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New York Real Estate Law ReporterColumns & DepartmentsLandlord Tenant LawLitigation

Landlord & Tenant

By ssalkin
April 01, 2019
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Landlord's Improper Incorporation

TY Builders, II, Inc. v. 55 Day Spa, Inc. 2018 WL 6332344 AppDiv, Second Dept. (memorandum opinion)

In landlord's action for damages for breach of a lease, tenant appealed from Supreme Court's award of summary judgment to landlord. The Appellate Division modified to eliminate the award of late fees, but otherwise affirmed, holding that tenant was estopped from relying on landlord's lack of proper incorporation.

At a time when the subject premises were owned by Weiss, TY Builders LLC, as landlord, leased premises to tenant for a three-year term. A rider to the lease was executed in the name of TY Builder II LLC and tenant. The lease and the rider were signed by Weiss and by tenant's principal. Three months after the lease was signed, tenant's principal notified Weiss that tenant was vacating the premises. Weiss notified tenant that it would remain liable for rent and late fees until the premises were relet. Ty Builders II, Inc., then brought this action for breach of the lease. Later Ty Builders II, Inc. later amended the complaint list itself as d/b/a the various LLCs. Landlord moved for summary judgment, and tenant cross-moved for summary judgment on the ground that the named corporation had not signed any of the lease documents, and that none of the entities named on the documents legally existed at the time the leases were executed. Supreme Court awarded summary judgment to landlord, including late fees and attorneys' fees.

In modifying, the Appellate Division first rejected tenant's argument that tenant was off the hook because landlord had not properly been formed. The court invoked the doctrine of incorporation by estoppel, holding that a party who recognized the organization as a corporation should not be allowed to raise immaterial issues which do not concern or affect that party. The court concluded that defects in organizational form should not allow tenant to escape liability under the lease. The court, however, concluded that the late fees in the lease rider, which amounted to penalties of more than 79%, were unreasonable and confiscatory. Accordingly, the court reduced the damages awarded to landlord.

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