Case Notes

The tenant operated a laundry on the premises pursuant to a lease whose original term expired on Nov. 30, 2011. A lease rider gave the tenant the option to renew for two successive five-year periods so long as the tenant notified the landlord of its intent to exercise the renewal option no later than six months prior to the expiration of the then-existing term. The rider provided for notice in writing and delivered personally or by registered or certified mail or by a reputable overnight courier service. The landlord contended that tenant did not provide notice of an intent to renew until it received notice by certified mail in November 2011. The landlord rejected that notice as untimely, and tenant vacated the premises pursuant to court order in April 2012. The tenant then brought this action for breach of contract. At trial, one of tenant's principals testified that he had an employee hand deliver a renewal notice on May 30, 2011. Although the principal did not mention hand delivery in his earlier deposition or two sworn affidavits, and although landlord's representative testified that its office was closed that day, which was Memorial Day, the Supreme Court awarded tenant judgment for $1,250,000. The landlord appealed.

In affirming, the Appellate Division first concluded that the testimony of tenant's principal was incredible, and that tenant had timely exercised its renewal option. But the court then noted that equity intervenes to relieve tenant of its failure to timely exercise a right to renew when the failure was the result of inadvertence, when nonrenewal would result in a forfeiture, and where landlord would not be prejudiced by tenant's delay in sending the renewal notice. In this case, the court started by crediting the tenant's principal's testimony that he sent notice by ordinary mail on May 30, even though he never mentioned the mail notice in his affidavits. The court concluded that failure to exercise the renewal notice in the manner required by the lease was a matter of inadvertence. The court then concluded that the tenant's loss of good will constituted forfeiture of a valuable asset, and then indicated that landlord was not prejudiced by the delay, because the landlord had received written notice by the May 30 mailing. The court rejected the landlord's contention that it was prejudiced because it had entered into a contract to sell the building to a buyer who wanted the premises vacant, noting that in light of the notice the tenant had received, execution of that contract was the product of bad faith or negligence.

Analysis

Although New York courts have awarded tenants equitable relief from failure to timely exercise a lease renewal option, to date, no court appears to have awarded money damages to a t. A tenant may establish the forfeiture necessary to obtain equitable relief if he or she has made substantial improvements to the property that could not be recouped during the initial lease term For instance, in Popyork, LLC v. 80 Ct. St. Corp., 23 A.D.3d 538, the Second Department held that the tenants' payment of $500,000 to acquire the former tenant's right during the first two years of the five year lease as well as the $300,000 in renovation expenses would result in forfeiture if the tenant were not allowed to renew. However, improvements to the property will not amount to forfeiture if the tenant has reaped the benefits of the improvements during the initial lease term. For instance, in Wayside Homes, Inc. v. Purcelli, 104 A.D.2d 650, the Second Department held that substantial improvements made by a tenant during the first year of a 30-year lease would not result in substantial forfeiture if the tenant were denied the renewal option. The c           ourt reasoned that since the improvements were made at the commencement of the long initial lease period, tenant had already realized the benefits of the improvements.