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Landlord & Tenant

By ALM Staff | Law Journal Newsletters |
September 29, 2010

Landlord May Arbitrarily Withhold Consent to
Assignment When Tenant Seeks Release of Liability

Kiop Forest Ave, LP v. Southern Smokehouse of Staten Island, Inc.

NYLJ 8/4/10 Civil Ct., Richmond Cty. (Marrazzo, J.)

In a commercial nonpayment proceeding, landlord sought summary judgment. The court granted landlord's motion, holding that because tenant had sought consent to a novation rather than to an assignment of its lease, landlord was not required to be reasonable in withholding consent.

Tenant assumed the obligations of a prior tenant commencing April 2008, and extending through the lease term, which was to run through fiscal year 2011. Tenant operated a restaurant on the premises. When, in late 2008, tenant began to experience a downturn in business, tenant requested a rent reduction, which landlord denied. Then, in September 2009, tenant sought to sell the business and to assign the lease. Landlord refused to accept the assignee, allegedly because the proposed assignee's sushi buffet might overlap with a Chinese takeout restaurant located in the shopping center. Tenant then defaulted in payment of rent, and landlord brought this nonpayment proceeding. Tenant alleged that landlord's refusal to consent to the assignment was unreasonable, and had caused tenant $80,000 in damages. Landlord moved for summary judgment.

In granting landlord's motion, the court started by noting that when a lease provision requires landlord not to unreasonably withhold consent to an assignment, landlord's refusal can only be based on objective factors, such as financial responsibility, suitability fo the building, legality of the proposed use, and nature of the occupancy. The court noted, however, that an assignment would not release the original tenant from the lease. In this case, the court concluded that tenant had sought a release from liability under the lease, which the court characterized as a novation rather than an assignment. The lease did not require landlord to act reasonably in evaluating a request for a novation, and, as a result, the landlord was entitled to summary judgment. The court also noted that tenant had failed to pay court-ordered use and occupancy during the pendency of the proceeding. As a result, the court struck tenant's answer and all affirmative defenses and counterclaims.

COMMENT

A landlord has the right to arbitrarily withhold consent when a tenant seeks release of liability as an incident to a proposed assignment. In NNA Rest. Mgt. LLC, v. Eshaghian, 29 A.D.3d 384, 384-385, the court held that the tenant's attempt to secure a release of liability in exchange for a proposed payment of money would have transformed the proposed assignment into a novation, and thus the landlord had the right to arbitrarily withhold consent.

A landlord's fear that a proposed assignment would leave landlord in violation of an exclusivity provision in another lease constitutes a reasonable basis for withholding consent to a tenant's proposed assignment, at least when the other lease is for space in the same building. In Kenney v. Eddygate Park Associates, 34 A.D.3d 1017, 1018, the court held that a landlord reasonably withheld consent to an assignment of a lease from the tenant, a barbeque restaurant, to a proposed Korean or Vietnamese restaurant on the landlord's fear of being exposed to litigation because the proposed Korean or Vietnamese restaurant would compete too closely with an existing Chinese restaurant that had an exclusive right to sell Chinese food in the commercial building.

By contrast, in the absence of an exclusivity covenant in another lease, a landlord's desire to avoid competition with an existing tenant does not generally constitute a reasonable basis for withholding consent to a tenant's proposed assignment. In International Chefs v. Corporate Prop. Investors, 140 A.D.2d 369, 369, the court held that a landlord unreasonably withheld consent to an assignment of a lease from the tenant, a fish and chips restaurant, to a proposed Japanese restaurant on the landlord's belief that the proposed Japanese restaurant would compete too closely with an existing Japanese restaurant in the same food court of the Roosevelt Field Shopping Center in Garden City.

Commingling of Security Deposit Does Not Preclude Claim for Breach of Lease

Paterno v. Carroll

NYLJ 7/29/10, p. 36, col. 4 AppDiv, Second Dept. (memorandum opinion)

In landlord's action for breach of a residential lease, both parties appealed from Supreme Court's denial of their respective summary judgment motions. The Appellate Division modified to grant tenant summary judgment on its claim for return of its security deposit, but held that landlord's wrongful commingling of the security deposit did not foreclose landlord from pursuing its claim for breach of the lease.

In 2006, landlord and tenants entered into a one-year lease for a condominium apartment. The lease gave tenant on option to renew, and required that the renewal option be exercised in writing by April 30, 2007. Tenants paid landlord a $12,000 security deposit. Tenants did not timely exercise the option, but in May, after landlord wrote to tenants asking whether they wanted to renew, tenants answered affirmatively, and signed a statement indicating a desire to renew for the period beginning Aug. 1, 2007. In July, one of the tenants discovered mold on the ceiling of the bedroom and sent a letter to landlord indicating that the situation was untenable and that tenants were vacating immediately. They moved out on Sept. 15, informing landlord that they wished to have some personal items left in the apartment examined for mold contamination and cleaned if necessary. When landlord brought this action for rent due under the renewal lease, tenant raised breach of the implied warranty of habitability, and also contended that landlord had wrongfully commingled the security deposit with other funds. Supreme Court denied the parties' respective summary judgment motions.

In modifying, the Appellate Division held that because landlord had failed to give tenants written notice of the banking institution that held their security deposit, an inference arose that landlord had commingled the deposit with his own funds. Because landlord did not rebut that inference, he forfeited his right to use the deposit for any purpose. As a result, tenants were entitled to immediate return of that deposit. At the same time, the court held that commingling of the deposit did not relieve tenants of the obligation to pay rent. Moreover, the court also rejected tenants' argument that because they had missed the April 30 renewal deadline, their renewal of the option was ineffective. The court noted that landlord had waived the deadline, and parties subsequently agreed to a one-year renewal. As a result, questions of fact remained about whether landlord's alleged breach of the implied warranty of habitability excused tenant from the obligation to pay rent. Neither party, therefore, was entitled to summary judgment on landlord's claim for rent.

Elevator Installation

Pacific Coast Silks, LLC v. 247 Realty, LLC

NYLJ 7/12/10, p. 18, col. 1 AppDiv, First Dept. (Opinion by Saxe, J.)

In commercial tenant's action to recover the first month's rent and its security deposit, landlord appealed from Supreme Court's judgment, after nonjury trial, in tenant's favor. The Appellate Division reversed and reinstated landlord's counterclaim for rent due, holding that the express provisions of the lease contemplated delays in completion of an elevator, and did not excuse tenant from performance on account of those delays.

When landlord and tenant executed a commercial lease on Sept. 5, 2006, the building was not served by an elevator because landlord was in the process of installing a new one as part of a major renovation. Access to the 7th floor leased space was by staircase. The lease itself was to run for one year from Oct. 1, 2006, with options to renew. The lease also included a provision specifying that if the elevator installation were not complete by Oct. 15, the commencement date of the lease would be adjusted to that date. In fact, however, the elevator was not functioning until Dec. 4. The lease also required landlord to perform other work in the space, and provided that the incompletion of that work would not toll the commencement date of the lease or abate any of tenant's rent obligation.

Tenant paid the first month's rent of $7,500 and a $22,500 security deposit when it signed the lease. Tenant never made any other payments. Landlord sent tenant a notice of termination on Dec. 18, demanding that tenant vacate by December 27 and pay rent arrears. Tenant responded by claiming possession had never been delivered because of the absence of elevator service, and that even if possession had been delivered, tenant had been constructively evicted. Tenant sought return of the $30,000 it had paid to landlord. When landlord refused to reimburse tenant, tenant brought this action, and landlord counterclaimed for rent due through March 31, 2007. The trial court awarded judgment for tenant, and dismissed landlord's counterclaim. Landlord appealed.

In reversing, the Appellate Division emphasized first that tenant had not established that elevator services was necessary for it to operate its business during the period of delay. The court then concluded that in a commercial lease, the parties are entitled to waive statutory protections. In this lease, the parties contemplated the possibility that elevator service might not be available at the start of the lease term, and made provision ' a two-week delay in the commencement date ' to account for that possibility. In the court's view, failure to make further provision should be understood to provide that tenant's obligation to pay rent began on Oct. 15, even without elevator service. As a result, tenant was not entitled to return of the security deposit or refund of the first month's rent. The court remanded for consideration of landlord's counterclaim, noting that the trial court had not determined whether landlord had provided proper notice that it was terminating the lease.

Luxury Deregulation Holding Applies Retroactively

Roberts v. Tishman Speyer Properties

NYLJ 7/30/10, p. 43, col. 1 Supreme Ct., N.Y. Cty. (Lowe, J.)

In a purported class action by tenants of Stuyvesant Town and Peter Cooper Village to recover $215 million in rent overcharges from MetLife resulting from improper use of luxury deregulation provisions, MetLife moved to dismiss for failure to state a claim. The court denied MetLife's motion, holding the Court of Appeals ruling luxury deregulation inapplicable should be applied retroactively.

In prior litigation between tenants and landlord of the two complexes, the Court of Appeals had held that the luxury decontrol statute did not apply to units for which landlord had obtained J-51 benefits. The court made its decision on Oct. 22, 2009, nearly three years after MetLife had sold the two complexes. In this litigation, tenants sought reimbursement from MetLife for excess rents collected by MetLife as a result of wrongful application of the luxury decontrol statute. MetLife moved to dismiss, arguing that the court's decision should not be applied retroactively.

In denying MetLife's motion, the court held that the Court of Appeals' opinion did not establish a new principle of law by overruling clear past precedent, but instead applied a statute that had been in effect for a number of years. Because there was no abrupt shift in decisional law, the court's decision should be applied retroactively.

Civil Court May Extend Due Date in Parties' Stipulation

368 Chauncey Ave. Trust v. Whitaker

NYLJ 8/2/10, p. 26, col. 3 AppTerm, 2nd, 11th, and 13th Districts (memorandum opinion)

In landlord's nonpayment proceeding, landlord appealed from Civil Court's grant to tenant of an extension of time to pay. The Appellate Term affirmed, holding that Civil Court had the authority to extend the due date of payments to which tenant had previously stipulated.

Landlord instituted this proceeding contending that tenant owed $2030 in rent. Tenant interposed a defense of breach of the warranty of habitability, and claimed that all rent had been paid. On Dec. 15, 2008, the parties entered into a stipulation by the terms of which landlord agreed that a smaller amount was owed and agreed to remedy various conditions, including the absence of hot water. Tenant agreed to make installment payments, and agreed that all payments would first be applied to current rent. A subsequent stipulation granted tenant an abatement of $850, leaving a balance due of $1,400. In April 2009, tenant sought a stipulation, claiming that the arrears had been paid late and that April rent had been accepted, leaving only one month's rent outstanding. The Civil Court granted the extension, and landlord appealed, relying on the stipulation.

In affirming, the Appellate Term emphasized that, upon a showing of good cause, a court has power to vacate a warrant of eviction prior to its execution. The court reasoned that if a court has that power, it certainly may extend the due date of payments agreed to by tenant. Here, the court concluded that tenant's default was de minimis, and Civil Court had discretion to issue a stay to permit tenant to satisfy the remaining arrears.

Landlord May Arbitrarily Withhold Consent to
Assignment When Tenant Seeks Release of Liability

Kiop Forest Ave, LP v. Southern Smokehouse of Staten Island, Inc.

NYLJ 8/4/10 Civil Ct., Richmond Cty. (Marrazzo, J.)

In a commercial nonpayment proceeding, landlord sought summary judgment. The court granted landlord's motion, holding that because tenant had sought consent to a novation rather than to an assignment of its lease, landlord was not required to be reasonable in withholding consent.

Tenant assumed the obligations of a prior tenant commencing April 2008, and extending through the lease term, which was to run through fiscal year 2011. Tenant operated a restaurant on the premises. When, in late 2008, tenant began to experience a downturn in business, tenant requested a rent reduction, which landlord denied. Then, in September 2009, tenant sought to sell the business and to assign the lease. Landlord refused to accept the assignee, allegedly because the proposed assignee's sushi buffet might overlap with a Chinese takeout restaurant located in the shopping center. Tenant then defaulted in payment of rent, and landlord brought this nonpayment proceeding. Tenant alleged that landlord's refusal to consent to the assignment was unreasonable, and had caused tenant $80,000 in damages. Landlord moved for summary judgment.

In granting landlord's motion, the court started by noting that when a lease provision requires landlord not to unreasonably withhold consent to an assignment, landlord's refusal can only be based on objective factors, such as financial responsibility, suitability fo the building, legality of the proposed use, and nature of the occupancy. The court noted, however, that an assignment would not release the original tenant from the lease. In this case, the court concluded that tenant had sought a release from liability under the lease, which the court characterized as a novation rather than an assignment. The lease did not require landlord to act reasonably in evaluating a request for a novation, and, as a result, the landlord was entitled to summary judgment. The court also noted that tenant had failed to pay court-ordered use and occupancy during the pendency of the proceeding. As a result, the court struck tenant's answer and all affirmative defenses and counterclaims.

COMMENT

A landlord has the right to arbitrarily withhold consent when a tenant seeks release of liability as an incident to a proposed assignment. In NNA Rest. Mgt. LLC, v. Eshaghian, 29 A.D.3d 384, 384-385, the court held that the tenant's attempt to secure a release of liability in exchange for a proposed payment of money would have transformed the proposed assignment into a novation, and thus the landlord had the right to arbitrarily withhold consent.

A landlord's fear that a proposed assignment would leave landlord in violation of an exclusivity provision in another lease constitutes a reasonable basis for withholding consent to a tenant's proposed assignment, at least when the other lease is for space in the same building. In Kenney v. Eddygate Park Associates, 34 A.D.3d 1017, 1018, the court held that a landlord reasonably withheld consent to an assignment of a lease from the tenant, a barbeque restaurant, to a proposed Korean or Vietnamese restaurant on the landlord's fear of being exposed to litigation because the proposed Korean or Vietnamese restaurant would compete too closely with an existing Chinese restaurant that had an exclusive right to sell Chinese food in the commercial building.

By contrast, in the absence of an exclusivity covenant in another lease, a landlord's desire to avoid competition with an existing tenant does not generally constitute a reasonable basis for withholding consent to a tenant's proposed assignment. In International Chefs v. Corporate Prop. Investors, 140 A.D.2d 369, 369, the court held that a landlord unreasonably withheld consent to an assignment of a lease from the tenant, a fish and chips restaurant, to a proposed Japanese restaurant on the landlord's belief that the proposed Japanese restaurant would compete too closely with an existing Japanese restaurant in the same food court of the Roosevelt Field Shopping Center in Garden City.

Commingling of Security Deposit Does Not Preclude Claim for Breach of Lease

Paterno v. Carroll

NYLJ 7/29/10, p. 36, col. 4 AppDiv, Second Dept. (memorandum opinion)

In landlord's action for breach of a residential lease, both parties appealed from Supreme Court's denial of their respective summary judgment motions. The Appellate Division modified to grant tenant summary judgment on its claim for return of its security deposit, but held that landlord's wrongful commingling of the security deposit did not foreclose landlord from pursuing its claim for breach of the lease.

In 2006, landlord and tenants entered into a one-year lease for a condominium apartment. The lease gave tenant on option to renew, and required that the renewal option be exercised in writing by April 30, 2007. Tenants paid landlord a $12,000 security deposit. Tenants did not timely exercise the option, but in May, after landlord wrote to tenants asking whether they wanted to renew, tenants answered affirmatively, and signed a statement indicating a desire to renew for the period beginning Aug. 1, 2007. In July, one of the tenants discovered mold on the ceiling of the bedroom and sent a letter to landlord indicating that the situation was untenable and that tenants were vacating immediately. They moved out on Sept. 15, informing landlord that they wished to have some personal items left in the apartment examined for mold contamination and cleaned if necessary. When landlord brought this action for rent due under the renewal lease, tenant raised breach of the implied warranty of habitability, and also contended that landlord had wrongfully commingled the security deposit with other funds. Supreme Court denied the parties' respective summary judgment motions.

In modifying, the Appellate Division held that because landlord had failed to give tenants written notice of the banking institution that held their security deposit, an inference arose that landlord had commingled the deposit with his own funds. Because landlord did not rebut that inference, he forfeited his right to use the deposit for any purpose. As a result, tenants were entitled to immediate return of that deposit. At the same time, the court held that commingling of the deposit did not relieve tenants of the obligation to pay rent. Moreover, the court also rejected tenants' argument that because they had missed the April 30 renewal deadline, their renewal of the option was ineffective. The court noted that landlord had waived the deadline, and parties subsequently agreed to a one-year renewal. As a result, questions of fact remained about whether landlord's alleged breach of the implied warranty of habitability excused tenant from the obligation to pay rent. Neither party, therefore, was entitled to summary judgment on landlord's claim for rent.

Elevator Installation

Pacific Coast Silks, LLC v. 247 Realty, LLC

NYLJ 7/12/10, p. 18, col. 1 AppDiv, First Dept. (Opinion by Saxe, J.)

In commercial tenant's action to recover the first month's rent and its security deposit, landlord appealed from Supreme Court's judgment, after nonjury trial, in tenant's favor. The Appellate Division reversed and reinstated landlord's counterclaim for rent due, holding that the express provisions of the lease contemplated delays in completion of an elevator, and did not excuse tenant from performance on account of those delays.

When landlord and tenant executed a commercial lease on Sept. 5, 2006, the building was not served by an elevator because landlord was in the process of installing a new one as part of a major renovation. Access to the 7th floor leased space was by staircase. The lease itself was to run for one year from Oct. 1, 2006, with options to renew. The lease also included a provision specifying that if the elevator installation were not complete by Oct. 15, the commencement date of the lease would be adjusted to that date. In fact, however, the elevator was not functioning until Dec. 4. The lease also required landlord to perform other work in the space, and provided that the incompletion of that work would not toll the commencement date of the lease or abate any of tenant's rent obligation.

Tenant paid the first month's rent of $7,500 and a $22,500 security deposit when it signed the lease. Tenant never made any other payments. Landlord sent tenant a notice of termination on Dec. 18, demanding that tenant vacate by December 27 and pay rent arrears. Tenant responded by claiming possession had never been delivered because of the absence of elevator service, and that even if possession had been delivered, tenant had been constructively evicted. Tenant sought return of the $30,000 it had paid to landlord. When landlord refused to reimburse tenant, tenant brought this action, and landlord counterclaimed for rent due through March 31, 2007. The trial court awarded judgment for tenant, and dismissed landlord's counterclaim. Landlord appealed.

In reversing, the Appellate Division emphasized first that tenant had not established that elevator services was necessary for it to operate its business during the period of delay. The court then concluded that in a commercial lease, the parties are entitled to waive statutory protections. In this lease, the parties contemplated the possibility that elevator service might not be available at the start of the lease term, and made provision ' a two-week delay in the commencement date ' to account for that possibility. In the court's view, failure to make further provision should be understood to provide that tenant's obligation to pay rent began on Oct. 15, even without elevator service. As a result, tenant was not entitled to return of the security deposit or refund of the first month's rent. The court remanded for consideration of landlord's counterclaim, noting that the trial court had not determined whether landlord had provided proper notice that it was terminating the lease.

Luxury Deregulation Holding Applies Retroactively

Roberts v. Tishman Speyer Properties

NYLJ 7/30/10, p. 43, col. 1 Supreme Ct., N.Y. Cty. (Lowe, J.)

In a purported class action by tenants of Stuyvesant Town and Peter Cooper Village to recover $215 million in rent overcharges from MetLife resulting from improper use of luxury deregulation provisions, MetLife moved to dismiss for failure to state a claim. The court denied MetLife's motion, holding the Court of Appeals ruling luxury deregulation inapplicable should be applied retroactively.

In prior litigation between tenants and landlord of the two complexes, the Court of Appeals had held that the luxury decontrol statute did not apply to units for which landlord had obtained J-51 benefits. The court made its decision on Oct. 22, 2009, nearly three years after MetLife had sold the two complexes. In this litigation, tenants sought reimbursement from MetLife for excess rents collected by MetLife as a result of wrongful application of the luxury decontrol statute. MetLife moved to dismiss, arguing that the court's decision should not be applied retroactively.

In denying MetLife's motion, the court held that the Court of Appeals' opinion did not establish a new principle of law by overruling clear past precedent, but instead applied a statute that had been in effect for a number of years. Because there was no abrupt shift in decisional law, the court's decision should be applied retroactively.

Civil Court May Extend Due Date in Parties' Stipulation

368 Chauncey Ave. Trust v. Whitaker

NYLJ 8/2/10, p. 26, col. 3 AppTerm, 2nd, 11th, and 13th Districts (memorandum opinion)

In landlord's nonpayment proceeding, landlord appealed from Civil Court's grant to tenant of an extension of time to pay. The Appellate Term affirmed, holding that Civil Court had the authority to extend the due date of payments to which tenant had previously stipulated.

Landlord instituted this proceeding contending that tenant owed $2030 in rent. Tenant interposed a defense of breach of the warranty of habitability, and claimed that all rent had been paid. On Dec. 15, 2008, the parties entered into a stipulation by the terms of which landlord agreed that a smaller amount was owed and agreed to remedy various conditions, including the absence of hot water. Tenant agreed to make installment payments, and agreed that all payments would first be applied to current rent. A subsequent stipulation granted tenant an abatement of $850, leaving a balance due of $1,400. In April 2009, tenant sought a stipulation, claiming that the arrears had been paid late and that April rent had been accepted, leaving only one month's rent outstanding. The Civil Court granted the extension, and landlord appealed, relying on the stipulation.

In affirming, the Appellate Term emphasized that, upon a showing of good cause, a court has power to vacate a warrant of eviction prior to its execution. The court reasoned that if a court has that power, it certainly may extend the due date of payments agreed to by tenant. Here, the court concluded that tenant's default was de minimis, and Civil Court had discretion to issue a stay to permit tenant to satisfy the remaining arrears.

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