The Most Crucial Commercial Lease Cases

The concepts associated with enforcing leases are tightly connected to the concepts associated with interpreting them. Frequently, cases discussing how a lease is to be enforced will of necessity also deal with the rules of how a lease is to be interpreted. Since commercial lease terms tend to be long, a considerable time may pass between when a clause is written and when a court must interpret it. Thus, a court may use the concept of “practical construction,” whereby it will examine how the parties actually lived under the lease, rather than taking a fresh look at the language in the lease itself. Greenblatt v. Zimmerman, 132 A.D. 283, 117 N.Y.S. 18 (NY 1st Dept. 1909). If the landlord suddenly departs from that interpretation, such as in calculating the rent, the courts will rarely sustain that departure.

For example, common in commercial leases are so-called “pay now ' fight later” clauses. These leases contain a component of the payments that the tenant must make ' usually called “additional rent.” However, unlike the “base rent,” the actual numbers are not set forth in the lease. Instead, the landlord has to examine the operating expenses of the building, which typically include real estate taxes, and compute which of the operating expenses are properly passed along to the tenant as additional rent. If the lease is unclear as to which expenses count as “operating expenses” and which do not, disputes will arise as to how much additional rent the tenant owes.

For example, a roof repair usually is considered an operating expense, but a roof replacement typically is not. A dispute can frequently arise as to whether a particular repair was so extensive as to constitute a replacement and, therefore, outside of the tenant's fiscal obligation. Leases will often call for arbitration to resolve such disputes. If the lease contains a “pay now ' fight later” clause, the tenant must first pay the disputed amount as a prerequisite to demanding arbitration about whether it was, in fact, owed. However, if the landlord abuses that process, the courts will enjoin the landlord's improper calculations. See Morgan Guaranty Trust Co. of NY v. Solow d/b/a Solow Building Co., 68 NY2d 779, 498 NE2d 147, 506 NYS2d 674 (NY Court of Appeals, 1986).

Ran First Assocs. v. 363 E. 76th St Corp.: Tenants' entitlement to the benefit of tax abatements procured by the landlord.

Clauses like the “pay now ' fight later” clauses are part of the generally common phenomenon in commercial leasing where the rent is divided. The tenant pays a base rent plus increases, as well as a share of the operating expenses of the building. Often, these expenses include real estate tax escalations. While leases often call for such things, they are generally silent about whether the tenant gets to share in the benefit of tax decreases the landlord manages to procure. Unless the lease states otherwise, the tenants do indeed get such benefit. Ran First Assocs. v. 363 E. 76th St Corp., 297 AD2d 506, 747 NYS2d 13 (NY 1st Dept. 2002).

41 Fifth Owners Corp. v. 41 Fifth Equities Corp.: Fixtures defined.

While many leases provide that fixtures become the property of the landlord, almost no lease defines just what is and what is not a fixture. 41 Fifth Owners Corp. v. 41 Fifth Equities Corp., 14 AD3d 386, 787 NYS2d 326 (NY App. Div. 2005) takes the lead in filling that gap, albeit somewhat tersely. While it may not attempt to provide a comprehensive definition of the term fixture, the opinion stated, “The dedicated purpose of the unit, its size and the extent of its connection to the structure render it a fixture.” It would appear that a vastly smaller unit would also be a fixture if indeed it had a dedicated purpose and was extensively connected to the structural fabric of the building itself.

Lease Violations

Jefpaul Garage Corp. v. Presbyterian Hospital in the City of New York; Homstead Enterprises v. Johnson Products, Inc.; Dunbar Housing Authority v. Nesmith: What constitutes a waiver.

In order to enforce a lease, one must determine whether it has been breached. While it is easier to determine if the tenant has technically breached the lease, it is a more fact-laden question to determine whether the landlord has waived that breach. The first and most important concept with waiver is its very definition. For that purpose, the leading case, Jefpaul Garage Corp. v. Presbyterian Hospital in the City of New York, 61 NY2d 442, 462 NE2d 1176, 474 NYS2d 458, (NY Court of Appeals 1984), defines a waiver as a voluntary relinquishment of a known right. The two key words in that definition are “voluntary” and “known.” If the landlord is acting under compulsion, there is no waiver. However, much
more importantly, if the landlord is unaware of either the right itself or the breach of it, then the landlord cannot be said to have relinquished a known right.

How does ignorance of the breach take the situation out of the definition? Let us illustrate this by way of an example. Under a rather common lease clause, if the tenant fails to have certain insurances naming the landlord as an additional insured, the tenant is in breach of the lease. It would stand to reason that the landlord is aware of this right ' and indeed the law charges the landlord with knowledge of the contents of its own lease. So there is no real question that the landlord knows that it has a right to be insured by the tenant. However, if the landlord does not know that the tenant is breaching this clause, for example, by fraudulently claiming that certain insurance is in place when in fact the insurance certificates are forged, then the landlord has not waived this breach if the landlord is deceived by the certificates. The lease gives the landlord a remedy for the tenant's breach: eviction. That remedy is itself one of the landlord's rights, but if the landlord is unaware of the breach, it does not know of the right to evict to which the breach of the insurance clause had given rise. Thus, with the falsified insurance, the landlord's right to terminate the lease is an unknown right, which landlord cannot be said to have waived. The other key point of Jefpaul is that the conduct on the part of the landlord cannot be accidental or inadvertent but must have been specifically intended as a waiver. To the same effect are Homstead Enterprises v. Johnson Products, Inc., 540 A.2d 471 (Maine 1988) and Dunbar Housing Authority v. Nesmith, 400 S.E.2d 296 (Supreme W. Va. 1990).

TSS-Seedman's, Inc. v. Elota Realty Company: Conditional limitations and conditions subsequent.

Summary proceedings, regarded as a derogation of common law, have been in use for almost 200 years, and have had ample time to develop a common law of their own. For most of that period, the courts have shown a decided hostility to the invocation of the summary remedy and the proceedings have, in many jurisdictions, betrayed a certain fragility. This is true even in New York State, where it was invented. Generally, in garden-variety commercial summary proceedings, especially those of the nonpayment kind, a landlord can get the relief sought. However, in summary proceedings brought not to recover funds, but rather to recover the property itself, many courts will find in the summary proceedings common law sufficient support to relegate suitors to the long, slow, and expensive common law ejectment proceeding.

The legal theory here is between two ostensibly different kinds of contingencies in leases arising from the tenant's failure to fulfill some obligation under the lease. In the one kind, the conditional limitation, upon the occurrence of the triggering event, the termination of the lease is automatic, with no further action needed by the landlord. In the other kind, the condition (a/k/a condition subsequent) the default gives the landlord the option to terminate the lease. There is nothing automatic. The landlord must exercise the option for it to take effect. TSS-Seedman's, Inc. v. Elota Realty Company, 72 NY2d 1024, 531 NE2d 646, 534 NYS2d 925 (NY Court of Appeals 1988). While it is generally easy to state this theory, it is remarkably difficult to apply it by using any kind of analytical means. However, if one applies the mechanical method of finding that the presence of a notice to cure creates a conditional limitation and the absence of one creates a condition subsequent, one will most generally come up with the correct result. A notice to cure, however, will often provoke a Yellowstone injunction (discussed below) and a landlord may obtain a better result with a naked termination notice, set up as a conditional limitation ' if the jurisdiction where the property is located allows it. For undeniably obsolete reasons, while conditional limitations can be the predicate of a summary proceeding, a condition subsequent can only be enforced through an ejectment action.

For all of the reasons commercial litigators condemn badly written leases and their drafters, no complaint rings louder or more justifiably than that of a landlord that finds its case can no longer can be maintained as a summary proceeding , but instead must proceed in the longer more cumbersome common law ejectment action. Hence, no lesson is more important to the lease drafter than understanding, drafting and implementing conditional limitations and staying far away from the ocean of dangerous conditions subsequent.

First National Stores, Inc. v. Yellowstone Shopping Center, Inc.; Food Pantry, Ltd. v. Waikiki Business Plaza, Inc.: A tenant's right to litigate.

In some jurisdictions, including New York and Hawaii, a procedure has been developed allowing a tenant that has received a notice to cure to contest prior to the declaration of the termination of the lease. First National Stores, Inc. v. Yellowstone Shopping Center, Inc., 21 NY2d 630, 237 NE2d 868, 290 NYS2d 721, (NY Court of Appeals 1968); Food Pantry, Ltd. v. Waikiki Business Plaza, Inc., 575 P.2d 869 (Supreme Hawaii 1978). Jurisdictions allowing such a procedure afford the tenant an enormous safeguard permitting the tenant the opportunity to find out if the landlord was right and to put things to rights before losing a valuable leasehold. Food Pantry, supra. However, there is a cost to that benefit. The same line of authority holds that the tenant must toll the cure period during that period, by way of a declaratory judgment action. Absent this tolling, if the tenant actually was in default of the lease, the courts themselves have no power to fix it once the cure period is up. These Yellowstone injunctions, as they have come to be known, are the single most powerful weapon in a tenant's arsenal and fear of their employment has guided many of a landlord's decisions.

Adam Leitman Bailey is the founding partner and Dov Treiman is the landlord-tenant managing partner of Adam Leitman Bailey, P.C. Leni Morrison, an associate of that firm, assisted in researching this article. Mr. Bailey and Mr. Treiman recently collaborated to produce the first 21st-century residential leases for Blumberg Excelsior.

The first part of this article, which appeared in the December 2008 Issue, discussed cases that address the preference for stability over sense, mitigation and interpretation of leases. The cases in Part Two herein address enforcement and violations.

Enforcing the Lease

Greenblatt v. Zimmerman; Morgan Guaranty Trust Co. of NY v. Solow d/b/a Solow Building Co.: Use of “practical construction” to interpret a lease.

The concepts associated with enforcing leases are tightly connected to the concepts associated with interpreting them. Frequently, cases discussing how a lease is to be enforced will of necessity also deal with the rules of how a lease is to be interpreted. Since commercial lease terms tend to be long, a considerable time may pass between when a clause is written and when a court must interpret it. Thus, a court may use the concept of “practical construction,” whereby it will examine how the parties actually lived under the lease, rather than taking a fresh look at the language in the lease itself. Greenblatt v. Zimmerman , 132 A.D. 283, 117 N.Y.S. 18 (NY 1st Dept. 1909). If the landlord suddenly departs from that interpretation, such as in calculating the rent, the courts will rarely sustain that departure.

For example, common in commercial leases are so-called “pay now ' fight later” clauses. These leases contain a component of the payments that the tenant must make ' usually called “additional rent.” However, unlike the “base rent,” the actual numbers are not set forth in the lease. Instead, the landlord has to examine the operating expenses of the building, which typically include real estate taxes, and compute which of the operating expenses are properly passed along to the tenant as additional rent. If the lease is unclear as to which expenses count as “operating expenses” and which do not, disputes will arise as to how much additional rent the tenant owes.

For example, a roof repair usually is considered an operating expense, but a roof replacement typically is not. A dispute can frequently arise as to whether a particular repair was so extensive as to constitute a replacement and, therefore, outside of the tenant's fiscal obligation. Leases will often call for arbitration to resolve such disputes. If the lease contains a “pay now ' fight later” clause, the tenant must first pay the disputed amount as a prerequisite to demanding arbitration about whether it was, in fact, owed. However, if the landlord abuses that process, the courts will enjoin the landlord's improper calculations. See Morgan Guaranty Trust Co. of NY v. Solow d/b/a Solow Building Co., 68 NY2d 779, 498 NE2d 147, 506 NYS2d 674 (NY Court of Appeals, 1986).

Ran First Assocs. v. 363 E. 76th St Corp.: Tenants' entitlement to the benefit of tax abatements procured by the landlord.

Clauses like the “pay now ' fight later” clauses are part of the generally common phenomenon in commercial leasing where the rent is divided. The tenant pays a base rent plus increases, as well as a share of the operating expenses of the building. Often, these expenses include real estate tax escalations. While leases often call for such things, they are generally silent about whether the tenant gets to share in the benefit of tax decreases the landlord manages to procure. Unless the lease states otherwise, the tenants do indeed get such benefit. Ran First Assocs. v. 363 E. 76th St Corp., 297 AD2d 506, 747 NYS2d 13 (NY 1st Dept. 2002).

41 Fifth Owners Corp. v. 41 Fifth Equities Corp.: Fixtures defined.

While many leases provide that fixtures become the property of the landlord, almost no lease defines just what is and what is not a fixture. 41 Fifth Owners Corp. v. 41 Fifth Equities Corp., 14 AD3d 386, 787 NYS2d 326 (NY App. Div. 2005) takes the lead in filling that gap, albeit somewhat tersely. While it may not attempt to provide a comprehensive definition of the term fixture, the opinion stated, “The dedicated purpose of the unit, its size and the extent of its connection to the structure render it a fixture.” It would appear that a vastly smaller unit would also be a fixture if indeed it had a dedicated purpose and was extensively connected to the structural fabric of the building itself.

Lease Violations

Jefpaul Garage Corp. v. Presbyterian Hospital in the City of New York; Homstead Enterprises v. Johnson Products, Inc.; Dunbar Housing Authority v. Nesmith: What constitutes a waiver.

In order to enforce a lease, one must determine whether it has been breached. While it is easier to determine if the tenant has technically breached the lease, it is a more fact-laden question to determine whether the landlord has waived that breach. The first and most important concept with waiver is its very definition. For that purpose, the leading case, Jefpaul Garage Corp. v. Presbyterian Hospital in the City of New York , 61 NY2d 442, 462 NE2d 1176, 474 NYS2d 458, (NY Court of Appeals 1984), defines a waiver as a voluntary relinquishment of a known right. The two key words in that definition are “voluntary” and “known.” If the landlord is acting under compulsion, there is no waiver. However, much
more importantly, if the landlord is unaware of either the right itself or the breach of it, then the landlord cannot be said to have relinquished a known right.

How does ignorance of the breach take the situation out of the definition? Let us illustrate this by way of an example. Under a rather common lease clause, if the tenant fails to have certain insurances naming the landlord as an additional insured, the tenant is in breach of the lease. It would stand to reason that the landlord is aware of this right ' and indeed the law charges the landlord with knowledge of the contents of its own lease. So there is no real question that the landlord knows that it has a right to be insured by the tenant. However, if the landlord does not know that the tenant is breaching this clause, for example, by fraudulently claiming that certain insurance is in place when in fact the insurance certificates are forged, then the landlord has not waived this breach if the landlord is deceived by the certificates. The lease gives the landlord a remedy for the tenant's breach: eviction. That remedy is itself one of the landlord's rights, but if the landlord is unaware of the breach, it does not know of the right to evict to which the breach of the insurance clause had given rise. Thus, with the falsified insurance, the landlord's right to terminate the lease is an unknown right, which landlord cannot be said to have waived. The other key point of Jefpaul is that the conduct on the part of the landlord cannot be accidental or inadvertent but must have been specifically intended as a waiver. To the same effect are Homstead Enterprises v. Johnson Products, Inc. , 540 A.2d 471 (Maine 1988) and Dunbar Housing Authority v. Nesmith , 400 S.E.2d 296 (Supreme W. Va. 1990).

TSS-Seedman's, Inc. v. Elota Realty Company: Conditional limitations and conditions subsequent.

Summary proceedings, regarded as a derogation of common law, have been in use for almost 200 years, and have had ample time to develop a common law of their own. For most of that period, the courts have shown a decided hostility to the invocation of the summary remedy and the proceedings have, in many jurisdictions, betrayed a certain fragility. This is true even in New York State, where it was invented. Generally, in garden-variety commercial summary proceedings, especially those of the nonpayment kind, a landlord can get the relief sought. However, in summary proceedings brought not to recover funds, but rather to recover the property itself, many courts will find in the summary proceedings common law sufficient support to relegate suitors to the long, slow, and expensive common law ejectment proceeding.

The legal theory here is between two ostensibly different kinds of contingencies in leases arising from the tenant's failure to fulfill some obligation under the lease. In the one kind, the conditional limitation, upon the occurrence of the triggering event, the termination of the lease is automatic, with no further action needed by the landlord. In the other kind, the condition (a/k/a condition subsequent) the default gives the landlord the option to terminate the lease. There is nothing automatic. The landlord must exercise the option for it to take effect. TSS-Seedman's, Inc. v. Elota Realty Company , 72 NY2d 1024, 531 NE2d 646, 534 NYS2d 925 (NY Court of Appeals 1988). While it is generally easy to state this theory, it is remarkably difficult to apply it by using any kind of analytical means. However, if one applies the mechanical method of finding that the presence of a notice to cure creates a conditional limitation and the absence of one creates a condition subsequent, one will most generally come up with the correct result. A notice to cure, however, will often provoke a Yellowstone injunction (discussed below) and a landlord may obtain a better result with a naked termination notice, set up as a conditional limitation ' if the jurisdiction where the property is located allows it. For undeniably obsolete reasons, while conditional limitations can be the predicate of a summary proceeding, a condition subsequent can only be enforced through an ejectment action.

For all of the reasons commercial litigators condemn badly written leases and their drafters, no complaint rings louder or more justifiably than that of a landlord that finds its case can no longer can be maintained as a summary proceeding , but instead must proceed in the longer more cumbersome common law ejectment action. Hence, no lesson is more important to the lease drafter than understanding, drafting and implementing conditional limitations and staying far away from the ocean of dangerous conditions subsequent.

First National Stores, Inc. v. Yellowstone Shopping Center, Inc.; Food Pantry, Ltd. v. Waikiki Business Plaza, Inc.: A tenant's right to litigate.

In some jurisdictions, including New York and Hawaii, a procedure has been developed allowing a tenant that has received a notice to cure to contest prior to the declaration of the termination of the lease. First National Stores, Inc. v. Yellowstone Shopping Center, Inc. , 21 NY2d 630, 237 NE2d 868, 290 NYS2d 721, (NY Court of Appeals 1968); Food Pantry, Ltd. v. Waikiki Business Plaza, Inc. , 575 P.2d 869 (Supreme Hawaii 1978). Jurisdictions allowing such a procedure afford the tenant an enormous safeguard permitting the tenant the opportunity to find out if the landlord was right and to put things to rights before losing a valuable leasehold. Food Pantry, supra. However, there is a cost to that benefit. The same line of authority holds that the tenant must toll the cure period during that period, by way of a declaratory judgment action. Absent this tolling, if the tenant actually was in default of the lease, the courts themselves have no power to fix it once the cure period is up. These Yellowstone injunctions, as they have come to be known, are the single most powerful weapon in a tenant's arsenal and fear of their employment has guided many of a landlord's decisions.

Adam Leitman Bailey is the founding partner and Dov Treiman is the landlord-tenant managing partner of Adam Leitman Bailey, P.C. Leni Morrison, an associate of that firm, assisted in researching this article. Mr. Bailey and Mr. Treiman recently collaborated to produce the first 21st-century residential leases for Blumberg Excelsior.