Scott E. Mollen

Commercial Landlord-Tenant—Neither Party Was a “Prevailing Party” and Both Parties' Motionsfor Attorney Fees Were Denied

This decision arose from a commercial lease dispute, involving a bar and restaurant. The landlord had served a “Thirty (30) Days Notice of Cancellation of Lease” (notice). The notice alleged that the tenant had engaged in unauthorized uses of the premises and had performed alterations without the landlord's consent and without required NYC Dep't of Buildings (DOB) permits. The notice specified that the lease would terminate if the defaults were not cured within 30 days. The court had previously granted the tenant a “Yellowstone” injunction.

Following a bench trial, the court awarded a judgment giving the tenant an opportunity to cure certain conditions at the premises. The tenant thereafter made the subject motion for “attorney fees… plus costs and disbursements, as the prevailing party in this action.” The landlord also moved for “an order finding that it is the prevailing party and awarding it reasonable,” professional and attorney fees.

The Court of Appeals has explained:

“[u]nder the general rule, attorney's fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule”…. “In order to justify an award of contractual attorney fees, the court need not adopt each claim raised in a lawsuit. Rather, the claimant must simply be the prevailing party on the central claims advanced, and receive substantial relief in consequence thereof”…. “To determine whether a party has 'prevailed' for the purpose of awarding attorney fees, the court must consider the 'true scope' of the dispute litigated and what was achieved within that scope”….

Although the landlord had waived the tenant's lease violations, the landlord “could not effectively waive compliance with DOB regulations enacted for the protection of the public.” The court had concluded that the tenant was entitled to an opportunity to cure by legalizing the subject conditions.The court had found that the tenant had made certain alterations “which constituted a substantial violation of the lease.” However, the court also found that the landlord had “waived the no-waiver and no-alterations provisions of the lease.” Evidence “established complicity on landlord's part in permitting the illegal alterations to be made….” Moreover, “virtually all of the alternations were made at the outset of the tenancy, and…landlord's long-standing forbearance from objecting to the alterations was not 'passive acquiescence,' as landlord claimed, but acquiescence that amounted to active involvement in illegally altering the premises.”

The court held that under these circumstances “neither party obtained substantial relief on its claims and therefore neither is the prevailing party.” Although the tenant achieved the opportunity to legalize its alterations, “the central relief sought by tenant was a determination that it was not in substantial violation of the lease and that it was not obligated to repair the conditions it alleged were 'caused by the owner.'” The landlord had also not obtained the “central relief” that it sought, i.e., the termination of the lease. The landlord had waived its objection to the lease violations and did not obtain “a declaration that the various alleged unauthorized uses of, and alterations to, the premises were 'default[s] under the lease.'”

Although the court found that the tenant had made several alterations with the landlord's knowledge and acquiescence, but without required permits, the court had also “rejected numerous other claims by landlord as to illegal alterations or unauthorized uses.” The landlord had also sought an injunction directing the tenant to legalize the alterations and uses, but had “effectively abandoned these claims at trial, taking the position that the tenancy must be terminated.” The landlord had not prevailed on that relief.

The court distinguished a prior case which held that merely because a tenant was granted a cure period, did not mean that the landlord was not the prevailing party. In that case, the court held that a residential tenant had breached a lease, and awarded possession to the landlord and had granted the tenant a 10-day statutory cure period. Here, the court did not find that the tenant was in default, based upon the landlord's waiver of its right to enforce the no-alterations clause of the lease. However, the court had ordered the tenant to cure the alterations because the landlord could not waive compliance with DOB regulations. Thus, the court denied both parties' request for attorney fees and costs.

Comment: The parties had also disputed whether the lease's attorney fee provision was applicable to the subject circumstances. The tenant argued that the attorney fee provision only applied if the landlord instituted an action and was a prevailing party. The landlord argued that the lease provided for attorney fees “in the event any 'action or inaction by tenant causes landlord to incur reasonable attorney fees.'” The court assumed for purposes of the subject motions, that attorney fees would be available to the landlord if it were the prevailing party.

Occasionally, we see cases where a landlord claims that a tenant made alterations that violated the lease and also violated municipal codes and the evidence shows that the landlord knew about the wrongful conduct and did nothing about it for several years. In some cases, that occurs because in a weak real estate market, the landlord just wants to keep the space occupied and collect the rent. When the market is strong and the original lease becomes a “below market” lease, that same landlord is “outraged” that improper alterations had been performed.

These cases often involve defenses of waiver, estoppel or ratification. Some cases will involve disputes as to whether the alterations were structural or non-structural. Of course, these cases will be decided based upon the specific facts of each case.

325 E. 14th St. Corp. v. Marie France Realty, Sup. Ct., N.Y. Co., Index No. 651074/2014, decided 5/18/18, Friedman, J.

Commercial Landlord-Tenant—Did Not Tortiously Interfere With Tenant's Sale of Her Restaurant by Telling the Purchaser that He had No Right to Occupy the Premises Without a Valid Assignment of the Lease and Without Payment of Rent Arrears

This commercial landlord-tenant action had been commenced by a plaintiff tenant against its landlord, seeking damages “based on tortious interference with contract, fraud and misrepresentation, and assault.” Following a trial, the court found that the defendant landlord had leased the premises to “A” pursuant to a lease dated Oct. 1, 2007, for a term that ended on and including Sept. 30, 2012. On or about Aug. 11, 2011, the plaintiff and the landlord executed a document labeled “Assignment and Assumption of Lease” (assignment). The assignment extended the lease until Sept. 30, 2016 and permitted the assignment of the lease from “A” to the plaintiff.

Thereafter, the plaintiff and “A” executed an “Agreement for the Sale of Business dated Aug. 20, 2011, providing for sale of the business for $30,000, which was to be paid upon execution of the document.” The plaintiff then took occupancy of the premises. “B” had executed documents on behalf of the plaintiff. “B” had “no prior experience as a business owner or in the restaurant business. “B” had “trouble making timely payments on rent and additional rent that came due under the lease, and decided shortly after her tenancy commenced that she wished to sell the business.” “B” asked the landlord “if he would consent to a sale and he stated he would cooperate as long as the arrears were paid.”

On or about Aug. 26, 2012, “B” signed an agreement for the sale of the restaurant with “C.” The agreement provided for “a down payment of $5,000, which was to be held in escrow until the closing.” The closing was scheduled to take place on Oct. 15, 2012, “at which time the balance of the purchase price of $25,000 would be due and payable.” Upon execution of the agreement, rather than holding the $5,000 in escrow as required by her agreement, “B” took the money and paid it to the landlord to be applied towards her arrears. Again, the landlord stated that he would consent to an assignment upon payment of arrears. The landlord also noted that he would require execution of a formal assignment and assumption of the lease.

Prior to the closing of the sale with “C,” “B” allowed “C” to commence “occupancy and he began to operate his business there.” “B” never obtained written consent of the landlord or had executed any assignment or assumption of the lease. The landlord discovered “C's” operation of the restaurant when the landlord passed by the premises and observed “C” in occupancy. The landlord then advised one of “C's” employees that “C” “had no right to be there without an executed [assignment] and that arrears had to be addressed before [landlord] would sign such a document.”

“C” thereafter backed out of the agreement to purchase the restaurant from “B” and vacated the premises, returning the keys to “B.” Although “B” took back possession from “C,” she never attempted to resume running the business.

The landlord thereafter commenced a summary nonpayment proceeding. The parties had entered into a stipulation pursuant to which, the plaintiff surrendered possession of the premises and the proceeding was discontinued without prejudice. The plaintiff subsequently withdrew her cause of action for assault and battery. The court held that the plaintiff had “failed to make out a prima facie case of fraud. The only misrepresentation alleged by plaintiff was based on “the validity of some charges on the tenant ledger…showing arrears due.”

The plaintiff acknowledged that she was in arrears at the time when she gave “C” possession of the premises. There was “no misrepresentation regarding the fact that plaintiff was in arrears, nor were the other elements of the cause of action established.” Accordingly, the court dismissed the action for fraud and misrepresentation.

The court then dismissed the tortious interference claim. The plaintiff never presented a contract between the plaintiff and a third party. The only contract presented had been entered into by “B” and “C.” The landlord had not acted “intentionally” to procure “C's” breach of contract. The plaintiff had wrongfully put “C” into possession, without the landlord's knowledge and prior to the landlord's written consent as required by the plaintiff's lease. The plaintiff presented no evidence as to why “C” breached the contract. Moreover, the plaintiff admitted that she had breached the contract with “C,” “by using the down payment to pay arrears instead of holding it in escrow.” “C” never testified as a witness.

The plaintiff argued that the court should “surmise” that “C” cancelled the purchase “after his employees were advised that plaintiff was in arrears and an [assignment] would not be signed off on by defendant until the arrears were paid.” The court reasoned that even if that were the reason and there was no such evidence in the record, “it would not constitute tortious interference, because [landlord] was justified in informing ['C's'] employees that they had no right to possession before an assignment was executed and that [landlord] would not execute an assignment until the arrears were paid.” Accordingly, the court dismissed the tortious interference claim. Since the landlord offered no evidence on his counterclaim for attorney fees and sanctions, the counterclaim was also dismissed.

D'Jesus Rest. Corp. v. 1133 Boston Rd. LLC, Civ. Ct., Bx. Co., Index No. TS300003-18/BX, Kraus, J.

Scott E. Mollen is a partner at Herrick, Feinstein.