Landlord & Tenant

Landlord Interferes with Tenant's Efforts to Find'a Substitute Tenant

230 Park Avenue Hold. Co. v. Kurzman Karelson& Frank, LLP

NYLJ 1/22/15, p. 22, col. 3

AppDiv, First Dept.

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

In commercial landlord's action for rent and attorneys' fees, landlord appealed from Supreme Court's denial of its motion for summary judgment dismissing tenant's affirmative defense that landlord had breached a stipulation of settlement. A divided Appellate Division affirmed, holding that questions of fact remained about whether landlord interfered with tenant's efforts to find a substitute tenant who would mitigate tenant's liability for future rent.

The parties' lease was due to expire on Dec. 31, 2012. Landlord brought a summary proceeding to remove tenant in 2011, and that proceeding was resolved by a stipulation of settlement under the terms of which tenant consented to entry of a final judgment of possession in favor of landlord and immediate issuance of a warrant of eviction, with execution to be stayed until Sept. 1, 2011. The stipulation required tenant to vacate by Aug. 31, 2011, and tenant complied with that provision. The stipulation also prohibited tenant from subletting or assigning its rights under the lease, while providing that tenant is not prohibited “from locating and/or offering [landlord] a potential Tenant for the premises.” Tenant then retained a broker to list the property for sublease.

On Sept. 15, 2011, landlord's managing agent asked tenant to remove the sublease listing. When landlord brought this action for rent, tenant asserted as an affirmative defense landlord's alleged breach of the stipulation by interfering with tenant's ability to locate a substitute tenant.Landlord sought summary judgment dismissing the affirmative defense, but Supreme Court denied the motion. Landlord appealed.

In affirming, the Appellate Division majority relied on the stipulation's language permitting tenant to locate and/or offer landlord a potential tenant. The majority concluded that this language was designed to give tenant the opportunity to cover all or some of the damages resulting from tenant's breach of the lease, and held that tenant had raised issues of fact about whether landlord, by seeking removal of the sublease listing, had breached the stipulation.

The dissenting justices, by contrast, rejected tenant's argument that the stipulation imposed on landlord an obligation to mitigate damages. The dissenters argued that although the stipulation did not prohibit tenants from locating substitute tenants, the stipulation did not provide tenants with a right to provide substitute tenants. Moreover, the dissenters emphasized that once tenant had relinquished its right to possession on Aug. 31, 2011, it no longer had the right to sublet the premises, so landlord's subsequent request to remove the sublease listing could not have interfered with tenant's right to sublet.

COMMENT

When a commercial lease prohibits subletting or assigning without landlord's consent, a landlord may refuse consent to a potential sublease or assignment for any or no reason, unless the lease requires landlord to be reasonable in withholding consent to the sublease. In Herlou Card Shop, Inc. v. Prudential Ins. of America, 73 A.D.2d 562, 562 the court reversed a judgment for tenant who had obtained a damage award for economic duress when landlord refused consent to an assignment of the lease unless tenant agreed to modify the lease to increase the rent. The court entered judgment for the landlord, holding that “[s]uch an exercise of the landlord's legal rights does not constitute economic duress so as to entitle the tenant to damages.”

When a commercial lease provides that a landlord may not unreasonably withhold consent to a sublease, landlord's refusal to consent to a reasonable subtenant does not excuse tenant from its obligations under the lease, but does entitle tenant to recover damages in an action against landlord or a on a counterclaim in landlord's later action for rent. In 601 West 26 Corp. v. John Wiley & Sons, Inc., 32 A.D.2d 522 the court held that landlord was entitled to partial summary judgment in its action for rent against a tenant who had alleged that landlord had acted unreasonably in withholding consent to a sublease, because landlord's reach did not justify tenant's abandonment or refusal to pay rent. The court indicated, however, that execution of the judgment should be stayed with respect to the amount of rhe rent reserved in tenant's proposed sublease, pending trial on whether landlord had acted unreasonably.

The majority in 230 Park Avenue appears to be reading the language of the stipulation as imposing on the landlord an obligation to be reasonable in considering a potential sublease, requiring trial on whether landlord had interfered with tenant's effort to sublet, and on what damages would be recoverable if landlord did interfere.

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Landlord Interferes with Tenant's Efforts to Find'a Substitute Tenant

230 Park Avenue Hold. Co. v. Kurzman Karelson& Frank, LLP

NYLJ 1/22/15, p. 22, col. 3

AppDiv, First Dept.

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

In commercial landlord's action for rent and attorneys' fees, landlord appealed from Supreme Court's denial of its motion for summary judgment dismissing tenant's affirmative defense that landlord had breached a stipulation of settlement. A divided Appellate Division affirmed, holding that questions of fact remained about whether landlord interfered with tenant's efforts to find a substitute tenant who would mitigate tenant's liability for future rent.

The parties' lease was due to expire on Dec. 31, 2012. Landlord brought a summary proceeding to remove tenant in 2011, and that proceeding was resolved by a stipulation of settlement under the terms of which tenant consented to entry of a final judgment of possession in favor of landlord and immediate issuance of a warrant of eviction, with execution to be stayed until Sept. 1, 2011. The stipulation required tenant to vacate by Aug. 31, 2011, and tenant complied with that provision. The stipulation also prohibited tenant from subletting or assigning its rights under the lease, while providing that tenant is not prohibited “from locating and/or offering [landlord] a potential Tenant for the premises.” Tenant then retained a broker to list the property for sublease.

On Sept. 15, 2011, landlord's managing agent asked tenant to remove the sublease listing. When landlord brought this action for rent, tenant asserted as an affirmative defense landlord's alleged breach of the stipulation by interfering with tenant's ability to locate a substitute tenant.Landlord sought summary judgment dismissing the affirmative defense, but Supreme Court denied the motion. Landlord appealed.

In affirming, the Appellate Division majority relied on the stipulation's language permitting tenant to locate and/or offer landlord a potential tenant. The majority concluded that this language was designed to give tenant the opportunity to cover all or some of the damages resulting from tenant's breach of the lease, and held that tenant had raised issues of fact about whether landlord, by seeking removal of the sublease listing, had breached the stipulation.

The dissenting justices, by contrast, rejected tenant's argument that the stipulation imposed on landlord an obligation to mitigate damages. The dissenters argued that although the stipulation did not prohibit tenants from locating substitute tenants, the stipulation did not provide tenants with a right to provide substitute tenants. Moreover, the dissenters emphasized that once tenant had relinquished its right to possession on Aug. 31, 2011, it no longer had the right to sublet the premises, so landlord's subsequent request to remove the sublease listing could not have interfered with tenant's right to sublet.

COMMENT

When a commercial lease prohibits subletting or assigning without landlord's consent, a landlord may refuse consent to a potential sublease or assignment for any or no reason, unless the lease requires landlord to be reasonable in withholding consent to the sublease. In Herlou Card Shop, Inc. v. Prudential Ins. of America, 73 A.D.2d 562, 562 the court reversed a judgment for tenant who had obtained a damage award for economic duress when landlord refused consent to an assignment of the lease unless tenant agreed to modify the lease to increase the rent. The court entered judgment for the landlord, holding that “[s]uch an exercise of the landlord's legal rights does not constitute economic duress so as to entitle the tenant to damages.”

When a commercial lease provides that a landlord may not unreasonably withhold consent to a sublease, landlord's refusal to consent to a reasonable subtenant does not excuse tenant from its obligations under the lease, but does entitle tenant to recover damages in an action against landlord or a on a counterclaim in landlord's later action for rent. In 601 West 26 Corp. v. John Wiley & Sons, Inc., 32 A.D.2d 522 the court held that landlord was entitled to partial summary judgment in its action for rent against a tenant who had alleged that landlord had acted unreasonably in withholding consent to a sublease, because landlord's reach did not justify tenant's abandonment or refusal to pay rent. The court indicated, however, that execution of the judgment should be stayed with respect to the amount of rhe rent reserved in tenant's proposed sublease, pending trial on whether landlord had acted unreasonably.

The majority in 230 Park Avenue appears to be reading the language of the stipulation as imposing on the landlord an obligation to be reasonable in considering a potential sublease, requiring trial on whether landlord had interfered with tenant's effort to sublet, and on what damages would be recoverable if landlord did interfere.

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