Landlord & Tenant Law

In affirming Supreme Court's determination that the apartment is subject to rent stabilization, the Appellate Division relied on the prior 1992 determination which, under the law of the case doctrine, the court treated as a binding holding that the apartment is subject to stabilization. The court indicated that the subsequent stipulation constituted an unenforceable waiver of rent stabilization protection. The court then held that because the apartment was stabilized, tenant had no basis for its claim that the owner tortiously interfered with its right to sublet the apartment.

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Exculpatory Clause Bars Tenant's Claim for Lost Profits Resulting from Landlord's Negligence

Chaitman v. Moezinia NYLJ 12/30/19, p. 18, col. 1 AppDiv, First Dept. (memorandum opinion)

In commercial tenant's action for a full rent abatement and lost profits, tenant appealed from Supreme Court's grant of summary judgment to landlord. The Appellate Division modified to reinstate the claim for rent abatement, and otherwise affirmed.

The lease provided that if more than 30% of the premises is damaged and the premises cannot be opened for business to the general public, all rent would be abated until the premises can be opened for business. The lease also provided that "notwithstanding anything to the contrary … Tenant waives, to the full extent permitted by law, any claim for consequential or punitive damages in connection [with damage to Tenant's property.]" Finally, the lease also required landlord to use reasonable efforts to minimize inconvenience, annoyance and injury to tenant's business and its use of the demised premises. Landlord allegedly performed negligent renovations to the premises that permitted tenant to remain open for its existing clients, but precluded tenant from accepting new clients. Tenant brought this action for a rent abatement and lost profits, but Supreme Court granted summary judgment to landlord.

In modifying, the Appellate Division held that issues of fact about the percentage of the premises affected by the renovations precluded summary judgment on the claim for a full rent abatement. But the Appellate Division held that the exculpatory clause barred tenant's claim for lost profits. The court rejected tenant's argument that General Obligation Law section 5-321, which invalidates agreements exempting landlord from liability for negligence causing injury to persons or property. Invalidating the exculpatory clause in this case, the court distinguished lost profits from injury to property and held that the statute did not apply to lost profits. Moreover, the court concluded that the lease's "reasonable efforts" provision did not override the exculpatory clause.

COMMENT

Courts consistently hold that lost profits due to business interruption do not constitute property damage under General Obligations Law §5–321. In Periphery Loungewear, Inc. v. Kantron Roofing Corp., 190 A.D.2d 457, the First Department held that an exculpatory clause releasing the lessor from liability for certain business injuries did not violate §5–321. In interpreting §5–321, the court found that "from the perspective of insurance coverage, the concept of business interruption loss is one wholly distinct and separate from property damage." In Duane Reade v. 405 Lexington, L.L.C., 22 A.D.3d 108, the court upheld an exculpatory clause in holding that tenant was not entitled to recover lost profits resulting from landlord's construction activity. Because tenant's damages were simply "lost customer transactions" and not injury to person or property, the court concluded that §5–321 did not apply.

Even when landlord's negligence causes injury to person or property, General Obligations Law §5–321 does not preclude enforcement of a lease provision requiring tenant to procure insurance against that negligence, at least if the lease was negotiated by sophisticated parties. In Hogeland v. Sibley, Lindsay & Curr Co., 42 N.Y.2d 153, the Court of Appeals held that landlord was entitled to indemnification from tenant for injuries suffered by a third party as a result of the combined negligence of landlord and tenant. In enforcing the indemnification provision in the lease, the court emphasized that it was considering the indemnification clause against a background in which the parties had mutually agreed to allocate the risk of liability to an insurer, reallocating liability to a third party, while still affording adequate protection to the public. Pointing to several provisions throughout the contract evidencing bilateral participation and equal treatment of both parties, the court concluded that the parties' mutual agreement did not violate §5–321. The court reaffirmed Hogeland nearly 30 years later in Great Northern Ins. Co. v. Interior Const. Corp., 7 N.Y.3d 412, again emphasizing that the parties had used insurance to allocate the risk of liability.

Conversely, where there is a lack of bilateral participation in the negotiation of the lease, the simple inclusion of an insurance procurement provision will not suffice to avoid the prohibition of §5–321. The Second and Fourth Departments have both held that absent clear mutuality, a lessor cannot simply circumvent §5–321 by placing its own burden to procure insurance for its own negligence onto the lessor. In Graphic Arts Supply, Inc. v. Raynor, 91 A.D.2d 827, the Fourth Department held an insurance procurement clause unenforceable where the clause was one-sided and the agreement evidenced a lack of "bilateral participation." In Port Auth. of New York & New Jersey v. Evergreen Int'l Aviation, Inc., 275 A.D.2d 358, the Second Department similarly refused to enforce an insurance procurement clause where the lease "lack[ed] any language to demonstrate a mutuality of intent."

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Landlord's Reliance on Representations of Prior Owners Does Not Preclude Finding That Overcharge Was Willful, Resulting In Treble Damages

Grady v. Hessert Realty, L.P. NYLJ 12/5/19, p. 22, cl. 1 AppDiv, First Dept. (memorandum opinion).

In tenant's action for declaratory relief and damages, landlord appealed from Supreme Court's order requiring landlord to offer tenant a renewal lease, requiring landlord to pay money damages in the amount of $106,923 plus interest, and requiring landlord to pay legal fees. The Appellate Division remanded for a recalculation of damages, but upheld Supreme Court's determination that landlord's overcharge was willful, justifying an award of treble damages.

As of 1998, the subject apartment was registered with DHCR at a rent-stabilized rent of $1,022.92. On May 8, 1999, tenant leased the apartment from Kent Realty at a monthly rent of $1,450. She regularly renewed the lease, with regular rent increases from that time through 2016, by which time the rent had risen to $2,050 per month. Starting in 2005, the renewal leases listed Mautner Glick Corp., (MGC) as owner, and most of the lease renewals were signed by Alvin Glick. On April 11, 2017, MGC's counsel informed tenant that MGC would not renew tenant's lease. Tenant then brought this action seeking a declaration that the apartment was rent stabilized, and seeking damages. Supreme Court granted tenant's summary judgment motion, holding that the apartment was rent stabilized, that tenant's rent was frozen at the last registered rent of $1,022.92, and that tenant was entitled to treble damages and attorneys' fees. Landlord appealed.

In remanding for a recalculation of damages, the Appellate Division upheld most of Supreme Court's determinations. The court held that failure to register subjected landlord to a rent freeze. The court then rejected landlord's arguments that the overcharge was not willful, holding first that landlord's alleged reliance on representations of prior owners constitute willful ignorance, and holding that landlord's offer of a refund of overcharges after tenant brought this action did not constitute evidence of a lack of willfulness. As a result, tenant was entitled to treble damages. The court reversed two of Supreme Court's determinations. First, the court held that the rent freeze ended when landlord re-registered the apartment in 2017, so that landlord was entitled to collect the lawful rent, plus increases, from that time forward. Second, the court held that because tenant was entitled to treble damages, tenant was not also entitled to prejudgment interest, because treble damages in cases like this one are awarded in lieu of interest. The court therefore remanded for a recalculation of damages.

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Tenant's Failure to Pay Rent and Other Charges Forfeits Tenant's Right to Renew

43^rd Street Deli, Inc. v. Paramount Leasehold, LLP NYLJ 12/5/19, p. 22, col. 5 AppDiv, First Dept. (memorandum opinion)

In tenant's action for a declaration that it was entitled to renew its lease, tenant appealed from Supreme Court's determination that tenant was not entitled to renew and from Supreme Court's determination that landlord is entitled to attorney's fees. The Appellate Division affirmed, holding that tenant forfeited its right to renew by defaulting in payment of rent and other charges

The parties' commercial lease gave tenant a right to renew for a five-year period providing that tenant was not in default of the lease beyond an allowed grace period. During the initial lease term, tenant failed to pay percentage rent, and failed to make payments towards its water bills as additional rent. In a previous litigation, landlord sought $133,936.03 in rent, and the parties settled for $71,211.24, with the landlord agreeing to waive collection of the remainder. When tenant, in this litigation, sought to renew the lease, Supreme Court held that tenant was not entitled to renew. Tenant appealed.

In affirming, the Appellate Division held that even though the landlord's water bills were inflated, tenant's bona fide objections did not warrant a complete failure to pay. The court noted that tenant could have preserved its right to dispute the accuracy of the bills by initiating this litigation and paying the bills simultaneously. Instead, tenant's default in its lease obligations deprived tenant of the right to renew and entitled landlord to attorney's fees.

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Questions of Fact Remain About Tenants Liability for Holdover Charges

177 Richard Street, LLC v. Weeks NYLJ 12/6/19, p. 22, col. 4 AppDiv, Second Dept. (memorandum opinion)

In landlord's action to recover damages for breach of a residential lease, landlord appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that questions of fact remained about tenant's liability for the holdover charges landlord sought to recover.

Tenants David and Manca Weeks occupied an apartment pursuant to a lease that expired on Feb. 28, 2015. When tenants allegedly held over past that date, landlord brought a holdover proceeding which concluded with a stipulation of settlement allowing tenants to remain until June 15, and landlord was authorized to bring a plenary action to recover unpaid rent and amounts due for use and occupancy through June 15. Landlord then brought this plenary action, the action contemplated by the stipulation of settlement. David Weeks defaulted, but Manca Weeks opposed landlord's motion. Supreme Court denied landlord's motion for summary judgment on the complaint against Manka Weeks, and landlord appealed.

In affirming, the Appellate Division focused on Manca's assertion that she notified landlord in December 2014 that she had vacated the apartment the previous February. The court then turned to the plain English rider to the lease, which provided that if one or more tenants should leave during the term of the lease, the remaining tenants are responsible for the entire monthly rent payment. The court then turned to another provision of the lease which provided for a $200 per day charge if "Tenant", defined as both David and Manca, occupied past the expiration of the lease term. In light of these provisions, the court held that questions of fact remained about whether Manca was liable for the rent and holdover charges the landlord sought.

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Tenant's Proposed Withdrawal of Application for Loft Board Coverage Void As Against Public Policy

Matter of Dom Ben Realty Corp. v. New York City Loft Board NYLJ 11/15/19, p. 24, col. 3 AppDiv, Second Dept. (memorandum opinion)

In landlord's article 78 proceeding challenging Loft Board orders rejecting tenants' proposed withdrawal of their coverage application, the Loft Board appealed from Supreme Court's grant of the petition. The Appellate Division modified to confirm the Loft Board's determination that the proposed withdrawals were void as against public policy.

Landlord had operated a paper waste disposal plant on the first floor of the subject Brooklyn building. Residential tenants, who occupied the remainder of the building, applied in 2014 for Loft Law coverage. Landlord opposed the applications, contending that its hazardous operation was inconsistent with residential use. Landlord and tenants then negotiated a settlement agreement by the terms of which landlord would shut down the waste disposal facility, tenants would be permitted to remain in the building as rent-stabilized tenants, landlord would immediately register the building with DHCR to obtain immediate rent stabilized status, and landlord would make additional concessions. Tenants then sought to withdraw their applications for Loft Law coverage, but the Loft Board rejected their proposed withdrawal of coverage application because only the Loft Law could legalize tenants' residential occupation of the building while the building had no residential certificate of occupancy. Landlord then brought this article 78 proceeding, and Supreme Court granted the petition, finding that the Loft Board's determination lacked a rational basis.

In modifying, the Appellate Division noted that the Loft Board regulations give the Board power to review settlement agreements and to reject proposed settlements. The court emphasized that the Loft Law provides the sole means by which the tenants could legal reside in the building, which made the Board's rejection of the withdrawal application rational. The court reasoned that the proposed settlement agreement would perpetuate an illegal occupancy, and noted that Loft Law coverage is not subject to waiver by a tenant. The court also held, however, that the Loft Board's determination that the settlement agreement was unenforceable in its entirety lacked a rational basis. Those provisions of the agreement other than the proposed withdrawal from Loft Law coverage remain enforceable.