tenant for a ten-year term for operation of a Rolls Royce/Bentley dealership. At the same time, landlord obtained a guaranty from tenant's principals. By its terms, the guaranty was to terminate after three years if tenant had not been in 'monetary default' during those three years; if tenant had been in 'monetary default,' the guaranty would continue for the duration of the lease term. During the first three years of the lease, tenant routinely paid rent on a monthly basis, but paid late. Landlord never objected, and continued to accept the rent checks. A little more than three years into the lease, tenant met with landlord to seek a rent reduction, or to seek permission to sell other cars from the location. When landlord refused to reduce the rent, tenant vacated. Landlord then sought relief for breach of the lease, and also sought to enforce the guaranty. The Supreme Court granted summary judgment to guarantors, holding that landlord's acceptance of late rent waived any right to contend that late payment constituted monetary default, and the Appellate Division affirmed, also concluding that landlord's acceptance of late payments waived any right landlord might have had to claim that tenant was in monetary default. As a result, the guaranty had terminated. Landlord appealed.

In affirming, the Court of Appeals declined to rely on the waiver rationale. Instead, the court focused on use of the words 'monetary default' in the lease ' a document executed by the same principals as the guaranties. The lease provides that in the event of a default in payment of rent, landlord must notify tenant of the default, and tenant has seven days to cure after notice of default. If tenant does not cure, landlord may serve a three-day notice of cancellation. The lease also provides that the owner may not serve the three-day notice until owner has 'served a second notice of such monetary default, and such monetary default shall remain uncured for three (3) days after Owner shall have served such second notice.' The court construed this language to distinguish between defaults and monetary defaults, and to provide that no monetary default can occur until after landlord declares a default and initiates a cure period. Because, in this case, tenant's seven-day cure period was never triggered, tenant's late payment did not constitute a monetary default, and the guaranty terminated after three years.

Landlord May Recover Surcharge for Intercom System

Doyle v. Metropolitan Insurance and Annuity Co.

NYLJ 12/18/06, p. 31, col. 2

AppDiv, First Dept.

(memorandum opinion).

In tenants' action against landlord to recover past charges for intercom services and to enjoin future collection of charges for those services, tenants appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that the intercom was a utility service and a security service for which landowner was entitled to collect a surcharge from tenants.

In 1969, landlord installed an intercom system in the subject buildings. At the time, there was no question that landlord was entitled to charge tenants for the system. In 1974, the buildings became subject to the rent stabilization law and code. Tenant contended that the rent stabilization regulations do not authorize a separate charge for intercom services. Landlord, however, relied upon
' 2522.10 of the Rent Stabilization Code, which permits surcharges when landlord acts as a provider of a utility service, and ' 2520.6(r)(3)(I) and 2520.6(4)(4)(xi), which authorize separate charges for security services that were provided and separately charged on the base date. The intercom system installed by landlord used Verizon telephone wires, and enabled visitors to dial a three digit number that was integrated with each tenant's private telephone line. Landlord paid Verizon for this service, and imposed a fixed $6.50 monthly charge on each tenant.

On these facts, the court concluded that the intercom system, furnished and operated by Verizon, and designed to screen visitor access to the buildings, qualified both as a utility service and a security service within the meaning of the Rent Stabilization Code. As a result, landlord's separate charges were fully authorized.

Lease Precludes Subrogation Claim

One Beacon Ins. Co. v. French Institute Alliance Francais NYC

NYLJ 1/10/07, p. 22, col. 1

Supreme Ct., N.Y. Cty

(Lehner. J.)

Tenant's liability insurer brought this action against landlord as subrogee of tenant's claim that landlord's negligence caused damage to tenant's property. The court dismissed the claim, holding that the lease and the insurance policy precluded insurer from advancing the subrogation claim.

In addition to leasing space in the subject building to tenant, landlord occupied some of the space itself. On Jan. 23, 2005, a flood damaged tenant's premises, and insurer paid out more than $100,000 to cover tenant's losses. The insurer contends that these losses were due to a freeze-up in the sprinkler system that resulted from landlord's failure to maintain adequate heating in the premises. Landlord, however, claimed that the subrogation claim was barred because: 1) by the terms of the lease, landlord and tenant waived all rights of recovery against each other by 'any one claiming under each of them by subrogation or otherwise'; and 2) by the terms of tenant's insurance policy, tenant was entitled to waive subrogation rights prior to a loss to the covered property. Insurer agreed that these provisions would bar subrogation claims if landlord were only a landlord, bur argued that because landlord also occupied space in the building, the lease and policy provisions did not bar subrogation.

In dismissing the claim, the court acknowledged that insurer's position might have merit if the claims against landlord did not arise out of its position as landlord, as, for instance, if the flood resulted from landlord's failure to turn off a faucet in the neighboring premises it occupied. In this case, however, the alleged negligence resulted directly from landlord's obligation as landlord ' in particular, the obligation to maintain adequate heat. As a result, the court held that the anti-subrogation provisions in the lease and policy were applicable, and precluded the insurer from recovery.

Neighboring Tenant Not Third-Party Beneficiary of Lease Covenant

Hamawi Deli Inc. v. Psaras,

NYLJ 1/4/07, p. 24, col. 1

Supreme Ct., Nassau Cty

(Palmieri, J.)

In an action by commercial tenant against landlord and neighboring tenant for breach of tenant's lease, for breach of the neighboring tenant's lease, for tortious interference with contract, and for unfair competition, all parties moved for summary judgment. The court awarded summary judgment to landlord and neighboring tenant, holding that plaintiff tenant was not a third-party beneficiary of the covenants in the lease between landlord and neighboring tenant.

Neighboring tenant assumed a lease for its premises in 2000. The lease provided that tenant 'shall use and occupy demised premises for Gift Shop, Cards, Health & Beauty Aids, and for no other purpose.' A rider restricted landlord's right to lease space within the same shopping area to any other tenant who would carry greeting cards, gift-wrap paper, gift bows, or gift tags. In 2001, plaintiff tenant entered into a lease for neighboring space, on which it operated a take-out delicatessen. Plaintiff tenant's lease includes no covenant against competition by neighboring tenants. Subsequently, neighboring tenant began to sell beverages and food items that competed with plaintiff tenant's delicatessen business. Plaintiff tenant then stopped paying rent, and brought this action, contending that landlord had breached the terms of its lease, that both landlord and neighboring tenant had violated its rights as a third-party beneficiary of the covenant in the neighboring lease, and that neighboring tenant had committed tortious interference with contract and unfair competition.

In awarding summary judgment to landlord and neighboring tenant, the court rejected plaintiff tenant's argument that the lease restrictions in neighboring tenant's lease were intended for plaintiff tenant's benefit. The court noted that plaintiff tenant's own lease included no restriction on landlord's right to lease to tenants that would compete with plaintiff tenant's business, and contrasted plaintiff tenant's lease with neighboring tenant's lease ' which did include protection against competition. The court also concluded that neighboring tenant had engaged in no culpable conduct that would give rise to a claim for tortious interference with contract, and also concluded that sale of competing products did not constitute unfair competition.

COMMENT

A non-party to a deed or lease has standing to enforce a restrictive covenant as an intended beneficiary, even without privity of estate, when the deed or lease names the non-party as a beneficiary. Thus, in Zamiarski v. Kozial, 18 A.D.2d 297, the court held that neighbors could enforce a deed covenant as a third-party beneficiary when the deed to the restricted parcel required a 10 foot setback for the specific benefit of the neighbors who lived on the adjacent parcel. Similarly, in Benipal v. Herath, 251 A.D.2d 933, defendant Gill's lease with defendant landlord was modified to restrict Gill and his successors from the sale of 'Indian Fare' and Indian-style food in contemplation of non-competition with neighboring Indian restaurant owner Benipal. An agreement dissolving a pre-existing partnership between the two tenants provided explicitly that Gill (and his successors, and assigns) would not compete with Benipal. When defendant Herath, who subleased from Gill, nevertheless began selling similar food, the court ruled that Benipal was entitled to enforce the provision in the modified lease as an intended beneficiary.

Even when the deed does not expressly confer the right to enforce on a neighboring owner, the neighbor may enforce deed restrictions when the original grantor subdivided land and sold it to grantees with common restrictions on all of the parcels, thereby imposing a general scheme of development. The Court of Appeals articulated this equitable principle in Korn v. Campbell, 192 NY 490. More recently, the court applied the principle in Graham v. Beermunder, 93 A.D.2d 254. Neighbors sought to enforce a provision found in landowners' deed that restricted landowners from subdividing their parcel without written approval from the grantor or his successor. The provision was found in neighbors' deed as well as most of the deeds in the residential development the grantor had subdivided. Although the deeds did not explicitly state that the restriction was for the benefit of other grantees, the court held that neighbors were entitled to enforce the restriction because their parcel and landowners' parcel were part of a common plan of development, of which landowners had notice.

A party cannot enforce a deed restriction as a third-party beneficiary when there is neither an express provision naming the party as a beneficiary nor a common scheme. Thus, in Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, the Court of Appeals held that tenants were not entitled to enforce a covenant in an agreement between developer and the City of New York. A housing company had contracted with the City of New York to build an apartment building in an area zoned for low and moderate-income tenants under the Urban Renewal Plan the city adopted in 1964. Under the agreement between the housing company and the city, the housing company would keep the requirements of the plan in effect for 40 years from the approval of the plan. When the housing company sought to dissolve, a group of tenants brought an action to hold the housing company to the agreement. The court held that tenants lacked standing to enforce because they had not established that the contract was for their benefit. The Hamawi opinion relied on Mendel in holding that tenant lacked standing to enforce.

Parol Evidence Necessary to Clarify Option Scope

Great South Bay Family Medical Practice LLP v. Raynor

NYLJ 1/2/07, p. 37, col. 3

AppDiv, Second Dept

(memorandum opinion)

In an action by tenant for a judgment declaring that it is entitled to exercise an option to purchase real property free and clear of any easement, tenant appealed from the Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that parol evidence was necessary to clarify the parties' intent about the scope of the option.

In 2001, landlord and tenant entered into a lease agreement. A rider to the lease gave tenant an option to buy the building of which the leased premises were a part for $1,600,000. Landlord sent copies of the lease to tenant for signature. Before signing the copies, tenant inserted and initialed a handwritten modification indicating that the option included the 'existing parking lot.' Landlord then initialed tenant's modification, and handwrote below that modification that 'landlord reserved the right to use said parking lot during normal business hours of the funeral home adjacent thereto.' (The funeral home, which landlord owns, has used the parking lot for more than 20 years). Landlord executed the copies of the modified lease, and landlord's lawyer returned them to the tenant with a cover letter noting that the modification had been added after a conversation between landlord and tenant. The letter also asked tenant to initial the modification and sign the rider. Tenant signed the rider but did not initial the modification. Later, landlord granted an easement over the property for the use and benefit of the funeral home. Tenant then sought to exercise the option to purchase free of any easement in favor of the funeral home, and landlord refused to convey on those terms. Tenant then brought this action, and sought summary judgment.

In affirming the Supreme Court's denial of tenant's summary judgment motion, the Appellate Division concluded that the option, as modified by the parties' handwritten changes, was not a clear, complete, and unambiguous document. The court concluded that interpretation of the handwritten changes required the admission of parol evidence about the parties' intent regarding their respective rights to the parking lot. As a result, summary judgment was premature.