Lessons from Sandy, One Year Later

In 4261 Realty v. DB Real Estate, 2013 WL 4437198, Sandy substantially damaged the premises. 4261's major focus was on the adequacy of notice under '9 of the form lease prepared by the REBNY, which provides, “Destruction, Fire and Other Casualty ' If damaged by fire or other casualty ' Tenant shall give immediate notice thereof to Owner and lease shall continue in full force and effect except ' .” Although the notice the tenant provided did not conform to the lease requirement that it be sent “return receipt requested,” 4261 excused that deficiency and held the notice sufficient because the landlord actually received the notice and because of the exigent circumstances.'

The decision in 4261, however, is in tension with Milltown Park v. American Felt & Filter Co., 180 A.D.2d 235, decided long before Sandy, in which the court required the notice precisely as defined by the lease in spite of the tenant's claim that the landlord had actual knowledge.

The other focus in 4261 was the landlord's claim that the premises never became wholly unusable so as to trigger a rent abatement. The court denied summary judgment,' finding a triable issue of fact on whether the premises were rendered wholly unusable or merely prtially so.

In Maiden Lane Properties v. Just Salad Partners, NYLJ 1202598292879 at *1 (Civ Ct., NY Schecter), another case construing '9 of the REBNY lease, the tenant gave no '9 notice at all, but still claimed the benefits of its rent abatement allowances. The tenant's claim was entirely based on loss of electricity. Because the lease exculpated the landlord from responsibility for electricity, and made it the tenant's exclusive responsibility under the lease, the court dismissed the tenant's claim, rejecting the argument that because the landlord had supplied (via free-standing generators) electricity to its residential tenants, it should also have provided electricity to its commercial tenant, Just Salad.'

Constructive Eviction

In Just Salad, the tenant also claimed “constructive eviction.” The court in Just Salad did not even mention the constructive eviction claim, undoubtedly because fault on the part of the landlord, not mere happenstance, is essential to a constructive eviction claim. Mere happenstance is not fault. As the Court of Appeals wrote in Barash v. Pennsylvania Terminal Real Estate Corp., 26 NY2d 77, “constructive eviction exists where, although there has been no physical expulsion or exclusion of the tenant, the landlord's wrongful acts substantially and materially deprive the tenant of the beneficial use and enjoyment of the premises.”'

Reasonable Preparation for Storm by Property Owner

While there have been no Sandy-related decisions on what a landlord should do to prepare for a storm, in one complaint, the tenant's theory was that the landlord was liable for neglecting to take supposedly reasonable precautions against flooding caused by Superstorm Sandy, such as window boarding and sandbagging. See Manfra, Tordella & Brookes, Inc. v. 90 Broad Owner, LLC, 2013 WL 373327.

Insurance Litigation

In Cashew Holdings, LLC v. Canopius U.S Insurance, Inc., 2013 WL 4735645, the only reported decision in Sandy-based insurance law, the Federal District Court denied the insured a preliminary injunction: 1) requiring payment on the insurance policy as a result of Superstorm Sandy; and 2) holding the insurance policy in place. The court cited lack of irreparable injury and a lack of likelihood of success, as the policy excluded damage due to flood or other causes linked to water. The decision was very much a battle of the experts as to whether plaintiff suffered its damages from the water or the wind. Since typically insurance policies cover for wind, but not for water, that determination is crucial. Because the decision in Cashew is on a preliminary' injunction, it does not ultimately determine for the case whether the theories of water or wind would eventually prevail.The court also found that the insurer was under no obligation to renew the insurance policy.

The lesson from this case is that the consumer or business should not only be extremely careful in selecting insurance policies, but should be prepared for vastly larger premiums in order to purchase more exotic policies once there is a recovery on insurance because of damage from a large scale storm.

Although Cashew is the only reported Sandy decision on the subject of insurance, an examination of reported complaints illustrates the kinds of issues we can expect to see in the aftermath of a major storm. For example, in Neptune Food Corporation v. Federal Insurance Company, 2013 WL 3423065, an insured sued for business losses caused by Superstorm Sandy. The controversy of the case centers around clauses in the insurance policy dealing with covered perils worsened by uncovered perils. Here, the covered peril is wind and the uncovered peril is water.'

In Bamundo v. Sentinel, NY County Index # 157622/2013, a law firm sought to collect on its loss of business insurance on the theory that its business was shut down by civil authorities who ordered transportation systems shut down and refused the employees of the firm access to their offices. The insurance companies disclaimed coverage, finding that it was not civil authority that shut down the business, but loss of electricity.'

In Lester Schwab v. Great Northern, NY County Index # 652708/2013, Newman Myers v. Great Northern, NY County Index # 151774/2013, and Shapiro v. National Fire, NY County Index # 650037/2013. various law firms allege that their respective insurance carrier breached their insurance policies. Each plaintiff entered into an insurance policy with each respective defendant, insuring the plaintiff against any loss of business income it may sustain and against any extra expenses it may incur as the result of a loss to the subject premises by a “covered peril.” In these three otherwise unrelated cases, the plaintiffs seek to recover for the loss of electricity on the theory that it was caused not by water, but by the explosion at the ConEd plant. Each insurer is claiming that the loss of electricity was due not to the explosion, but to the flooding that destroyed the electrical infrastructure.

Utilities

Utilities have always enjoyed special legal protections. This is no more evident than in Balacki v. Long Island Power Authority, 40 Misc.3d 1220, a small claims case in which the claimant sued for loss of food due to a lack of refrigeration from the extended loss of power in the aftermath of Superstorm Sandy. Although the court found clear evidence that the Power Authority was negligent, it dismissed the complaint, citing prevailing case law exempting a power utility from liability for loss of electricity if the published rates claim such an exemption for mere negligence, as opposed to gross negligence.

Conclusion

Although it is impossible to know precisely what the risks will be, attorneys drafting the necessary documents must use both the experience of the past and imaginings of the future to prepare for the worst. For the landlord, long-term preparation for a storm of any kind must include careful drafting of the lease so as to allocate the risks of the storm to the tenant. For the tenant that typically must accept most of the lease as written, the chief corresponding preparation is in getting appropriate insurance policies, covering both the costs of making physical repairs to the premises and the loss of business that can be occasioned by forces entirely exterior to the premises such as loss of electricity, Internet, or potable water.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Dov Treiman, a Partner in the firm, chairs its Landlord-Tenant Civil Litigation practice.'

Real Estate lawyers have been and will be the leaders of the rebuilding process of our storm-torn city. One of our most important functions is to prepare for the next storm or potential casualty. In order to improve our lawyering it is essential that we learn the lessons of Sandy. For this, we turn to the Sandy-related real estate cases on commercial leasing, insurance coverage and other related issues.

There are, in total, five reported real estate decisions that have come down in the aftermath of Superstorm Sandy. Additionally, there are some seven complaints on file. These suits, both completed and pending, can provide useful instruction for the kinds of actions a landowner must take to prepare for the next natural or civil disaster to afflict New York City.

Landlord Tenant Litigation: What Is a Casualty?

In 4261 Realty v. DB Real Estate, 2013 WL 4437198, Sandy substantially damaged the premises. 4261's major focus was on the adequacy of notice under '9 of the form lease prepared by the REBNY, which provides, “Destruction, Fire and Other Casualty ' If damaged by fire or other casualty ' Tenant shall give immediate notice thereof to Owner and lease shall continue in full force and effect except ' .” Although the notice the tenant provided did not conform to the lease requirement that it be sent “return receipt requested,” 4261 excused that deficiency and held the notice sufficient because the landlord actually received the notice and because of the exigent circumstances.'

The decision in 4261 , however, is in tension with Milltown Park v. American Felt & Filter Co. , 180 A.D.2d 235, decided long before Sandy, in which the court required the notice precisely as defined by the lease in spite of the tenant's claim that the landlord had actual knowledge.

The other focus in 4261 was the landlord's claim that the premises never became wholly unusable so as to trigger a rent abatement. The court denied summary judgment,' finding a triable issue of fact on whether the premises were rendered wholly unusable or merely prtially so.

In Maiden Lane Properties v. Just Salad Partners, NYLJ 1202598292879 at *1 (Civ Ct., NY Schecter), another case construing '9 of the REBNY lease, the tenant gave no '9 notice at all, but still claimed the benefits of its rent abatement allowances. The tenant's claim was entirely based on loss of electricity. Because the lease exculpated the landlord from responsibility for electricity, and made it the tenant's exclusive responsibility under the lease, the court dismissed the tenant's claim, rejecting the argument that because the landlord had supplied (via free-standing generators) electricity to its residential tenants, it should also have provided electricity to its commercial tenant, Just Salad.'

Constructive Eviction

In Just Salad, the tenant also claimed “constructive eviction.” The court in Just Salad did not even mention the constructive eviction claim, undoubtedly because fault on the part of the landlord, not mere happenstance, is essential to a constructive eviction claim. Mere happenstance is not fault. As the Court of Appeals wrote in Barash v. Pennsylvania Terminal Real Estate Corp. , 26 NY2d 77, “constructive eviction exists where, although there has been no physical expulsion or exclusion of the tenant, the landlord's wrongful acts substantially and materially deprive the tenant of the beneficial use and enjoyment of the premises.”'

Reasonable Preparation for Storm by Property Owner

While there have been no Sandy-related decisions on what a landlord should do to prepare for a storm, in one complaint, the tenant's theory was that the landlord was liable for neglecting to take supposedly reasonable precautions against flooding caused by Superstorm Sandy, such as window boarding and sandbagging. See Manfra, Tordella & Brookes, Inc. v. 90 Broad Owner, LLC, 2013 WL 373327.

Insurance Litigation

In Cashew Holdings, LLC v. Canopius U.S Insurance, Inc., 2013 WL 4735645, the only reported decision in Sandy-based insurance law, the Federal District Court denied the insured a preliminary injunction: 1) requiring payment on the insurance policy as a result of Superstorm Sandy; and 2) holding the insurance policy in place. The court cited lack of irreparable injury and a lack of likelihood of success, as the policy excluded damage due to flood or other causes linked to water. The decision was very much a battle of the experts as to whether plaintiff suffered its damages from the water or the wind. Since typically insurance policies cover for wind, but not for water, that determination is crucial. Because the decision in Cashew is on a preliminary' injunction, it does not ultimately determine for the case whether the theories of water or wind would eventually prevail.The court also found that the insurer was under no obligation to renew the insurance policy.

The lesson from this case is that the consumer or business should not only be extremely careful in selecting insurance policies, but should be prepared for vastly larger premiums in order to purchase more exotic policies once there is a recovery on insurance because of damage from a large scale storm.

Although Cashew is the only reported Sandy decision on the subject of insurance, an examination of reported complaints illustrates the kinds of issues we can expect to see in the aftermath of a major storm. For example, in Neptune Food Corporation v. Federal Insurance Company, 2013 WL 3423065, an insured sued for business losses caused by Superstorm Sandy. The controversy of the case centers around clauses in the insurance policy dealing with covered perils worsened by uncovered perils. Here, the covered peril is wind and the uncovered peril is water.'

In Bamundo v. Sentinel, NY County Index # 157622/2013, a law firm sought to collect on its loss of business insurance on the theory that its business was shut down by civil authorities who ordered transportation systems shut down and refused the employees of the firm access to their offices. The insurance companies disclaimed coverage, finding that it was not civil authority that shut down the business, but loss of electricity.'

In Lester Schwab v. Great Northern, NY County Index # 652708/2013, Newman Myers v. Great Northern, NY County Index # 151774/2013, and Shapiro v. National Fire, NY County Index # 650037/2013. various law firms allege that their respective insurance carrier breached their insurance policies. Each plaintiff entered into an insurance policy with each respective defendant, insuring the plaintiff against any loss of business income it may sustain and against any extra expenses it may incur as the result of a loss to the subject premises by a “covered peril.” In these three otherwise unrelated cases, the plaintiffs seek to recover for the loss of electricity on the theory that it was caused not by water, but by the explosion at the ConEd plant. Each insurer is claiming that the loss of electricity was due not to the explosion, but to the flooding that destroyed the electrical infrastructure.

Utilities

Utilities have always enjoyed special legal protections. This is no more evident than in Balacki v. Long Island Power Authority , 40 Misc.3d 1220, a small claims case in which the claimant sued for loss of food due to a lack of refrigeration from the extended loss of power in the aftermath of Superstorm Sandy. Although the court found clear evidence that the Power Authority was negligent, it dismissed the complaint, citing prevailing case law exempting a power utility from liability for loss of electricity if the published rates claim such an exemption for mere negligence, as opposed to gross negligence.

Conclusion

Although it is impossible to know precisely what the risks will be, attorneys drafting the necessary documents must use both the experience of the past and imaginings of the future to prepare for the worst. For the landlord, long-term preparation for a storm of any kind must include careful drafting of the lease so as to allocate the risks of the storm to the tenant. For the tenant that typically must accept most of the lease as written, the chief corresponding preparation is in getting appropriate insurance policies, covering both the costs of making physical repairs to the premises and the loss of business that can be occasioned by forces entirely exterior to the premises such as loss of electricity, Internet, or potable water.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Dov Treiman, a Partner in the firm, chairs its Landlord-Tenant Civil Litigation practice.'