Landlord & Tenant

By ALM Staff | Law Journal Newsletters |
August 27, 2008

Net Lease Should Be Considered in Valuing Property for Purpose of Calculating Renewal Rent

936 Second Avenue L.P. v. Second Corporate Development Co., Inc.

NYLJ 6/13/08, p. 26, col. 1

Court of Appeals

(Opinion by Graffeo, J.)

In an action by lessee for a judgment declaring that the parties' net lease should be considered in appraising the property's value for purposes of calculating rent for a renewal term, lessee appealed from the Appellate Division's affirmance of the Supreme Court's determination excluding the effect of the net lease on the property's value. The Court of Appeals reversed, holding that in the absence of language to the contrary, the net lease should be considered in valuing the property.

Lessor and lessee's predecessor entered into a 20-year net lease in 1966. The subject property includes three buildings that include 22 rent-regulated apartments and four retail stores. The lease also gave lessee the option to renew for two 20-year terms at a rent equal to seven percent of the value of the land and the building at the commencement of specified 10-year periods. If the parties did not agree on value, the dispute was to be resolved by appraisers selected by the parties, with a third appraiser to be appointed if the first two could not agree. Lessee apparently renewed for the first 20-year period without incident, but when lessee exercised the option to renew for the second 20-year period, the parties and their appraisers sharply disagreed on the property's value. Lessor's appraiser valued the property at $7.1 million while lessee's appraiser valued the property at $3.43 million. Lessee's appraiser indicated that the difference reflected, in part, his decision to consider the effect of the net lease in valuing the property, while the lessor's appraiser did not consider the effect of the lease. Lessee then brought this declaratory judgment action to establish that the net lease should be considered. The Supreme Court granted summary judgment to lessor, and the Appellate Division affirmed. Lessee appealed.

In reversing, the Court of Appeals emphasized that the net lease itself was silent about whether the net lease itself should be considered, but noted that case law generally recognizes that valuation of land should take into consideration all encumbrances unless there is a clear provision to the contrary. Here, the net lease itself was an encumbrance, and the court concluded that it should be considered in determining the property's value.

Residential Landlord Has No Duty to Mitigate

Rios v. Carillo

NYLJ 7/10/08, p. 26, col. 1

AppDiv, Second Dept.

(Opinion by Lifson, J.)

In residential landlord's action for unpaid rent, landlord appealed from the Supreme Court's dismissal of the complaint for failure to mitigate damages. The Appellate Division reversed and remitted to the Supreme Court to determine whether landlord had accepted tenant's surrender, holding that a residential landlord has no duty to mitigate damages.

In 2000, landlord leased the subject premises to tenant for a two-year term. In October 2001, tenant vacated the premises and ceased paying rent. Tenant alleges that he obtained landlord's consent. In 2003, landlord brought this action for unpaid rent. After a nonjury trial before a judicial hearing officer, the Supreme Court dismissed the complaint, concluding that landlord had failed to prove that she had made a serious effort to mitigate damages. Landlord appealed.

In reversing, the Second Department acknowledged a division in authority among lower courts about the duty of a residential landlord to mitigate damages. The court noted, however, that in a commercial case, the Court of Appeals has made it crystal clear that landlord has no duty to mitigate damages, and emphasized that the court's language did not distinguish between residential and commercial leases. As a result, the court concluded that in the absence of legislative enactment, the common law rule applies, and a residential landlord has no duty to mitigate. The court did note, however, that because the Supreme Court dismissed this case for failure to mitigate, that court never determined whether a surrender by operation of law had occurred. As a result, the court remitted to the Supreme Court for a determination on that issue.

COMMENT

When a landlord and tenant both behave in a manner inconsistent with continuation of the landlord-tenant relationship, courts hold that the tenancy has been surrendered by operation of law, releasing the tenant from further liability. See Riverside Research Inst. v. KMGA, Inc. 68 N.Y.2d 689 (finding surrender by operation of law, and release of tenant from liability, when landlord assisted tenant in vacating the building and billed tenant for nominal damages). The term “surrender by operation of law” assumes landlord's implied acceptance, and conflicts with a common usage which treats the word “surrender” as a unilateral action of the tenant, which landlord may either accept or reject. See, e.g., Centurian Development, Ltd. v. Kenford Co., 60 A.D. 2d 96, 100 (“If defendant is to escape the obligation to pay the full rent due under its lease, it must do so with the agreement of the landlord, that is, by the landlord's acceptance of its surrender of the premises.”) When a tenant vacates and landlord relets the premises, courts typically find a surrender by operation of law if landlord expects to profit from the new lease. See, e.g., Cutaia v. Buyer's Bazaar, Inc. 224 A.D.2d 952 [landlord relet at higher rent]; Centurian Development, Ltd. v. Kenford Co., supra [landlord retained option fee from prospective tenant]. Even when landlord does not relet at a higher rent, courts sometimes hold that the act of reletting constitutes a surrender by operation of law unless tenant has signified some consent to the reletting. Thus, in Gray v. Kaufman Dairy and Ice Cream Co, 162 N.Y. 388, the Court of Appeals held that when landlord sent tenant written notice that landlord intended to relet on tenant, and tenant made no reply, the court held that landlord's subsequent reletting constituted a surrender by operation of law because tenant's failure to reply could not be construed as acquiescence. The court distinguished an earlier case finding no surrender by operation of law, noting that in the earlier case, Underhill v. Collins, 132 N.Y., 370, when tenant indicated that he was vacating the premises, landlord had expressly declined to release tenant, but orally offered to relet the premises on tenant's account. In that case, the court drew the inference that tenant had consented to the reletting, and that landlord had not released tenant from liability.

Landlord Who Plans to Gut Building Entitled Not to Renew Tenant's Lease

Peckham v. Calogero

NYLJ 7/2/08, p. 26, col. 1

AppDiv, First Dept.

(3-2 decision; majority opinion by Saxe, J.; dissenting opinion by Acosta, J.)

Tenant brought an article 78 proceeding challenging a determination by the Division of Housing and Community Renewal granting landlord's petition not to renew tenant's lease because landlord was going to demolish the building. On landlord's appeal from the Supreme Court's remand to the DHCR, a divided Appellate Division reversed, holding that there was no basis for the remand.

Tenant is the sole remaining rent-stabilized tenant in landlord's four-story building. Landlord plans to build a six-story, 12-unit building on the premises. As a result, landlord sought permission not to renew tenant's rent-stabilized lease.

Landlord indicated that demolition would involve removal of the roof, the entire interior of the building, much of the facade, and the entire rear wall of the building, so that upon demolition, one would be able to stand on the roof of a neighboring building and look straight down into the basement of the building.

Tenant argued that landlord's application to the Department of Buildings had labeled the work a reconstruction or alteration, and questioned landlord's evidence of financial ability to complete the work.

The Rent Administrator granted landlord's application, and the DHCR denied tenant's petition for administrative review.

Tenant then brought this article 78 proceeding, arguing that the DHCR's standards for what constitutes demolition and for whether an owner has demonstrated financial ability both were unclear. The Supreme Court granted the petition, requiring the DHCR to clarify its standards. On appeal, the DHCR reversed its position, asserting that clarification is necessary, and challenging landlord's right to appeal. In reversing, the Appellate Division first granted landlord's right to appeal.

The court then held that tenant could not, in an article 78 proceeding, raise the argument that the DHCR's standards demolition standards were unclear because tenant did not raise that argument before the DHCR. The majority went on to hold that both the DHCR practice and court decisions made it clear that gutting of the interior residential areas of a building constitutes demolition.

The majority also held that there was nothing irrational about DHCR's decision that landlord had the financial ability to complete its plan.

As a result, the court concluded that the Supreme Court's remand to the DHCR was unwarranted. The dissenting justices emphasized the importance of deferring to DHCR's own determination that its standards needed clarification.

Tenant Who Leads Homeless Lifestyle May Not Maintain Apartment as Primary Residence

TOA Construction Co., Inc. v. Tsitsires

NYLJ 7/11/08, p. 26, col. 1

AppDiv, First Dept.

(3-2 decision; majority opinion by Saxe, J.; dissenting opinion by Andrias, J.)

In landlord's nonprimary residence proceeding, landlord appealed from the Appellate Term's reversal of Civil Court's award of possession to the landlord. A divided Appellate Division reversed and reinstated the judgment of possession, holding that even though tenant, who lived a homeless lifestyle, had no other primary residence, landlord had adequately established that tenant did not maintain the subject apartment as a primary residence.

In 1970, tenant began occupying a rent-stabilized unit in the subject SRO. Landlord allowed the building to fall into disrepair, and took affirmative steps to empty out the building. On July 14, 2000, landlord served on tenant a notice of expiration of tenant's tenancy for failure to maintain the apartment as a primary residence. On Dec. 7, 2000, after expiration of the tenancy, landlord brought this proceeding to terminate the tenancy. Civil Court awarded landlord possession, relying on testimony that although tenant stored personal possessions in the apartment, he stopped in the apartment only a handful of times during the relevant period, and maintained the lifestyle of a homeless person. A divided Appellate Term reversed, concluding that even if tenant did not actually live the apartment, his absence should be deemed excusable because the record did not establish any abandonment of the apartment or any establishment of any new residence. Landlord appealed.

In reversing, the Appellate Division majority rejected tenant's contention, adopted at the Appellate Term, that tenant could not lose his primary residence in the subject apartment without acquiring a primary residence somewhere else. For the Appellate Division majority, the critical question was whether the tenant lacked an ongoing, substantial, physical nexus with the premises for actual living purposes, and the Appellate Division concluded that, on the evidence credited by Civil Court, tenant did not meet that standard. As a result, landlord was entitled to possession without regard to whether landlord maintained the premises adequately.

Justice Andrias, dissenting for himself and Justice Mazzarelli, agreed with the Appellate Term's finding that tenant's absences should be deemed excusable because tenant had not abandoned the premises or established a new residence. He also pinpointed misstatements of fact in the trial court opinion, and noted that the result reached by the majority did not advance the purposes of the rent-stabilization laws, because a judgment for landlord would not make the premises available for another tenant, in light of landlord's clear intention to empty the building.

Net Lease Should Be Considered in Valuing Property for Purpose of Calculating Renewal Rent

936 Second Avenue L.P. v. Second Corporate Development Co., Inc.

NYLJ 6/13/08, p. 26, col. 1

Court of Appeals

(Opinion by Graffeo, J.)

In an action by lessee for a judgment declaring that the parties' net lease should be considered in appraising the property's value for purposes of calculating rent for a renewal term, lessee appealed from the Appellate Division's affirmance of the Supreme Court's determination excluding the effect of the net lease on the property's value. The Court of Appeals reversed, holding that in the absence of language to the contrary, the net lease should be considered in valuing the property.

Lessor and lessee's predecessor entered into a 20-year net lease in 1966. The subject property includes three buildings that include 22 rent-regulated apartments and four retail stores. The lease also gave lessee the option to renew for two 20-year terms at a rent equal to seven percent of the value of the land and the building at the commencement of specified 10-year periods. If the parties did not agree on value, the dispute was to be resolved by appraisers selected by the parties, with a third appraiser to be appointed if the first two could not agree. Lessee apparently renewed for the first 20-year period without incident, but when lessee exercised the option to renew for the second 20-year period, the parties and their appraisers sharply disagreed on the property's value. Lessor's appraiser valued the property at $7.1 million while lessee's appraiser valued the property at $3.43 million. Lessee's appraiser indicated that the difference reflected, in part, his decision to consider the effect of the net lease in valuing the property, while the lessor's appraiser did not consider the effect of the lease. Lessee then brought this declaratory judgment action to establish that the net lease should be considered. The Supreme Court granted summary judgment to lessor, and the Appellate Division affirmed. Lessee appealed.

In reversing, the Court of Appeals emphasized that the net lease itself was silent about whether the net lease itself should be considered, but noted that case law generally recognizes that valuation of land should take into consideration all encumbrances unless there is a clear provision to the contrary. Here, the net lease itself was an encumbrance, and the court concluded that it should be considered in determining the property's value.

Residential Landlord Has No Duty to Mitigate

Rios v. Carillo

NYLJ 7/10/08, p. 26, col. 1

AppDiv, Second Dept.

(Opinion by Lifson, J.)

In residential landlord's action for unpaid rent, landlord appealed from the Supreme Court's dismissal of the complaint for failure to mitigate damages. The Appellate Division reversed and remitted to the Supreme Court to determine whether landlord had accepted tenant's surrender, holding that a residential landlord has no duty to mitigate damages.

In 2000, landlord leased the subject premises to tenant for a two-year term. In October 2001, tenant vacated the premises and ceased paying rent. Tenant alleges that he obtained landlord's consent. In 2003, landlord brought this action for unpaid rent. After a nonjury trial before a judicial hearing officer, the Supreme Court dismissed the complaint, concluding that landlord had failed to prove that she had made a serious effort to mitigate damages. Landlord appealed.

In reversing, the Second Department acknowledged a division in authority among lower courts about the duty of a residential landlord to mitigate damages. The court noted, however, that in a commercial case, the Court of Appeals has made it crystal clear that landlord has no duty to mitigate damages, and emphasized that the court's language did not distinguish between residential and commercial leases. As a result, the court concluded that in the absence of legislative enactment, the common law rule applies, and a residential landlord has no duty to mitigate. The court did note, however, that because the Supreme Court dismissed this case for failure to mitigate, that court never determined whether a surrender by operation of law had occurred. As a result, the court remitted to the Supreme Court for a determination on that issue.

COMMENT

When a landlord and tenant both behave in a manner inconsistent with continuation of the landlord-tenant relationship, courts hold that the tenancy has been surrendered by operation of law, releasing the tenant from further liability. See Riverside Research Inst. v. KMGA, Inc. 68 N.Y.2d 689 (finding surrender by operation of law, and release of tenant from liability, when landlord assisted tenant in vacating the building and billed tenant for nominal damages). The term “surrender by operation of law” assumes landlord's implied acceptance, and conflicts with a common usage which treats the word “surrender” as a unilateral action of the tenant, which landlord may either accept or reject. See, e.g., Centurian Development, Ltd. v. Kenford Co., 60 A.D. 2d 96, 100 (“If defendant is to escape the obligation to pay the full rent due under its lease, it must do so with the agreement of the landlord, that is, by the landlord's acceptance of its surrender of the premises.”) When a tenant vacates and landlord relets the premises, courts typically find a surrender by operation of law if landlord expects to profit from the new lease. See, e.g., Cutaia v. Buyer's Bazaar, Inc. 224 A.D.2d 952 [landlord relet at higher rent] ; Centurian Development, Ltd. v. Kenford Co., supra [landlord retained option fee from prospective tenant]. Even when landlord does not relet at a higher rent, courts sometimes hold that the act of reletting constitutes a surrender by operation of law unless tenant has signified some consent to the reletting. Thus, in Gray v. Kaufman Dairy and Ice Cream Co, 162 N.Y. 388, the Court of Appeals held that when landlord sent tenant written notice that landlord intended to relet on tenant, and tenant made no reply, the court held that landlord's subsequent reletting constituted a surrender by operation of law because tenant's failure to reply could not be construed as acquiescence. The court distinguished an earlier case finding no surrender by operation of law, noting that in the earlier case, Underhill v. Collins, 132 N.Y., 370, when tenant indicated that he was vacating the premises, landlord had expressly declined to release tenant, but orally offered to relet the premises on tenant's account. In that case, the court drew the inference that tenant had consented to the reletting, and that landlord had not released tenant from liability.