Landlord & Tenant

Landlord Not Liable for Failure to Maintain Stair Lights During Blackout

Kopsachilis v. 130 East 18 Owners Corp.

NYLJ 12/3/08, p. 27, col. 5

Court of Appeals

(Opinion by Smith, J.)

In a negligence action against the owner of an apartment building, the owner appealed from a divided Appellate Division's affirmance of the Supreme Court's denial of the owner's summary judgment motion. The Court of Appeals reversed and dismissed the complaint, holding that the owner was not liable for negligence per se when the owner failed to maintain lights in a fire stair during the 2003 New York blackout.

During the blackout, plaintiff stayed in a co-worker's apartment overnight. The next morning, when she decided to leave, she opened the door to a fire stair, felt around for a landing, and fell down the stairs, injuring herself. The building had lights on the fire stairs, and had a battery backup for those lights, but the backup lasted only 40 minutes, so that the stairs were entirely dark at the time of plaintiff's injury. Plaintiff brought this action, alleging that failure to keep the fire stairs lit constituted a violation of '37 of the Multiple Dwelling Law, and therefore constituted negligence per se. When the building owner moved for summary judgment, the Supreme Court denied the motion, and a 3-2 majority of the Appellate Division affirmed. The owner appealed.

In reversing, the Court of Appeals noted that '37(1) imposes an obligation to light fire stairs. Section 37(2) provides that “[e]xcept as provided in subdivision three, every such light shall be turned on ' at sunset ' and shall not be turned off ' until the following sunrise.” Section 37(2) also provides that if a light “becomes extinguished and remains so without the knowledge or consent of the owner he shall not be liable.” Section 37 includes an exception, requiring that in fire stairs without windows, the lights “shall be kept burning continuously.” The Court of Appeals held that the “knowledge or consent” requirement of '37(2) applies to the extinguishment of all lights required by '37(1), whether those lights were required to be on only at night or continuously. The court held that the most natural reading of the statute was that the words in '37(2) “[e]xcept as provided in subdivision three” did not modify the knowledge or consent defense. The court noted that it would be unlikely that the legislature meant to make liability depend on the owner's knowledge or consent when a light fails in a windowed hallway during the night, but to impose strict liability when the same failure occurs in a windowless area. As a result, the court held that the owner was entitled to summary judgment.

---

Transfer of Shares Does Not Violate Restriction on Lease Assignment

East Best Food Corp. v. NY 46th Street LLC

NYLJ 11/17/08, p. 26, col. 5

AppDiv, First Dept.

(memorandum opinion)

In an action by commercial tenant to enjoin landlord from terminating the lease, landlord appealed from the Supreme Court's denial of its motion seeking partial summary judgment. The Appellate Division modified to award summary judgment to tenant, holding that tenant had not violated the lease's non-assignment clause.

The lease, executed in 2003 between tenant and landlord's predecessor, provided that the premises would be used to run a “gourmet” food business. Article 12A also provided that tenant could not assign or sublease the premises without landlord's consent. Article 12C allowed tenant to assign the lease to a successor, purchaser, or related corporate entity, provided that the transaction was not undertaken for the principal purpose of acquiring tenant's interest in the lease, and provided that substantially the same business would operate on the premises. Article 12C also provided that a transfer of a controlling interest in tenant's shares “at one time or over a period of time through a series of transfers” would be deemed an assignment within the meaning of article 12.

In June 2005, one of the three individual shareholders of tenant transferred his 50% interest to another shareholder (in return for shares in another corporation), giving that shareholder a 90% interest in tenant. In May 2006, that shareholder acquired the interest of the remaining 10% shareholder, and then notified landowner that he intended to assign the lease to a newly created corporate entity, which would continue the same business on the premises. Landlord sent tenant a notice of default, and gave tenant 30 days to cure. Tenant then sought an injunction against termination of the lease, expressing a willingness to cure any default by reversing the transactions. Landlord sought partial summary judgment, contending that the transfers together constituted an assignment that was an incurable default as a matter of law.

In awarding summary judgment to tenant, the Appellate Division invoked the principle that restrictions against assignment are disfavored and to be construed strictly. The court then concluded that the two transactions were independent transfers not designed to circumvent landlord's right to consent to assignments. Finally, the court noted that no shareholder had transferred a controlling interest in tenant, and the lease did not prohibit shareholders from transferring shares comprising less than a controlling interest in tenant. As a result, tenant had not violated the lease provisions.

COMMENT

Absent an express provision to the contrary, a corporate tenant's transfer of its stock to a third party generally does not constitute an assignment for purposes of a lease provision prohibiting assignments. In Dennis' Natural Mini-Meals v. 91 Fifth Ave. Corp, 172 A.D.2d 331, the court held that the sale of common stock in the restaurant tenant-corporation to a third party was not a breach of the non-assignment clause. The lease allowed the tenant a one-time assignment with the landlord's consent, not to be unreasonably withheld. After the landlord denied tenant's request to assign the lease, the tenant-corporation's owner sold all his common stock in the corporation to a third party. First finding the landlord's refusal unreasonable, the court went further to hold that the corporate transaction did not constitute an assignment. The court reasoned that a landlord should know a corporate tenant is an entity that exists separately from its owners and may be sold and transferred freely. Had the landlord wished to preclude its lease from changing hands in such a transfer, the court concluded, the landlord should have expressly declared so in its lease. See also, Sea Cliff Delicatessen, Inc. v. Skrepek, 199 A.D.2d 510 (holding that a conveyance of all issued and outstanding stock in tenant-corporation to third party was not an assignment for purpose of a non-assignment provision).

Where lease provisions restrict share transfers in tenant-corporations, courts have generally construed the provisions narrowly, suggesting an unwillingness to imply or interpret any transfer restriction except for those plainly written into the lease. For example, courts have held that a merger of a tenant-corporation into its corporate parent does not trigger a lease provision restricting transfer of a controlling interest in the tenant. Thus, in Brentsun Realty v. D'Urso Supermarkets, 182 A.D.2d 604, the court held that the merger of the tenant, a wholly owned subsidiary corporation, into its parent corporation did not constitute an assignment for the purpose of a non-assignment provision, even though the lease provided that a transfer or sale of 50% or more of the stock of the tenant-corporation constituted an assignment. The court held that, though the tenant's corporate form had changed, at no time since assuming the lease had the tenant-subsidiary transferred or sold at least half its stock to its parent corporation. See also, CRT Services v. Seven Hanover Associates, 1992 U.S. Dist. LEXIS 13473 (holding the conversion of tenant's parent from a general partnership into a limited partnership was not a “direct or indirect transfer of a controlling interest by or of a corporate tenant”, and thus not an assignment in violation of the lease's non-assignment provision.)

If, however, a lease expressly contemplates transfers of the lease to related entities, and deems those transfers “assignments”, then courts hold that such transfers trigger lease restrictions on assignments. In Cellular Telephone Company v. 210 East 86th Street Corp., 44 A.D.3d 77, the court held that a merger at issue constituted an assignment that triggered the landlord's right to recapture the premises. The lease required landlord's consent for all assignments except assignments to affiliates, deemed a transfer of 25% of tenant's capital stock as an assignment, and provided that any assignment gave the landlord a right to cancel the lease. The lease also provided that tenant did not need landlord's consent to assign the lease to an affiliated entity. The original tenant was a partnership between two separate legal entities with largely common beneficial ownership. When one of the partners acquired the other, resulting in dissolution of the partnership as a matter of law and an effective transfer of half of tenant's stock, landlord sought to terminate the lease. The court acknowledged that the transfer was to an affiliate, but held that landlord was entitled to terminate the lease anyway, because the lease gave the landlord a right to cancel the lease whenever tenant assigned the lease, and did not provide an exception for assignments to affiliated entities. See also, Modern Communications v. NEP Image Group, 2008 NY Slip Op 50995U (holding a restriction on a “transfer of more than 50% beneficial interest” could be broadly interpreted to prohibit a series of merger transactions.)

---

Voluntary Payment Doctrine Does Not Bar Recovery of Overpayments Pursuant To Escalation Clause

Barnan Associates v. 196 Owners Corp.

NYLJ 11/20/08, p. 33, col. 3

AppDiv, First Dept.

(memorandum opinion)

In an action by commercial tenant to recover overpayments pursuant to a lease's tax escalation clause, tenant appealed from the Supreme Court's award of summary judgment to landlord. The Appellate Division reversed and awarded summary judgment to tenant, holding that the Supreme Court had misconstrued the lease, and that the voluntary payment doctrine did not preclude recovery.

The lease requires tenant to pay, as additional rent each year, 14.5% of the dollar value of any increase in “real estate taxes” over the “base amount of real estate taxes.” Real estate taxes are defined to include “the aggregate of all taxes levied or assessed against the land and building. '” By contrast, the “base amount of real estate taxes” is defined in greater detail. That amount is to be computed by applying the “base tax rate” to the “base assessed valuation.” The base assessed valuation, in turn, is defined to be the fully assessed valuation for the year 1979-80, “made without regard or giving effect to any exemption or abatement.” Although the lease's definition of “base amount of real estate taxes” is, therefore, explicitly spelled out in the lease, there is not comparable definition of “real estate taxes.” Landlord has collected escalation amounts based on the real estate taxes that would be due if it were not for applicable exemptions or abatements. Tenant brought this action for a refund, asserting that landlord was entitled to escalation amounts only on taxes actually assessed. The Supreme Court awarded summary judgment to landlord.

In reversing, the Appellate Division first noted that the definition of real estate taxes, unlike the definition of base real estate taxes, did not include any exclusion for exemptions or abatements. The court relied both on this difference in language, and on the principle that tax escalation clauses are generally designed to afford relief to landlord when an increased assessment results in increased payment, to conclude that real estate taxes include only those taxes actually paid by landlord. The court then rejected landlord's argument that the voluntary payment doctrine barred any claim by tenant for a refund, noting that the record did not indicate that tenant had any notice of the actual taxes paid by landlord during the time tenant made the tax escalation payments. The court noted landlord's argument that tenant's representative on the co-op's board of directors had been privy to financial statements, but declined to address that argument because the financial statements, and their access by tenant's representative, did not appear in the record. Accordingly, the court held that tenant was entitled to summary judgment with respect to all overpayments made since 2000, because tenant conceded that any claim for prior overpayments was barred by the statute of limitations.

Landlord Not Liable for Failure to Maintain Stair Lights During Blackout

Kopsachilis v. 130 East 18 Owners Corp.

NYLJ 12/3/08, p. 27, col. 5

Court of Appeals

(Opinion by Smith, J.)

In a negligence action against the owner of an apartment building, the owner appealed from a divided Appellate Division's affirmance of the Supreme Court's denial of the owner's summary judgment motion. The Court of Appeals reversed and dismissed the complaint, holding that the owner was not liable for negligence per se when the owner failed to maintain lights in a fire stair during the 2003 New York blackout.

During the blackout, plaintiff stayed in a co-worker's apartment overnight. The next morning, when she decided to leave, she opened the door to a fire stair, felt around for a landing, and fell down the stairs, injuring herself. The building had lights on the fire stairs, and had a battery backup for those lights, but the backup lasted only 40 minutes, so that the stairs were entirely dark at the time of plaintiff's injury. Plaintiff brought this action, alleging that failure to keep the fire stairs lit constituted a violation of '37 of the Multiple Dwelling Law, and therefore constituted negligence per se. When the building owner moved for summary judgment, the Supreme Court denied the motion, and a 3-2 majority of the Appellate Division affirmed. The owner appealed.

In reversing, the Court of Appeals noted that '37(1) imposes an obligation to light fire stairs. Section 37(2) provides that “[e]xcept as provided in subdivision three, every such light shall be turned on ' at sunset ' and shall not be turned off ' until the following sunrise.” Section 37(2) also provides that if a light “becomes extinguished and remains so without the knowledge or consent of the owner he shall not be liable.” Section 37 includes an exception, requiring that in fire stairs without windows, the lights “shall be kept burning continuously.” The Court of Appeals held that the “knowledge or consent” requirement of '37(2) applies to the extinguishment of all lights required by '37(1), whether those lights were required to be on only at night or continuously. The court held that the most natural reading of the statute was that the words in '37(2) “[e]xcept as provided in subdivision three” did not modify the knowledge or consent defense. The court noted that it would be unlikely that the legislature meant to make liability depend on the owner's knowledge or consent when a light fails in a windowed hallway during the night, but to impose strict liability when the same failure occurs in a windowless area. As a result, the court held that the owner was entitled to summary judgment.

---

Transfer of Shares Does Not Violate Restriction on Lease Assignment

East Best Food Corp. v. NY 46th Street LLC

NYLJ 11/17/08, p. 26, col. 5

AppDiv, First Dept.

(memorandum opinion)

In an action by commercial tenant to enjoin landlord from terminating the lease, landlord appealed from the Supreme Court's denial of its motion seeking partial summary judgment. The Appellate Division modified to award summary judgment to tenant, holding that tenant had not violated the lease's non-assignment clause.

The lease, executed in 2003 between tenant and landlord's predecessor, provided that the premises would be used to run a “gourmet” food business. Article 12A also provided that tenant could not assign or sublease the premises without landlord's consent. Article 12C allowed tenant to assign the lease to a successor, purchaser, or related corporate entity, provided that the transaction was not undertaken for the principal purpose of acquiring tenant's interest in the lease, and provided that substantially the same business would operate on the premises. Article 12C also provided that a transfer of a controlling interest in tenant's shares “at one time or over a period of time through a series of transfers” would be deemed an assignment within the meaning of article 12.

In June 2005, one of the three individual shareholders of tenant transferred his 50% interest to another shareholder (in return for shares in another corporation), giving that shareholder a 90% interest in tenant. In May 2006, that shareholder acquired the interest of the remaining 10% shareholder, and then notified landowner that he intended to assign the lease to a newly created corporate entity, which would continue the same business on the premises. Landlord sent tenant a notice of default, and gave tenant 30 days to cure. Tenant then sought an injunction against termination of the lease, expressing a willingness to cure any default by reversing the transactions. Landlord sought partial summary judgment, contending that the transfers together constituted an assignment that was an incurable default as a matter of law.

In awarding summary judgment to tenant, the Appellate Division invoked the principle that restrictions against assignment are disfavored and to be construed strictly. The court then concluded that the two transactions were independent transfers not designed to circumvent landlord's right to consent to assignments. Finally, the court noted that no shareholder had transferred a controlling interest in tenant, and the lease did not prohibit shareholders from transferring shares comprising less than a controlling interest in tenant. As a result, tenant had not violated the lease provisions.

COMMENT

Absent an express provision to the contrary, a corporate tenant's transfer of its stock to a third party generally does not constitute an assignment for purposes of a lease provision prohibiting assignments. In Dennis' Natural Mini-Meals v. 91 Fifth Ave. Corp, 172 A.D.2d 331, the court held that the sale of common stock in the restaurant tenant-corporation to a third party was not a breach of the non-assignment clause. The lease allowed the tenant a one-time assignment with the landlord's consent, not to be unreasonably withheld. After the landlord denied tenant's request to assign the lease, the tenant-corporation's owner sold all his common stock in the corporation to a third party. First finding the landlord's refusal unreasonable, the court went further to hold that the corporate transaction did not constitute an assignment. The court reasoned that a landlord should know a corporate tenant is an entity that exists separately from its owners and may be sold and transferred freely. Had the landlord wished to preclude its lease from changing hands in such a transfer, the court concluded, the landlord should have expressly declared so in its lease. See also, Sea Cliff Delicatessen, Inc. v. Skrepek, 1 99 A.D.2d 510 (holding that a conveyance of all issued and outstanding stock in tenant-corporation to third party was not an assignment for purpose of a non-assignment provision).

Where lease provisions restrict share transfers in tenant-corporations, courts have generally construed the provisions narrowly, suggesting an unwillingness to imply or interpret any transfer restriction except for those plainly written into the lease. For example, courts have held that a merger of a tenant-corporation into its corporate parent does not trigger a lease provision restricting transfer of a controlling interest in the tenant. Thus, in Brentsun Realty v. D'Urso Supermarkets, 182 A.D.2d 604, the court held that the merger of the tenant, a wholly owned subsidiary corporation, into its parent corporation did not constitute an assignment for the purpose of a non-assignment provision, even though the lease provided that a transfer or sale of 50% or more of the stock of the tenant-corporation constituted an assignment. The court held that, though the tenant's corporate form had changed, at no time since assuming the lease had the tenant-subsidiary transferred or sold at least half its stock to its parent corporation. See also, CRT Services v. Seven Hanover Associates, 1992 U.S. Dist. LEXIS 13473 (holding the conversion of tenant's parent from a general partnership into a limited partnership was not a “direct or indirect transfer of a controlling interest by or of a corporate tenant”, and thus not an assignment in violation of the lease's non-assignment provision.)

If, however, a lease expressly contemplates transfers of the lease to related entities, and deems those transfers “assignments”, then courts hold that such transfers trigger lease restrictions on assignments. In Cellular Telephone Company v. 210 East 86th Street Corp., 44 A.D.3d 77, the court held that a merger at issue constituted an assignment that triggered the landlord's right to recapture the premises. The lease required landlord's consent for all assignments except assignments to affiliates, deemed a transfer of 25% of tenant's capital stock as an assignment, and provided that any assignment gave the landlord a right to cancel the lease. The lease also provided that tenant did not need landlord's consent to assign the lease to an affiliated entity. The original tenant was a partnership between two separate legal entities with largely common beneficial ownership. When one of the partners acquired the other, resulting in dissolution of the partnership as a matter of law and an effective transfer of half of tenant's stock, landlord sought to terminate the lease. The court acknowledged that the transfer was to an affiliate, but held that landlord was entitled to terminate the lease anyway, because the lease gave the landlord a right to cancel the lease whenever tenant assigned the lease, and did not provide an exception for assignments to affiliated entities. See also , Modern Communications v. NEP Image Group, 2008 NY Slip Op 50995U (holding a restriction on a “transfer of more than 50% beneficial interest” could be broadly interpreted to prohibit a series of merger transactions.)

---

Voluntary Payment Doctrine Does Not Bar Recovery of Overpayments Pursuant To Escalation Clause

Barnan Associates v. 196 Owners Corp.

NYLJ 11/20/08, p. 33, col. 3

AppDiv, First Dept.

(memorandum opinion)

In an action by commercial tenant to recover overpayments pursuant to a lease's tax escalation clause, tenant appealed from the Supreme Court's award of summary judgment to landlord. The Appellate Division reversed and awarded summary judgment to tenant, holding that the Supreme Court had misconstrued the lease, and that the voluntary payment doctrine did not preclude recovery.

The lease requires tenant to pay, as additional rent each year, 14.5% of the dollar value of any increase in “real estate taxes” over the “base amount of real estate taxes.” Real estate taxes are defined to include “the aggregate of all taxes levied or assessed against the land and building. '” By contrast, the “base amount of real estate taxes” is defined in greater detail. That amount is to be computed by applying the “base tax rate” to the “base assessed valuation.” The base assessed valuation, in turn, is defined to be the fully assessed valuation for the year 1979-80, “made without regard or giving effect to any exemption or abatement.” Although the lease's definition of “base amount of real estate taxes” is, therefore, explicitly spelled out in the lease, there is not comparable definition of “real estate taxes.” Landlord has collected escalation amounts based on the real estate taxes that would be due if it were not for applicable exemptions or abatements. Tenant brought this action for a refund, asserting that landlord was entitled to escalation amounts only on taxes actually assessed. The Supreme Court awarded summary judgment to landlord.

In reversing, the Appellate Division first noted that the definition of real estate taxes, unlike the definition of base real estate taxes, did not include any exclusion for exemptions or abatements. The court relied both on this difference in language, and on the principle that tax escalation clauses are generally designed to afford relief to landlord when an increased assessment results in increased payment, to conclude that real estate taxes include only those taxes actually paid by landlord. The court then rejected landlord's argument that the voluntary payment doctrine barred any claim by tenant for a refund, noting that the record did not indicate that tenant had any notice of the actual taxes paid by landlord during the time tenant made the tax escalation payments. The court noted landlord's argument that tenant's representative on the co-op's board of directors had been privy to financial statements, but declined to address that argument because the financial statements, and their access by tenant's representative, did not appear in the record. Accordingly, the court held that tenant was entitled to summary judgment with respect to all overpayments made since 2000, because tenant conceded that any claim for prior overpayments was barred by the statute of limitations.