Landlord & Tenant

U.S. Dist. Ct, SDNY

(Engelmayer, J.)

In landlord's action for $2 million in past-due rent, corporate tenant's principals moved for discovery. The court denied the motion, holding that tenant could not prevail on a constructive eviction theory even if discovery revealed that landlord had interfered with tenant's enjoyment of the premises.

When landlord's predecessor leased the subject premises to corporate tenant, tenant's principals executed a limited guarantee of all covenants in the lease. After corporate tenant's default on rent and real estate taxes, landlord brought this action to recover on the guarantee. Tenant resisted, contending that landlord breached by posting “Retail Space Available” signs in the storefront, leading creditors to believe that tenant was out of business, and also by inviting brokers and prospective tenants into the premises, creating traffic that drove away tenant's customers, many of whom allegedly came to buy X-rated DVDs. Tenant contended that landlord's breaches of its covenant of good faith and fair dealing excused tenant from payment of rent, and therefore excused tenant's principals from liability on their guarantee. Tenant sought discovery to substantiate these claims. In particular, tenant sought testimony from the property manager, and sought the identify of companies and brokers landlord used for leasing the premises, and agents who communicated with those companies or brokers.

In denying the discovery motion, the court emphasized that even if landlord had breached, the breach did not constitute actual or constructive eviction, and therefore did not excuse tenant from payment of rent. The court noted that there could be no actual eviction in the absence of physical expulsion or exclusion from the premises. The court then turned to constructive eviction, and emphasized that a tenant cannot claim constructive eviction while remaining in possession of the premises. Because tenant never left, it could not assert constructive eviction. Moreover the lease expressly provided that tenant would not be entitled to any abatement or setoff against the rent in case of interference with use by a private person or corporation, and that the tenant's obligation to pay rent would be an independent covenant for which tenant should be liable in any event. The court also noted that the acts alleged by tenant's principals were too minor to have constituted constructive eviction even if tenant had decided to leave the premises. As a result, tenant was not entitled to discovery.

COMMENT

Where a commercial lease provides that a tenant's rent obligation and a landlord's obligations are independent covenants, courts generally bar a tenant that remains in possession from asserting that landlord's breach fully excused tenant's rent obligation. By contrast, unless a lease provision bars counterclaims, when landlord brings a nonpayment proceeding, courts do permit an in-possession tenant to counterclaim for damages that would partially offset tenant's rent obligation. In Thomson-Houston Electric Co. v. Durant Land Imp. Co., 144 N.Y. 34, the Court of Appeals allowed commercial tenant's counterclaim for landlord's failure to repair the building's walls in landlord's nonpayment action. The court rejected landlord's argument that tenant's possession of the building barred tenant's breach-of-lease counterclaims. At the same time, the court concluded that landlord's alleged breach would not excuse tenant from paying all rent noting that actual or constructive eviction claims require tenants to abandon possession. More recently, the First Department reaffirmed that a commercial landlord's breach of an independent covenant fails to relieve tenant from the duty to pay rent. In Universal Communications Network, Inc. v. 229 West 28th Owner, LLC, 85 A.D.3d 668, the court held that commercial tenant's rent obligation was an independent covenant and thus landlord's alleged interference with tenant's construction failed to excuse the rent obligation.

Courts generally uphold lease provisions precluding commercial tenants from raising counterclaims in nonpayment summary proceedings. Thus, a commercial tenant that agrees to a “no counterclaim” lease provision must generally bring a separate action to recover damages for the landlord's breach. For instance, in Mid-Island Shopping Plaza, Co. v. Cutler, 112 A.D.2d 405, the Second Department held that res judicata did not bar tenant's claim for damages, despite tenant's default in landlord's earlier summary nonpayment proceeding. The court emphasized that the “no counterclaim” provision in the lease would have precluded tenant from raising that claim in the nonpayment proceeding.

Despite the general enforceability of “no-counterclaim” commercial lease provisions, at least one New York court has allowed a tenant's counterclaim for constructive eviction in a landlord's nonpayment summary proceeding. In Ring v. Arts Intern., Inc., 7 Misc.3d 869, the court, where the commercial lease included a “no counterclaim” provision,(1) allowed in-possession tenant's constructive eviction counterclaim seeking a rent abatementbecause the court found the claim “inextricably intertwined” with landlord's claim, without acknowledging the general rule that constructive eviction claims require tenants to abandon possession. At the same time, the court dismissed tenant's counterclaims for landlord's breach of lease as not “inextricably intertwined” with landlord's claim. The court recognized the general rule that “no counterclaim” provisions are enforceable in nonpayment summary proceedings. But the court found an exception: In residential cases, courts sometimes permit a tenant's counterclaims that are “inextricably intertwined” with a landlord's claim even where the lease provides a “no counterclaim” provision. Without citing a case where the “inextricably intertwined” exception was applied in a commercial context, the court stated that actual or constructive eviction is “[t]he principal example of a counterclaim within [the 'inextricably intertwined'] exception in a commercial nonpayment proceeding.” In contrast, the court found that tenant's breach-of-lease counterclaim was not “inextricably intertwined” with landlord's nonpayment claim because calculating the necessary repair costs was unrelated to tenant's rental obligation ' tenant could separately litigate the repair costs without duplicating the issues raised in the nonpayment claim.

'

Horizontal Multiple Dwelling

Matter of Kobrick v. DHCR

NYLJ 3/23/15, p. 20, col. 6

AppDiv, First Dept.

(memorandum opinion)

In tenant's article 78 proceeding challenging DHCR's determination that his apartment is not subject to rent stabilization, tenant appealed from Supreme Court's denial of the petition and dismissal of the proceeding. The Appellate Division affirmed, concluding that DHCR had rationally concluded that tenant's building is not part of a horizontal multiple dwelling.

Since 1969, the building in which tenant resides and the adjacent building have shared common ownership and management, and have shared a common heating system. Based on those facts, tenant sought a determination that the buildings constituted a horizontal multiple dwelling, which would have subjected tenant's apartment to rent stabilization. DHCR rejected tenant's contentions, relying on evidence that the buildings were built separately, conveyed under separate deeds, and have separate block and lot numbers. DHCR also noted that the buildings did not share a common design and did not share common walls. Tenant then brought this article 78 proceeding.

In holding that Supreme Court had properly denied the petition, the Appellate Division emphasized that DHCR had followed proper procedures, and was not required to hold a hearing. DHCR had properly based its decision on the inspection and the parties' written submissions.

'

Guarantor Liable

136 Field Holding Co LLC v. Invar International Holding, Inc.

NYLJ 3/26/15

U.S. Dist. Ct., SDNY

(Woods, J.)

In landlord's action on a guarantee, landlord sought summary judgment. The court granted the motion, holding that guarantor was liable under the absolute guarantee without regard to tenants' liability for the underlying obligation.

Tenant Razinsky held an option to acquire the subject property, a waterfront property in Greenwich, CT. Razinski transferred that option to landlord under a master agreement that required landlord to pay tenant more than $2.5 million, to be used in part to benefit Invar, a corporation wholly owned by Razinski and his family. The master agreement contemplated a lease between landlord and tenants, Razinski and his wife. The parties entered into a residential lease for a term to end on June 30, 2013, subject to a six-month extension. The lease also provided that if tenants held over past the end of the term, tenant would waive any holdover right and agree to make a holdover payment of $1 million. Invar, tenants' corporation, “absolutely, unconditionally and irrevocably” guaranteed “the full complete and timely payment” of tenants' obligations “without regard to the validity, regularity, or enforceability of the Transaction Documents.” Tenants held over past the expiration of the lease term, and still occupy the mansion. Tenants are litigating, in state court, the enforceability of the holdover payment provision. Meanwhile, landlord brought this federal proceeding against Invar, seeking to recover on Invar's guaranty.

In awarding summary judgment to landlord, the court rejected Invar's argument that the guaranty did not contain an express waiver of Invar's right to assert defenses. The court found no authority for the proposition that a waiver is necessary before a guarantor waives defenses to performance under the primary obligation. The court relied on the language obligating guarantor to pay “without regard to the ' enforceability” of the primary obligation. The court also emphasized that the Razinskis, Invar's principals, had represented that they were sophisticated parties with significant resources.

COMMENT

A liquidated damages clause covering holdover by a tenant is enforceable unless it does not reasonably reflect, at the time of drafting, the foreseeable rent increase at the end of the contract term or if the liquidated damages are grossly disproportionate to the actual rents collected by landlord after the holdover ends. In Thirty-Third Equities Co. LLC v. Americo Grp., Inc., 7 43 N.Y.S.2d 10, the court enforced liquidated damages against a holdover in an amount equivalent to 250% of the contract monthly rent because first, there was no evidence that the projected increase was unreasonable when drafted, and second, the subsequent tenant's rent was approximately the same as the liquidated damages amount. However, in In re T.R. Acquisition Corp., 309 B.R. 830, the court invalidated a liquidated damages clause providing for payment of double the annual rent, where the tenant's holdover was for more than one year, because it did not reflect foreseeable or actual damages. Actual damages in such a case is the market rent that could have been collected during the holdover, less any rents actually collected from the tenant during that time. In T.R. Acquisition, the landlord brought an action to collect on a $280,000 liquidated damages clause, where the annual rent under the lease was $140,000. This was because the holdover tenant had continued to pay the lease rent throughout the holdover period, and the premises were then rented to a subsequent tenant, with an annual rent of $130,000. The court found that the clause was unenforceable because the liquidated damages were grossly disproportionate to the actual damages: the market rent that could have been collected during the holdover The court did not address whether the liquidated damages clause was a reasonable reflection of foreseeable damages at the time of drafting .

Although the precise issue has not arisen in the landlord-tenant context, in other contexts, courts have held guarantors liable on an absolute and unconditional guarantee even when the principal is not liable on the underlying obligation. In Acadia Woods Partners, LLC v. Signal Lake Fund LP, 102 A.D.3d 522, the court upheld a grant of summary judgment against a guarantor because the guarantor had waived all defenses, including that the underlying agreement was unenforceable, by signing an unconditional guarantee that expressly disclaimed any defenses on the ground of unenforceability. Additionally, the court reasoned that liability on a guaranty is completely separate from liability of the principal debtor “given that the guaranty is a separate undertaking and a self-standing document.” Similarly, in Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, the court expressly held that an absolute and unconditional guarantee was a waiver of all defenses, even absent express disclaimers of specific defenses.

'

Force Majeure Clause

Beardslee v. Inflection Energy, LLC

NYLJ 4/1/15, p. 23, col. 5

Court of Appeals

(Opinion by Pigott, J.)

In a declaratory judgment action by lessors seeking to establish that oil and gas leases had terminated, the Second Circuit certified questions to the Court of Appeals about whether a force majeure clause in the lease extended the primary term of the leases. The Court of Appeals concluded that the force majeure clause did not extend the term of the leases.

In 2001 and subsequent years, a number of upstate lessors entered into oil and gas leases with an energy company giving the energy company the right to drill, produce, and otherwise operate for oil and gas. The leases provided that if drilling commenced, landowners would obtain a royalty on gross proceeds. The leases' habendum clause provided that the primary term would be five years “and as long thereafter as the said land is operated by Lessee in the production of oil or gas.” Each lease also included a force majeure clause, which provided that if drilling were delayed or interrupted by various events including “some order, rule, regulation ' of the government,” the time of delay shall not be counted against the lessee “anything in this lease to the contrary notwithstanding.”

In 2008, Governor Paterson ordered environmental review to address the impact of fracking, and by 2011 the state Department of Environmental Conservation announced that no permits for fracking would be issued until a supplemental generic environmental impact statement was prepared. In 2012, after five years had expired since the inception of all of the leases, lessors brought this declaratory judgment action in federal district court. That court awarded summary judgment to lessors, rejecting the energy company's argument that the leases had been extended by virtue of the force majeure clause. On appeal, the Second Circuit certified two questions to the Court of Appeals: first, whether the state's moratorium on oil and gas leases constituted a force majeure event; and second, if so, if the clause modified the habendum clause and extended the primary five-year term of the lease.

The Court of Appeals declined to answer the first question because it regarded the second question as dispositive. The court emphasized first that the habendum clause did not incorporate the force majeure clause by reference and second that the force majeure clause did not refer to the habendum clause with specificity. The court concluded that the force majeure clause did not modify all clauses in the lease, but only those clauses with which it was in conflict. The court concluded that the “notwithstanding” language in the force majeure clause applied only after drilling for oil and gas operations had begun, not to the initial five-year term of the lease (unless drilling had begun during that period).

'

Section 8

Matter of Flosar Realty LLC v. New York City Housing Authority

NYLJ 3/13/15

AppDiv, First Dept.

(Opinion by Richter, J.)

In an article 78 proceeding by 19 landlords seeking to compel the New York City Housing Authority (NYCHA) to process renewal leases requesting increases in section 8 subsidies and to process requests seeking reinstatement of section 8 subsidies once prior violations have been remedied, landlords appealed from Supreme Court's grant of the NYCHA's motion to dismiss the claims. The Appellate Division modified to reinstate the petition, holding that a writ of mandamus lies to require the authority to process landlords' applications.

NYCHA administers the federal section 8 program, which provides rent subsidies to eligible tenants. The rent paid to a landlord who participates in the section 8 program may not exceed the reasonable rent, as determined by NYCHA. The Authority is also required to inspect units and notify the landlord of any defects, and NYCHA may not make subsidy payments for a unit that fails to meet housing quality standards until it verifies that the defects have been corrected.

Landlords in this proceeding have filed applications for rent increases for apartments occupied by section 8 tenants, and have sought reinstatement of previously suspended subsidies based on correction of the violations that led to the earlier suspension. Landlords contend that all of the increases sought are commensurate with increases approved by the New York City Rent Guidelines Board. Landlords contend, however, that NYCHA has failed to process the application. When landlords brought this mandamus action to compel NYCHA to process the application, Supreme Court granted NYCHA's motion, concluding that landlords had not demonstrated a clear legal right to the relief sought.

In modifying, the Appellate Division agreed with Supreme Court that NYCHA has discretion about whether to increase rent subsidies, and is not bound by the determination of the Rent Guidelines Board. But the Appellate Division held that NYCHA enjoys no discretion not to make a decision; that is, NYCHA had an affirmative obligation to process landlords' applications rather than leaving them in limbo. As a result, landlords were entitled to mandamus relief. Similarly, landlords were entitled to a determination on their applications for resumption of subsidies upon correction of violations.

'

Constructive Eviction

Thor 725 8th Avenue LLC v. Goonetilleke

NYLJ 3/11/15, p. 21, col. 1

U.S. Dist. Ct, SDNY

(Engelmayer, J.)

In landlord's action for $2 million in past-due rent, corporate tenant's principals moved for discovery. The court denied the motion, holding that tenant could not prevail on a constructive eviction theory even if discovery revealed that landlord had interfered with tenant's enjoyment of the premises.

When landlord's predecessor leased the subject premises to corporate tenant, tenant's principals executed a limited guarantee of all covenants in the lease. After corporate tenant's default on rent and real estate taxes, landlord brought this action to recover on the guarantee. Tenant resisted, contending that landlord breached by posting “Retail Space Available” signs in the storefront, leading creditors to believe that tenant was out of business, and also by inviting brokers and prospective tenants into the premises, creating traffic that drove away tenant's customers, many of whom allegedly came to buy X-rated DVDs. Tenant contended that landlord's breaches of its covenant of good faith and fair dealing excused tenant from payment of rent, and therefore excused tenant's principals from liability on their guarantee. Tenant sought discovery to substantiate these claims. In particular, tenant sought testimony from the property manager, and sought the identify of companies and brokers landlord used for leasing the premises, and agents who communicated with those companies or brokers.

In denying the discovery motion, the court emphasized that even if landlord had breached, the breach did not constitute actual or constructive eviction, and therefore did not excuse tenant from payment of rent. The court noted that there could be no actual eviction in the absence of physical expulsion or exclusion from the premises. The court then turned to constructive eviction, and emphasized that a tenant cannot claim constructive eviction while remaining in possession of the premises. Because tenant never left, it could not assert constructive eviction. Moreover the lease expressly provided that tenant would not be entitled to any abatement or setoff against the rent in case of interference with use by a private person or corporation, and that the tenant's obligation to pay rent would be an independent covenant for which tenant should be liable in any event. The court also noted that the acts alleged by tenant's principals were too minor to have constituted constructive eviction even if tenant had decided to leave the premises. As a result, tenant was not entitled to discovery.

COMMENT

Where a commercial lease provides that a tenant's rent obligation and a landlord's obligations are independent covenants, courts generally bar a tenant that remains in possession from asserting that landlord's breach fully excused tenant's rent obligation. By contrast, unless a lease provision bars counterclaims, when landlord brings a nonpayment proceeding, courts do permit an in-possession tenant to counterclaim for damages that would partially offset tenant's rent obligation. In Thomson-Houston Electric Co. v. Durant Land Imp. Co., 144 N.Y. 34, the Court of Appeals allowed commercial tenant's counterclaim for landlord's failure to repair the building's walls in landlord's nonpayment action. The court rejected landlord's argument that tenant's possession of the building barred tenant's breach-of-lease counterclaims. At the same time, the court concluded that landlord's alleged breach would not excuse tenant from paying all rent noting that actual or constructive eviction claims require tenants to abandon possession. More recently, the First Department reaffirmed that a commercial landlord's breach of an independent covenant fails to relieve tenant from the duty to pay rent. In Universal Communications Network, Inc. v. 229 West 28th Owner, LLC, 85 A.D.3d 668, the court held that commercial tenant's rent obligation was an independent covenant and thus landlord's alleged interference with tenant's construction failed to excuse the rent obligation.

Courts generally uphold lease provisions precluding commercial tenants from raising counterclaims in nonpayment summary proceedings. Thus, a commercial tenant that agrees to a “no counterclaim” lease provision must generally bring a separate action to recover damages for the landlord's breach. For instance, in Mid-Island Shopping Plaza, Co. v. Cutler, 112 A.D.2d 405, the Second Department held that res judicata did not bar tenant's claim for damages, despite tenant's default in landlord's earlier summary nonpayment proceeding. The court emphasized that the “no counterclaim” provision in the lease would have precluded tenant from raising that claim in the nonpayment proceeding.

Despite the general enforceability of “no-counterclaim” commercial lease provisions, at least one New York court has allowed a tenant's counterclaim for constructive eviction in a landlord's nonpayment summary proceeding. In Ring v. Arts Intern., Inc., 7 Misc.3d 869, the court, where the commercial lease included a “no counterclaim” provision,(1) allowed in-possession tenant's constructive eviction counterclaim seeking a rent abatementbecause the court found the claim “inextricably intertwined” with landlord's claim, without acknowledging the general rule that constructive eviction claims require tenants to abandon possession. At the same time, the court dismissed tenant's counterclaims for landlord's breach of lease as not “inextricably intertwined” with landlord's claim. The court recognized the general rule that “no counterclaim” provisions are enforceable in nonpayment summary proceedings. But the court found an exception: In residential cases, courts sometimes permit a tenant's counterclaims that are “inextricably intertwined” with a landlord's claim even where the lease provides a “no counterclaim” provision. Without citing a case where the “inextricably intertwined” exception was applied in a commercial context, the court stated that actual or constructive eviction is “[t]he principal example of a counterclaim within [the 'inextricably intertwined'] exception in a commercial nonpayment proceeding.” In contrast, the court found that tenant's breach-of-lease counterclaim was not “inextricably intertwined” with landlord's nonpayment claim because calculating the necessary repair costs was unrelated to tenant's rental obligation ' tenant could separately litigate the repair costs without duplicating the issues raised in the nonpayment claim.

'

Horizontal Multiple Dwelling

Matter of Kobrick v. DHCR

NYLJ 3/23/15, p. 20, col. 6

AppDiv, First Dept.

(memorandum opinion)

In tenant's article 78 proceeding challenging DHCR's determination that his apartment is not subject to rent stabilization, tenant appealed from Supreme Court's denial of the petition and dismissal of the proceeding. The Appellate Division affirmed, concluding that DHCR had rationally concluded that tenant's building is not part of a horizontal multiple dwelling.

Since 1969, the building in which tenant resides and the adjacent building have shared common ownership and management, and have shared a common heating system. Based on those facts, tenant sought a determination that the buildings constituted a horizontal multiple dwelling, which would have subjected tenant's apartment to rent stabilization. DHCR rejected tenant's contentions, relying on evidence that the buildings were built separately, conveyed under separate deeds, and have separate block and lot numbers. DHCR also noted that the buildings did not share a common design and did not share common walls. Tenant then brought this article 78 proceeding.

In holding that Supreme Court had properly denied the petition, the Appellate Division emphasized that DHCR had followed proper procedures, and was not required to hold a hearing. DHCR had properly based its decision on the inspection and the parties' written submissions.

'

Guarantor Liable

136 Field Holding Co LLC v. Invar International Holding, Inc.

NYLJ 3/26/15

U.S. Dist. Ct., SDNY

(Woods, J.)

In landlord's action on a guarantee, landlord sought summary judgment. The court granted the motion, holding that guarantor was liable under the absolute guarantee without regard to tenants' liability for the underlying obligation.

Tenant Razinsky held an option to acquire the subject property, a waterfront property in Greenwich, CT. Razinski transferred that option to landlord under a master agreement that required landlord to pay tenant more than $2.5 million, to be used in part to benefit Invar, a corporation wholly owned by Razinski and his family. The master agreement contemplated a lease between landlord and tenants, Razinski and his wife. The parties entered into a residential lease for a term to end on June 30, 2013, subject to a six-month extension. The lease also provided that if tenants held over past the end of the term, tenant would waive any holdover right and agree to make a holdover payment of $1 million. Invar, tenants' corporation, “absolutely, unconditionally and irrevocably” guaranteed “the full complete and timely payment” of tenants' obligations “without regard to the validity, regularity, or enforceability of the Transaction Documents.” Tenants held over past the expiration of the lease term, and still occupy the mansion. Tenants are litigating, in state court, the enforceability of the holdover payment provision. Meanwhile, landlord brought this federal proceeding against Invar, seeking to recover on Invar's guaranty.

In awarding summary judgment to landlord, the court rejected Invar's argument that the guaranty did not contain an express waiver of Invar's right to assert defenses. The court found no authority for the proposition that a waiver is necessary before a guarantor waives defenses to performance under the primary obligation. The court relied on the language obligating guarantor to pay “without regard to the ' enforceability” of the primary obligation. The court also emphasized that the Razinskis, Invar's principals, had represented that they were sophisticated parties with significant resources.

COMMENT

A liquidated damages clause covering holdover by a tenant is enforceable unless it does not reasonably reflect, at the time of drafting, the foreseeable rent increase at the end of the contract term or if the liquidated damages are grossly disproportionate to the actual rents collected by landlord after the holdover ends. In Thirty-Third Equities Co. LLC v. Americo Grp., Inc., 7 43 N.Y.S.2d 10, the court enforced liquidated damages against a holdover in an amount equivalent to 250% of the contract monthly rent because first, there was no evidence that the projected increase was unreasonable when drafted, and second, the subsequent tenant's rent was approximately the same as the liquidated damages amount. However, in In re T.R. Acquisition Corp., 309 B.R. 830, the court invalidated a liquidated damages clause providing for payment of double the annual rent, where the tenant's holdover was for more than one year, because it did not reflect foreseeable or actual damages. Actual damages in such a case is the market rent that could have been collected during the holdover, less any rents actually collected from the tenant during that time. In T.R. Acquisition, the landlord brought an action to collect on a $280,000 liquidated damages clause, where the annual rent under the lease was $140,000. This was because the holdover tenant had continued to pay the lease rent throughout the holdover period, and the premises were then rented to a subsequent tenant, with an annual rent of $130,000. The court found that the clause was unenforceable because the liquidated damages were grossly disproportionate to the actual damages: the market rent that could have been collected during the holdover The court did not address whether the liquidated damages clause was a reasonable reflection of foreseeable damages at the time of drafting .

Although the precise issue has not arisen in the landlord-tenant context, in other contexts, courts have held guarantors liable on an absolute and unconditional guarantee even when the principal is not liable on the underlying obligation. In Acadia Woods Partners, LLC v. Signal Lake Fund LP, 102 A.D.3d 522, the court upheld a grant of summary judgment against a guarantor because the guarantor had waived all defenses, including that the underlying agreement was unenforceable, by signing an unconditional guarantee that expressly disclaimed any defenses on the ground of unenforceability. Additionally, the court reasoned that liability on a guaranty is completely separate from liability of the principal debtor “given that the guaranty is a separate undertaking and a self-standing document.” Similarly, in Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, the court expressly held that an absolute and unconditional guarantee was a waiver of all defenses, even absent express disclaimers of specific defenses.

'

Force Majeure Clause

Beardslee v. Inflection Energy, LLC

NYLJ 4/1/15, p. 23, col. 5

Court of Appeals

(Opinion by Pigott, J.)

In a declaratory judgment action by lessors seeking to establish that oil and gas leases had terminated, the Second Circuit certified questions to the Court of Appeals about whether a force majeure clause in the lease extended the primary term of the leases. The Court of Appeals concluded that the force majeure clause did not extend the term of the leases.

In 2001 and subsequent years, a number of upstate lessors entered into oil and gas leases with an energy company giving the energy company the right to drill, produce, and otherwise operate for oil and gas. The leases provided that if drilling commenced, landowners would obtain a royalty on gross proceeds. The leases' habendum clause provided that the primary term would be five years “and as long thereafter as the said land is operated by Lessee in the production of oil or gas.” Each lease also included a force majeure clause, which provided that if drilling were delayed or interrupted by various events including “some order, rule, regulation ' of the government,” the time of delay shall not be counted against the lessee “anything in this lease to the contrary notwithstanding.”

In 2008, Governor Paterson ordered environmental review to address the impact of fracking, and by 2011 the state Department of Environmental Conservation announced that no permits for fracking would be issued until a supplemental generic environmental impact statement was prepared. In 2012, after five years had expired since the inception of all of the leases, lessors brought this declaratory judgment action in federal district court. That court awarded summary judgment to lessors, rejecting the energy company's argument that the leases had been extended by virtue of the force majeure clause. On appeal, the Second Circuit certified two questions to the Court of Appeals: first, whether the state's moratorium on oil and gas leases constituted a force majeure event; and second, if so, if the clause modified the habendum clause and extended the primary five-year term of the lease.

The Court of Appeals declined to answer the first question because it regarded the second question as dispositive. The court emphasized first that the habendum clause did not incorporate the force majeure clause by reference and second that the force majeure clause did not refer to the habendum clause with specificity. The court concluded that the force majeure clause did not modify all clauses in the lease, but only those clauses with which it was in conflict. The court concluded that the “notwithstanding” language in the force majeure clause applied only after drilling for oil and gas operations had begun, not to the initial five-year term of the lease (unless drilling had begun during that period).

'

Section 8

Matter of Flosar Realty LLC v. New York City Housing Authority

NYLJ 3/13/15

AppDiv, First Dept.

(Opinion by Richter, J.)

In an article 78 proceeding by 19 landlords seeking to compel the New York City Housing Authority (NYCHA) to process renewal leases requesting increases in section 8 subsidies and to process requests seeking reinstatement of section 8 subsidies once prior violations have been remedied, landlords appealed from Supreme Court's grant of the NYCHA's motion to dismiss the claims. The Appellate Division modified to reinstate the petition, holding that a writ of mandamus lies to require the authority to process landlords' applications.

NYCHA administers the federal section 8 program, which provides rent subsidies to eligible tenants. The rent paid to a landlord who participates in the section 8 program may not exceed the reasonable rent, as determined by NYCHA. The Authority is also required to inspect units and notify the landlord of any defects, and NYCHA may not make subsidy payments for a unit that fails to meet housing quality standards until it verifies that the defects have been corrected.

Landlords in this proceeding have filed applications for rent increases for apartments occupied by section 8 tenants, and have sought reinstatement of previously suspended subsidies based on correction of the violations that led to the earlier suspension. Landlords contend that all of the increases sought are commensurate with increases approved by the New York City Rent Guidelines Board. Landlords contend, however, that NYCHA has failed to process the application. When landlords brought this mandamus action to compel NYCHA to process the application, Supreme Court granted NYCHA's motion, concluding that landlords had not demonstrated a clear legal right to the relief sought.

In modifying, the Appellate Division agreed with Supreme Court that NYCHA has discretion about whether to increase rent subsidies, and is not bound by the determination of the Rent Guidelines Board. But the Appellate Division held that NYCHA enjoys no discretion not to make a decision; that is, NYCHA had an affirmative obligation to process landlords' applications rather than leaving them in limbo. As a result, landlords were entitled to mandamus relief. Similarly, landlords were entitled to a determination on their applications for resumption of subsidies upon correction of violations.

'