Landlord & Tenant

Court of Appeals

(4-3 decision; opinion by Read, J; dissenting opinion by Ciparick, J.)

In an action by tenants seeking to compel the City of New York to continue participating in the Advantage program created by the city, tenants appealed from an Appellate Division order affirming Supreme Court's dismissal of the complaint. The Court of Appeals affirmed, holding that the city had not obligated itself by contract to continue the program once funding from the state and federal government disappeared.

In 2007, the city established the Advantage rental assistance program to help homeless individuals and family transition into rental apartments. The program provided rent subsidies for eligible tenants. Five documents were prepared for each eligible tenant: a lease to which the city was not a party; a certification letter informing the tenant of eligibility; a statement of understanding by the tenant; a statement of understanding by the landlord; and a lease rider. The certification letter “guaranteed” tenants that the rent subsidy would be paid for one year, and for a second year if tenant met eligibility requirements. The statement of understanding signed by the tenant included a variety of commitments by the tenant made in return for the statement that the city would pay a portion of the tenant's rent. In the lease rider, the landlord acknowledged that the amount and duration of the subsidies was “subject to all applicable rules and requirements” of the Advantage program. The program was funded in equal parts by the city, state and federal governments, but the state budget for 2011-12 did not include funding for the program. Once state funding was withdrawn, the city was no longer eligible for federal funding. At that point, the city informed participants that their rent subsidies would end on April 1, 2011. Tenants then brought this action on behalf of themselves and others similarly situated seeking specific performance of the alleged contract between themselves and the city, and declaratory and injunctive relief. Supreme Court denied a preliminary injunction, but also denied the city's motion to dismiss. The Appellate Division then granted preliminary injunctive relief directing that the program be continued pending a hearing. Then, after an expedited trial, Supreme Court dismissed the complaint. The Appellate Division, one justice dissenting, affirmed.

In affirming, the Court of Appeals majority held that Supreme Court had properly examined the objective manifestations of the city and concluded that the city had not manifested an intent to enter into a contract. The court indicated that the word “guaranteed” in the certification letter had to be viewed in context, where the language “guaranteed rent not tied to PA” was designed only to demonstrate that tenant's subsidy was not to be tied to the tenant's eligibility for public assistance. Moreover, the court emphasized that Supreme Court's finding of fact that the city had not manifested an intent to be contractually bound had been affirmed by the Appellate Division. As a result, the Court of Appeals was limited to deciding whether there was sufficient evidence in the record to support Supreme Court's determination. Here, the majority concluded that there was sufficient evidence. Finally, the majority noted that if the court were too quick to find contract obligations in cases like this one, the result might be greater reluctance by municipalities to establish programs for the needy, out of fear that they would be forced to continue these programs even if funding were withdrawn.

Judge Carmen Beauchamp Ciparick, dissenting for herself, Chief Judge Jonathan Lippman, and Judge Theodore T. Jones argued that the mandatory language used in the written agreements created a contract as a matter of law and emphasized the human cost of the court's ruling, both to tenants subject to eviction and to landlord who would bear the cost of evicting tenants who could no longer afford the rent.

DHCR Should Determine Rent Formula

Olson v. Stellar West 110 LLC

NYLJ 6/11/02, p. 18, col. 5

AppDiv, First Dept.

(memorandum opinion)

In tenant's action for a judgment declaring that their tenant is subject to the Rent Stabilization Law, and for a determination that their base rent should be set pursuant to DHCR's default formula, tenants appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that DHCR should determine in the first instance whether landlord had committed fraud and what remedy, if any, was appropriate.

Tenants entered into possession in December 2001 at a monthly rent of $2,800. The prior rent-controlled tenant had been paying $846.66 per month. Landlord's predecessor did not notify tenants of their right to bring a fair market rent appeal, (FMRA) or of any change in status of the apartment upon the prior tenant's departure. Tenants' leases indicated that the premises were not subject to rent regulation. Not until nine years later, in 2010, did tenants bring this action against current landlord, seeking declaratory relief. They contended that prior landlord's fraud prevented them from bringing a timely FMRA, and excused them from the four-year statute of limitations generally applicable to
FMRAs. Current landlord acquired the building in 2007, and did not notify tenants of the apartment's status. Supreme Court dismissed the complaint, and tenants appealed.

In affirming, the Appellate Division invoked the doctrine of “primary jurisdiction” and held that DHCR should, in light of its expertise, investigate tenants' fraud allegations, determine the status of the apartment, and determine what formula should be used in assessing rent if the apartment should, indeed, be subject to rent regulation.

Liquidated Damages Clause

30 Broadway, LLC v. Grand Central Dental, LLP

NYLJ 6/26/12, p. 25, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to recover damages for breach of a commercial lease, landlord appealed from Supreme Court's award of $154,613.55 in damages, the amount of rent due on the date of commencement of the trial. The Appellate Division reversed and awarded the landlord $700,620.05, holding that the lease's liquidated damages clause was fully enforceable.

Tenant leased the subject premises from landlord in 2006 for a period of 10 years and 3 months. The lease included a rent acceleration clause that obligated tenant to pay the full balance of rent due upon default. Although tenant intended to renovate the space into dental offices, tenant never followed through on those plans and almost immediately notified landlord that it did not want to lease the space. Tenant attempted to sublet the premises, installing a sign on the premises stating that they were “For Rent. No reasonable offer refused.” Landlord removed the “no reasonable offer refused” language from the lease by April 2007. In June 2008, after efforts to sublet proved unsuccessful, tenant surrendered the space to landlord and stopped paying rent. Landlord then brought this action to recover rent due for the balance of the lease term. Supreme Court, after a nonjury trial, invoked equitable principles to limit landlord's damages to the amount due at the commencement of the trial, holding that landlord had breached its duty of good faith by removing a portion of the “for rent” sign, thus hindering tenant's ability to sublet the premises.

In reversing, the Appellate Division held that tenant had produced no evidence that removal of part of the sign impeded its efforts to find a new subtenant. The court also noted that the language was removed more than a year before tenant's default, at a time when landlord and tenant were both actively (but
unsuccessfully) seeking a new tenant for the premises. Under those circumstances, the court could find no basis for relieving tenant of its leasehold obligation, under the rent acceleration clause, to pay the balance due for the remainder of the lease term.

COMMENT

Where a tenant willfully withholds rent, New York courts will enforce a freely bargained rent acceleration clause so long as landlord takes no steps to interfere with tenant's ability to maintain possession of the property upon payment of rent. In Fifty States Mgmt. Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573, the Court of Appeals enforced a rent acceleration clause as proper where tenant willfully failed to pay rent, there was no claim of fraud or exploitative overreach on the part of landlord, and tenant remained entitled to possession of the property upon payment of future rents. The court rejected the argument that equity will intervene to prevent the enforcement of a rent acceleration clause where enforcement would cause financial hardship. Although more than 19 years remained on the 20-year commercial lease, the court determined that the bargained-for clause was not an impermissible penalty. See Olim Realty Corporation v. Big John's Moving, Inc., 250 A.D.2d 744 (“Pursuant to the express provisions of the lease, the landlord was therefore entitled to accelerate the rent due for the remainder of the lease and to recover attorney's fees and late charges.”). But see, contra, Ross Realty v. V & A Iron Fabricators, Inc., 5 Misc.3d 72 (holding that an acceleration clause is unenforceable where the lease containing the clause does not require the landlord to relet the premises upon its recovery of possession). However, the court in Fifty States Mgmt. suggested that there are circumstances in which a rent acceleration clause will not be enforced, including where tenant's nonpayment is the result of a good faith mistake and tenant promptly cures the mistake with no prejudice to the landlord. Additionally, the court suggested that such a clause might be unenforceable if it is boilerplate or the result of unequal bargaining power.

Landlord will be denied the right to collect future rents where, upon tenant's default, landlord chooses to reenter the leased premises. In Benderson v. Poss, 142 A.D.2d 937, the court held that, despite the existence of a rent acceleration clause in a commercial lease, landlord was not entitled to collect rents due after landlord locked the breaching tenant out, terminated the lease, and retook possession. The court held that after landlord terminated the landlord-tenant relationship, tenant was liable only for damages, not rents. However, the court determined the accelerated rent provision couldn't be enforceable as liquidated damages because the amount due under the provision ' the entire rent remaining due on the lease ' was not reasonably proportionate to landlord's probable loss.

However, in Seven Corners Shopping Ctr. Falls Church v. Chesapeake Enterprises USA LLC, 2009 WL 700868, the court held that a rent acceleration clause was enforceable as liquidated damages where the original tenant's liability was limited to the difference for the entire lease term between the rent that it agreed to pay and the rent that the new tenant agreed to pay. Although the lease had been terminated, the parties had explicitly provided that tenant would remain liable for any difference between the rent provided in the lease and any rent landlord collected under a new lease regardless of whether it had been terminated.

Landlord Barred from Luxury Deregulation

In re 73 Warren Street LLC v. Division of Housing and Community Renewal

NYLJ 6/18/12, p. 18, col. 1

AppDiv, First Dept.

(memorandum opinion)

In landlord's article 78 proceeding challenging DHCR's determination that it was not entitled to commence a luxury deregulation proceeding against tenant, landlord appealed from Supreme Court's determination denying the petition and dismissing the proceeding. The Appellate Division affirmed, holding that even though landlord's J-51 tax exemption had expired, landlord's participation in the program barred landlord from commencing a luxury deregulation proceeding.

Landlord's building was not rent regulated until 1977, when it became regulated due to landlord's receipt of J-51 tax benefits. Tenant Schrager rented an apartment in the building in 1984. No lease advised tenant that his apartment would be subject to rent regulation when the J-51 benefits expired, which they did in 1990. When landlord brought a luxury decontrol proceeding before DHCR, the rent administrator denied the petition, concluding that the exclusion from luxury decontrol applied because landlord had become subject to rent stabilization by receiving J-51 benefits. DHCR denied a petition for administrative review, and landowner brought this article 78 proceeding. In denying the petition, Supreme Court rejected landlord's argument that luxury decontrol was available once J-51 benefits expired.

In affirming, the Appellate Division relied on section 26-504.1 of the Administrative Code, which provides that luxury deregulation shall not apply to housing accommodations which became subject to rent stabilization “by virtue or receiving tax benefits pursuant to section four hundred twenty-one-a or four hundred eighty nine of the real property tax law, except as otherwise provided” in a subdivision of section 421-a. Section 489 incorporates the J-51 program, and the court emphasized that the statute includes no exception for section 489 parallel to the exception included for section 421-a. The court noted that if the legislature had wanted to create parallel exceptions, it could have done so. As a result, cessation of the J-51 benefits did not entitle landlord to bring a luxury deregulation proceeding.

Tenant Who Surrenders Premises Is Not Liable

S.C. Patchogue Associates v. Sears, Roebuck and Co.

NYLJ 6/27/12, p. 35, col. 4

AppTerm, 9th & 10th Districts

(memorandum opinion)

In landlord's summary nonpayment proceeding, landlord appealed from District Court's order directing that a release to landlord of funds held in escrow constituted a satisfaction of tenant's default in payment of rent. The Appellate Term affirmed, holding that once tenant surrendered the premises, the landlord-tenant relationship was terminated and tenant was not liable for future rent.

After commencement of the summary proceeding, tenant sent a letter to landlord, on July 30, 2010, indicating that it was removing from the undeveloped land it had leased and relinquishing its interest as tenant. Tenant consented to release of previously escrowed funds to satisfy past rent obligations, but sought return of a sum representing rent for August 2010. Landlord rejected the surrender, and tenant then moved for dismissal of the summary proceeding on the ground that the lease had already terminated. District Court concluded that commencement of a summary proceeding gives tenant an option to consider the lease cancelled, and to vacate the premises. As a result, the court awarded landlord money only through July 2010. Landlord appealed.

In affirming, the Appellate Term agreed with District Court that, once landlord brought the summary nonpayment proceeding, tenant had the option to vacate the premises and effect cancellation of the lease. Here, tenant established a prima facie case that it had surrendered the premises, and landlord did not raise a triable issue of fact on the issue of surrender. The court rejected landlord's argument that because tenant continued to make payments into escrow in compliance with a Supreme Court order, there was evidence that tenant had not surrendered the premises. Finally, the court noted that if the lease had included a survival clause ' which this lease did not ' tenant would have remained liable for monetary obligations under the lease, even if the proceeding had resulted in an award of possession in landlord's favor.

COMMENT

In Cornwell v. Sanford, 222 N.Y. 248, the Court of Appeals held that the commencement of a summary nonpayment proceeding creates in the tenant a right to vacate the premises and effect cancellation of the lease. In Cornwell, tenant vacated premises upon receiving notice that landlord initiated a summary nonpayment proceeding. The court held that initiating summary proceeding gave tenant the right to cancel the lease as removal was the effect the landlord sought in bringing the summary proceeding. The court indicated that it was immaterial whether removal was caused by a warrant or the voluntary conduct of the tenant. Once tenant had surrendered possession, tenant's liability for future rent terminated. See also W. Flatt Associates v. Maggiulli, 66 A.D.3d 1450 (holding that landlord may recover full rent for the period subsequent to the termination date of the lease only where the parties clearly contracted for continued liability). Where the parties to a commercial lease fail to provide such a provision in the lease, the landlord may only recover rent payable before the warrant was issued or the reasonable value of use of the premises prior to such time. See Riglander v. Nile Tobacco Works, 21 Misc. 339.

However, the parties to a lease are free to include a “survival clause” to ensure that tenant's liability for damages survives the termination of tenancy. Thus, in Int'l Publications v. Matchabelli, 260 N.Y. 451, the Court of Appeals held that landlord was entitled to a judgment against tenant for the difference between the rent reserved in the lease and the amount landlord ultimately collected from a substitute tenant, even after landlord re-entered the premises pursuant to a judgment entered in a summary proceeding. The court relied on a lease provision indicating that re-entry by the landlord “shall not be deemed to have absolved or discharged tenant from any liability hereunder.” Further, in Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130, the Court of Appeals held that tenant could be liable for full rent where the lease expressly provided that landlord had no duty to mitigate damages and that upon tenant's abandonment of the premises or eviction, it would remain liable for all monetary obligations arising under the lease.

Landlord May Not Apply Security Deposit

Park Towers South Company, LLC v. 57 W. Operating Co., Inc.

NYLJ 6/11/12, p. 18., col. 6

AppDiv, First Dept.

(memorandum opinion)

In landlord's action for unpaid rent, landlord appealed from Supreme Court's determination that landlord was not entitled to apply tenant's security deposit toward rent due after tenant vacated the premises. The Appellate Division affirmed, concluding that tenant's eviction by the City Marshal terminated tenant's obligation to pay rent.

Tenant's lease was guaranteed by guarantors who were protected from liability after tenant's departure pursuant to “good guy” clauses in the guarantees. Supreme Court had erroneously held that the good guy clauses excused tenant from further payment of rent after the vacate date specified by the guarantors.

The Appellate Division, however, emphasized that landlord had brought eviction proceedings against tenant, and a City Marshal had executed a warrant of eviction. The court held that the issuance of the warrant of eviction terminated the landlord-tenant relationship and extinguished tenant's obligation to pay future rent. As a result, landlord was not entitled to apply the security deposit against future rent obligations.

City Not Obligated to Continue Advantage Program

Zheng v. City of New York

NYLJ 6/27/12, p. 23, col. 1

Court of Appeals

(4-3 decision; opinion by Read, J; dissenting opinion by Ciparick, J.)

In an action by tenants seeking to compel the City of New York to continue participating in the Advantage program created by the city, tenants appealed from an Appellate Division order affirming Supreme Court's dismissal of the complaint. The Court of Appeals affirmed, holding that the city had not obligated itself by contract to continue the program once funding from the state and federal government disappeared.

In 2007, the city established the Advantage rental assistance program to help homeless individuals and family transition into rental apartments. The program provided rent subsidies for eligible tenants. Five documents were prepared for each eligible tenant: a lease to which the city was not a party; a certification letter informing the tenant of eligibility; a statement of understanding by the tenant; a statement of understanding by the landlord; and a lease rider. The certification letter “guaranteed” tenants that the rent subsidy would be paid for one year, and for a second year if tenant met eligibility requirements. The statement of understanding signed by the tenant included a variety of commitments by the tenant made in return for the statement that the city would pay a portion of the tenant's rent. In the lease rider, the landlord acknowledged that the amount and duration of the subsidies was “subject to all applicable rules and requirements” of the Advantage program. The program was funded in equal parts by the city, state and federal governments, but the state budget for 2011-12 did not include funding for the program. Once state funding was withdrawn, the city was no longer eligible for federal funding. At that point, the city informed participants that their rent subsidies would end on April 1, 2011. Tenants then brought this action on behalf of themselves and others similarly situated seeking specific performance of the alleged contract between themselves and the city, and declaratory and injunctive relief. Supreme Court denied a preliminary injunction, but also denied the city's motion to dismiss. The Appellate Division then granted preliminary injunctive relief directing that the program be continued pending a hearing. Then, after an expedited trial, Supreme Court dismissed the complaint. The Appellate Division, one justice dissenting, affirmed.

In affirming, the Court of Appeals majority held that Supreme Court had properly examined the objective manifestations of the city and concluded that the city had not manifested an intent to enter into a contract. The court indicated that the word “guaranteed” in the certification letter had to be viewed in context, where the language “guaranteed rent not tied to PA” was designed only to demonstrate that tenant's subsidy was not to be tied to the tenant's eligibility for public assistance. Moreover, the court emphasized that Supreme Court's finding of fact that the city had not manifested an intent to be contractually bound had been affirmed by the Appellate Division. As a result, the Court of Appeals was limited to deciding whether there was sufficient evidence in the record to support Supreme Court's determination. Here, the majority concluded that there was sufficient evidence. Finally, the majority noted that if the court were too quick to find contract obligations in cases like this one, the result might be greater reluctance by municipalities to establish programs for the needy, out of fear that they would be forced to continue these programs even if funding were withdrawn.

Judge Carmen Beauchamp Ciparick, dissenting for herself, Chief Judge Jonathan Lippman, and Judge Theodore T. Jones argued that the mandatory language used in the written agreements created a contract as a matter of law and emphasized the human cost of the court's ruling, both to tenants subject to eviction and to landlord who would bear the cost of evicting tenants who could no longer afford the rent.

DHCR Should Determine Rent Formula

Olson v. Stellar West 110 LLC

NYLJ 6/11/02, p. 18, col. 5

AppDiv, First Dept.

(memorandum opinion)

In tenant's action for a judgment declaring that their tenant is subject to the Rent Stabilization Law, and for a determination that their base rent should be set pursuant to DHCR's default formula, tenants appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that DHCR should determine in the first instance whether landlord had committed fraud and what remedy, if any, was appropriate.

Tenants entered into possession in December 2001 at a monthly rent of $2,800. The prior rent-controlled tenant had been paying $846.66 per month. Landlord's predecessor did not notify tenants of their right to bring a fair market rent appeal, (FMRA) or of any change in status of the apartment upon the prior tenant's departure. Tenants' leases indicated that the premises were not subject to rent regulation. Not until nine years later, in 2010, did tenants bring this action against current landlord, seeking declaratory relief. They contended that prior landlord's fraud prevented them from bringing a timely FMRA, and excused them from the four-year statute of limitations generally applicable to
FMRAs. Current landlord acquired the building in 2007, and did not notify tenants of the apartment's status. Supreme Court dismissed the complaint, and tenants appealed.

In affirming, the Appellate Division invoked the doctrine of “primary jurisdiction” and held that DHCR should, in light of its expertise, investigate tenants' fraud allegations, determine the status of the apartment, and determine what formula should be used in assessing rent if the apartment should, indeed, be subject to rent regulation.

Liquidated Damages Clause

30 Broadway, LLC v. Grand Central Dental, LLP

NYLJ 6/26/12, p. 25, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to recover damages for breach of a commercial lease, landlord appealed from Supreme Court's award of $154,613.55 in damages, the amount of rent due on the date of commencement of the trial. The Appellate Division reversed and awarded the landlord $700,620.05, holding that the lease's liquidated damages clause was fully enforceable.

Tenant leased the subject premises from landlord in 2006 for a period of 10 years and 3 months. The lease included a rent acceleration clause that obligated tenant to pay the full balance of rent due upon default. Although tenant intended to renovate the space into dental offices, tenant never followed through on those plans and almost immediately notified landlord that it did not want to lease the space. Tenant attempted to sublet the premises, installing a sign on the premises stating that they were “For Rent. No reasonable offer refused.” Landlord removed the “no reasonable offer refused” language from the lease by April 2007. In June 2008, after efforts to sublet proved unsuccessful, tenant surrendered the space to landlord and stopped paying rent. Landlord then brought this action to recover rent due for the balance of the lease term. Supreme Court, after a nonjury trial, invoked equitable principles to limit landlord's damages to the amount due at the commencement of the trial, holding that landlord had breached its duty of good faith by removing a portion of the “for rent” sign, thus hindering tenant's ability to sublet the premises.

In reversing, the Appellate Division held that tenant had produced no evidence that removal of part of the sign impeded its efforts to find a new subtenant. The court also noted that the language was removed more than a year before tenant's default, at a time when landlord and tenant were both actively (but
unsuccessfully) seeking a new tenant for the premises. Under those circumstances, the court could find no basis for relieving tenant of its leasehold obligation, under the rent acceleration clause, to pay the balance due for the remainder of the lease term.

COMMENT

Where a tenant willfully withholds rent, New York courts will enforce a freely bargained rent acceleration clause so long as landlord takes no steps to interfere with tenant's ability to maintain possession of the property upon payment of rent. In Fifty States Mgmt. Corp. v. Pioneer Auto Parks, Inc., 4 6 N.Y.2d 573, the Court of Appeals enforced a rent acceleration clause as proper where tenant willfully failed to pay rent, there was no claim of fraud or exploitative overreach on the part of landlord, and tenant remained entitled to possession of the property upon payment of future rents. The court rejected the argument that equity will intervene to prevent the enforcement of a rent acceleration clause where enforcement would cause financial hardship. Although more than 19 years remained on the 20-year commercial lease, the court determined that the bargained-for clause was not an impermissible penalty. See Olim Realty Corporation v. Big John's Moving, Inc., 250 A.D.2d 744 (“Pursuant to the express provisions of the lease, the landlord was therefore entitled to accelerate the rent due for the remainder of the lease and to recover attorney's fees and late charges.”). But see, contra, Ross Realty v. V & A Iron Fabricators, Inc., 5 Misc.3d 72 (holding that an acceleration clause is unenforceable where the lease containing the clause does not require the landlord to relet the premises upon its recovery of possession). However, the court in Fifty States Mgmt. suggested that there are circumstances in which a rent acceleration clause will not be enforced, including where tenant's nonpayment is the result of a good faith mistake and tenant promptly cures the mistake with no prejudice to the landlord. Additionally, the court suggested that such a clause might be unenforceable if it is boilerplate or the result of unequal bargaining power.

Landlord will be denied the right to collect future rents where, upon tenant's default, landlord chooses to reenter the leased premises. In Benderson v. Poss, 142 A.D.2d 937, the court held that, despite the existence of a rent acceleration clause in a commercial lease, landlord was not entitled to collect rents due after landlord locked the breaching tenant out, terminated the lease, and retook possession. The court held that after landlord terminated the landlord-tenant relationship, tenant was liable only for damages, not rents. However, the court determined the accelerated rent provision couldn't be enforceable as liquidated damages because the amount due under the provision ' the entire rent remaining due on the lease ' was not reasonably proportionate to landlord's probable loss.

However, in Seven Corners Shopping Ctr. Falls Church v. Chesapeake Enterprises USA LLC, 2009 WL 700868, the court held that a rent acceleration clause was enforceable as liquidated damages where the original tenant's liability was limited to the difference for the entire lease term between the rent that it agreed to pay and the rent that the new tenant agreed to pay. Although the lease had been terminated, the parties had explicitly provided that tenant would remain liable for any difference between the rent provided in the lease and any rent landlord collected under a new lease regardless of whether it had been terminated.

Landlord Barred from Luxury Deregulation

In re 73 Warren Street LLC v. Division of Housing and Community Renewal

NYLJ 6/18/12, p. 18, col. 1

AppDiv, First Dept.

(memorandum opinion)

In landlord's article 78 proceeding challenging DHCR's determination that it was not entitled to commence a luxury deregulation proceeding against tenant, landlord appealed from Supreme Court's determination denying the petition and dismissing the proceeding. The Appellate Division affirmed, holding that even though landlord's J-51 tax exemption had expired, landlord's participation in the program barred landlord from commencing a luxury deregulation proceeding.

Landlord's building was not rent regulated until 1977, when it became regulated due to landlord's receipt of J-51 tax benefits. Tenant Schrager rented an apartment in the building in 1984. No lease advised tenant that his apartment would be subject to rent regulation when the J-51 benefits expired, which they did in 1990. When landlord brought a luxury decontrol proceeding before DHCR, the rent administrator denied the petition, concluding that the exclusion from luxury decontrol applied because landlord had become subject to rent stabilization by receiving J-51 benefits. DHCR denied a petition for administrative review, and landowner brought this article 78 proceeding. In denying the petition, Supreme Court rejected landlord's argument that luxury decontrol was available once J-51 benefits expired.

In affirming, the Appellate Division relied on section 26-504.1 of the Administrative Code, which provides that luxury deregulation shall not apply to housing accommodations which became subject to rent stabilization “by virtue or receiving tax benefits pursuant to section four hundred twenty-one-a or four hundred eighty nine of the real property tax law, except as otherwise provided” in a subdivision of section 421-a. Section 489 incorporates the J-51 program, and the court emphasized that the statute includes no exception for section 489 parallel to the exception included for section 421-a. The court noted that if the legislature had wanted to create parallel exceptions, it could have done so. As a result, cessation of the J-51 benefits did not entitle landlord to bring a luxury deregulation proceeding.

Tenant Who Surrenders Premises Is Not Liable

S.C. Patchogue Associates v. Sears, Roebuck and Co.

NYLJ 6/27/12, p. 35, col. 4

AppTerm, 9th & 10th Districts

(memorandum opinion)

In landlord's summary nonpayment proceeding, landlord appealed from District Court's order directing that a release to landlord of funds held in escrow constituted a satisfaction of tenant's default in payment of rent. The Appellate Term affirmed, holding that once tenant surrendered the premises, the landlord-tenant relationship was terminated and tenant was not liable for future rent.

After commencement of the summary proceeding, tenant sent a letter to landlord, on July 30, 2010, indicating that it was removing from the undeveloped land it had leased and relinquishing its interest as tenant. Tenant consented to release of previously escrowed funds to satisfy past rent obligations, but sought return of a sum representing rent for August 2010. Landlord rejected the surrender, and tenant then moved for dismissal of the summary proceeding on the ground that the lease had already terminated. District Court concluded that commencement of a summary proceeding gives tenant an option to consider the lease cancelled, and to vacate the premises. As a result, the court awarded landlord money only through July 2010. Landlord appealed.

In affirming, the Appellate Term agreed with District Court that, once landlord brought the summary nonpayment proceeding, tenant had the option to vacate the premises and effect cancellation of the lease. Here, tenant established a prima facie case that it had surrendered the premises, and landlord did not raise a triable issue of fact on the issue of surrender. The court rejected landlord's argument that because tenant continued to make payments into escrow in compliance with a Supreme Court order, there was evidence that tenant had not surrendered the premises. Finally, the court noted that if the lease had included a survival clause ' which this lease did not ' tenant would have remained liable for monetary obligations under the lease, even if the proceeding had resulted in an award of possession in landlord's favor.

COMMENT

In Cornwell v. Sanford, 222 N.Y. 248, the Court of Appeals held that the commencement of a summary nonpayment proceeding creates in the tenant a right to vacate the premises and effect cancellation of the lease. In Cornwell, tenant vacated premises upon receiving notice that landlord initiated a summary nonpayment proceeding. The court held that initiating summary proceeding gave tenant the right to cancel the lease as removal was the effect the landlord sought in bringing the summary proceeding. The court indicated that it was immaterial whether removal was caused by a warrant or the voluntary conduct of the tenant. Once tenant had surrendered possession, tenant's liability for future rent terminated. See also W. Flatt Associates v. Maggiulli, 66 A.D.3d 1450 (holding that landlord may recover full rent for the period subsequent to the termination date of the lease only where the parties clearly contracted for continued liability). Where the parties to a commercial lease fail to provide such a provision in the lease, the landlord may only recover rent payable before the warrant was issued or the reasonable value of use of the premises prior to such time. See Riglander v. Nile Tobacco Works, 21 Misc. 339 .

However, the parties to a lease are free to include a “survival clause” to ensure that tenant's liability for damages survives the termination of tenancy. Thus, in Int'l Publications v. Matchabelli, 260 N.Y. 451, the Court of Appeals held that landlord was entitled to a judgment against tenant for the difference between the rent reserved in the lease and the amount landlord ultimately collected from a substitute tenant, even after landlord re-entered the premises pursuant to a judgment entered in a summary proceeding. The court relied on a lease provision indicating that re-entry by the landlord “shall not be deemed to have absolved or discharged tenant from any liability hereunder.” Further, in Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130, the Court of Appeals held that tenant could be liable for full rent where the lease expressly provided that landlord had no duty to mitigate damages and that upon tenant ' s abandonment of the premises or eviction, it would remain liable for all monetary obligations arising under the lease.

Landlord May Not Apply Security Deposit

Park Towers South Company, LLC v. 57 W. Operating Co., Inc.

NYLJ 6/11/12, p. 18., col. 6

AppDiv, First Dept.

(memorandum opinion)

In landlord's action for unpaid rent, landlord appealed from Supreme Court's determination that landlord was not entitled to apply tenant's security deposit toward rent due after tenant vacated the premises. The Appellate Division affirmed, concluding that tenant's eviction by the City Marshal terminated tenant's obligation to pay rent.

Tenant's lease was guaranteed by guarantors who were protected from liability after tenant's departure pursuant to “good guy” clauses in the guarantees. Supreme Court had erroneously held that the good guy clauses excused tenant from further payment of rent after the vacate date specified by the guarantors.

The Appellate Division, however, emphasized that landlord had brought eviction proceedings against tenant, and a City Marshal had executed a warrant of eviction. The court held that the issuance of the warrant of eviction terminated the landlord-tenant relationship and extinguished tenant's obligation to pay future rent. As a result, landlord was not entitled to apply the security deposit against future rent obligations.