Scott E. Mollen

Commercial Landlord—Tenant-Lease Option to Renew Lacked Essential Element-Void and Unenforceable—Doctrine of Definiteness

 A defendant landlord had moved for summary judgment on several counterclaims, arguing that there are no triable issues of fact “regarding the expiration of the lease and that a valid option to renew did not exist.” The landlord sought “use and occupancy,” attorney fees, a final judgment of possession and issuance of a warrant of eviction. It also sought dismissal of several of the tenant's causes of action and affirmative defenses. The tenant opposed the landlord's motions and cross-moved for summary judgment on its causes of action and for dismissal of the landlord's counter-claims.

The landlord argued that since the lease option to renew did not “identify a rent amount or a methodology for calculating the rent during a renewal,” “the option is unenforceable.” The landlord also contended that the tenant could not exercise the option because the tenant was in default of their agreement by having failed to “pay the complete buyout debt plus interest and late charges.”

The tenant argued that the agreement embodied a “valid option to renew because the renewal rent would increase by 3 percent each year as the agreement's rental amounts increased.” The tenant asserted that he had exercised his option “by serving a notice of intent to renew and continuing to make rental payments until he received a 30-day notice of termination in January 2016.”

The tenant claimed that he was not in default at the time when he elected to renew and that the “buyout debt was premised on his receiving certain equipment at the premises.” The tenant claimed that that the parties had “agreed to end the buyout payments after December 2011” because he did not receive certain property and equipment. The landlord countered that “he is due repayment of the buyout debt.”

The court explained that the “doctrine of definiteness or certainty” provides that courts may not enforce contracts unless they are “able to determine what in fact the parties have agreed to….” “If an agreement is not certain in its material terms, there can be no legal enforceable contract….” Moreover, “a mere agreement to agree, in which a material term is left for future negotiation, is unenforceable….”

The New York Court of Appeals “identified two ways in which their requirement of definiteness could be satisfied in the absence of an explicit contract term: (1) an agreement could contain a single 'methodology for determining the [missing term]…within the four corners of the lease, for a [term] so arrived at would have been the end product of agreement between the parties themselves'; or (2) an agreement could 'invite recourse to an objective extrinsic event, condition or standard on which the amount was made to depend….”.

The subject option to renew provided that the lease could be extended for an additional five-year period provided that the tenant “provides written notice to the owner by certified mail, with return receipt to be received by the landlord no later than April 1, 2015 provided the tenant is not in default of any provisions of the lease as amended and modified.”

The court found that the agreement lacked any “methodology within its four corners to determine the missing rent for the renewal period nor invited recourse to an objective extrinsic event, condition or standard on which the amount was made to depend.” Rather, the renewal clause “is completely silent as to the renewal rent.” Accordingly, the court held that the option to renew was “missing an essential element and was therefore void and unenforceable.”

Since the lease had expired, the court further held that the landlord was entitled to holdover rent until the tenant vacates the premises.

The tenant had alleged that it was to receive property, including inventory and assume an outstanding debt and that in addition to monies paid on execution of the lease, the tenant had “commenced to pay monthly additional rent until full payment of the balance.” The landlord had submitted a “buyout debt ledger” which showed that the additional monthly payments had stopped with a November 2011 payment and an outstanding balance remained.

The court found that the tenant had raised a triable issue of fact with respect to the “buyout debt.” The tenant's submitted documentation showed that monthly additional rent had not been sought after November 2011. The tenant alleged that payments stopped “due to the parties consensus” and that such debt was conditioned on receipt of property and inventory when the tenant took possession, which the tenant never received. The tenant, claiming that the parties agreed that the buyout debt would no longer be due, cited invoices and emails sent by the landlord which failed “to contain a demand for the payment, after November 2011.”

Thus, the court granted the landlord's motion for summary judgment for a declaratory judgment that the option to renew is invalid and for use and occupancy. The court set the matter down for a hearing as to the “balance due and/or credit of any additional rent and late charges.” The court denied the tenant's cross motion for summary judgment on all of the tenant's claims and for dismissal of the landlord's counter-claims. The court directed that a warrant of eviction issue.

Comment: Occasionally, the courts see cases which usually involve relatively small commercial landlords and tenants, where an option to renew a lease will be embodied either in an alleged oral agreement or a relatively informal document. Sometimes, one or both parties sought to avoid the expense of hiring attorneys to help negotiate and draft such option agreements. Here, the option to renew was set forth in a written lease. The tenant had argued that the terms and conditions of the written lease, including the rent escalation term were to be continued. The court determined that such argument was not based on language in the lease.

It should also be noted that the decision stated that the option to renew could not be exercised if at the time of exercise, the tenant was in default of “any provisions of the lease.” An option to renew is a significant lease benefit for a tenant. Neither party may know where “fair market rent” will be five or 10 years after lease execution. If the fair market rent is significantly above a renewal option rent, a landlord may be incentivized to challenge an exercise of the right to renew. Therefore, when representing a tenant, counsel should resist language that provides the option to renew cannot be exercised if there is “any” default. A tenant might limit it to any “material” default or limit a no-default condition to certain lease obligations. For example, it conditions the option to renew on “no monetary defaults” or to a major event default which is subject to a notice of default. Often, tenants will insist upon notice and right to cure if the landlord believes that a default has occurred. Obviously larger and/or strong credit tenants have stronger bargaining power than small independent tenants.

Vizel v. Vitale, Supreme Court, Kings Co., Case No. 502107/2016, decided Oct. 18, 2018, Fisher, J.

Landlord-Tenant—Out-of-Court Surrender Agreement Unenforceable—Tenant Buy-Outs Can Be “Win-Win” Situations

A landlord commenced a summary proceeding against an occupant, seeking possession of an apartment on the grounds that the occupant is a “licensee whose license has expired.” The occupant served an answer which asserted several defenses and a counterclaim for harassment. Following a trial, the court noted that the landlord had “effectuated service of a notice to quit pursuant to RPAPL §713 before commencing this proceeding,” the occupant had “at least some point in the past, been a tenant of the subject premises subject to the Rent Stabilization Law,” and most recently had occupied the apartment pursuant to a two-year lease commencing Oct. 1, 2016.

The occupant and the landlord had executed an “out of court” agreement on Dec. 23, 2016 (agreement). The agreement provided that the occupant would surrender possession of the apartment on or before March 15, 2017, in exchange for which the landlord would pay the occupant $20,000. The agreement stated that it was “irrevocable and unconditional; that (occupant's) default in vacating would subject (occupant) to immediate eviction for holding over and to liability for use and occupancy at a rate of $1,500 per day; that (landlord) does not have to repair any conditions; and that (occupant) would withdraw claims at the New York State Division of Housing and Community Renewal (DHCR) with prejudice.” The agreement also embodied a general release. The landlord paid the occupant $3,000 as an initial down payment. The agreement was drafted by the landlord.

The landlord had tried to find another apartment for the occupant. The occupant is 72 years old, had lived in the apartment for eight years, lived in the neighborhood for 20 years, is retired, is unemployed, lives alone, and receives Section 8 financial assistance. Social Security Disability is the occupant's sole source of income. The occupant suffers from a “psychiatric disability,” related to stress and depression, for which he takes medication. His last family member died in November 2016 and that death had a “psychological effect” on him. He suffered from depression when he signed the agreement.

The occupant introduced into evidence a prescription he received for an antidepressant and a doctor's letter which stated that the occupant had been a patient since February 2017 and is being treated for depression. The landlord did not dispute such evidence.

The occupant testified that a landlord employee (landlord) had initiated communication about surrendering the apartment. The landlord had called the occupant twice a week and visited the occupant three times a week in the three weeks prior to execution of the agreement. The landlord had stated that it would “not renew (occupant's) lease, thus putting his Section 8 subsidy in jeopardy.” The occupant asserted that he initially declined the landlord's request to surrender the apartment. The parties disputed whether the landlord had advised the occupant to seek counsel before signing the agreement. The occupant had offered to return the $3,000 down payment he had received.

The court explained that courts may “enforce an out-of-court agreement of a rent-regulated tenant to surrender an apartment for consideration, although public policy and equitable concerns inform the court's evaluation of such an agreement.” Courts will enforce out-of-court surrender agreements “when a landlord otherwise had cause to commence an eviction proceeding against a tenant, when it was the tenant who initiated the negotiation, and when the tenant obtained the advice of counsel.”

However, in the subject case, the landlord had not demonstrated that he had “any cause to seek (occupant's) eviction,… a factor militating against enforceability of an out-of-court surrender.” The landlord did not deny that it had advised the occupant that it would not renew the occupant's lease “if (occupant) did not surrender the subject premises, an empty threat against a rent-stabilized tenant who is entitled to a lease renewal by operation of law.” The court noted that “[m]isleading a tenant into believing that the tenant has no other option but to vacate a rent-stabilized apartment voids an out-of-court surrender.”

The court further noted that the NYC Housing Maintenance Code (HMC), amended in Dec. 2, 2015, before the landlord initially contacted the occupant, defines harassment as “an owner's initiation of contact with a tenant to induce a tenant to vacate the tenant's apartment in the absence of detailed written disclosures including, inter alia, that the tenant may reject an offer and that the tenant may seek guidance of counsel.”

The court opined that the landlord's initiation of negotiations as to surrender of the subject tenancy, distinguished this case from judicial precedent which enforced an out of court surrender agreement. The court stated that the landlord's actions contravened the HMC and that weighed against enforcement of the agreement.

Moreover, unlike out-of-court agreements which have been upheld, the occupant did not execute the agreement with the benefit of counsel. Citing the tenant's receipt of Section 8 benefits and the occupant's disability, the court noted that, “[a] tenant's vulnerabilities, resulting from poverty and disabilities, factor against enforcement of an out-of-court settlement as well.”

The landlord countered that the occupant's acceptance of the $3,000 payment requires enforcement of the agreement. Since the landlord had not rebutted the occupant's assertion that he attempted to return that money, the court found that such factor also weighed against enforcement of the agreement.

Since the landlord lacked a basis to evict the occupant before negotiating the agreement, landlord had initiated the negotiation, had advised the occupant his lease would not renew if he did not surrender the lease, the occupant lacked an attorney to consult with and suffered from poverty and a disability, the court held that the agreement was not enforceable and the occupant is a rent-stabilized tenant and not a licensee. Thus, the court dismissed the proceeding which sought possession, without prejudice to a non-possessory claim relating to the $3,000 that had been paid by the landlord and without prejudice to any defense that the occupant may have to such claim.

In addressing the occupant's counterclaims based on harassment, the court found that the landlord's “initiation of the negotiation of the agreement squarely fits into the definition of harassment as defined by N.Y.C. Admin. Code §27-2004(48)(f-2).” The court explained that the HMC permits tenants to seek to have HMC violations placed on the subject premises, “to seek an order from the court restraining an owner from engaging in such conduct, and to impose civil penalties payment to the New York City Commissioner of Finance.” The Admin. Code provides that upon a finding of harassment, courts may impose a civil penalty of not less than $2,000 and not more than $10,000.

Accordingly, the court directed the landlord to “restrain from engaging in any conduct in violation of N.Y.C. Admin. Code.” Based on the landlord's efforts to relocate the occupant to an elevator building, the court ordered the “minimum penalty.” Thus, the court ordered a civil penalty of $2,000.00 against the landlord based on the occupant's counterclaim and ordered that the landlord notify the NYC Department of Housing Preservation and Development (HPD) of the penalty and that HPD post such penalty on its website.

Comment: An owner “buying-out” a rent-regulated tenant is not inherently bad or illegal. In certain situations, a “buy-out” represents a positive life changing event, akin to winning a lottery. Tenants can utilize a “buy-out” payment to purchase a new, better apartment or home. A tenant may have contemplated relocating to another state for health or family reasons or just personal preference.

The law is not intended to foreclose such opportunities. Rather, it is intended to prevent unscrupulous landlords from wrongfully pressuring or deceiving rent regulated tenants into relinquishing their valuable rights to receive renewal leases. It is especially important to prevent harassment of rent-regulated tenants because so many of them are elderly, infirm and/or just get by on very limited income. Given the cost of alternative housing, a lump sum “buyout” may not be as valuable as a renewal lease.

As for who initiates the buyout dialogue in these matters, it is usually the landlord. That is because in most situations, it is the landlord who decides whether a “buyout” negotiation is worth the effort and the expense. Tenants are usually not aware of landlords' plans to demolish their buildings, combine units or make other significant building alterations.

If a landlord was barred from initiating such discussion, tenants could lose very valuable opportunities. The landlord's “sin” is usually not in asking if a tenant would consider a buy-out, but it is the landlord's incessant pressure on the tenant to make a deal. There presently are pending anti-harassment bills that seek to further address such concerns. In seeking to redress such wrongful conduct, government should not eliminate opportunities for true “win-win” negotiations and agreements by placing unreasonable restraints on the parties ability to dialogue and negotiate.

 ABJ Milano LLC v. Howell, Civil Court, NY Co., Case No. 65131/2017, decided Oct. 9, 2018, Stoller, J.

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