The Most Crucial Commercial Lease Cases

Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc.; Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc.: importance of stability.

Of these leading cases and probably the most essential one to understand is Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 NY2d 130, 661 NE2d 694 (N.Y. 1995), for it is this case that erects the entire dominant theory of commercial leasing law. The court wrote:

Parties who engage in transactions based on prevailing law must be able to rely on the stability of such precedents. In business transactions, particularly, the certainty of settled rules is often more important than whether the established rule is better than another or even whether it is the “correct” rule. This is perhaps true in real property more than any other area of the law, where established precedents are not lightly to be set aside. (citations omitted.)

Of necessity, this holding sets the theme for this entire article. Yes, some jurisdictions will vary from other jurisdictions about their holdings on a particular point, but the principle of stability is so important to real property law, that these jurisdictions will not lightly be persuaded to abandon their own view and hold some better view. In ancient Egypt, this principle of stability was known as maat, and endured for 5,000 years. Therefore, there is no reason to believe that in New York the principle of Holy Properties will be changed any time soon. Under Holy Properties, better is simply not good enough.

Holy Properties adhered to the common law ' now minority rule held only in Alabama, Georgia, Minnesota, Mississippi, New York, and West Virginia ' that a landlord has no duty to mitigate damages when the tenant abandons the lease. After acknowledging its minority position, the New York high court felt that the adherence to maat was so important that it overrode any considerations of having a right or better rule. The majority view imposing such a duty is set forth in the Texas decision, Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293 (1997), which lists leading cases from all the states on the question. For that reason, Austin Hill makes it to the “greatest case” list. However, for its preservation of maat, Holy Properties is the leading case in the nation and Austin Hill, for its violation of maat, is reduced to a mere footnote.

While it is perhaps more the business of economists and MBAs than of lawyers to make these determinations, it cannot be doubted that maat in commercial transactions, especially commercial leasing, will make a state more economically attractive for businesses seeking a new location. Nobody likes the law to be an unknown commodity.

Interpreting Leases

151 West Associates v. Printsiples Fabric Corp.: construction of leases against their drafters.

While leasing no doubt has a flavor of conveyancing to it and was certainly understood at common law to be such, Holy Properties, supra, modern commercial leasing law is vastly more inclined to look at the lease as a contract subject to the same kinds of principles that govern contracts generally. Austin Hill, supra; For an extended discussion, see also, Foundation Development Corp. v. Loehmann's Inc., infra (“The interplay of property and contract law in the landlord-tenant relationship is complex. Thus, before deciding whether the breach in this case could support a forfeiture, we must examine the common law nature of that relationship.”).

Among the most important of these principles is that of contra proferentem, the idea that contracts are construed most strongly against their drafters. This doctrine is somewhat stronger in the residential leasing context than in the commercial leasing context because in all but very few residential leasing markets, the leases are presented to the tenants essentially as take-it-or-leave-it. However, in commercial leasing, the amount of participation by the tenant can vary widely. The mere fact that a lease says that it was jointly drafted by the landlord and the tenant will not, in most jurisdictions, foreclose the tenant from offering proof that this was simply not true. The clause reciting that a contract is not one of adhesion may be no less a contract of adhesion than the rest of the contract. As a practical matter, therefore, any landlord who wants to elude the doctrine is going to have to have and maintain a paper trail demonstrating the tenant's actual participation in the drafting process. For landlord's counsel, this may well mean letters that begin, “This is to memorialize your request that the lease say '” The leading case discussing all these ideas is 151 West Associates v. Printsiples Fabric Corp., 61 NY2d 732, 460 NE2d 1344 (N.Y.1984) in which the court wrote:

It has long been the rule that ambiguities in a contractual instrument will be resolved contra proferentem, against the party who prepared or presented it. Moreover, unless the terms of a lease are clear, no additional requirements or liabilities will be imposed upon a tenant. (citation omitted).

Vermont Teddy Bear Co. v. 538 Madison Realty Co.: strict adherence to the terms of the lease.

In Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 NY3d 470, 807 NE2d 876 (N.Y. 2004 ), the court takes this idea to the next step, holding that it does not matter what the parties meant to say or what they should have said. When it comes to a lease, the parties will be bound by the clear meaning of the words actually employed. As the court put it:

When interpreting contracts, we have repeatedly applied the familiar and eminently sensible proposition of law that, when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms ' We have also emphasized this rule's special import in the context of real property transactions, where commercial certainty is a paramount concern.

Again, we find that same concern we saw in Holy Properties, supra, the idea of “commercial certainty,” stability, or maat. The kicker in Vermont Teddy Bear is the phrase, “In the absence of any ambiguity, we look solely to the language used by the parties to discern the contract's meaning.” In short, if the clause is clear, it need not be sensible to be enforced.

Vermont Teddy Bear stands as something of an unsung hero of capitalism. Its proposition that a written agreement two people entered into shall be enforced no matter the severity of the consequences or the lunacy of the terms actually strengthens business relationships monumentally. Business people will only do business in a reliable province where the laws are stable and justice is invoked fairly. However, fairness can only be achieved when courts enforce the agreements before them without relying on the equities or any prejudices ' hence the importance of this case.

Fifty States Mgt. Corp. v Pioneer Auto Parks; Cummings Properties, LLC v. National Communications Corp.: Enforcement of leases as written; acceleration of rent upon default. Foundation Development Corp. v. Loehmann's Inc.: Equitable nonenforcement of lease acceleration clause.

In spite of its importance, Vermont Teddy Bear can hardly be regarded as unique. It stands in a line of increasingly powerful cases binding landlords and tenants to the actual wording of their leases. In one of the most signal cases of all time, Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 N.Y.2d 573, 389 N.E.2d 113 (N.Y. 1979) examined whether a clause in a lease making the rent for the entire term of the lease due upon a single default could be enforced. While there were earlier cases that had argued that such a drastic result was inequitable and constituted an unenforceable forfeiture, New York's high court in Fifty States cut through all of that, holding:

In sum, the facts of this case do not justify equitable intervention. The parties freely bargained for the inclusion of a clause in their lease whereby the rent for the remainder of the lease term would be accelerated upon breach of tenant's covenant to pay rent. ' That honoring at least this aspect of its bargain may cause Pioneer fiscal hardship does not, standing alone, serve as a basis for construing the acceleration clause as a penalty under the guise of applying equitable principles to a routine commercial transaction.

In short, in a commercial transaction, the parties are to be held to the terms they negotiated, even if harsh. Cummings Properties, LLC v. National Communications Corp., 869 N.E.2d 617 (Mass. 2007); contra, Foundation Development Corp. v. Loehmann's Inc., 788 P.2d 1189 (Ariz. 1990) (refusing to apply a forfeiture statute or lease clause where the default is brief).

Foundation Development is a particularly important case in this entire area, which not only states the view contrary to that of Fifty States and Cummings Properties, but masterfully gathers the historical and judicial precedents nationwide for the purpose.

The conclusion of this article will examine cases that address enforcement, violations, stipulations and actual and constructive eviction.

Adam Leitman Bailey, a member of this newsletter's Board of Editors, is the founding partner and Dov Treiman is the landlord-tenant managing partner of Adam Leitman Bailey, P.C., New York. Leni Morrison, an associate of the firm, assisted in researching this article.

For almost two years, the attorneys at Adam Leitman Bailey, P.C, have been compiling a list of the greatest commercial leasing cases of all time. The authors have always been fans of “greatest” lists ' there being something special about choosing the best among so many great people, entertainers, athletes, composers, or, in our case, cases that have had the greatest effect on leasing law. “Greatest” lists permeate our entire culture and are the basis for entire institutions, e.g., The Academy Awards, Tonys, Grammys, and the various Halls of Fame. Cooperstown, NY, is a city entirely based on “greatest” lists, housing both the Baseball Hall of Fame and the greatest of the American summer opera festivals, Glimmerglas.

Law, however, is a peculiar field which, like baseball, lends itself well to actual statistical analysis of “greatness.” These “greatest” cases are so heavily cited that they have demonstrated their significant impact on landlords' and tenants' businesses. Hence, no litigator or drafter would dare to enter either a courtroom or a lease negotiation without a thorough knowledge of these cases. A mere handful of cases have achieved that kind of influence in commercial landlord-tenant relations. While across the United States there are a number of localities having enacted residential rent regulation, for the most part in the commercial arena, the principles of governing law are those of the common law, whose roots and development over the past thousand years are found originally in Britain and then later in the United States. These cases cover stability in leasing law, mitigation of damages, lease interpretation, lease enforcement, lease violations, attorneys' fees, court stipulations, and actual and constructive eviction. While late night television talk show hosts would no doubt list these cases in inverse order of importance, this two-part article will use them to trace the lifetime of a leasehold from negotiation through breach and enforcement.

Mitigation of Damages

Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc.; Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc.: importance of stability.

Of these leading cases and probably the most essential one to understand is H oly Properties Ltd., L.P. v. Kenneth Cole Productions, Inc. , 87 NY2d 130, 661 NE2d 694 (N.Y. 1995), for it is this case that erects the entire dominant theory of commercial leasing law. The court wrote:

Parties who engage in transactions based on prevailing law must be able to rely on the stability of such precedents. In business transactions, particularly, the certainty of settled rules is often more important than whether the established rule is better than another or even whether it is the “correct” rule. This is perhaps true in real property more than any other area of the law, where established precedents are not lightly to be set aside. (citations omitted.)

Of necessity, this holding sets the theme for this entire article. Yes, some jurisdictions will vary from other jurisdictions about their holdings on a particular point, but the principle of stability is so important to real property law, that these jurisdictions will not lightly be persuaded to abandon their own view and hold some better view. In ancient Egypt, this principle of stability was known as maat, and endured for 5,000 years. Therefore, there is no reason to believe that in New York the principle of Holy Properties will be changed any time soon. Under Holy Properties, better is simply not good enough.

Holy Properties adhered to the common law ' now minority rule held only in Alabama, Georgia, Minnesota, Mississippi, New York, and West Virginia ' that a landlord has no duty to mitigate damages when the tenant abandons the lease. After acknowledging its minority position, the New York high court felt that the adherence to maat was so important that it overrode any considerations of having a right or better rule. The majority view imposing such a duty is set forth in the Texas decision, Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc. , 948 S.W.2d 293 (1997), which lists leading cases from all the states on the question. For that reason, Austin Hill makes it to the “greatest case” list. However, for its preservation of maat, Holy Properties is the leading case in the nation and Austin Hill, for its violation of maat, is reduced to a mere footnote.

While it is perhaps more the business of economists and MBAs than of lawyers to make these determinations, it cannot be doubted that maat in commercial transactions, especially commercial leasing, will make a state more economically attractive for businesses seeking a new location. Nobody likes the law to be an unknown commodity.

Interpreting Leases

151 West Associates v. Printsiples Fabric Corp.: construction of leases against their drafters.

While leasing no doubt has a flavor of conveyancing to it and was certainly understood at common law to be such, Holy Properties, supra, modern commercial leasing law is vastly more inclined to look at the lease as a contract subject to the same kinds of principles that govern contracts generally. Austin Hill, supra; For an extended discussion, see also, Foundation Development Corp. v. Loehmann's Inc., infra (“The interplay of property and contract law in the landlord-tenant relationship is complex. Thus, before deciding whether the breach in this case could support a forfeiture, we must examine the common law nature of that relationship.”).

Among the most important of these principles is that of contra proferentem, the idea that contracts are construed most strongly against their drafters. This doctrine is somewhat stronger in the residential leasing context than in the commercial leasing context because in all but very few residential leasing markets, the leases are presented to the tenants essentially as take-it-or-leave-it. However, in commercial leasing, the amount of participation by the tenant can vary widely. The mere fact that a lease says that it was jointly drafted by the landlord and the tenant will not, in most jurisdictions, foreclose the tenant from offering proof that this was simply not true. The clause reciting that a contract is not one of adhesion may be no less a contract of adhesion than the rest of the contract. As a practical matter, therefore, any landlord who wants to elude the doctrine is going to have to have and maintain a paper trail demonstrating the tenant's actual participation in the drafting process. For landlord's counsel, this may well mean letters that begin, “This is to memorialize your request that the lease say '” The leading case discussing all these ideas is 151 West Associates v. Printsiples Fabric Corp. , 61 NY2d 732, 460 NE2d 1344 (N.Y.1984) in which the court wrote:

It has long been the rule that ambiguities in a contractual instrument will be resolved contra proferentem, against the party who prepared or presented it. Moreover, unless the terms of a lease are clear, no additional requirements or liabilities will be imposed upon a tenant. (citation omitted).

Vermont Teddy Bear Co. v. 538 Madison Realty Co.: strict adherence to the terms of the lease.

In Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 NY3d 470, 807 NE2d 876 (N.Y. 2004 ), the court takes this idea to the next step, holding that it does not matter what the parties meant to say or what they should have said. When it comes to a lease, the parties will be bound by the clear meaning of the words actually employed. As the court put it:

When interpreting contracts, we have repeatedly applied the familiar and eminently sensible proposition of law that, when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms ' We have also emphasized this rule's special import in the context of real property transactions, where commercial certainty is a paramount concern.

Again, we find that same concern we saw in Holy Properties, supra, the idea of “commercial certainty,” stability, or maat. The kicker in Vermont Teddy Bear is the phrase, “In the absence of any ambiguity, we look solely to the language used by the parties to discern the contract's meaning.” In short, if the clause is clear, it need not be sensible to be enforced.

Vermont Teddy Bear stands as something of an unsung hero of capitalism. Its proposition that a written agreement two people entered into shall be enforced no matter the severity of the consequences or the lunacy of the terms actually strengthens business relationships monumentally. Business people will only do business in a reliable province where the laws are stable and justice is invoked fairly. However, fairness can only be achieved when courts enforce the agreements before them without relying on the equities or any prejudices ' hence the importance of this case.

Fifty States Mgt. Corp. v Pioneer Auto Parks; Cummings Properties, LLC v. National Communications Corp.: Enforcement of leases as written; acceleration of rent upon default. Foundation Development Corp. v. Loehmann's Inc.: Equitable nonenforcement of lease acceleration clause.

In spite of its importance, Vermont Teddy Bear can hardly be regarded as unique. It stands in a line of increasingly powerful cases binding landlords and tenants to the actual wording of their leases. In one of the most signal cases of all time, Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 N.Y.2d 573, 389 N.E.2d 113 (N.Y. 1979) examined whether a clause in a lease making the rent for the entire term of the lease due upon a single default could be enforced. While there were earlier cases that had argued that such a drastic result was inequitable and constituted an unenforceable forfeiture, New York's high court in Fifty States cut through all of that, holding:

In sum, the facts of this case do not justify equitable intervention. The parties freely bargained for the inclusion of a clause in their lease whereby the rent for the remainder of the lease term would be accelerated upon breach of tenant's covenant to pay rent. ' That honoring at least this aspect of its bargain may cause Pioneer fiscal hardship does not, standing alone, serve as a basis for construing the acceleration clause as a penalty under the guise of applying equitable principles to a routine commercial transaction.

In short, in a commercial transaction, the parties are to be held to the terms they negotiated, even if harsh. Cummings Properties, LLC v. National Communications Corp. , 869 N.E.2d 617 (Mass. 2007); contra , Foundation Development Corp. v. Loehmann's Inc. , 788 P.2d 1189 (Ariz. 1990) (refusing to apply a forfeiture statute or lease clause where the default is brief).

Foundation Development is a particularly important case in this entire area, which not only states the view contrary to that of Fifty States and Cummings Properties, but masterfully gathers the historical and judicial precedents nationwide for the purpose.

The conclusion of this article will examine cases that address enforcement, violations, stipulations and actual and constructive eviction.

Adam Leitman Bailey, a member of this newsletter's Board of Editors, is the founding partner and Dov Treiman is the landlord-tenant managing partner of Adam Leitman Bailey, P.C., New York. Leni Morrison, an associate of the firm, assisted in researching this article.