Landlord & Tenant

AppDiv, First Dept.

(Opinion by Friedman, J.P.)

In tenant's declaratory judgment action to establish that landlord is not entitled to collect additional rent dating back to 1998, landlord appealed from Supreme Court's order declaring that tenant is liable for additional rent only for years starting with 2009. The Appellate Division affirmed, concluding that timely presentation of a statement of landlord's operating costs was a constructive condition precedent to tenant's obligation to pay additional rent.

In 1997, the trust, as landlord, leased a floor of a commercial building to Mount Sinai, as tenant, for a term to expire on April 30, 2013. Mount Sinai has also exercised an option to extend the term for an additional year. The lease provides that tenant shall pay to landlord “as additional rent ' Lessee's proportionate share of any increase in Operating Costs over the Base Operating Year,” which was defined to be calendar year 1998. The lease provided that landlord would submit to tenant a statement of operating expenses as soon as reasonably practicable after close of each year. Tenant is obligated to pay additional rent owed within 10 days after receipt of landlord's statement. Tenant had a right to dispute the statement, but payment of the amount billed is a “condition precedent to” tenant's right “to contest ' [the] correctness” of an additional rent statement.

Landlord did not furnish tenant with any statements of operating expenses until March 1, 2011. On that date, landlord submitted statements of operating costs for each year from 1998 through 2010, together with an invoice for $369,793.66, representing the amount due for the entire period. Tenant did not pay the invoice, and did not follow the lease procedures for disputing the “correctness” of the invoice. When landlord served a notice of default and a 30-day notice to cure, tenant brought this declaratory judgment action, contending that landlord's failure to submit statements for 12 years barred it from now collecting those amounts. Supreme Court declared that tenant was liable for increased rent only for 2009 and 2010, but not for prior years, and landlord appealed. (Tenant cross-appealed from the determination that it was liable for 2009 and 2010 additional rent).

In affirming, the Appellate Division first held that tenant's failure to follow the lease procedures for challenging correctness of a rent statement did not bar tenant's declaratory judgment action. The court concluded that the issue in this case was not the correctness of the landlord's statements, but rather the effect of landlord's failure to provide the statements in a timely manner.

The court then held that timely submission of operating costs statements is an implied or constructive condition precedent to tenant's obligation to pay additional rent. The court turned to a lease provision specifying that landlord's right to additional rent would not be impaired by a delay in billing not to exceed two years, and indicated that this two-year “safe harbor” provision established the time period the parties would have considered reasonable for submission of operating cost statements. The court therefore held that landlord was not entitled to enforce the additional rent provisions for periods beyond two years. The court did, however, hold that landlord was entitled to recover for 2009 and 2010 despite landlord's delay in providing a cost statement for 1998, the base year for operating cost calculations.

COMMENT

The Second Department has consistently held that when a lease requires landlord to notify tenant of an increase in rent pursuant to the lease's rent escalation clause, timely notice of the increase is a condition precedent to the tenant's obligation to pay ' even where the lease language does not explicitly condition the tenant's obligation on landlord's provision of notice. Thus, in Winfield Capital Corp. v. Mahopac Auto Glass, 208 A.D.2d 715, the court held that landlord's failure to provide timely notice excused tenant from payment of increased rent in light of a lease provision specifying that the “landlord shall notify tenant prior to February 1 ' [and] tenant shall pay its share” failed to provide timely notice. See also Woodlaurel, Inc. v. Wittman, 199 A.D.2d 497, (in which a similar notice provision was interpreted to be conditional).

In the face of a rent escalation provision specifying that the landlord would notify the tenant of the amount due on an annual basis, the Second Department has held that a delay of three years or more in providing tenant with statement was not timely and precluded recovery. Walton v. Eastern Analytical Labs, 246 A.D.2d 532 (three years not timely); see also Winfield Capital Corp., 208 A.D.2d 715 (seven years not timely); Woodlaurel, 199 A.D. 2d 497 (lease provisions for notice were not included in the opinion, but 11 years was not timely).

Until Mt. Sinai, the First Department had refused to hold that landlord's failure to provide notice of escalated rent excused tenant from paying escalated rent. In Goldstein v. City of New York, 159 A.D.2d 313, the court held that landlord was entitled to collect eight years of additional rent retroactively, despite landlord's failure to provide timely notice to tenant. The tenant, the City of New York, challenged a rent escalation provision arguing that timely notification was a condition precedent to the tenant's obligation to pay. The court rejected the argument, emphasizing the absence of express language making timely notification a condition precedent: “The lease agreement could have provided that failure to comply with section 3 [timely notice] constitutes waiver of the landlord's claim for additional rent ' It did not. Accordingly, compliance ' is not a condition precedent … ” Goldstein v. City of New York, supra, at 315. Thus, Mt. Sinai may signal a departure from Goldstein and may bring the First Department into conformity with the Second Department, making timely notice a condition precedent to the collection of additional rent.

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Tenants May Operate Daycare Business

Riverdale Osborne Towers Housing Assoc. v. Keaton

NYLJ 9/5/13

Civil Ct., Kings Cty.

(Scheckowitz, J.)

Landlord brought a holdover proceeding against tenants, alleging that they had violated lease provisions and HUD regulations by operating a daycare business on the premises. The court dismissed the proceeding, holding that both HUD regulations and a prior stipulation between the parties entitled tenants to operate the daycare business so long as the apartment was principally used as their primary residence.

One of the tenants has been occupying the premises in an HUD building for 35 years, and has been operating a daycare business for 15 years. Nevertheless, in early 2013, landlord brought a holdover proceeding contending that tenant's use of the premises violated the terms of the lease. The parties then entered into a stipulation of settlement under the terms of which tenant represented that use of the premises as a daycare center was “an incidental business, which generates only incidental income,” and that she would provide landlord with proof of insurance. When tenant failed to provide proof of insurance, landlord moved to restore the proceeding to the calendar, but withdrew the motion when tenant provided proof of insurance. Then landlord again moved to restore the proceeding on the ground that tenants have violated the stipulation by operating the business as their primary source of income.

In dismissing the proceeding, the court concluded that as long as tenants continued to use the apartment as their primary residence, they had not violated the provision in the stipulation requiring that the daycare business be “incidental.” The court also concluded that HUD regulations permit tenants to derive their primary source of income from daycare businesses operated in apartments, so long as tenant is occupying the premises as his or her primary residence.

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Timely Presentation of Costs

Mount Sinai Hospital v. 1998 Alexander Karten Annuity Trust

NYLJ 8/22/13

AppDiv, First Dept.

(Opinion by Friedman, J.P.)

In tenant's declaratory judgment action to establish that landlord is not entitled to collect additional rent dating back to 1998, landlord appealed from Supreme Court's order declaring that tenant is liable for additional rent only for years starting with 2009. The Appellate Division affirmed, concluding that timely presentation of a statement of landlord's operating costs was a constructive condition precedent to tenant's obligation to pay additional rent.

In 1997, the trust, as landlord, leased a floor of a commercial building to Mount Sinai, as tenant, for a term to expire on April 30, 2013. Mount Sinai has also exercised an option to extend the term for an additional year. The lease provides that tenant shall pay to landlord “as additional rent ' Lessee's proportionate share of any increase in Operating Costs over the Base Operating Year,” which was defined to be calendar year 1998. The lease provided that landlord would submit to tenant a statement of operating expenses as soon as reasonably practicable after close of each year. Tenant is obligated to pay additional rent owed within 10 days after receipt of landlord's statement. Tenant had a right to dispute the statement, but payment of the amount billed is a “condition precedent to” tenant's right “to contest ' [the] correctness” of an additional rent statement.

Landlord did not furnish tenant with any statements of operating expenses until March 1, 2011. On that date, landlord submitted statements of operating costs for each year from 1998 through 2010, together with an invoice for $369,793.66, representing the amount due for the entire period. Tenant did not pay the invoice, and did not follow the lease procedures for disputing the “correctness” of the invoice. When landlord served a notice of default and a 30-day notice to cure, tenant brought this declaratory judgment action, contending that landlord's failure to submit statements for 12 years barred it from now collecting those amounts. Supreme Court declared that tenant was liable for increased rent only for 2009 and 2010, but not for prior years, and landlord appealed. (Tenant cross-appealed from the determination that it was liable for 2009 and 2010 additional rent).

In affirming, the Appellate Division first held that tenant's failure to follow the lease procedures for challenging correctness of a rent statement did not bar tenant's declaratory judgment action. The court concluded that the issue in this case was not the correctness of the landlord's statements, but rather the effect of landlord's failure to provide the statements in a timely manner.

The court then held that timely submission of operating costs statements is an implied or constructive condition precedent to tenant's obligation to pay additional rent. The court turned to a lease provision specifying that landlord's right to additional rent would not be impaired by a delay in billing not to exceed two years, and indicated that this two-year “safe harbor” provision established the time period the parties would have considered reasonable for submission of operating cost statements. The court therefore held that landlord was not entitled to enforce the additional rent provisions for periods beyond two years. The court did, however, hold that landlord was entitled to recover for 2009 and 2010 despite landlord's delay in providing a cost statement for 1998, the base year for operating cost calculations.

COMMENT

The Second Department has consistently held that when a lease requires landlord to notify tenant of an increase in rent pursuant to the lease's rent escalation clause, timely notice of the increase is a condition precedent to the tenant's obligation to pay ' even where the lease language does not explicitly condition the tenant's obligation on landlord's provision of notice. Thus, in Winfield Capital Corp. v. Mahopac Auto Glass, 208 A.D.2d 715, the court held that landlord's failure to provide timely notice excused tenant from payment of increased rent in light of a lease provision specifying that the “landlord shall notify tenant prior to February 1 ' [and] tenant shall pay its share” failed to provide timely notice. See also Woodlaurel, Inc. v. Wittman, 199 A.D.2d 497, (in which a similar notice provision was interpreted to be conditional).

In the face of a rent escalation provision specifying that the landlord would notify the tenant of the amount due on an annual basis, the Second Department has held that a delay of three years or more in providing tenant with statement was not timely and precluded recovery. Walton v. Eastern Analytical Labs, 246 A.D.2d 532 (three years not timely); see also Winfield Capital Corp., 208 A.D.2d 715 (seven years not timely); Woodlaurel, 199 A.D. 2d 497 (lease provisions for notice were not included in the opinion, but 11 years was not timely).

Until Mt. Sinai, the First Department had refused to hold that landlord's failure to provide notice of escalated rent excused tenant from paying escalated rent. In Goldstein v. City of New York, 159 A.D.2d 313, the court held that landlord was entitled to collect eight years of additional rent retroactively, despite landlord's failure to provide timely notice to tenant. The tenant, the City of New York, challenged a rent escalation provision arguing that timely notification was a condition precedent to the tenant's obligation to pay. The court rejected the argument, emphasizing the absence of express language making timely notification a condition precedent: “The lease agreement could have provided that failure to comply with section 3 [timely notice] constitutes waiver of the landlord's claim for additional rent ' It did not. Accordingly, compliance ' is not a condition precedent … ” Goldstein v. City of New York, supra, at 315. Thus, Mt. Sinai may signal a departure from Goldstein and may bring the First Department into conformity with the Second Department, making timely notice a condition precedent to the collection of additional rent.

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Tenants May Operate Daycare Business

Riverdale Osborne Towers Housing Assoc. v. Keaton

NYLJ 9/5/13

Civil Ct., Kings Cty.

(Scheckowitz, J.)

Landlord brought a holdover proceeding against tenants, alleging that they had violated lease provisions and HUD regulations by operating a daycare business on the premises. The court dismissed the proceeding, holding that both HUD regulations and a prior stipulation between the parties entitled tenants to operate the daycare business so long as the apartment was principally used as their primary residence.

One of the tenants has been occupying the premises in an HUD building for 35 years, and has been operating a daycare business for 15 years. Nevertheless, in early 2013, landlord brought a holdover proceeding contending that tenant's use of the premises violated the terms of the lease. The parties then entered into a stipulation of settlement under the terms of which tenant represented that use of the premises as a daycare center was “an incidental business, which generates only incidental income,” and that she would provide landlord with proof of insurance. When tenant failed to provide proof of insurance, landlord moved to restore the proceeding to the calendar, but withdrew the motion when tenant provided proof of insurance. Then landlord again moved to restore the proceeding on the ground that tenants have violated the stipulation by operating the business as their primary source of income.

In dismissing the proceeding, the court concluded that as long as tenants continued to use the apartment as their primary residence, they had not violated the provision in the stipulation requiring that the daycare business be “incidental.” The court also concluded that HUD regulations permit tenants to derive their primary source of income from daycare businesses operated in apartments, so long as tenant is occupying the premises as his or her primary residence.

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