Landlord & Tenant

Landlord Not Entitled to Lost Rent

Building Services Local 32 B-J Pension Fund v. 101 Limited Partnership

NYLJ 3/13/14, p. 23. col. 3

AppDiv, First Dept.

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

In an action by tenants for a declaratory judgment that they were not in default of the lease, landlord appealed from Supreme Court's dismissal of its counterclaim for delay damages and dissolution of an injunction bond posted by tenants. The Appellate Division modified to reinstate the bond, but otherwise affirmed, holding that landlord was not entitled to lost rent for the period during which it was required to make repairs because of tenant's failure to make repairs required by the terms of the lease.

Landlord had built a 24-story office building, which it leased to tenant on a net lease basis for 20 years beginning in 1991. Although tenant had options to renew the lease, tenant declined to extend the lease beyond its initial period, which ended in 2011. The lease required tenant, during the period of the lease, to replace building systems as they became obsolescent, and also required tenants to return the building to landlord in good repair at the expiration of the lease term. The lease also gave landlord the right to perform any obligations on which tenant defaulted.

In 2010, landlord notified tenant that it needed to replace allegedly obsolescent building systems. Tenant brought this action to establish that it was not in default. At tenant's behest, Supreme Court issued an injunction preventing landlord from interfering with tenant's possession, but requiring tenant to post a bond that would cover landlord's damages, including damages from future delay in renting the premises as a result of the need to replace building systems as the end of the lease term. Landlord subsequently counterclaimed for delay damages ' rent lost because of the need to make repairs after tenant surrendered the premises.S upreme Court dismissed the counterclaim, holding that a landlord cannot hold tenant liable for delay in ability to relet the premises.

In modifying, a divided Appellate Division agreed with Supreme Court that New York law does not permit a landlord to recover damages for lost rent when landlord has to make repairs that the lease required the tenant to make. In the majority's view, landlord may recover only the cost of making those repairs or the difference between the value of the premises with the improvement and absent the improvement. The majority did, however, conclude that a question of fact remained about whether any lost rent might be recovered from the injunction bond tenants had posted if landlord were ultimately to prove that tenant had breached its lease obligations. Justices Andrias and Friedman dissented, contending that if landlord were to prove breach, landlord would be entitled to recover all damages that were the foreseeable result of that breach.

COMMENT

When a tenant breaches a lease covenant requiring it to make repairs, the landlord may not recover for lost rent during the period during which repairs are made and the premises remain unleased. For example, the court in Charlebois v. Carisbrook Industries, I nc., 23 A.D.3d 821, held that tenant was not liable for rent as a holdover tenant when tenant made repairs to the premises over a period of four months following the conclusion of the lease. At the expiration of the lease, landlord noticed that tenant had not complied with the terms of a preventive maintenance program mandated by the lease. Only then did tenant make the r epairs, prompting landlord's action to recover rent from tenant as a holdover. Noting that landlord had provided no evidence that it had lost a sale or lease during this period, the court awarded summary judgment to tenant and dismissed the complaint. See also New York University v. Cliff Tower, LLC, 107 A.D.3d 649 (holding that landlord was not entitled to lost rent based on a breach of a repair covenant where the lease did not provide for additional rent beyond the term of the lease); Arnot Realty Corp. v. New York Telephone Co., 245 A.D.2d 780 (same).

When a lease requires the tenant to restore the premises to their condition at the inception of the lease, courts generally bar landlord from recovering more than the cost of making the minimum repairs necessary to restore the premises, even if a reasonable landlord would make more extensive repairs. For example, in Centre Great Neck Co. v. Penn Encord, Inc., 276 A.D.2d 735, the court limited landlord's damages to the cost of patching a damaged roof when tenant breached a lease covenant to maintain the premises in “good condition” and to surrender the premises in the same condition as at the commencement of the lease. The court rejected landlord's request for damages measured by the cost of installing a new roof and a new sump-pump system.

Failure to Maintain Franchise Constitutes Breach of Lease

12 Broadway Realty, LLC v. Lakhani Enterprises

NYLJ 3/17/14, p. 18, col. 4

AppDiv, First Dept.

(memorandum opinion)

In landlord's action for breach of a lease, tenant's assignor appealed from Supreme Court's denial of its summary judgment motion on his claim under a guaranty by tenant's principal. The Appellate Division reversed and granted the summary judgment motion, holding that tenant breached the lease by failing to maintain a Quiznos franchise on the premises.

The 2004 lease provided that the tenant “shall use and occupy the demised [premises] for a [Quiznos] sandwich shop,” and a rider authorized the display of Quiznos signage on the premises. The original tenant, WRS, assigned the lease to Lakhani Enterprises in 2008. Lakhani Enterprises also purchased all of the assets of WRS, and the asset purchase agreement specified that Lakhani Enterprises would use its best efforts to become a Quiznos franchisee. Finally, Lakhani Enterprises' principal, Lakhani, executed a guarantee to the principal of WRS, Simpson, conditioned on breach of the lease. Lakhani Enterprises subsequently lost its Quiznos franchise, prompting an action by landlord and a third party complaint by Simpson seeking to recover from Lakhani on the guarantee. Supreme Court denied Simpson's summary judgment motion, and Simpson appealed.

In reversing and granting the summary judgmentmotion, the Appellate Division relied on the plain language of the lease to hold that tenant had breached the lease by failing to maintain a Quiznos franchise. Because tenant breached the lease, assignor's principal was entitled to summary judgment on its claim under the guaranty.

COMMENT

New York case law is sparse on what lease language is sufficient for a landlord to hold a tenant in breach for losing a franchise. In the only case directly on point, E-Z Eating 41 Corp. v. H.E. Newport L.L.C., 84 A.D.3d 401, the court held that tenant's action for a declaration that it did not breach its lease agreement by losing its Burger King franchise was moot because the period to cure tenant's alleged default under the lease had expired and tenant had already vacated the premises. The lease agreement provided that “tenant shall operate its business ' solely as a restaurant with table-seating operated under the name and style of 'Burger King' ' and for no other purpose.” Id. at 402. Though the dissent believed later lease provisions created ambiguity as to the permissibility of other uses, the majority did not examine the language and was explicit that its decision was not reached on the merits. Id. at 401 .

Outside the franchise context, if a tenant covenants to operate the premises as a particular type of business and is later forced to close for business reasons, courts are hesitant to hold tenant in breach so long as tenant continues to pay rent. Thus, in Fay's Drug Co., Inc. v. Geneva Plaza Assn., 98 A.D.2d 978, the court held that where tenant ceased doing business on the premises, but continued to pay rent, tenant did not breach its covenant to operate the premises as a drug store. Id. at 978. The lease stipulated that “Tenant covenants and agrees to use the demised premises as a drug store, to be conducted similarly to the Key Drug Stores operated by Tenant, and agrees not to use or permit the premises to be used for any other purpose.” Id. Tenant had closed its doors and was no longer operating its drug store, but the lease, which the court found unambiguous, contained no continuous use provision. Id. The court observed that the premises in question were the smallest of three stores in landlord's shopping center and did not appear to serve as a magnet for the other tenants. Id. at 979.

Even where a lease agreement clearly and unambiguously requires continuous use, courts may, for administrative reasons, decline to enjoin rent-paying tenants from ceasing operations on the premises. This holds true even where closure is likely to bring about negative externalities. See, e.g., Grossman v. Wegman's Food Mkts., 43 A.D.2d 813 (Though tenant's closure of its unprofitable grocery store was likely to hurt other tenants, landlord could not invoke continuous use clause where grocery store continued to pay rent.); Price v. Herman, 81 N.Y.S.2d 361, aff'd 275 A.D. 675 (Though tenant bakery's cessation of operations in violation of a continuous use clause in its lease agreement threatened landlord's right to use the premises for a valid, non-conforming use in the future, no injunction was warranted where tenant continued paying substantial rent.). The courts in both Grossman and Price c onceded that tenants had violated the express terms in their leases, but explained that requiring a rent-paying tenant to remain open would necessitate long-term, continuous supervision, making judicial oversight impractical. 43 A.D.2d at 813; 81 N.Y.S.2d at 362.

Questions of Fact Preclude Summary Judgment

New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp.

NYLJ 3/24/14, p. 26, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In tenant's action for breach of a lease and for specific performance of a right of first refusal, both parties appealed from Supreme Court's denial of their respective summary judgment motions. The Appellate Division affirmed, holding that questions of fact remained about whether landlord had breached its contract by offering the property for sale to a third party.

In 1981, tenant leased the property from landlord. In 1986, tenant entered into a new lease for additional space. The new lease gave tenant a right of first refusal “[i]n the event of a sale of this property.” In 2000, landlord transferred title to a new entity in which it retained a controlling interest. Tenant then brought this action for breach and specific performance. In an earlier stage of the litigation, the Appellate Division held that because landlord retained a controlling interest in the transferee, the transfer was not the equivalent of an outright sale. The court also held that tenant might be able to establish that landlord made the transfer in bad faith in order to preclude tenant from acquiring the property. During further discovery, tenant learned of a previous contract of sale to an entity not controlled by landlord. Tenant contended that this earlier contract triggered its first refusal right, and that landlord had, in violation of the lease, provided tenant with no notice of the contract. Both parties moved for summary judgment, and Supreme Court denied both motions.

In affirming, the Appellate Division held that triable issues of fact remained about whether landlord actually offered the property for sale to the contract vendee of the earlier contract, or whether that contract was merely a “placeholder” for the subsequent contract to the entity controlled by landlord. The court also concluded that questions of fact remained about whether tenant was ready, willing, and able to purchase the property.

Loft Premises

73 Tribeca LLC v. Greenbaum

NYLJ 3/11/14, p. 22, col. 1

AppTerm, First Dept.

(memorandum opinion)

In landlord's holdover proceeding, tenant appealed from Civil Court's award of judgment to landlord. The Appellate Term reversed and dismissed the petition, holding that landlord had not adequately established that the loft premises had been deregulated as a result of a prior landlord's constructive purchase of fixtures from the prior tenant.

Prior tenant, Seery, left the loft premises in 1987, but his roommate, McFadden, remained in possession. When Seery departed, he left fixtures in the apartment. Seery's 1980 lease provided that upon its termination, he was entitled to $2,000 from prior landlord, apparently to cover the value of the fixtures. The trial court in this proceeding to evict a subsequent tenant held that upon Seery's departure, landlord had “constructively purchased” Seery's fixtures in return for unpaid rent by Seery, resulting in deregulation of the loft apartment. The trial court also concluded that landlord's purchase of fixtures from McFadden when he left in 1990 would have resulted in deregulation. Current tenant appealed from these determinations, contending that landlord had not established that the loft unit is o longer subject to regulation under Article 7-C of the Loft Law.

In reversing, the Appellate Term concluded that landlord had not proved that Seery abandoned with rent unpaid in an amount in excess of the value of the fixtures left in the apartment. The court emphasized that absence of evidence of value of the fixtures, and concluded that the “amorphous” language in the 1980 lease was insufficient to fill that gap. The court also noted that landlord could not rely on purchase of McFadden's fixtures because landlord had not advanced purchase of those fixtures as a reason for termination. As a result, the court dismissed the petition.

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Landlord Not Entitled to Lost Rent

Building Services Local 32 B-J Pension Fund v. 101 Limited Partnership

NYLJ 3/13/14, p. 23. col. 3

AppDiv, First Dept.

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

In an action by tenants for a declaratory judgment that they were not in default of the lease, landlord appealed from Supreme Court's dismissal of its counterclaim for delay damages and dissolution of an injunction bond posted by tenants. The Appellate Division modified to reinstate the bond, but otherwise affirmed, holding that landlord was not entitled to lost rent for the period during which it was required to make repairs because of tenant's failure to make repairs required by the terms of the lease.

Landlord had built a 24-story office building, which it leased to tenant on a net lease basis for 20 years beginning in 1991. Although tenant had options to renew the lease, tenant declined to extend the lease beyond its initial period, which ended in 2011. The lease required tenant, during the period of the lease, to replace building systems as they became obsolescent, and also required tenants to return the building to landlord in good repair at the expiration of the lease term. The lease also gave landlord the right to perform any obligations on which tenant defaulted.

In 2010, landlord notified tenant that it needed to replace allegedly obsolescent building systems. Tenant brought this action to establish that it was not in default. At tenant's behest, Supreme Court issued an injunction preventing landlord from interfering with tenant's possession, but requiring tenant to post a bond that would cover landlord's damages, including damages from future delay in renting the premises as a result of the need to replace building systems as the end of the lease term. Landlord subsequently counterclaimed for delay damages ' rent lost because of the need to make repairs after tenant surrendered the premises.S upreme Court dismissed the counterclaim, holding that a landlord cannot hold tenant liable for delay in ability to relet the premises.

In modifying, a divided Appellate Division agreed with Supreme Court that New York law does not permit a landlord to recover damages for lost rent when landlord has to make repairs that the lease required the tenant to make. In the majority's view, landlord may recover only the cost of making those repairs or the difference between the value of the premises with the improvement and absent the improvement. The majority did, however, conclude that a question of fact remained about whether any lost rent might be recovered from the injunction bond tenants had posted if landlord were ultimately to prove that tenant had breached its lease obligations. Justices Andrias and Friedman dissented, contending that if landlord were to prove breach, landlord would be entitled to recover all damages that were the foreseeable result of that breach.

COMMENT

When a tenant breaches a lease covenant requiring it to make repairs, the landlord may not recover for lost rent during the period during which repairs are made and the premises remain unleased. For example, the court in Charlebois v. Carisbrook Industries, I nc., 23 A.D.3d 821, held that tenant was not liable for rent as a holdover tenant when tenant made repairs to the premises over a period of four months following the conclusion of the lease. At the expiration of the lease, landlord noticed that tenant had not complied with the terms of a preventive maintenance program mandated by the lease. Only then did tenant make the r epairs, prompting landlord's action to recover rent from tenant as a holdover. Noting that landlord had provided no evidence that it had lost a sale or lease during this period, the court awarded summary judgment to tenant and dismissed the complaint. See also New York University v. Cliff Tower, LLC, 107 A.D.3d 649 (holding that landlord was not entitled to lost rent based on a breach of a repair covenant where the lease did not provide for additional rent beyond the term of the lease); Arnot Realty Corp. v. New York Telephone Co., 245 A.D.2d 780 (same).

When a lease requires the tenant to restore the premises to their condition at the inception of the lease, courts generally bar landlord from recovering more than the cost of making the minimum repairs necessary to restore the premises, even if a reasonable landlord would make more extensive repairs. For example, in Centre Great Neck Co. v. Penn Encord, Inc., 276 A.D.2d 735, the court limited landlord's damages to the cost of patching a damaged roof when tenant breached a lease covenant to maintain the premises in “good condition” and to surrender the premises in the same condition as at the commencement of the lease. The court rejected landlord's request for damages measured by the cost of installing a new roof and a new sump-pump system.

Failure to Maintain Franchise Constitutes Breach of Lease

12 Broadway Realty, LLC v. Lakhani Enterprises

NYLJ 3/17/14, p. 18, col. 4

AppDiv, First Dept.

(memorandum opinion)

In landlord's action for breach of a lease, tenant's assignor appealed from Supreme Court's denial of its summary judgment motion on his claim under a guaranty by tenant's principal. The Appellate Division reversed and granted the summary judgment motion, holding that tenant breached the lease by failing to maintain a Quiznos franchise on the premises.

The 2004 lease provided that the tenant “shall use and occupy the demised [premises] for a [Quiznos] sandwich shop,” and a rider authorized the display of Quiznos signage on the premises. The original tenant, WRS, assigned the lease to Lakhani Enterprises in 2008. Lakhani Enterprises also purchased all of the assets of WRS, and the asset purchase agreement specified that Lakhani Enterprises would use its best efforts to become a Quiznos franchisee. Finally, Lakhani Enterprises' principal, Lakhani, executed a guarantee to the principal of WRS, Simpson, conditioned on breach of the lease. Lakhani Enterprises subsequently lost its Quiznos franchise, prompting an action by landlord and a third party complaint by Simpson seeking to recover from Lakhani on the guarantee. Supreme Court denied Simpson's summary judgment motion, and Simpson appealed.

In reversing and granting the summary judgmentmotion, the Appellate Division relied on the plain language of the lease to hold that tenant had breached the lease by failing to maintain a Quiznos franchise. Because tenant breached the lease, assignor's principal was entitled to summary judgment on its claim under the guaranty.

COMMENT

New York case law is sparse on what lease language is sufficient for a landlord to hold a tenant in breach for losing a franchise. In the only case directly on point, E-Z Eating 41 Corp. v. H.E. Newport L.L.C., 84 A.D.3d 401, the court held that tenant's action for a declaration that it did not breach its lease agreement by losing its Burger King franchise was moot because the period to cure tenant's alleged default under the lease had expired and tenant had already vacated the premises. The lease agreement provided that “tenant shall operate its business ' solely as a restaurant with table-seating operated under the name and style of 'Burger King' ' and for no other purpose.” Id. at 402. Though the dissent believed later lease provisions created ambiguity as to the permissibility of other uses, the majority did not examine the language and was explicit that its decision was not reached on the merits. Id. at 401 .

Outside the franchise context, if a tenant covenants to operate the premises as a particular type of business and is later forced to close for business reasons, courts are hesitant to hold tenant in breach so long as tenant continues to pay rent. Thus, in Fay's Drug Co., Inc. v. Geneva Plaza Assn., 98 A.D.2d 978, the court held that where tenant ceased doing business on the premises, but continued to pay rent, tenant did not breach its covenant to operate the premises as a drug store. Id. at 978. The lease stipulated that “Tenant covenants and agrees to use the demised premises as a drug store, to be conducted similarly to the Key Drug Stores operated by Tenant, and agrees not to use or permit the premises to be used for any other purpose.” Id. Tenant had closed its doors and was no longer operating its drug store, but the lease, which the court found unambiguous, contained no continuous use provision. Id. The court observed that the premises in question were the smallest of three stores in landlord's shopping center and did not appear to serve as a magnet for the other tenants. Id. at 979.

Even where a lease agreement clearly and unambiguously requires continuous use, courts may, for administrative reasons, decline to enjoin rent-paying tenants from ceasing operations on the premises. This holds true even where closure is likely to bring about negative externalities. See, e.g., Grossman v. Wegman's Food Mkts., 43 A.D.2d 813 (Though tenant's closure of its unprofitable grocery store was likely to hurt other tenants, landlord could not invoke continuous use clause where grocery store continued to pay rent.); Price v. Herman, 81 N.Y.S.2d 361, aff'd 275 A.D. 675 (Though tenant bakery's cessation of operations in violation of a continuous use clause in its lease agreement threatened landlord's right to use the premises for a valid, non-conforming use in the future, no injunction was warranted where tenant continued paying substantial rent.). The courts in both Grossman and Price c onceded that tenants had violated the express terms in their leases, but explained that requiring a rent-paying tenant to remain open would necessitate long-term, continuous supervision, making judicial oversight impractical. 43 A.D.2d at 813; 81 N.Y.S.2d at 362.

Questions of Fact Preclude Summary Judgment

New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp.

NYLJ 3/24/14, p. 26, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In tenant's action for breach of a lease and for specific performance of a right of first refusal, both parties appealed from Supreme Court's denial of their respective summary judgment motions. The Appellate Division affirmed, holding that questions of fact remained about whether landlord had breached its contract by offering the property for sale to a third party.

In 1981, tenant leased the property from landlord. In 1986, tenant entered into a new lease for additional space. The new lease gave tenant a right of first refusal “[i]n the event of a sale of this property.” In 2000, landlord transferred title to a new entity in which it retained a controlling interest. Tenant then brought this action for breach and specific performance. In an earlier stage of the litigation, the Appellate Division held that because landlord retained a controlling interest in the transferee, the transfer was not the equivalent of an outright sale. The court also held that tenant might be able to establish that landlord made the transfer in bad faith in order to preclude tenant from acquiring the property. During further discovery, tenant learned of a previous contract of sale to an entity not controlled by landlord. Tenant contended that this earlier contract triggered its first refusal right, and that landlord had, in violation of the lease, provided tenant with no notice of the contract. Both parties moved for summary judgment, and Supreme Court denied both motions.

In affirming, the Appellate Division held that triable issues of fact remained about whether landlord actually offered the property for sale to the contract vendee of the earlier contract, or whether that contract was merely a “placeholder” for the subsequent contract to the entity controlled by landlord. The court also concluded that questions of fact remained about whether tenant was ready, willing, and able to purchase the property.

Loft Premises

73 Tribeca LLC v. Greenbaum

NYLJ 3/11/14, p. 22, col. 1

AppTerm, First Dept.

(memorandum opinion)

In landlord's holdover proceeding, tenant appealed from Civil Court's award of judgment to landlord. The Appellate Term reversed and dismissed the petition, holding that landlord had not adequately established that the loft premises had been deregulated as a result of a prior landlord's constructive purchase of fixtures from the prior tenant.

Prior tenant, Seery, left the loft premises in 1987, but his roommate, McFadden, remained in possession. When Seery departed, he left fixtures in the apartment. Seery's 1980 lease provided that upon its termination, he was entitled to $2,000 from prior landlord, apparently to cover the value of the fixtures. The trial court in this proceeding to evict a subsequent tenant held that upon Seery's departure, landlord had “constructively purchased” Seery's fixtures in return for unpaid rent by Seery, resulting in deregulation of the loft apartment. The trial court also concluded that landlord's purchase of fixtures from McFadden when he left in 1990 would have resulted in deregulation. Current tenant appealed from these determinations, contending that landlord had not established that the loft unit is o longer subject to regulation under Article 7-C of the Loft Law.

In reversing, the Appellate Term concluded that landlord had not proved that Seery abandoned with rent unpaid in an amount in excess of the value of the fixtures left in the apartment. The court emphasized that absence of evidence of value of the fixtures, and concluded that the “amorphous” language in the 1980 lease was insufficient to fill that gap. The court also noted that landlord could not rely on purchase of McFadden's fixtures because landlord had not advanced purchase of those fixtures as a reason for termination. As a result, the court dismissed the petition.

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