Landlord & Tenant Law

Insurance Failure Precludes Exercise of Purchase Option 

455 Dumont Associates LLC v. Rule Realty Corp. NYLJ 2/18/20, p. 37, col. 1 AppDiv, Second Dept. (memorandum opinion)

In commercial tenant's action for declaratory and injunctive relief, tenant appealed from Supreme Court's declaration that tenant had no legal interest in the real property. The Appellate Division affirmed, holding that tenant's failure to procure insurance entitled landlord to terminate the lease and prevent tenant from exercising its option to purchase the property.

The parties entered into a lease for a period beginning Oct. 1, 2004 and ending on Sept. 30, 2015. The lease required tenant to purchase $2,000,000 in insurance coverage, and to provide proof of coverage to landlord. The lease also gave tenant an option to purchase the property. In three letters dated in early 2014, landlord notified tenant that it was in default for failure to procure the requisite insurance coverage. Those letters were followed by a letter dated April 30, 2014 informing tenant that the lease would be terminated as of May 8, 2014. On July 25, 2014, tenant commenced this action for a declaration that the lease had not been validly terminated and that tenant was entitled to exercise its option to purchase. Supreme Court granted summary judgment to landlord and declared that tenant had no interest in the property. Tenant appealed.

In affirming, the Appellate Division started by holding that failure to provide the required insurance was a material breach of the lease, and was an obligation separate and apart from tenant's obligation to indemnify landlord. The court then rejected tenant's argument that landlord had waived compliance with the insurance obligation by accepting rent for years without objecting. The court relied on a lease provision specifying that failure to enforce a condition in the lease did not constitute a waiver, and the court went on to hold that mere negligence or oversight by landlord would not operate as a waiver. Because landlord properly exercised its right to terminate the lease before tenant exercised its purchase option, tenant could no longer exercise the option, leaving tenant with no interest in the subject property.