Landlord & Tenant Law

In granting landlord's summary judgment motion, the court relied on language in the lease providing that in the event of default or dispossess by summary proceedings, owner was entitled to relet the premises for a period that might be shorter than or longer than the balance of the lease term, and that in the event of such a relet, tenant would remain liable for any deficiency between the rent reserved under the lease and any rent collected on account of the subsequent lease. The lease also made express provision for attorneys' fees and expenses. The court held that these lease provisions barred tenant's surrender defense.

Comment

Courts infer surrender by operation of law when a tenant abandons possession and the landlord relets the property. In Brock Enterprises Ltd. v Dunham's Bay Boat Co. Inc., 292 AD2d 681, 682, the Third Department dismissed landlord's claim for rent due from a prior tenant when, after the tenant's abandonment, landlord relet the property to new tenants. The court held that reletting of the property constitutes a situation so inconsistent with the landlord-tenant relationship that it indicates mutual intent to deem the lease terminated and amounted to surrender by operation of law.

When the lease explicitly authorizes the landlord to relet the property on tenant's account, courts will not infer surrender from landlord's lease to a substitute tenant. In Kottler v New York Bargain House, 242 NY 28 [1926], the court relied on a lease provision in holding that a sublessor who relet after the initial subtenant defaulted and vacated was entitled to recover a deficiency from the defaulting subtenant.. The lease had empowered the sublessor to reenter and relet as agent of the tenant if the property became vacant. When sublessor relet to a new subtenant at a lower rent, the court held that the original tenant remained liable for the balance due.

Absent an express provision in the lease authorizing the landlord to relet on tenant's behalf, some doubt remains about whether landlord can relet on tenant's account without tenant's express consent. In Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130, the court suggested, in dictum, that landlord could relet on tenant's account so long as landlord provided notice. That dictum, however, is in tension with a much earlier holding denying landlord recovery because landlord did not obtain tenant's consent to the reletting. In Gray v Kaufman Dairy & Ice-Cream Co., 162 NY 388 [1900], the court held that landlord's mere notice to tenant that landlord was reletting on tenant's account was insufficient to permit landlord to recover a deficiency from the original tenant when tenant had not affirmatively consented to the reletting. In Gray, after tenant's abandonment, landlord promptly wrote to the tenant refusing to accept tenant's offer to surrender and informing tenant that it would relet the property on tenant's account. The tenant never replied to the proposal to relet on their behalf. The court held that mere silence was insufficient evidence to find tenant's implied consent to reletting of the premises.

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Breaching Landlord Liable for Tenant's Expenses In Preparing Leased Space

Bistro Shop KKC v, N.Y. Park N. Salem, Inc. NYLJ 9/26/19, p. 23, col. 2 AppDiv, First Dept. (memorandum opinion)

In tenant's action for rescission damages resulting from landlord's breach by failure to timely complete construction work, landlord appealed from Supreme Court's award of damages with prejudgment interest. The Appellate Division affirmed, holding that tenant was entitled to rescission damages as a result of landlord fundamental breach of the lease.

Landlord owns a building at 30 East 60^th Street and agreed to lease space in the building to tenant for restaurant use. The lease contemplated that landlord would add numerous floors to the building, requiring construction work that would involve occupation of the leased space for a short duration. The lease authorized tenant to conduct demolition and preparatory construction work while landlord simultaneously occupied the premises. In December 2007, tenant notified landlord that it had completed preparatory work and sought permission to continue preparing the space as a restaurant. On Jan. 24, 2008, landlord and tenant agreed that tenant could continue to renovate the space while landlord waited for approvals necessary to complete its work. In March 2008, tenant stopped renovating the premises because landlord was not in compliance with the lease. Landlord offered the premises to tenant eight years later — in 2016. Tenant then brought this action to recover damages for its demolition and preparation expenses. After a nonjury trial, Supreme Court awarded tenant damages, plus prejudgment interest. Landlord appealed.

In affirming, the Appellate Division emphasized that tenant's work had been rendered useless by landlord's fundamental breach, which defeated the object of the parties. As a result, the court held that tenant was entitled to rescission damages. Moreover, because tenant had been deprived of the time value of the money it had expended, the court held that Supreme Court had properly exercised its discretion in awarding tenant interest on the money tenant had expended.

Comment

When a landlord fails to deliver possession, the tenant may recover necessary expenses incurred in preparing for the occupation or use of the property, unless the lease provides otherwise. For instance, in Friedland v. Myers, 139 N.Y. 432 (1893), the Court of Appeals held that the lessee of a drug store was entitled to recover actual expenses paid or incurred in the construction of the necessary fixtures when the lessor was unable to deliver possession because of the superior rights of a prior tenant. The court emphasized that lessor was aware that lessee had contracted for the construction of cases, counters and other fixtures. Similarly, in Beth David Hosp. v. Terrace Garden, Inc., 175 N.Y.S. 498 (1919) the court held that when landlord cancelled a lease for tenant's one-day event, tenant was entitled to recover expenses for the printing and mailing of tickets. The court held that the landlord must have contemplated that a tenant who leased premises for a single event would print and mail tickets before the day of the event.

By contrast, tenant cannot recover for expenses the landlord could not have contemplated tenant would occur. Thus, in Friedland, the court denied lessee recovery for perishable drugs the lessee had purchased before commencement of the lease term, holding that there was no reason for landlord to believe tenant would purchase perishable drugs before the lease term began.

Additionally, Tenant is not entitled to consequential damages when a provision in the lease expressly excuses the landlord from any liability for failure to give possession on the start date of the lease. In Duane Reade, Inc. v. Reade Broadway Assoc., 274 A.D.2d. 301 (2000) the Court held that an express exclusion in the lease relieved landlord of liability for lost profits suffered during a five-month delay resulting from the failure of a holdover tenant to leave.

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Apartments Withdrawn from Mitchell-Lama Not Rent-Stabilized

West Village Houses Renters v. WHV Housing Development Fund Corp. NYLJ 9/30/19, p. 18, col. 3 AppDiv, First Dept. (memorandum opinion)

In a declaratory judgment action brought by a renters union consisting of non-purchasing tenants in a housing complex withdrawn from the Mitchell-Lama program, the renters union appealed from Supreme Court's declaration that their apartments were not rent-stabilized and from that court's award of attorney's fees to the cooperative that now owns the building. The Appellate Division modified to delete the award of attorney's fees, but otherwise affirmed.

The subject housing complex withdrew from the Mitchell-Lama program on June 25, 2004, and was converted to cooperative ownership on March 9, 2006. The prior owner received J-51 tax benefits. In this action, the renters union contended that as a result of those benefits, the non-purchasing tenants were now covered by rent stabilization. Supreme Court dismissed the complaint and awarded attorney's fees to the cooperative.

In affirming, the Appellate Division held first that the units did not become stabilized upon withdrawal from the Mitchell-Lama program because the units were financed by loans from the Housing Development Corporation (HDC), a public benefit corporation, and were subject to rent regulation under the private housing finance law. Because the statute empowered HDC to regulate rents, the receipt of J-51 benefits did not trigger rent stabilization. The court then held that the units did not become stabilized upon conversion to cooperative ownership because rent stabilization does not apply to cooperatives and condominiums regardless of whether the owner receives J-51 benefits. Finally, the court held that even if the units had been rent-stabilized in the interim between withdrawal from Mitchell-Lama and conversion to cooperative ownership, the conversion did not require continuation of rent stabilization regulation because General Business Law section 352-eeee does not apply to cooperative conversions under the Private Housing Finance Law. The court, however, held that the leases authorized attorney's fees only in the cases of tenant default or where landlord was forced to defend due to a tenant's actions. Because this case did not fall into either category, the owner was not entitled to fees.

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Default Formula Does Not Constitute Penalty, and Does Not Preclude Class Certification

Simpson v. 16-26 East 105, LLC NYLJ 10/3/19, p. 23, col. 3 AppDiv, First Dept. (memorandum opinion)

In tenants' action for declaratory relief and damages arising from alleged rent overcharges, tenants appealed from Supreme Court's denial of their motion for class certification. The Appellate Division reversed and granted the motion, holding that the rent stabilization code's "default formula" does not constitute a penalty that would preclude class certification.

Tenants in a contiguous row of buildings owned by a common landlord contend that landlord improperly deregulated their building while receiving J-51 tax benefits for the building. Tenants brought this action for declaratory relief and damages, and sought class certification. Supreme Court denied their class certification motion, holding that, in certain circumstances, the rent stabilization code's default formula constituted a penalty. CPLR 901 precludes recovery of a penalty in a class action. Tenants appealed.

In reversing, the Appellate Division noted that the default formula becomes applicable when the base date rent cannot be determined, when a full rent history is not provided, or when the owner has engaged in fraudulent practices. The court concluded that because the same formula is applied in cases of fraud as in cases where the base date rent cannot be determined, the formula does not constitute "punishing conduct." Because an action to recover damages measured by reference to the default formula is not an action to recover a penalty, CPLR 901 is not applicable, and the motion to certify the class should have been granted.