Landlord & Tenant

AppDiv, First Dept. (memorandum opinion)

In an action by landlord for a judgment declaring that landlord was entitled to an accounting of tenant's gross sales, landlord appealed from Supreme Court's denial of its motion for partial summary judgment, and tenant cross-appealed from Supreme Court's denial of its motion to compel arbitration. Supreme Court modified to grant landlord's summary judgment motion, rejecting tenant's claim that landlord had orally waived the percentage rent clause in the lease.

Tenant operates a deli on the leased premises, pursuant to a lease which requires tenant to pay, as additional rent, a percentage of gross sales if those sales exceeded an amount fixed by a formula specified in the lease. The lease required tenant to self-report gross sales, but also included provisions authorizing landlord to verify tenant's statements. The lease provided for arbitration if landlord disputed tenant's statements, but did not provide for arbitration if tenant failed to provide the statements. The lease also included a provision precluding oral modification or waiver. In 2011, landlord wrote tenant asking for statements for the preceding six years so that it could conduct an audit of tenant's gross sales.

When tenant did not appear at the time specified by landlord for the audit, landlord brought this action seeking tenant's books and records and a declaration that landlord was entitled to a percentage of tenant's gross sales. Supreme Court directed tenant to turn over the records, upon which landlord's accountants concluded that tenant was liable for $263,114.55 in additional rent. Landlord then sought partial summary judgment for that amount. Tenant contended that landlord had orally waived the percentage rent clause in 2005 or 2006, and moved to compel arbitration. Supreme Court denied both motions, holding that a hearing was necessary to evaluate tenant's oral waiver claim, but that tenant was not, under the terms of the lease, entitled to arbitration.

In modifying, the Appellate Division rejected tenant's contention that its failure to pay a percentage of gross sales for a period of years provided adequate evidence of the alleged oral waiver. The court concluded that the failure to pay for a six-year period was not unequivocally referable to the oral waiver, and also held that tenant had raised no question of fact about the accuracy of landlord's audit. As a result, landlord was entitled to summary judgment on its claim for percentage rent.

COMMENT

Although General Obligations Law ' 15-301(1) generally requires a signed writing to modify a written agreement with a no-oral-modification clause, the Court of Appeals has held that an oral modification is enforceable when the parties' partial performance of the modification is “unequivocally referable” to the oral modification. In Rose v. Spa Realty Associates, 42 N.Y.2d 338, the Court of Appeals granted purchaser specific performance of an alleged oral modification permitting purchaser to buy 96 unit sites rather than the 150-unit minimum specified in the original sale contract. When purchaser discovered a sewage problem on the premises that made government approval of 150 units unlikely, the parties orally agreed that seller would seek approval for a total of 96 units, and seller did in fact seek and obtain approval for 96 units. The court concluded that seller's action was compatible only with the modification, and not with any option contained in the original written agreement. As a result, the part performance was unequivocally referable to the oral modification.

Partial performance is not unequivocally referable to an oral modification when the performance is entirely consistent with the party's original obligations under the writing. In Joseph P. Day Realty Corp. v. Jefferson Lawrence Associates, Inc., 270 A.D.2d 140, the First Department declined to enforce an alleged oral modification permitting tenant to vacate its leased premises prior to the expiration of the lease, concluding that tenant's supposed part performance ' payment of rent through the month of its departure and abandonment of its security deposit ' was not unequivocally referable to the claimed modification because the terms of the preexisting written lease obligated tenant to pay rent and entitled landlord to retain tenant's security deposit.

Rose v Spa Realty Associates, supra, a lso held that a party who causes another to substantially rely on an oral modification to a written agreement, will be estopped from invoking ' 15-301(1) to bar proof of the modification. Thus, in Rose, when the seller applied for approval to build 96 units rather than 150, it understood that purchaser was building model homes, drawing plans, and promoting the reduced project. On that basis, the court concluded that seller was estopped from invoking section 15-301(1). Similarly, in Latham Four Partnership v. SSI Medical Services, Inc., landlord was estopped from enforcing a no-oral modification provision when landlord orally agreement to permit tenant to extend its lease term for four months, and tenant relied on the agreement by releasing a new landlord from a signed lease.

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