Landlord & Tenant

Assignee Waived Right to Challenge Assignor's Power To Assign

CPS Operating Co. LLC v.

Pathmark Stores Inc.

NYLJ 6/7/10, p. 18, col. 1

AppDiv, First Dept.

(4-1 decision; majority opinion by Acosta J; dissenting opinion by Saxe, J.)

In an action by prospective assignee of a leasehold interest against lessee for a declaration that the assignment was invalid, lessee appealed from Supreme Court's denial of lessee's summary judgment motion. The Appellate Division reversed and dismissed the complaint, holding that assignee had waived any defect in title arising from a covenant requiring the city's consent to any assignment.

As party of an urban renewal plan, the city's department of Housing Preservation and Development (HPD) sold the subject parcel to Cherry-Pike with the provision that a Pathmark supermarket would be built on the site and operated for 25 years. The 25-year period would expire in 2009. The agreement entitled Cherry-Pike to lease or sublease to a tenant other than Pathmark upon obtaining prior written approval of HPD, “which shall not be unreasonably withheld or delayed.” Cherry-Pike entered into a lease with Pathmark, and Pathmark operated a supermarket on the site. Subsequently, Cherry-Pike sold its interest to Cherry Street, which became Pathmark's landlord. As the real estate market heated up, the subject parcel became more valuable for uses other than supermarket use. In 2007, CPS entered into an assignment agreement with Pathmark to purchase Pathmark's leasehold interest for $87 million. CPS made a $5 million deposit. The agreement provided that Pathmark's lease was to be transferred “subject ' to the Permitted Exceptions ' ” and the “ permitted exceptions” included the terms of the land disposition agreement with the city, as well as the terms of Pathmark's lease. Pathmark represented to CPS that it was not prohibited from consummating the assignment by any agreement other than the permitted exceptions. After execution of the assignment, Cherry Street, Pathmark's landlord, delivered a notice to Pathmark indicating that consummation of the assignment would constitute a default of the lease and the underlying disposition agreement. Cherry Street was apparently interested in acquiring the leasehold interest itself. Pathmark took no action to cure, contended that it did not seek HPD's approval because CPS had waived the requirement that Pathmark seek approval. When CPS received notice of Cherry Street's position, it placed an additional $1 million in escrow to delay closing by a month. Then, when market forces changed and the leasehold became less valuable, CPS changed its position and relied on the HPD consent provision to terminate the contract and demand return of its deposit. When Pathmark refused, CPS brought this declaratory judgment action. Supreme Court denied Pathmark's summary judgment motion, and Pathmark appealed.

In reversing, the Appellate Division majority held that by listing the conditions imposed in the original land disposition agreement as “permitted exceptions,” CPS, as assignee had agreed to assume whatever risks might eventuate if the city were to seek to enforce the consent requirement. The court noted that the risks were not great, because all parties expected that HPD would permit uses other than supermarket use. Justice Saxe, dissenting, contended that the consent requirement imposed by the disposition agreement could not be treated as a “permitted exception.” He argued that permitted exceptions generally allowed a buyer to take the same kind of encumbered title the seller had previously held. But in this case, the consent requirement did not allow the buyer to step into the seller's shoes because if the parties do not comply with the consent requirement, the transfer is simply impermissible. Although he conceded that CPS might have raised the consent requirement to avoid what had turned out to be a bad deal, in his view, CPS's motivation was irrelevant to the legal questions at issue: was Pathmark in default of the agreement by virtue of the consent requirement, and was CPS entitled to waive that requirement.

COMMENT

An assignment or sublease is voidable, but not void, if it violates a requirement that the tenant obtain the landlord's consent before making such a transfer. A landlord may therefore be estopped from objecting to such an assignment, depending on the landlord's conduct subsequent to the execution of the transfer. For example, in Woolard v. Schaffer Stores Co., 272 N.Y. 304, the Court of Appeals held that a landlord waived his right to object to a sublease that was executed without the landlord's consent (as the lease required), because he continued to accept rent payments after learning of the sublease. The court rejected the landlord's argument that he had preserved any objections by indicating to the tenant that acceptance of the rental payments did not constitute a forfeiture of his rights. Similarly, in Condit v. Manischewitz, 220 A.D. 366, the Appellate Division held that a landlord waived her right to challenge an assignment made in violation of a clause in the original lease requiring the tenant to obtain the landlord's permission and pay an additional security deposit before entering into a sublease agreement. The court held that the landlord ratified the sublease by accepting rent payments with full knowledge, even though the lease provided that a failure by the landlord to insist on strict performance of the lease shall not constitute a relinquishment of the right to enforce the violated provision in the future.

In contrast to Woollard and Condit, in Excel Graphics Technologies, Inc. v. CFG-AGSCB 75 Ninth Ave., LLC., 1 A.D.3d 65, the Appellate Division held that a landlord had not waived his objections to a sublet by accepting rent payments and permitting a subtenant to put its name on the building directory, despite having knowledge of the primary tenant's breach of the lease's consent requirement. The court found no waiver here because the lease explicitly contemplated the very acts relied upon by tenant, and provided that the landlord would not waive any right by continuing to accept rent or by taking no action when an unauthorized subtenant's name appeared on the building directory.

The case law discussed above supports the majority's analysis in the CPS case. If a lease transfer is merely voidable, but not void, when executed in violation of a lease provision, it makes sense that an assignee can take a transfer subject to the rights of the landlord or a third-party. The cases do not support the dissent's contention that a transfer in violation of a consent requirement is simply impermissible. To the contrary, Woollard and Condit show that consent requirements can be waived, leaving tenant entitled to a leasehold interest acquired through a transfer made in violation of lease requirements.

Restrictive Covenant Not Enforceable Against Prior Tenant

Fratelli's Pizza and Restaurant Corp. v. Kayzee Realty Corp.

NYLJ 6/10/10, p. 34, col. 6.

AppDiv, First Dept.

(memorandum opinion; concurring memorandum by Tom, J.)

In an action by tenant against landlord and neighboring tenant to enforce a restrictive covenant in the lease, plaintiff tenant appealed from Supreme Court's dismissal of the complaint based on documentary evidence. The Appellate Division affirmed, holding that a restrictive covenant is not enforceable against a tenant whose lease term started before execution of the lease that included the restrictive covenant.

Plaintiff tenant had been in possession pursuant to a 10-year lease that commenced in 2000. On March 20, 2006, plaintiff tenant signed a lease extension agreement, to end in 2026, that provided that landlord would not rent specified neighboring premises “to any party who offers for sale the same type of food sold by” plaintiff tenant. The agreement also obligated landlord to take steps to have any neighboring tenant cease and desist from making such sales. On Jan. 5, 2006, landlord entered into a lease of specified neighboring premises with defendant tenant. That lease did not include a restrictive covenant. Defendant tenant allegedly sells food of the same type as plaintiff tenant, and plaintiff tenant brought this action to restrain such sales. Supreme Court dismissed the complaint, and plaintiff tenant appealed.

In affirming, the Appellate Division held that a restrictive covenant may not be enforced against a competing tenant whose lease predates the covenant's execution. As a result, Supreme Court properly dismissed the complaint. The Appellate Division also noted that the language of the covenant was consistent with prospective application, establishing that the parties did not intend that the covenant would apply to tenants with pre-existing leases.

Terminating Tenant Liable For Post-Termination Rent

Eujoy Realty Corp. v. Van Wagner Communications, LLC

NYLJ 5/20/10, p. 33, col. 1

AppDiv, First Dept.

(3-2 decision; memorandum opinion; dissenting memorandum by Tom, J.)

In landlord's action for rent due under a terminated billboard lease, landlord appealed from Supreme Court's grant of summary judgment to tenant. The Appellate Division reversed and awarded summary judgment to landlord, holding that because tenant did not terminate until an annual rent payment had become due, tenant was liable for the entire year's rent even though tenant terminated eight days after the payment became due.

In 2000, landlord and tenant entered into a 15-year lease or a billboard visible from the Long Island Expressway. The lease gave tenant a right to terminate if construction should “substantially obstruct” the view of the billboard from the expressway. The lease also obligated tenant to pay rent in advance on Jan. 1 of each year, and rent of $96,243 became due on Jan. 1, 2007. Finally, the lease provided that if the lease should be terminated prior to the date of its expiration, tenant “shall not be entitled to the return of ' any basic rent paid in advance and covering a period beyond the date on which the lease is terminated.” Tenant exercised its right to terminate the lease for obstruction, effective Jan. 8, 2007. Due to an oversight in tenant's accounts payable department, tenant nevertheless issues a check for the $96,243, the full 2007 rent. When tenant discovered the error, tenant stopped payment on the check and issued a new check for $2,109.43, the prorated rent for the period between Jan. 1 and Jan. 8. Landlord accepted the check without protest and then brought this action for the balance of the rent due for 2007, together with interest and counsel fees. Landlord's contention was that tenant had wrongfully stopped payment on the initial check. Supreme Court awarded summary judgment to tenant, and landlord appealed.

In reversing, the Appellate Division majority emphasized that if tenant had paid the full 2007 rent on Jan. 1, the lease made it crystal clear that tenant would not be entitled to a pro rata refund if tenant were to terminate at some point during the year. The majority reasoned that tenant should be in no better position because tenant had not breached its leasehold obligation by not making the full year's payment on Jan. 1. As a result, the tenant was liable for the balance of the 2007 rent.

Justice Tom, dissenting for himself and Justice Freedman, first complained that landlord had not raised its current theory in its complaint, and argued that the court should not consider it on appeal. Turning to the merits, however, he argued that when a tenant rightfully removes from premises, enabling landlord to recover possession, the lease is canceled and tenant is entitled to recover any rent that is advanced. He relied on ' 7-103 of the General Obligations Law, which provides that a sum advanced under an agreement for rental of real property continues to be the money of the payor until applied to payments under the agreement when due. Moreover, he noted that ' 7-103(3) provides that any provision purporting to waive the statute's protection is absolutely void. As a result, he concluded that even if tenant had paid the rent due on Jan. 1, the statute would entitle tenant to a refund of the rent due for any period beyond Jan. 8.

Assignee Waived Right to Challenge Assignor's Power To Assign

CPS Operating Co. LLC v.

Pathmark Stores Inc.

NYLJ 6/7/10, p. 18, col. 1

AppDiv, First Dept.

(4-1 decision; majority opinion by Acosta J; dissenting opinion by Saxe, J.)

In an action by prospective assignee of a leasehold interest against lessee for a declaration that the assignment was invalid, lessee appealed from Supreme Court's denial of lessee's summary judgment motion. The Appellate Division reversed and dismissed the complaint, holding that assignee had waived any defect in title arising from a covenant requiring the city's consent to any assignment.

As party of an urban renewal plan, the city's department of Housing Preservation and Development (HPD) sold the subject parcel to Cherry-Pike with the provision that a Pathmark supermarket would be built on the site and operated for 25 years. The 25-year period would expire in 2009. The agreement entitled Cherry-Pike to lease or sublease to a tenant other than Pathmark upon obtaining prior written approval of HPD, “which shall not be unreasonably withheld or delayed.” Cherry-Pike entered into a lease with Pathmark, and Pathmark operated a supermarket on the site. Subsequently, Cherry-Pike sold its interest to Cherry Street, which became Pathmark's landlord. As the real estate market heated up, the subject parcel became more valuable for uses other than supermarket use. In 2007, CPS entered into an assignment agreement with Pathmark to purchase Pathmark's leasehold interest for $87 million. CPS made a $5 million deposit. The agreement provided that Pathmark's lease was to be transferred “subject ' to the Permitted Exceptions ' ” and the “ permitted exceptions” included the terms of the land disposition agreement with the city, as well as the terms of Pathmark's lease. Pathmark represented to CPS that it was not prohibited from consummating the assignment by any agreement other than the permitted exceptions. After execution of the assignment, Cherry Street, Pathmark's landlord, delivered a notice to Pathmark indicating that consummation of the assignment would constitute a default of the lease and the underlying disposition agreement. Cherry Street was apparently interested in acquiring the leasehold interest itself. Pathmark took no action to cure, contended that it did not seek HPD's approval because CPS had waived the requirement that Pathmark seek approval. When CPS received notice of Cherry Street's position, it placed an additional $1 million in escrow to delay closing by a month. Then, when market forces changed and the leasehold became less valuable, CPS changed its position and relied on the HPD consent provision to terminate the contract and demand return of its deposit. When Pathmark refused, CPS brought this declaratory judgment action. Supreme Court denied Pathmark's summary judgment motion, and Pathmark appealed.

In reversing, the Appellate Division majority held that by listing the conditions imposed in the original land disposition agreement as “permitted exceptions,” CPS, as assignee had agreed to assume whatever risks might eventuate if the city were to seek to enforce the consent requirement. The court noted that the risks were not great, because all parties expected that HPD would permit uses other than supermarket use. Justice Saxe, dissenting, contended that the consent requirement imposed by the disposition agreement could not be treated as a “permitted exception.” He argued that permitted exceptions generally allowed a buyer to take the same kind of encumbered title the seller had previously held. But in this case, the consent requirement did not allow the buyer to step into the seller's shoes because if the parties do not comply with the consent requirement, the transfer is simply impermissible. Although he conceded that CPS might have raised the consent requirement to avoid what had turned out to be a bad deal, in his view, CPS's motivation was irrelevant to the legal questions at issue: was Pathmark in default of the agreement by virtue of the consent requirement, and was CPS entitled to waive that requirement.

COMMENT

An assignment or sublease is voidable, but not void, if it violates a requirement that the tenant obtain the landlord's consent before making such a transfer. A landlord may therefore be estopped from objecting to such an assignment, depending on the landlord's conduct subsequent to the execution of the transfer. For example, in Woolard v. Schaffer Stores Co., 272 N.Y. 304, the Court of Appeals held that a landlord waived his right to object to a sublease that was executed without the landlord's consent (as the lease required), because he continued to accept rent payments after learning of the sublease. The court rejected the landlord's argument that he had preserved any objections by indicating to the tenant that acceptance of the rental payments did not constitute a forfeiture of his rights. Similarly, in Condit v. Manischewitz, 220 A.D. 366, the Appellate Division held that a landlord waived her right to challenge an assignment made in violation of a clause in the original lease requiring the tenant to obtain the landlord's permission and pay an additional security deposit before entering into a sublease agreement. The court held that the landlord ratified the sublease by accepting rent payments with full knowledge, even though the lease provided that a failure by the landlord to insist on strict performance of the lease shall not constitute a relinquishment of the right to enforce the violated provision in the future.

In contrast to Woollard and Condit, in Excel Graphics Technologies, Inc. v. CFG-AGSCB 75 Ninth Ave., LLC., 1 A.D.3d 65, the Appellate Division held that a landlord had not waived his objections to a sublet by accepting rent payments and permitting a subtenant to put its name on the building directory, despite having knowledge of the primary tenant's breach of the lease's consent requirement. The court found no waiver here because the lease explicitly contemplated the very acts relied upon by tenant, and provided that the landlord would not waive any right by continuing to accept rent or by taking no action when an unauthorized subtenant's name appeared on the building directory.

The case law discussed above supports the majority's analysis in the CPS case. If a lease transfer is merely voidable, but not void, when executed in violation of a lease provision, it makes sense that an assignee can take a transfer subject to the rights of the landlord or a third-party. The cases do not support the dissent's contention that a transfer in violation of a consent requirement is simply impermissible. To the contrary, Woollard and Condit show that consent requirements can be waived, leaving tenant entitled to a leasehold interest acquired through a transfer made in violation of lease requirements.

Restrictive Covenant Not Enforceable Against Prior Tenant

Fratelli's Pizza and Restaurant Corp. v. Kayzee Realty Corp.

NYLJ 6/10/10, p. 34, col. 6.

AppDiv, First Dept.

(memorandum opinion; concurring memorandum by Tom, J.)

In an action by tenant against landlord and neighboring tenant to enforce a restrictive covenant in the lease, plaintiff tenant appealed from Supreme Court's dismissal of the complaint based on documentary evidence. The Appellate Division affirmed, holding that a restrictive covenant is not enforceable against a tenant whose lease term started before execution of the lease that included the restrictive covenant.

Plaintiff tenant had been in possession pursuant to a 10-year lease that commenced in 2000. On March 20, 2006, plaintiff tenant signed a lease extension agreement, to end in 2026, that provided that landlord would not rent specified neighboring premises “to any party who offers for sale the same type of food sold by” plaintiff tenant. The agreement also obligated landlord to take steps to have any neighboring tenant cease and desist from making such sales. On Jan. 5, 2006, landlord entered into a lease of specified neighboring premises with defendant tenant. That lease did not include a restrictive covenant. Defendant tenant allegedly sells food of the same type as plaintiff tenant, and plaintiff tenant brought this action to restrain such sales. Supreme Court dismissed the complaint, and plaintiff tenant appealed.

In affirming, the Appellate Division held that a restrictive covenant may not be enforced against a competing tenant whose lease predates the covenant's execution. As a result, Supreme Court properly dismissed the complaint. The Appellate Division also noted that the language of the covenant was consistent with prospective application, establishing that the parties did not intend that the covenant would apply to tenants with pre-existing leases.

Terminating Tenant Liable For Post-Termination Rent

Eujoy Realty Corp. v. Van Wagner Communications, LLC

NYLJ 5/20/10, p. 33, col. 1

AppDiv, First Dept.

(3-2 decision; memorandum opinion; dissenting memorandum by Tom, J.)

In landlord's action for rent due under a terminated billboard lease, landlord appealed from Supreme Court's grant of summary judgment to tenant. The Appellate Division reversed and awarded summary judgment to landlord, holding that because tenant did not terminate until an annual rent payment had become due, tenant was liable for the entire year's rent even though tenant terminated eight days after the payment became due.

In 2000, landlord and tenant entered into a 15-year lease or a billboard visible from the Long Island Expressway. The lease gave tenant a right to terminate if construction should “substantially obstruct” the view of the billboard from the expressway. The lease also obligated tenant to pay rent in advance on Jan. 1 of each year, and rent of $96,243 became due on Jan. 1, 2007. Finally, the lease provided that if the lease should be terminated prior to the date of its expiration, tenant “shall not be entitled to the return of ' any basic rent paid in advance and covering a period beyond the date on which the lease is terminated.” Tenant exercised its right to terminate the lease for obstruction, effective Jan. 8, 2007. Due to an oversight in tenant's accounts payable department, tenant nevertheless issues a check for the $96,243, the full 2007 rent. When tenant discovered the error, tenant stopped payment on the check and issued a new check for $2,109.43, the prorated rent for the period between Jan. 1 and Jan. 8. Landlord accepted the check without protest and then brought this action for the balance of the rent due for 2007, together with interest and counsel fees. Landlord's contention was that tenant had wrongfully stopped payment on the initial check. Supreme Court awarded summary judgment to tenant, and landlord appealed.

In reversing, the Appellate Division majority emphasized that if tenant had paid the full 2007 rent on Jan. 1, the lease made it crystal clear that tenant would not be entitled to a pro rata refund if tenant were to terminate at some point during the year. The majority reasoned that tenant should be in no better position because tenant had not breached its leasehold obligation by not making the full year's payment on Jan. 1. As a result, the tenant was liable for the balance of the 2007 rent.

Justice Tom, dissenting for himself and Justice Freedman, first complained that landlord had not raised its current theory in its complaint, and argued that the court should not consider it on appeal. Turning to the merits, however, he argued that when a tenant rightfully removes from premises, enabling landlord to recover possession, the lease is canceled and tenant is entitled to recover any rent that is advanced. He relied on ' 7-103 of the General Obligations Law, which provides that a sum advanced under an agreement for rental of real property continues to be the money of the payor until applied to payments under the agreement when due. Moreover, he noted that ' 7-103(3) provides that any provision purporting to waive the statute's protection is absolutely void. As a result, he concluded that even if tenant had paid the rent due on Jan. 1, the statute would entitle tenant to a refund of the rent due for any period beyond Jan. 8.