The Most Crucial Commercial Lease Cases

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 second part of this article, which appeared in the February 2009 issue, discussed cases that address enforcement and violations. The cases in the conclusion herein address stipulations and eviction.

Stipulations

Hallock v. State of New York and Power Authority of State of New York; Koval v. Simon Telelect, Inc.; Luethke v. Suhr: High favor to which attorney stipulations are entitled and authority of attorney.

Although not itself a decision from the realm of commercial leasing, the single most influential decision in the realm of commercial litigation is Hallock v. State of New York and Power Authority of State of New York, 64 NY2d 224, 474 NE2d 1178, 485 NYS2d 510 (NY Court of Appeals 1984). The focus of this three-part series is case law. Obviously, there can be no case law without litigation. Nevertheless, it is always preferable for the parties involved in litigation, the courts, and society itself that the parties arrive at some kind of resolution of the matter without requiring the court to go to judgment. The chief mechanism of such a resolution is the judicial stipulation, and it can save taxpayers hundreds of millions of dollars annually. Stipulations are, therefore, highly favored by the courts and, when crafted by attorneys on all sides, should be almost invulnerable to attack. Indeed, absent notice of lack of authority to the other side, it is conclusively presumed that an attorney's stipulation binds his or her client. Koval v. Simon Telelect, Inc., 693 N.E.2d 1299 (Ind. 1998), but see, Luethke v. Suhr, 650 N.W.2d 220 (Neb. 2002).

1029 Sixth LLC v. Riniv Corp.: Strict enforcement of stipulations.

The attack on a stipulation, however, can be somewhat subtle. The parties may continue to avow that the stipulation binds them while one side seeks to be excused from a de minimis departure from the obligations undertaken in the stipulation. Courts will generally allow such departures, unless the stipulation by its own terms forbids them. 1029 Sixth LLC v. Riniv Corp., 32 HCR 340A, 9 AD3d 142, 777 NYS2d 122 (NY App.Div. 1st Dept. 2004).

379 Madison Avenue, Inc., v. The Stuyvesant Company; Sykes v. RFD Third Ave. I Assocs., LLC: Attorneys' fees enforceable.

It is now generally agreed that a lease clause calling for the tenant to pay for the landlord's attorneys' fees in the event of litigation is fully enforceable. 379 Madison Avenue, Inc., v. The Stuyvesant Company, 242 A.D. 567, 275 N.Y.S. 953 (NY App.Div. 1st Dept. 1934), affirmed on opinion below 268 N.Y. 576, 198 N.E. 412 (NY Court of Appeals 1935).

In those jurisdictions that allow victory in the litigation in chief to be the basis of an award of attorneys' fees when authorized by the lease, there is some controversy as to whether a “win” achieved by means of a stipulation is enough of a win to justify the attorneys' fees award. Some hold that such a doctrine discourages parties from stipulating to their own defeat, but others hold that it encourages the winner to win at the bargaining table, knowing that the win will not be diminished if it has been achieved through a stipulation. The dominant view is that a stipulated win will, in fact, support an award of attorneys' fees. Sykes v. RFD Third Ave. I Assocs., LLC, 39 AD3d 279, 833 NYS2d 76 (NY App.Div. 1st Dept. 2007).

Subletting and Assignment

F & F Restaurant Corp. v. Wells, Goode & Benefit, Ltd.: Landlord bound not to withhold consent without a valid reason.

Among the most common clauses in commercial leases are those dealing with subletting and assignment. At common law, tenancies may be freely sublet and leases are freely assignable. So, if the lease is silent on the issue, the tenant can do as it wishes. However, most leases are not silent on the issue; they either prohibit one or the other or they restrict it. The most common form of restriction is that sublets or assignments must only be on consent of the landlord. Also, most typically, consent “shall not be unreasonably withheld.” This phrase has come to mean that consent will be deemed given unless the landlord can articulate a valid reason to refuse consent. The two key concepts in that sentence are “articulate” and “valid.” If the landlord is silent, the law deems consent to have been given. If the landlord simply says “no” without stating a reason, the law again deems consent to have been given. If the landlord says “no” and gives a reason that is not valid, the law still again deems the consent to have been given. As F & F Restaurant Corp. v. Wells, Goode & Benefit, Ltd,, 61 NY2d 496, 474 NYS2d 707, 463 NE2d 23 (N.Y. 1984) states:

It is enough on this point to note that Neuman as equitable owner had the right to withhold consent only if he had a reasonable ground for doing so and that the existence of a reasonable ground must be proved by Neuman's successor, the present owner, and will not be presumed. For like reason, the assignment from Margin Call to plaintiff must be given effect unless the landlord can establish a reasonable ground for withholding consent.

Actual and Constructive Eviction

Echo Consulting Services, Inc. v. North Conway Bank: Tenant is deprived of essential use of premises. Barash v. Pennsylvania Terminal Real Estate Corporation: Definition and distinctions of actual and constructive eviction.

At the other end of the spectrum from stipulations resolving litigation is self-help. This comes in two principal varieties: 1) Actual eviction occurs when the landlord ' without benefit of judicial process ' deprives the tenant of actual possession of the premises, in whole or in part, by means of physically depriving the tenant of some or all of the leased space; 2) Constructive eviction occurs when the tenant ' also without benefit of judicial process ' deems itself to have been deprived of the use of the premises and abandons them in whole or in part. When the tenant only abandons a portion of the used space, deeming it unusable, it is a “partial constructive eviction.” Echo Consulting Services, Inc. v. North Conway Bank, 669 A.2d 227 (N.H. 1996). In sum, actual eviction is a self-help remedy employed by landlords; constructive eviction is a self-help remedy employed by tenants. Barash v. Pennsylvania Terminal Real Estate Corporation, 26 NY2d 77, 256 NE2d 707, 308 NYS2d 649, (N.Y.1970) states, “To be an eviction, constructive or actual, there must be a wrongful act by the landlord which deprives the tenant of the beneficial enjoyment or actual possession of the demised premises.” From this point of view, the action is in either case regarded as being taken by the landlord, but this is a faulty perception. It is the inaction of the landlord and the action of the tenant that makes one realize a constructive eviction has taken place. It is the opposite for an actual eviction.

Eastside Exhibition Corp. v. 210 E. 86th St Corp.: Landlord's entitlement to rent in spite of de minimis permanent deprivation of leased space.

The established rule of law was seriously upset by Eastside Exhibition Corp. v. 210 E. 86th St Corp., 23 AD3d 100, 801 NYS2d 568 (NY App.Div. 1st Dept. 2005). The common law rule had been that an actual partial eviction, no matter how small, deprives a landlord of the entire entitlement to rent. To put this in realistic terms, let us say that the landlord rents the tenant some 2,000 square feet and then reduces the square footage to 1,980 for the purpose of installing a utility closet to which the tenant is forbidden access. At common law, such deprivation of the 20 square feet would deprive the landlord of all entitlement to rent until the premises are restored to their previous condition. However, in Eastside Exhibition, the court ruled that a de minimis deprivation will not forfeit the landlord's entitlement to rent.

Note the important distinction here: actual eviction ' whether it is actual total eviction or actual partial eviction ' entitles the tenant to total forgiveness of the rent, except that Eastside holds that where the actual partial eviction is de minimis, the tenant is not entitled to total forgiveness, but only an assessment of the damages actually sustained. In a claim of constructive eviction, on the other hand, the tenant has deemed the premises so unusable that the tenant has abandoned them in whole or in part. Under constructive eviction, the amount of forgiveness of rent the tenant receives varies with the amount of space the tenant has abandoned.

Those watching the development of commercial leasing law are keeping a careful eye on how and whether Eastside's doctrine spreads across the country. It cannot be denied that it violates the established norm.

Conclusion

As we saw with our analysis of Holy Properties, in Part One of this article in the December issue, the principle of maat, i.e., stablility, is critical in the study of commercial leasing law. Yet, as we see from Eastside Exhibition, supra and Austin Hill (Part One) it is not necessarily the last word. Indeed, Echo Consulting, supra, states:

When reasons of public policy dictate “courts have a duty to reappraise old doctrines in the light of the facts and values of contemporary life ' particularly old common law doctrines which the courts themselves created and developed.” Our society has evolved considerably since the tenurial system of property law was created by the courts.

There are fields of law in which one can rely on ancient doctrines and not worry about their changing too much. One can keep practicing law at the end of one's career essentially the way one did at the beginning. Unfortunately ' or fortunately ' commercial leasing law is not such a field.

Many of the cases discussed in this three-part article help commercial leasing practitioners avoid land mines. Other cases assist in understanding the essence and important rules of commercial leasing. Other cases are simply core elements of the continuously developing common law of commercial leasing. Although many other cases could and should be added to this body, these cases will give the reader enough weapons and shields to enter the friendly battle of commercial lease representation. The practitioner who does not master at least the cases discussed in this article and keep an eye open for further developments works at his or her peril.

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. Leni Morrison, an associate with the 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 second part of this article, which appeared in the February 2009 issue, discussed cases that address enforcement and violations. The cases in the conclusion herein address stipulations and eviction.

Stipulations

Hallock v. State of New York and Power Authority of State of New York; Koval v. Simon Telelect, Inc.; Luethke v. Suhr: High favor to which attorney stipulations are entitled and authority of attorney.

Although not itself a decision from the realm of commercial leasing, the single most influential decision in the realm of commercial litigation is Hallock v. State of New York and Power Authority of State of New York , 64 NY2d 224, 474 NE2d 1178, 485 NYS2d 510 (NY Court of Appeals 1984). The focus of this three-part series is case law. Obviously, there can be no case law without litigation. Nevertheless, it is always preferable for the parties involved in litigation, the courts, and society itself that the parties arrive at some kind of resolution of the matter without requiring the court to go to judgment. The chief mechanism of such a resolution is the judicial stipulation, and it can save taxpayers hundreds of millions of dollars annually. Stipulations are, therefore, highly favored by the courts and, when crafted by attorneys on all sides, should be almost invulnerable to attack. Indeed, absent notice of lack of authority to the other side, it is conclusively presumed that an attorney's stipulation binds his or her client. Koval v. Simon Telelect, Inc. , 693 N.E.2d 1299 (Ind. 1998), but see, Luethke v. Suhr , 650 N.W.2d 220 (Neb. 2002).

1029 Sixth LLC v. Riniv Corp.: Strict enforcement of stipulations.

The attack on a stipulation, however, can be somewhat subtle. The parties may continue to avow that the stipulation binds them while one side seeks to be excused from a de minimis departure from the obligations undertaken in the stipulation. Courts will generally allow such departures, unless the stipulation by its own terms forbids them. 1029 Sixth LLC v. Riniv Corp., 32 HCR 340A, 9 AD3d 142, 777 NYS2d 122 (NY App.Div. 1st Dept. 2004).

379 Madison Avenue, Inc., v. The Stuyvesant Company; Sykes v. RFD Third Ave. I Assocs., LLC: Attorneys' fees enforceable.

It is now generally agreed that a lease clause calling for the tenant to pay for the landlord's attorneys' fees in the event of litigation is fully enforceable. 379 Madison Avenue, Inc., v. The Stuyvesant Company , 242 A.D. 567, 275 N.Y.S. 953 (NY App.Div. 1st Dept. 1934), affirmed on opinion below 268 N.Y. 576, 198 N.E. 412 (NY Court of Appeals 1935).

In those jurisdictions that allow victory in the litigation in chief to be the basis of an award of attorneys' fees when authorized by the lease, there is some controversy as to whether a “win” achieved by means of a stipulation is enough of a win to justify the attorneys' fees award. Some hold that such a doctrine discourages parties from stipulating to their own defeat, but others hold that it encourages the winner to win at the bargaining table, knowing that the win will not be diminished if it has been achieved through a stipulation. The dominant view is that a stipulated win will, in fact, support an award of attorneys' fees. Sykes v. RFD Third Ave. I Assocs., LLC , 39 AD3d 279, 833 NYS2d 76 (NY App.Div. 1st Dept. 2007).

Subletting and Assignment

F & F Restaurant Corp. v. Wells, Goode & Benefit, Ltd.: Landlord bound not to withhold consent without a valid reason.

Among the most common clauses in commercial leases are those dealing with subletting and assignment. At common law, tenancies may be freely sublet and leases are freely assignable. So, if the lease is silent on the issue, the tenant can do as it wishes. However, most leases are not silent on the issue; they either prohibit one or the other or they restrict it. The most common form of restriction is that sublets or assignments must only be on consent of the landlord. Also, most typically, consent “shall not be unreasonably withheld.” This phrase has come to mean that consent will be deemed given unless the landlord can articulate a valid reason to refuse consent. The two key concepts in that sentence are “articulate” and “valid.” If the landlord is silent, the law deems consent to have been given. If the landlord simply says “no” without stating a reason, the law again deems consent to have been given. If the landlord says “no” and gives a reason that is not valid, the law still again deems the consent to have been given. As F & F Restaurant Corp. v. Wells, Goode & Benefit, Ltd,, 61 NY2d 496, 474 NYS2d 707, 463 NE2d 23 (N.Y. 1984) states:

It is enough on this point to note that Neuman as equitable owner had the right to withhold consent only if he had a reasonable ground for doing so and that the existence of a reasonable ground must be proved by Neuman's successor, the present owner, and will not be presumed. For like reason, the assignment from Margin Call to plaintiff must be given effect unless the landlord can establish a reasonable ground for withholding consent.

Actual and Constructive Eviction

Echo Consulting Services, Inc. v. North Conway Bank: Tenant is deprived of essential use of premises. Barash v. Pennsylvania Terminal Real Estate Corporation: Definition and distinctions of actual and constructive eviction.

At the other end of the spectrum from stipulations resolving litigation is self-help. This comes in two principal varieties: 1) Actual eviction occurs when the landlord ' without benefit of judicial process ' deprives the tenant of actual possession of the premises, in whole or in part, by means of physically depriving the tenant of some or all of the leased space; 2) Constructive eviction occurs when the tenant ' also without benefit of judicial process ' deems itself to have been deprived of the use of the premises and abandons them in whole or in part. When the tenant only abandons a portion of the used space, deeming it unusable, it is a “partial constructive eviction.” Echo Consulting Services, Inc. v. North Conway Bank , 669 A.2d 227 (N.H. 1996). In sum, actual eviction is a self-help remedy employed by landlords; constructive eviction is a self-help remedy employed by tenants. Barash v. Pennsylvania Terminal Real Estate Corporation , 26 NY2d 77, 256 NE2d 707, 308 NYS2d 649, (N.Y.1970) states, “To be an eviction, constructive or actual, there must be a wrongful act by the landlord which deprives the tenant of the beneficial enjoyment or actual possession of the demised premises.” From this point of view, the action is in either case regarded as being taken by the landlord, but this is a faulty perception. It is the inaction of the landlord and the action of the tenant that makes one realize a constructive eviction has taken place. It is the opposite for an actual eviction.

Eastside Exhibition Corp. v. 210 E. 86th St Corp.: Landlord's entitlement to rent in spite of de minimis permanent deprivation of leased space.

The established rule of law was seriously upset by Eastside Exhibition Corp. v. 210 E. 86th St Corp., 23 AD3d 100, 801 NYS2d 568 (NY App.Div. 1st Dept. 2005). The common law rule had been that an actual partial eviction, no matter how small, deprives a landlord of the entire entitlement to rent. To put this in realistic terms, let us say that the landlord rents the tenant some 2,000 square feet and then reduces the square footage to 1,980 for the purpose of installing a utility closet to which the tenant is forbidden access. At common law, such deprivation of the 20 square feet would deprive the landlord of all entitlement to rent until the premises are restored to their previous condition. However, in Eastside Exhibition, the court ruled that a de minimis deprivation will not forfeit the landlord's entitlement to rent.

Note the important distinction here: actual eviction ' whether it is actual total eviction or actual partial eviction ' entitles the tenant to total forgiveness of the rent, except that Eastside holds that where the actual partial eviction is de minimis, the tenant is not entitled to total forgiveness, but only an assessment of the damages actually sustained. In a claim of constructive eviction, on the other hand, the tenant has deemed the premises so unusable that the tenant has abandoned them in whole or in part. Under constructive eviction, the amount of forgiveness of rent the tenant receives varies with the amount of space the tenant has abandoned.

Those watching the development of commercial leasing law are keeping a careful eye on how and whether Eastside's doctrine spreads across the country. It cannot be denied that it violates the established norm.

Conclusion

As we saw with our analysis of Holy Properties, in Part One of this article in the December issue, the principle of maat, i.e., stablility, is critical in the study of commercial leasing law. Yet, as we see from Eastside Exhibition, supra and Austin Hill (Part One) it is not necessarily the last word. Indeed, Echo Consulting, supra, states:

When reasons of public policy dictate “courts have a duty to reappraise old doctrines in the light of the facts and values of contemporary life ' particularly old common law doctrines which the courts themselves created and developed.” Our society has evolved considerably since the tenurial system of property law was created by the courts.

There are fields of law in which one can rely on ancient doctrines and not worry about their changing too much. One can keep practicing law at the end of one's career essentially the way one did at the beginning. Unfortunately ' or fortunately ' commercial leasing law is not such a field.

Many of the cases discussed in this three-part article help commercial leasing practitioners avoid land mines. Other cases assist in understanding the essence and important rules of commercial leasing. Other cases are simply core elements of the continuously developing common law of commercial leasing. Although many other cases could and should be added to this body, these cases will give the reader enough weapons and shields to enter the friendly battle of commercial lease representation. The practitioner who does not master at least the cases discussed in this article and keep an eye open for further developments works at his or her peril.

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. Leni Morrison, an associate with the firm, assisted in researching this article. Mr. Bailey and Mr. Treiman recently collaborated to produce the first 21st-century residential leases for Blumberg Excelsior.