Scott E. Mollen

Commercial Landlord-Tenant—Court Denies Equitable Relief—Tenant Failed to Timely Exercise Option to Purchase—Letter 11 Months Late

This decision involved an option to purchase (option) which was embodied in a commercial lease. The commercial tenant “admittedly failed to exercise” the option in a timely manner. The court found that the tenant had failed to prove its entitlement to the “equitable relief of avoiding the consequences of its untimely attempt to exercise the option and forfeiture of its investments.” This decision also contained an extensive analysis of the “Dead Man's Statute.” My summary will focus on that portion of the decision which addressed the untimely exercise of the option.

The parties had entered into a lease dated March 1, 1999, pursuant to which the tenant rented the subject premises for use as an auto garage and repair shop for a six-year time period. The tenant claimed that the lease included an option granting the tenant the right to purchase the property for $950,000 at the end of the fourth year of the lease. The option required the tenant to give written notice to the landlord of its intent to exercise the option by certified mail “within 90 days prior to end of the fourth year, i.e., by November 30, 2002 (Notice).” The option also required that the tenant be “ready, willing, and able” to close before the end of February 2003 and that the Notice set a time and location for the closing.

It was undisputed that the tenant failed to timely provide written notice of its intent to exercise the option by the required date. The landlord had commenced the subject action seeking a judgement declaring that the option was unenforceable. The landlord argued that the option had been removed from the lease at the time when it was executed and alternately, if the option was in the lease, the tenant failed to provide timely notice of exercise as required by the lease.

The tenant had argued that it had personally advised the landlord of its intent to exercise its rights under the option in February 2002 and also at “other times in Fall 2002” and that the landlord's response was to file the subject lawsuit in March 2003. The tenant asserted that the landlord had “disaffirmed” existence of the option, and the tenant therefore concluded that any written exercise would have been “futile.” The tenant also cited “extensive improvements in the amount of approximately $150,000 in anticipation of becoming the purchaser, and it was still in the process of expending money.” However, the tenant had not informed the landlord in writing of its election to exercise the option until Oct. 17, 2003, three days before it filed its counterclaims and 11 months “after it should have tendered its written notice.” The tenant's untimely exercise letter stated that the tenant was “ready, willing, and able” to purchase the premises for $950,000 on or three months after the date of the Notice and that the written notice “reiterates and confirms” the tenant's prior oral exercise of the option, which the tenant had “personally conveyed” to the landlord prior to Dec. 31, 2002, at which time the owner “rejected the oral exercise and stated that there was no option in the lease.”

The court stated that “[f]or reasons still unknown to this court, it took almost (11) years for this case to come to trial.” There had been “numerous motions and a change in plaintiff's attorneys.”

The court explained a court may relieve a commercial tenant's failure to timely exercise an option to purchase or renew a lease “where (1) such failure was the result of 'inadvertence,' 'negligence' or “honest mistake;' (2) the nonrenewal would result in a 'forfeiture' by the tenant due to his substantial improvements on the property; and (3) the landlord would not be prejudiced by the tenant's failure to send, or its delay in sending, the renewal notice…All three prongs must be satisfied for equitable relief to be granted; if any of the criteria are not met then relief must be denied…equity allows a court to intervene to protect a tenant from his failure to strictly comply with a relatively inconsequential requirement of an option clause 'because he might suffer a forfeiture if he has made valuable improvements on the property.' Equitable relief must always depend upon the facts of a particular case, and should be granted only where the tenant's failure was slight, and the loss suffered by the landlord was small when compared to the hardship that would result to the tenant…Substantial noncompliance with the terms of an option clause cannot be rewarded by a judicial forgiveness that redounds to the detriment of the other party to the contract. Where a lease specifically requires written notice to exercise a renewal or purchase option, a tenant's oral notice that he intends to exercise the option is ineffective and insufficient on its own to warrant equitable relief…However, such oral communications, if supported by the record, may be evidence that the lessee knew or should have known that the tenant intended to exercise the option.”

The tenant acknowledged that it failed to exercise the option until 11 months after deadline, “including more than seven months after Plaintiff's initiation of this action.” The tenant sought equitable relief on the grounds its delay was “inadvertent” and it had “orally informed” the landlord on “multiple occasions from February through October 2002 that he intended to exercise the purchase option.” The tenant also argued that it will suffer a substantial forfeiture because it had made costly improvements to the property totaling more than $130,000 “in anticipation of purchasing the property, which it would not have expended otherwise.” The tenant further argued there is no prejudice to the landlord since the landlord had not negotiated to sell or lease the property to another party and had no intention to do so.

The landlord countered that the tenant's “delay was inordinate,” that no court had ever excused an 11-month delay that resulted “wholly from the tenant's negligence,” and the tenant's delay was willful and not excusable. The landlord also argued that the tenant failed to prove that the alleged improvements had been made with the “specific intention of purchasing property rather than utilizing it during the lease term.” Finally, the landlord argued that the tenant had failed to show the absence of prejudice to the landlord, and for all the foregoing reasons, equitable relief should be denied.

The court's “central concern” was the “length of the tenant's delay, and reason for it.” Courts are more likely “to excuse a shorter delay caused by an innocuous reason.” Most cases where equitable relief had been granted involved delays of less than six weeks and the tenant's failure to timely exercise had been cured “immediately or soon after notice was given by the landlord.” Equitable relief had been denied when “a delay exceeded eight months and the delay was caused solely by the tenant's negligence.” The court found only two cases where late exercises of options to purchase were permitted beyond eight months. In those cases, there were “exceptional circumstances where the landlord contributed to the tenant's delay.”

Here, the court observed that the tenant's 11-month delay in providing timely written notice of intent to exercise the option “far exceeds the outer limit of reasonable delay, particularly since (tenant) was put on notice that the option deadline had passed and then still waited another seven months before submitting its written notice.” Court noted that in “practically all cases where the delay was excused, the tenant cured its delay immediately upon learning that it had defaulted.”

Although prior decisions had not provided “actual definitions,” courts have applied “a spectrum ranging from minor inadvertance (commonly referred to as 'venial inattention') to substantial negligence to gross negligence.” Courts have excused short delays “resulting from a nominal technical defect or venial inattention which usually takes the form of exercising the option in a manner different from what is described in the lease.”

The court noted that where tenants have failed to exercise the option at all and had not immediately cured the default “after learning that the time to exercise the option has expired, the courts will ipso facto find that substantial negligence defeated any claim for equitable relief.” Furthermore, “regardless of the length of the delay, equitable relief will be denied where tenant's delay was willful or the result of his own gross negligence.”

Here, the sole reason for the tenant's failure to timely send the Notice for more than eleven months was the tenant's “negligence.” The tenant claimed that he was working extremely hard and had been “consumed by personal matters” during the time prior to the option deadline. He cited “family and personal problems” at a time when he was working six days a week. He claimed that he was preoccupied with obtaining a job for his brother, who had been incarcerated and was granted supervised release provided that he found a job. The tenant claimed that he spent five to six months seeking work for his brother and that he did that on Sundays, since he was working six days a week. The tenant also cited marital difficulties and also blamed his prior attorney.

The court stated that if the tenant “attempted to cure his delay by submitting a written notice to (landlord) immediately after finding work for (his brother) in February 2003, which coincided with the expiration of the 90-day period in which the parties should have closed on the option,” the court might have ruled otherwise. However, the tenant offered no legitimate reason why he waited another seven months after February 2003 in which to send the Notice.

The court explained that having “continuous marital difficulties, 'losing track of time' or not trusting his attorney did not justify this delay.” Moreover, the tenant's testimony was contradicted by other testimony that the tenant was very familiar with the terms of the option and understood its requirements. The tenant had confirmed his awareness of the option by testifying that he had orally told the landlord that he was going to buy the building “every time” that the landlord came down to the building. He claimed that he saw the landlord five to six times and mentioned on each of these occasions that he would be exercising the option to purchase.

The tenant had also stated that prior to the three-month option period, he had sought financial assistance from family members to raise the $950,000 and had spoken to a lender to secure financing for the purchase. Thus, the court noted that the tenant was “fully aware of his responsibility to exercise the option in writing and the lease requirement to be 'ready, willing, and able' to purchase the property at that time.” The tenant also admitted that his sister was a director of the tenant's business, she was aware of the lease and option terms, and she “had authority to exercise the option and could have done so on the (tenant's) behalf.”

Thus, the court stated that the tenant failed to prove that his failure to timely exercise the option in writing resulted from “inadvertence,” “negligence” or “honest mistake.” It found that the tenant was “entirely responsible for his delay and…that he was aware of the option deadline.” Moreover, the tenant failed to cure the default for “several more months.” The court concluded that the tenant's delay “constitutes inexcusable gross negligence and does not warrant the granting of the equitable relief.”

The tenant asserted that based on his intention to own the property, he had purchased and installed “expensive” “high functioning equipment.” The tenant had allegedly installed, inter alia, a “new heating system, a ventilation system, new skylights…an air compressor line, two hydraulic lifts…lighting throughout the premises, a wall around the loading dock for safety.”

The tenant claimed that he hired his real estate broker to oversee these improvements, the broker managed the work and sent a monthly statement for the work done at the premises and the materials used and that the tenant had paid the broker by “cash and check.” The broker corroborated the tenant's testimony. However, all of the receipts were dated June 1999 and December 2000, within the first three years of the lease term. There were no expenditures made during or after 2001 and the tenant never explained his failure to make additional expenditures after 2001.

The landlord argued that the broker was an interested witness since he would benefit from the sale of the building to the tenant and argued that since the tenant had made the alleged expenditures within the first three years of the six-year lease, the tenant “recouped its expenses,” the expenditures did not prove an intent to exercise the option.

Furthermore, many of the expense-related documents were “handwritten, undated, or simply referred to the month and year in which they may have been incurred and did not specify the nature of the expenditures beyond general or vague descriptions.” Several of the receipts lacked “any address, while others referenced” two different addresses. The tenant admitted to “financial co-mingling” between his various entities and two locations, and it was difficult to determine which expenditures were solely for the subject location. The broker admitted having helped the tenant with his operations at two different locations. Moreover, many expenditures were for “removable trade fixtures…would not count towards a forfeiture.”

The court acknowledged that the “forfeiture may be found even in cases where there's no substantial expenditures…if the tenant shows that the business location itself is a 'valuable asset' and the tenant stands to lose customer good will associated with that location….” Thus, where there is a “long-standing location for retail business,” that could be an “important part of good will of that enterprise” and the loss of “earned customer good will can constitute a forfeiture.”

Here, the tenant had not claimed or offered evidence to demonstrate loss of goodwill associated with the property. The tenant had been denied a certificate of occupancy for the subject property and he could only use the property as an “adjunct location to his primary operation” at a different location. The tenant had used the subject property “for the limited purpose of storing cars until he was ready to work on them” at his other location. Although the tenant did occasional repair work at the subject location, “no customers ever visited the premises.”

The court held that the tenant could not succeed in this action, even if he could demonstrate that there was a lack of prejudice to the landlord. Accordingly, the court granted the landlord's request for a declaratory judgment that the option was unenforceable. The court also awarded a final judgment of possession to the landlord.

25-35 Bridge St. LLC v. Excel Auto. Tech Ctr. Inc., Kings County Supreme Court, Case No. 11088/2003, decided Oct. 29, 2018, Levine, J

Landlord-Tenant—Warranty of Habitability—Relatively Rare Case—Tenant's Affirmative Misconduct Warranted Reduction of Abatement

A landlord commenced a nonpayment summary proceeding against a tenant, alleging that the tenant had failed to pay rent. The tenant asserted a defense of breach of the Warranty of Habitability (WOH) based on several conditions, including an inoperable toilet.

The landlord had responded to the tenant's complaints and on several occasions, the landlord's super had “retrieved chicken bones” which the tenant had “attempted to flush down the toilet.” The tenant had also complained that an intercom had poor audio and a faulty buzzer. While the buzzer problem had been remedied, the audio issue had not been remedied. Additionally, the tenant complained about rodent and insect infestation. He claimed that rats inside his walls caused his dogs to chew holes in the walls. The tenant alleged that when the landlord “plugged some of the holes,” the rats found new holes. The infestation claim was supported by a prior stipulation and HPD records, which referred to the presence of roaches, but not rats.

The court explained that the WOH requires that the premises rented and all common areas “are fit for human habitation and for the uses reasonably intended by the parties, and free from conditions dangerous to life, health or safety.” The “proper measure of damages for breach of the (WHO) is the difference between the fair market value of the premises in fully habitable condition, as measured by the rent reserved under the lease, and the value of the premises during the period of the breach.” “Complete vacatur is not necessary to receive an abatement; it is sufficient to have been constructively evicted from a portion of the premises.”

The tenant cited five defects which allegedly warranted an abatement, i.e., “lack of heat/window problems, lack of a working intercom, a rodent and insect infestation, holes in the wall as a result of the infestation, and a non-functioning toilet.”

The record did not corroborate the lack of heat and window problems during the subject time period. Since there was no evidence that demonstrated the impact of the intercom defect, a defect which had been repaired, the court held that the tenant was entitled to only a “nominal abatement of 1 percent.”

Although there was evidence of insect and rodent infestation, there was “insufficient evidence in the record from which the court (could) deduce any substantial impact upon the apartment's value, including the presence of insects or rodents in the apartment proper, other than the holes in the walls caused by (tenant's) dogs.” The court awarded a 10 percent abatement based on the infestation.

The court then explained that a tenant's “misconduct can reduce or entirely preclude an abatement.” Tenant misconduct could include, e.g., “denial of access to correct conditions.” Here, the court held that “flushing bones down the toilet—whether chicken, ham, or any other animal—is objectively unreasonable conduct precluding an abatement for that condition.” The court noted that after the “first four toilet clogs,” the landlord's superintendent had arrived promptly to remedy the condition. The court opined that at a minimum, “after the first clog, and certainly after the second or third, (tenant) was on notice to dispose of any bones in a reasonable manner—that is, not in the toilet.” Accordingly, the court awarded judgment for the landlord for the unpaid rent, less than an 11 percent aggregate abatement. Since the lease did not contain a provision for legal fees, the court denied the landlord's request for legal fees.

Maxwell Dev. v. France, Civil Court, New York, Case No. LT-083272-17, decided Nov. 1, 2018, Ramseur, D.

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