Landlord & Tenant

Landlord May Decide How to Apply Defaulting Tenant's Payment

360 Motor Parkway LLC v. Mortgage Zone, Inc.

8/20/09, p. 30, col. 1

Supreme Ct., Suffolk Cty

(Pines, J.)

In an action for rent due and expenses, landlord sought a default judgment against tenant and summary judgment against subtenant. The court granted landlord's motion, holding that landlord could decide how to apply tenant's letter of credit to amounts due under the lease.

In 2006, landlord entered into a lease with tenant for 10 years and six months. The lease required tenant to remain liable for all rent due and all additional rent until the expiration of the lease, together with landlord's attorney's fees. The lease also required tenant to deliver to landlord a standby letter of credit for $850,000 to serve as security for tenant's performance of leasehold obligations. In February 2008, tenant sublet the premises to subtenant. A letter agreement provided that subtenant would assume all of the obligations of the original lease. The sublease, however, provided that subtenant could terminate the sublease if a specified condition occurred. That condition did occur, and subtenant terminated the sublease effective May 31, 2008. Subtenant, however, did not pay the May rent. Landlord brought this action against tenant and subtenant for rent and additional rent due, together with expenses and attorney's fees. Tenant defaulted, and subtenant contended that tenant's letter of credit should be applied to satisfy the obligation to pay May 2008 rent. Landlord sought a default judgment against tenant and summary judgment against subtenant for the amounts due under the sublease until its May 31 termination.

The court first noted landlord's right to a default judgment against tenant. In then granting landlord summary judgment against subtenant, the court started by observing that subtenant did not dispute that the terms of the sublease made it directly liable to landlord for unpaid rent, and does not dispute that it failed to pay $99,171.74 in rent for May 2008. The court then turned to tenant's argument that the $850,000 letter of credit should be applied to pay older debts before newer debts, and that the letter should be applied to pay the May 2008 rent before
tenant's obligations to pay subsequent rent for the remainder of the lease term. The court rejected the argument, holding that because tenant had not specified how the funds should be applied, landlord was free to decide whether to apply them first to older or newer debts. As a result, the court held that the letter of credit should be applied in a way most favorable to landlord. Because the letter would not be sufficient to compensate landlord for all losses resulting from the default, subtenant remains liable for the May 2008 rent.

Landlord May Decide How to Apply Defaulting Tenant's Payment

360 Motor Parkway LLC v. Mortgage Zone, Inc.

8/20/09, p. 30, col. 1

Supreme Ct., Suffolk Cty

(Pines, J.)

In an action for rent due and expenses, landlord sought a default judgment against tenant and summary judgment against subtenant. The court granted landlord's motion, holding that landlord could decide how to apply tenant's letter of credit to amounts due under the lease.

In 2006, landlord entered into a lease with tenant for 10 years and six months. The lease required tenant to remain liable for all rent due and all additional rent until the expiration of the lease, together with landlord's attorney's fees. The lease also required tenant to deliver to landlord a standby letter of credit for $850,000 to serve as security for tenant's performance of leasehold obligations. In February 2008, tenant sublet the premises to subtenant. A letter agreement provided that subtenant would assume all of the obligations of the original lease. The sublease, however, provided that subtenant could terminate the sublease if a specified condition occurred. That condition did occur, and subtenant terminated the sublease effective May 31, 2008. Subtenant, however, did not pay the May rent. Landlord brought this action against tenant and subtenant for rent and additional rent due, together with expenses and attorney's fees. Tenant defaulted, and subtenant contended that tenant's letter of credit should be applied to satisfy the obligation to pay May 2008 rent. Landlord sought a default judgment against tenant and summary judgment against subtenant for the amounts due under the sublease until its May 31 termination.

The court first noted landlord's right to a default judgment against tenant. In then granting landlord summary judgment against subtenant, the court started by observing that subtenant did not dispute that the terms of the sublease made it directly liable to landlord for unpaid rent, and does not dispute that it failed to pay $99,171.74 in rent for May 2008. The court then turned to tenant's argument that the $850,000 letter of credit should be applied to pay older debts before newer debts, and that the letter should be applied to pay the May 2008 rent before
tenant's obligations to pay subsequent rent for the remainder of the lease term. The court rejected the argument, holding that because tenant had not specified how the funds should be applied, landlord was free to decide whether to apply them first to older or newer debts. As a result, the court held that the letter of credit should be applied in a way most favorable to landlord. Because the letter would not be sufficient to compensate landlord for all losses resulting from the default, subtenant remains liable for the May 2008 rent.