Landlord & Tenant

In reversing, the Appellate Division noted that the lease included a nonwaiver provision stating that failure of landlord to insist upon strict performance of any of the lease's terms should not be deemed a waiver of any of landlord's rights and remedies, and should not be deemed a waiver of any subsequent breach or default. The court concluded that the nonwaiver clause raised a question of fact about whether landlord had waived its right to bring a breach of lease claim. As a result, summary judgment was not warranted.

Post-Eviction Rent
Laquila Realty LLC v. Jalyng Food Corp
.NYLJ 3/24/17, p. 32, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action by commercial landlord for post-eviction rent, corporate tenant appealed from Supreme Court's award of rent, and principals of the corporate tenant appealed from Supreme Court's failure to dismiss the complaint against the principals as guarantors. The Appellate Division modified to dismiss the claim based on the guaranty, and otherwise affirmed, holding that the lease authorized the award of post-eviction rent.

In April 2008, landlord and corporate tenant entered into a 15-year lease for store premises in Mount Vernon. The lease provided that tenant would remain liable for rent after eviction, and also provided that if tenant breached, landlord was not precluded from any other remedy at law or in equity. The lease also included language incorporating a personal guaranty by the tenant's principals. At the end of the lease, the two principals signed as “Tenant.” They defaulted on payment of rent and landlord obtained a judgment of possession on Oct. 26, 2009. Tenant was evicted pursuant to that judgment. Landlord then brought the instant action against tenant for breach of the lease, and against tenant's principals on their purported guarantee. Tenant asserted a counterclaim for conversion of fixtures and equipment. After a nonjury trial, Supreme Court awarded landlord $1,183,698.38 against the corporate tenant and tenant's principals, and dismissed tenant's counterclaim.

In modifying, the Appellate Division held that when a lease provision so provides, tenant remains liable for monetary obligations of the lease even after eviction. As a result, Supreme Court properly determined that landlord was entitled to post-eviction damages. The Appellate Division also upheld Supreme Court's dismissal of tenant's conversion counterclaim, citing tenant's failure to establish a superior right of possession, and failure to demand the equipment and fixtures before landlord brought this action. But the Appellate Division reversed Supreme Court's judgment against the tenant's principals, holding that because they signed the lease agreement only as “tenant,” and not individually or as guarantors, the language purporting to create a personal guarantee was ineffective to constitute an enforceable personal obligation.

COMMENT

A rent acceleration clause in a New York commercial lease is enforceable as a liquidated damages provision so long as the lease entitles the tenant to a credit for any rents landlord actually collects before the end of the lease term. In New 24 West 40th Street LLC v. XE Capital Management, LLC, 104 A.D.3d 513, the First Department affirmed the trial court's award to landlord of liquidated damages measured as the fixed annual rent for the remainder of the lease term, discounted to present value at an interest rate of 4%. In concluding that the liquidated damages provision did not constitute an unenforceable penalty, the court relied on lease provisions entitling tenant to a credit, at the end of the lease term, for any rent payments landlord received from tenant's subtenants, and from any other prospective tenants. Several years earlier, in Seven Corners Shopping Center Falls Church v. Chesapeake Enterprises USA, LLC, 2009 WL 700868, the federal district court for the Western District of New York, in enforcing a rent acceleration clause, held that landlord would be entitled to collect the difference between the rent tenant agreed to pay for the balance of the lease term and the amount landlord's substitute tenant had agreed to pay. Applying New York law, the court indicated that this formula eliminated the possibility that landlord would collect a windfall as a result of tenant's breach.

By contrast, a rent acceleration clause constitutes an unenforceable penalty if it obligates a breaching tenant to pay all rent due for the remainder of the lease without accounting for the benefits landlord receives from retaking possession or renting to another tenant. In 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 24 N.Y.3d 528, the Court of Appeals remanded for a hearing on whether accelerated rent was disproportionate to landlord's actual damages when landlord retook possession upon tenant's breach. After landlord sent notice to tenant demanding cure of violations issued by the city, tenant vacated the premises and ceased paying rent. After landlord recovered possession, it sought to enforce the lease's rent acceleration clause which, by its terms, entitled landlord to collect all future rents without restricting it in future use of the property. The Court of Appeals found “compelling” the tenant's argument that enforcement of the clause would provide landlord with a “windfall that allows Van Duzer to double dip — get the full rent now and hold the property.” Id. at 536. Although the court indicated that liquidated damage provisions in leases are generally enforceable, subject to judicial scrutiny, the court remanded for a determination about whether enforcement of theliquidated damages clause in this lease would provide landlord with damages disproportionate to actual losses, rendering the clause an unenforceable penalty.

No Breach of Quiet Enjoyment Covenant
TDS Leasing, LLC v. Tradito
NYLJ 3/24/17, p. 27, col. 2
AppDiv, Second Dept.
(memorandum opinion)

In tenant's action for breach of the commercial lease, tenant appealed from Supreme Court's denial of its summary judgment motion and grant of landlords' cross-motion for summary judgment. The Appellate Division modified, holding that both summary judgment motions should have been denied because landlords' conclusory affidavits were insufficient to establish their entitlement to judgment as a matter of law.

Landlords leased commercial space to tenant who, in turn, subleased the space to subtenant. Landlords subsequently evicted tenant pursuant to a default judgment that was later vacated for improper service. The default judgment was based on tenant's alleged failure to pay real estate taxes, as required by the lease. Tenant and subtenant then brought this action alleging that landlords had breached the covenant of quiet enjoyment. Tenant subsequently assigned its causes of action to subtenant. Supreme Court awarded summary judgment to landlords.

In modifying, the Appellate Division first upheld Supreme Court's denial of subtenant's summary judgment motion. The court held that in order to prevail on a claim for breach of the covenant of quiet enjoyment, a tenant must establish either that tenant has performed all conditions precedent for maintaining the action, or that landlord has waived those conditions. In this case, tenant failed to meet its prima facie burden of establishing performance or waiver. But the Appellate Division then held that Supreme Court should not have awarded summary judgment to landlords because they had failed to establish that tenants did not pay the real estate taxes required by the lease. The court held that landlord's conclusory affidavits were insufficient to warrant summary judgment.

Right of First Refusal
Hendel v. Torah
NYLJ 3/15/17, p. 21, col. 1
Supreme Ct., Queens Cty
(McDonald, J.)

In tenant's action for specific performance of a right of first refusal, landlord moved for summary judgment. The court granted the motion, holding that the right of first refusal expired with the end of the initial lease between the parties.

The lease between the parties covered the period between Aug. 1, 2011 and Aug. 31, 2012. The lease included a right of first refusal. When the lease expired, tenant continued to occupy the premises pursuant to a month-to-month agreement. In April 2016, landlord served tenant with a 30-day notice of termination after entering into a contract to sell the property to a third party. Tenant refused to vacate, contending that tenant still had a right of first refusal. Tenant brought this action for specific performance, and landlord moved for summary judgment.

In granting landlord's motion, the court noted that tenant had never entered into a written extension of the existing lease, but instead entered into an oral agreement to remain in possession as a month-to-month tenant. The court acknowledged that when parties extend a lease into a month-to-month tenancy, the covenants of a lease are generally extended, but concluded that the right of first refusal is an exception to that rule. As a result, the right of first refusal had expired and tenant was not entitled to specific performance.

COMMENT

When a landlord and tenant extend a lease on a month-to-month basis, the lease covenants generally bind the parties during the month-to-month tenancy. For instance, in City of New York v. Pennsylvania R. Co., 37 N.Y.2d 298 (1975), in granting the landlord's motion for summary judgment in its action for breach of a covenant to keep the leased premises in good repair, the court held that when a tenant holds over, “there is implied a continuance of the tenancy on the same terms and subject to the same covenants as those contained in the original instrument.” In City of New York, the leased premises was Pier 77, and the court held that the city could bring the action for breach against tenant railroad company decades after the last written lease had expired.

However, there are two covenants that do not automatically extend beyond the expiration of the lease into a month-to-month tenancy: 1) a covenant giving tenant a right of first refusal; and 2) a covenant giving tenant a purchase option during the term of the lease or a subsequent renewal. In those cases, unless the landlord expressly extends the covenants when it accedes to the new month-to-month tenancy, neither covenant will survive the expiration of the original lease and will not extend into the month-to-month tenancy. For example, in Coinmach Corp. v. Fordham Hill Owners Corp., 3 A.D.3d 312, the First Department dismissed a commercial tenant's action for specific performance to enforce a right of first refusal tenant did not attempt to exercise until after expiration of the written lease term. The court held “the right of first refusal is an exception to the general rule that the covenants of a lease are extended intoa month-to-month tenancy, and it must be expressly re-affirmed.” Id. In Coinmach, the tenant allowed the lease to expire without making an agreement to extend the right of first refusal into the implied month-to-month tenancy that arose by operation of law when tenant remained on the premises after the original lease expired.

Likewise, in Lazarus v. Flournoy, 28 A.D.2d 685, the Second Department granted the landlord's application to recover possession of real property from the holdover tenant and undertenant, finding that the tenant was not entitled to exercise a purchase option because the option was only valid during the original term of the lease and did not survive its expiration. In Lazarus, the lease allowed for an option to purchase the property “during the term of this lease or any renewal thereof.” Gulf Oil Corp. v. Buram Realty Co., 11 N.Y.2d 223, (1962), cited by Lazarus, provides an explanation for the purchase option exception, although Gulf Oil did not involve a month-to-month extension. In holding that a purchase option in the initial lease did not extend to 22 subsequent lease extensions, the court noted that while a landlord may be prepared to give his tenant an option to purchase the property at a fixed price for a limited period of time, we should not assume that the landlord would be willing to do the same for an extended and uncertain period beyond the expiration of the lease. Id. at 226-27. Presumably, a similar justification can be applied to the right of first refusal exception.

Commercial Tenant's Duty to Maintain Premises
Sunoce Properties, Inc. v. Bally Total Fitness of Greater New York, Inc.
NYLJ 3/3/17, p. 37, col. 2
AppDiv, Second Dept
. (memorandum opinion)

In commercial landlord's action against tenant for breach of a lease, landlord appealed from Supreme Court's award of summary judgment to tenant. The Appellate Division reversed and denied the motion, holding that questions of fact remained about whether landlord had waived its right to enforce tenant's duty to keep and maintain the premises in good repair.

The parties entered into a lease in 1975, and extended the lease seven times. The lease required tenant to keep and maintain the premises in good order, condition and repair. When landlord brought this action alleging that tenant had breached the lease, tenant contended that landlord had waived its right because landlord had been alerted to ongoing water damage at the property beginning in 1977 and had continued to accept rent and extend the lease with full knowledge of the water damage. Supreme Court agreed with tenant and awarded summary judgment dismissing the claim. Landlord appealed.

In reversing, the Appellate Division noted that the lease included a nonwaiver provision stating that failure of landlord to insist upon strict performance of any of the lease's terms should not be deemed a waiver of any of landlord's rights and remedies, and should not be deemed a waiver of any subsequent breach or default. The court concluded that the nonwaiver clause raised a question of fact about whether landlord had waived its right to bring a breach of lease claim. As a result, summary judgment was not warranted.

Post-Eviction Rent
Laquila Realty LLC v. Jalyng Food Corp
.NYLJ 3/24/17, p. 32, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action by commercial landlord for post-eviction rent, corporate tenant appealed from Supreme Court's award of rent, and principals of the corporate tenant appealed from Supreme Court's failure to dismiss the complaint against the principals as guarantors. The Appellate Division modified to dismiss the claim based on the guaranty, and otherwise affirmed, holding that the lease authorized the award of post-eviction rent.

In April 2008, landlord and corporate tenant entered into a 15-year lease for store premises in Mount Vernon. The lease provided that tenant would remain liable for rent after eviction, and also provided that if tenant breached, landlord was not precluded from any other remedy at law or in equity. The lease also included language incorporating a personal guaranty by the tenant's principals. At the end of the lease, the two principals signed as “Tenant.” They defaulted on payment of rent and landlord obtained a judgment of possession on Oct. 26, 2009. Tenant was evicted pursuant to that judgment. Landlord then brought the instant action against tenant for breach of the lease, and against tenant's principals on their purported guarantee. Tenant asserted a counterclaim for conversion of fixtures and equipment. After a nonjury trial, Supreme Court awarded landlord $1,183,698.38 against the corporate tenant and tenant's principals, and dismissed tenant's counterclaim.

In modifying, the Appellate Division held that when a lease provision so provides, tenant remains liable for monetary obligations of the lease even after eviction. As a result, Supreme Court properly determined that landlord was entitled to post-eviction damages. The Appellate Division also upheld Supreme Court's dismissal of tenant's conversion counterclaim, citing tenant's failure to establish a superior right of possession, and failure to demand the equipment and fixtures before landlord brought this action. But the Appellate Division reversed Supreme Court's judgment against the tenant's principals, holding that because they signed the lease agreement only as “tenant,” and not individually or as guarantors, the language purporting to create a personal guarantee was ineffective to constitute an enforceable personal obligation.

COMMENT

A rent acceleration clause in a New York commercial lease is enforceable as a liquidated damages provision so long as the lease entitles the tenant to a credit for any rents landlord actually collects before the end of the lease term. In New 24 West 40th Street LLC v. XE Capital Management, LLC, 104 A.D.3d 513, the First Department affirmed the trial court's award to landlord of liquidated damages measured as the fixed annual rent for the remainder of the lease term, discounted to present value at an interest rate of 4%. In concluding that the liquidated damages provision did not constitute an unenforceable penalty, the court relied on lease provisions entitling tenant to a credit, at the end of the lease term, for any rent payments landlord received from tenant's subtenants, and from any other prospective tenants. Several years earlier, in Seven Corners Shopping Center Falls Church v. Chesapeake Enterprises USA, LLC, 2009 WL 700868, the federal district court for the Western District of New York, in enforcing a rent acceleration clause, held that landlord would be entitled to collect the difference between the rent tenant agreed to pay for the balance of the lease term and the amount landlord's substitute tenant had agreed to pay. Applying New York law, the court indicated that this formula eliminated the possibility that landlord would collect a windfall as a result of tenant's breach.

By contrast, a rent acceleration clause constitutes an unenforceable penalty if it obligates a breaching tenant to pay all rent due for the remainder of the lease without accounting for the benefits landlord receives from retaking possession or renting to another tenant. In 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 24 N.Y.3d 528, the Court of Appeals remanded for a hearing on whether accelerated rent was disproportionate to landlord's actual damages when landlord retook possession upon tenant's breach. After landlord sent notice to tenant demanding cure of violations issued by the city, tenant vacated the premises and ceased paying rent. After landlord recovered possession, it sought to enforce the lease's rent acceleration clause which, by its terms, entitled landlord to collect all future rents without restricting it in future use of the property. The Court of Appeals found “compelling” the tenant's argument that enforcement of the clause would provide landlord with a “windfall that allows Van Duzer to double dip — get the full rent now and hold the property.” Id. at 536. Although the court indicated that liquidated damage provisions in leases are generally enforceable, subject to judicial scrutiny, the court remanded for a determination about whether enforcement of theliquidated damages clause in this lease would provide landlord with damages disproportionate to actual losses, rendering the clause an unenforceable penalty.

No Breach of Quiet Enjoyment Covenant
TDS Leasing, LLC v. Tradito
NYLJ 3/24/17, p. 27, col. 2
AppDiv, Second Dept.
(memorandum opinion)

In tenant's action for breach of the commercial lease, tenant appealed from Supreme Court's denial of its summary judgment motion and grant of landlords' cross-motion for summary judgment. The Appellate Division modified, holding that both summary judgment motions should have been denied because landlords' conclusory affidavits were insufficient to establish their entitlement to judgment as a matter of law.

Landlords leased commercial space to tenant who, in turn, subleased the space to subtenant. Landlords subsequently evicted tenant pursuant to a default judgment that was later vacated for improper service. The default judgment was based on tenant's alleged failure to pay real estate taxes, as required by the lease. Tenant and subtenant then brought this action alleging that landlords had breached the covenant of quiet enjoyment. Tenant subsequently assigned its causes of action to subtenant. Supreme Court awarded summary judgment to landlords.

In modifying, the Appellate Division first upheld Supreme Court's denial of subtenant's summary judgment motion. The court held that in order to prevail on a claim for breach of the covenant of quiet enjoyment, a tenant must establish either that tenant has performed all conditions precedent for maintaining the action, or that landlord has waived those conditions. In this case, tenant failed to meet its prima facie burden of establishing performance or waiver. But the Appellate Division then held that Supreme Court should not have awarded summary judgment to landlords because they had failed to establish that tenants did not pay the real estate taxes required by the lease. The court held that landlord's conclusory affidavits were insufficient to warrant summary judgment.

Right of First Refusal
Hendel v. Torah
NYLJ 3/15/17, p. 21, col. 1
Supreme Ct., Queens Cty
(McDonald, J.)

In tenant's action for specific performance of a right of first refusal, landlord moved for summary judgment. The court granted the motion, holding that the right of first refusal expired with the end of the initial lease between the parties.

The lease between the parties covered the period between Aug. 1, 2011 and Aug. 31, 2012. The lease included a right of first refusal. When the lease expired, tenant continued to occupy the premises pursuant to a month-to-month agreement. In April 2016, landlord served tenant with a 30-day notice of termination after entering into a contract to sell the property to a third party. Tenant refused to vacate, contending that tenant still had a right of first refusal. Tenant brought this action for specific performance, and landlord moved for summary judgment.

In granting landlord's motion, the court noted that tenant had never entered into a written extension of the existing lease, but instead entered into an oral agreement to remain in possession as a month-to-month tenant. The court acknowledged that when parties extend a lease into a month-to-month tenancy, the covenants of a lease are generally extended, but concluded that the right of first refusal is an exception to that rule. As a result, the right of first refusal had expired and tenant was not entitled to specific performance.

COMMENT

When a landlord and tenant extend a lease on a month-to-month basis, the lease covenants generally bind the parties during the month-to-month tenancy. For instance, in City of New York v. Pennsylvania R. Co., 37 N.Y.2d 298 (1975), in granting the landlord's motion for summary judgment in its action for breach of a covenant to keep the leased premises in good repair, the court held that when a tenant holds over, “there is implied a continuance of the tenancy on the same terms and subject to the same covenants as those contained in the original instrument.” In City of New York, the leased premises was Pier 77, and the court held that the city could bring the action for breach against tenant railroad company decades after the last written lease had expired.

However, there are two covenants that do not automatically extend beyond the expiration of the lease into a month-to-month tenancy: 1) a covenant giving tenant a right of first refusal; and 2) a covenant giving tenant a purchase option during the term of the lease or a subsequent renewal. In those cases, unless the landlord expressly extends the covenants when it accedes to the new month-to-month tenancy, neither covenant will survive the expiration of the original lease and will not extend into the month-to-month tenancy. For example, in Coinmach Corp. v. Fordham Hill Owners Corp., 3 A.D.3d 312, the First Department dismissed a commercial tenant's action for specific performance to enforce a right of first refusal tenant did not attempt to exercise until after expiration of the written lease term. The court held “the right of first refusal is an exception to the general rule that the covenants of a lease are extended intoa month-to-month tenancy, and it must be expressly re-affirmed.” Id. In Coinmach, the tenant allowed the lease to expire without making an agreement to extend the right of first refusal into the implied month-to-month tenancy that arose by operation of law when tenant remained on the premises after the original lease expired.

Likewise, in Lazarus v. Flournoy, 2 8 A.D.2d 685, the Second Department granted the landlord's application to recover possession of real property from the holdover tenant and undertenant, finding that the tenant was not entitled to exercise a purchase option because the option was only valid during the original term of the lease and did not survive its expiration. In Lazarus, the lease allowed for an option to purchase the property “during the term of this lease or any renewal thereof.” Gulf Oil Corp. v. Buram Realty Co., 11 N.Y.2d 223, (1962), cited by Lazarus, provides an explanation for the purchase option exception, although Gulf Oil did not involve a month-to-month extension. In holding that a purchase option in the initial lease did not extend to 22 subsequent lease extensions, the court noted that while a landlord may be prepared to give his tenant an option to purchase the property at a fixed price for a limited period of time, we should not assume that the landlord would be willing to do the same for an extended and uncertain period beyond the expiration of the lease. Id. at 226-27. Presumably, a similar justification can be applied to the right of first refusal exception.