Scott E. Mollen

Contracts—Right of First Refusal Cannot be Exercised After a Prior Exercise and Default—Sanctions Granted

A plaintiff claimed that a defendant breached an agreement to give the plaintiff a right of first refusal (ROFR) to purchase real property. The defendant moved to dismiss, to vacate a notice of pendency and for sanctions. The court granted the motion to dismiss, since the ROFR no longer exists—"a party related to plaintiff exercised it but then defaulted." The court categorized the action as "frivolous" and awarded "costs in the form of reimbursement for actual expenses reasonably incurred and reasonable attorney's fees."

The defendant owned the subject real property. The plaintiff owned a neighboring property. Pursuant to a July 2006 written agreement (agreement), the defendant's predecessor and the plaintiff had agreed that the plaintiff and any successors or assigns formed by the plaintiff's managing member would have a ROFR to buy the defendant's property.

In 2017, the plaintiff exercised the ROFR and an entity, whose managing member was plaintiff, entered into a contract with the defendant for sale of the property. A closing date had been extended to November 1, 2017, time being of the essence. On October 27, 2017, the purchaser commenced an action and moved to stay the closing. The court had denied that motion. The purchaser failed to appear at the closing. A court previously held that the purchaser had defaulted and that the defendant was entitled to keep the down-payment as liquidated damages.

Three months later, the plaintiff commenced the subject action and filed a notice of pendency against the property. The plaintiff sought a declaratory judgment that he has a ROFR for the property and sought to enjoin the defendant from selling the property. The defendant promptly demanded that the lawsuit and notice of pendency be voluntarily withdrawn to avoid motion practice. The defendant explained that the plaintiff had already exercised the ROFR and that the prior default precluded enforcement of the ROFR. The defendant further advised the "plaintiff of an imminent 1031 exchange transaction that could be jeopardized by plaintiff's proceedings and threatened to seek sanctions if the notice of pendency was not lifted and the action was not discontinued." After the plaintiff failed to respond to the defendant's letter, the defendant moved to dismiss.

The court explained that since the plaintiff had already exercised his ROFR and had breached the agreement by failing to close, the plaintiff can no longer prevent the defendant from selling the property. An appellate case held that: "if the law were otherwise, then a holder of a right of first refusal could tie up the property for years and years. He would just need to keep exercising the right, default over and over again, and keep repeating that cycle. Meanwhile, the owner of the property would be stuck and have no recourse to sell the property to anyone else." The "plaintiff had cited no law to the contrary and there was no legal support whatsoever for his meritless opposition."

The plaintiff argued that he never previously exercised the ROFR, since it was another entity that had done so in 2017. However, the agreement made it clear that the ROFR belonged to the plaintiff and any assignee formed by him. Emails conclusively proved that the plaintiff had exercised the ROFR and chosen to contract through another entity. Nor, was there "authority for plaintiff's unsupported belief that he or his affiliates can continuously exercise the right after invoking it once and then defaulting."

The court noted that this action was the "third case commenced against defendant by plaintiff or his affiliates all of whom were represented by the same counsel" and it "should not have been instituted." The court explained that the plaintiff should have discontinued the action after receiving the defendant's warning letter and instead, the plaintiff compelled the defendant to "incur fees and the deal that defendant had in place with a third party was lost. To add insult to injury, plaintiff opposed the motion late, costing defendant more time."

The court further held that sanctions are appropriate since the plaintiff had argued that affiliated company which purported to buy the property was not a successor or assign of the plaintiff and such entity "has long been ready and willing to purchase the property." Those assertions were "belied by the record and by the affirmed findings in the Prior Action."

The court concluded that since the subject action and the plaintiff's opposition to the motion to dismiss were "completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law, (the defendant) is entitled to recover the reasonable legal fees pursuant to 22 NYCRR §130-1.1[a],[c][1]." The court also vacated the notice of pendency and dismissed the action.

Comment: Rights of first refusal often generate litigation. Sometimes, small property owners will attempt to save legal fees and draft such provisions without the assistance of counsel. Unfortunately, even a well drafted ROFR may not immunize an owner from litigation if—the holder of the ROFR engages in a bad faith effort to "tie a property up" in litigation, in order to gain leverage in a "price negotiation." However, a well drafted ROFR may discourage litigation and enhance the likelihood of success in a litigation.

In order to minimize the likelihood of disputes with respect to a ROFR, a ROFR should address inter alia, who may exercise the ROFR, the duration of the ROFR, details as to the method of exercising the ROFR, including deadlines for exercising the ROFR, how the exercise should be communicated, the information which the holder of the ROFR entitled to, etc.

Vahdat v. Capdel LLC, Supreme court, New York Co., Case No. 652099/2019, decided July 15, 2019, Schecter, J.

Landlord Tenant—Rent Stabilization—Landlord Violated Rent Receipt Law

This decision involved the issue of "whether the tenant has a remedy when the landlord fails to provide written receipts for cash payments of rent."

The landlord had commenced a nonpayment proceeding, seeking possession of a rent-stabilized apartment and a judgment for rent arrears in the amount of $11,575 (at $1,479 per month for the period July 2018 to January 2019 and a balance of $1,221 for June 2018). The tenant asserted that the alleged rent arrears "were at least partially paid and that the apartment needed repairs." The tenant, thereafter had agreed to pay current rent for April and May 2019 and the matter proceeded to trial.

The tenant's initial rent-stabilized lease was dated July 10, 2017, for a one-year term commencing July 20, 2017 and ending July 31, 2018 at the rent of $1,450 per month. The renewal lease for the period August 1, 2018 through July 31, 2020 provided for rent of $1,479 per month. The tenant had paid the rent for April and May 2019 with money orders and prior to the subject court proceeding, the tenant had paid rent by "cash only."

At trial, the landlord alleged that rent arrears of $16,011 were due from June 2018 to March 2019 plus June 2019 rent. The landlord submitted a rent ledger "showing a balance of $1,250 for June 2018, $1,450 for July 2018, $1,479 per month from August 2018 to March, 2019 and $1,479 for June 2019." The landlord's rent ledger "conflicted in part with the amount of rent arrears alleged in the petition." The tenant argued "that he owned only six-months rent, from November 2018 through March 2019 plus June 2019 at $1,479 per month."

The tenant testified that he ceased paying rent in November 2018 when the landlord "made it clear that he and his family were no longer wanted as tenants." The tenant claims that the landlord had "never provided rent receipts, except for the initial payment of the first month's rent and security deposit." The landlord claimed that the tenant had been given rent receipts for "any rent payment made."

The court gave the landlord the opportunity to "produce proper rent receipts or other appropriate documentation concerning the amount of rent paid and owed." The landlord's managing agent testified that the landlord "maintained rent records, but that the receipt books were unavailable and instead displayed a handful of various slips of paper, bearing no resemblance to a business record." The landlord did not attempt to put those items into evidence.

Real Property Law (RPL) §235-e (a) and the Rent Stabilization Code (RSC) §2525.2(b)(2) "provide that upon receipt of rent payment by cash or any other form than personal check of the tenant, the landlord has the duty to provide the payor with a written receipt containing the following:

1. The date;
2. The amount;
3. The identity of the premises and the period for which paid; and
4. The signature and title of the person receiving the rent payment."

RSC §2525.2(b)(3) provides that the receipt given to the rent-stabilized tenant must state the "name and New York City address of the property's managing agent or designee thereof, pursuant to section 27-2105 of the Administrative Code of the City of New York." The RSC provides that "[f]ailure to comply with these provisions of the Rent Stabilization Code constitutes 'evasionary' practice." Since the tenant is a rent-stabilized tenant, the landlord's failure to provide "proper rent receipts would violate both the (RPL) and the (RSC)."

"Neither the RPL nor the RSC specifically describes the consequence or penalty to the landlord for noncompliance with these sections." However, RSC §2526.2, provides that a tenant may file a complaint with the NYS Div. of Housing and Community Renewal (DHCR), "seeking enforcement of the Code section." The subject proceeding was not affected by "significant recent changes to housing laws as this matter was commenced and trial concluded prior to enactment of the Housing Stability and Tenant Protection Act of 2019."

The court found that "[b]ased upon the logic and consistency of (tenant's) testimony and the court's observation of (landlord's) demeanor on the witness stand," the tenant was "credible." The court cited the landlord's "inconsistent records, and the contradictory testimony of the parties." Moreover, the landlord had failed to show that the tenant had been "provided with rent receipts as legally required." Accordingly, the court held that the landlord was "entitled to a judgment of possession and for rent arrears in the amount of $8,874," for the "arrears due from November 2018 through March 2019 plus June 2019 at $1,479 per month." The court had noted that "[p]ursuant to the Housing Stability and Tenant Protection Act of 2019, effective June 14, 2019, RPL §235-e has been amended and provides in pertinent part that:

(b) A lessee may request in writing, that a lessor provide a receipt for rent paid by personal check. If such a request is made, the lessor, or any agent of the lessor authorized to receive rent, shall provide the lessee with the payment described in subdivision (a) of this section. Such request shall, unless otherwise specified by the lessee, remain in effect for the duration of such lessee's tenancy. The lessor shall maintain a record of all cash receipts rent for at least three years.

(c) If a payment is personally transmitted to a lessor, or an agent of a lessor authorized to receive rent, the receipt for such payment shall be issued immediately to a lessee. If a payment of rent is transmitted indirectly to a lessor, or an agent of the lessor authorized to receive rent, a lessee shall be provided with a receipt within fifteen days of such lessor or agent's receipt of a rent payment.

(d) if a lessor, or an agent of a lessor authorized to receive rent fails to receive payment for rent within five days of the date specified in a lease agreement, such lessor or agent shall send the lessee, by certified mail, a written notice statin the failure to receive such rent payment. The failure of the lessor, or any agent of the lessor authorized to receive rent, to provide a lessee with a written notice of the nonpayment of rent may be used as an affirmative defense by such lessee in an eviction proceeding based on the nonpayment of rent."

Mayflower Props. v. Pacheco, Civil court, New York Co., Case No. 2901/2019, decided July 11, 2019, Black, J.

Construction— Parties' Dispute Is Subject to Prompt Payment Acts' Arbitration Provision—Case Law "Slim"

A petitioner property owner (owner) sought a preliminary injunction staying an arbitration which had been commenced by a general contractor (contractor). The court denied the petition.

The court stated that the construction contract was governed by New York's Prompt Payment Act (PPA), which, inter alia, requires "a particular procedure for the submission and payment of contract or invoices." The PPA requires that "upon receiving an invoice, the building owner must 'approve or disapprove' the invoice. N.Y.G.B.L. §756-a(2)(a)(i)." The invoice may be disapproved because of "unsatisfactory or disputed job progress" or "failure to comply with other material provisions of the construction contract." However, an owner is not permitted to "'unreasonably withhold' approval or 'in bad faith disapprove all or a portion of an invoice.'" Moreover, an owner must "prepare and issue a written statement" justifying a refusal to pay. Payment is to be made within thirty (30) days of approval of an invoice and an "owner may withhold 'only an amount that is sufficient to pay the costs and expenses the owner reasonably expects to incur in order to cure the defect' that prompted the disapproval."

If an owner fails to pay within the required time period, interest will accrue. If an owner fails to timely approve or disapprove or fails to timely pay the "undisputed invoice amount," "a contractor may suspend performance." Additionally, "upon receipt of a written complaint…that an owner has violated the provisions of this article…the parties shall attempt to resolve the matter giving rise to such complaint" and "[i]f they cannot agree on a resolution, 'the aggrieved party may refer the matter…to the American Arbitration Association for an expedited arbitration.' N.Y.G.B.L. §756-b(3)(c)." The PPA also provides that any contract provision which states that "expedited arbitration as expressly provided for and in the manner established by [§756-b] is unavailable to one or both parties 'is void and unenforceable.'."

On May 9, 2019, contractor submitted an invoice for $721,305.39. By letter dated May 13, 2019, owner stated that it would not pay the invoice since the "amount owed was less than the amount of a lien that (contractor) had asserted against the property."

Contractor then issued a notice of complaint, alleging that payment was being withheld "unreasonably and in bad faith" and in violation of the PPA. After the parties failed to resolve the disagreement, contractor "served a demand for expedited arbitration and requested that it be located in Boston, Massachusetts." Owner then sought, in a New York State court, an order staying the arbitration. Contractor then removed the action to the federal court.

The salient issue was "whether the parties' dispute is subject to mandatory arbitration."

The contract did not "provide a basis for compelled arbitration." The contract permitted arbitration only "upon mutual agreement of the parties." Contractor argued however, that the PPA's arbitration provision applies. Owner contended that the PPA's arbitration provision "applies only to undisputed invoices." The court agreed with contractor.

The court noted that caselaw on the subject "is admittedly slim." A 2013 New York State trial court "held that the PPA's mandatory arbitration provision 'applies to undisputed invoices only.'" A 2014, New York State trial court held that the "parties could contractually modify the availability of arbitration based on the PPA's general savings clause."

The subject court (court) explained that those two trial court decisions had been contradicted by a 2016 decision of the Appellate Division, Third Department. Third Department held that the "PPA's forced arbitration provision applied, even though 'a dispute arose over an invoice and petitioner withheld certain payments from respondent.'" The Third Department held "that parties could not contractually abridge or modify the PPA's arbitration provision because §757(3) 'voids and renders unenforceable any contractual provision that makes expedited arbitration unavailable to one or both parties.'" The Third Department appeared to be "the only New York appellate authority to have interpreted the relevant provisions of the PPA." The court opined that such decision "is binding on this court and unambiguously favors (contractor)."

The court further stated that even if the Third Department case was not binding, it agreed with the Third Department's interpretation. The PPA's arbitration provision did not, "by its terms, limit the availability of arbitration to statutory violations related to undisputed invoices." Rather, the PPA "applies broadly to any "violation' of 'the provisions of this article.'" N.Y.G.B.L. §757(3)(a). Moreover, an owner "could violate the PPA regarding a disputed invoice — by, for example, disapproving the invoice in bad faith… or simply refusing to approve it for a reason that is not sanctioned by the statute." Here, contractor alleged that owner had withheld payment in bad faith.

Owner had also argued that another remedy, "suspension of performance, is available only when the owner fails to pay an undisputed amount (or fails to approve or disapprove the invoice at all)." Owner reasoned that the "entire remedial section of the statute is concerned only with the undisputed invoices." The court believed otherwise. It stated that the "[L]egislature's decision to limit one remedy to undisputed invoices strongly suggests that other remedies, which contain no such limitation, are available regardless of whether the invoice is disputed."

Owner further asserted that it cannot be forced to arbitrate until it has been determined that the owner had actually "violated the provisions of" the PPA. The court rejected that argument. The "predicate for arbitration is a 'complaint' which in legal terminology refers to an allegation." It held that it was not necessary for a contractor to "prove, at this early stage, that (the owner) is actually in violation of the statute, only to claim as much." The court believed that it was "unthinkable that the New York Legislature intended to subject every demand for arbitration under the PPA to gatekeeping merits litigation in court before any arbitration could proceed."

Owner also noted that PPA language stating that a party may "refer the matter" to arbitration — left some room for doubt as to whether the other party was compelled to participate." The court found such argument to be "meritless." It stated that the "overall context of the provision clearly contemplates mandatory arbitration, and it is flatly implausible that the statute allows a silent veto to the party opposing arbitration."

Thus, the court asserted that notwithstanding the "limited" New York caselaw on the subject and "[e]ven if the state of the law is somewhat confused," that did not help the owner. Owner had the burden of showing a likelihood of success on the merits of justifying a preliminary injunction." Since owner had not demonstrated that it is "likely to prevail" the court denied owner's motion of preliminary injunction and held that further disputes, including whether owner had violated the PPA, "are merits questions reserved for the arbitrator."

The contractor had requested that the arbitration be held in Boston, a "forum with no connection to the instant dispute or to petitioner." Contractor acknowledged that such request was in error and contractor would not object to holding the arbitration in New York. The court stated that it "expect[ed] that (owner) will promptly request that the arbitration be held in New York and (contractor) would join in that request." Therefore, the court did not need to take further action with respect to that issue.

Maple Drake Austell Owner LLC v. D.F. Pray Inc., U.S.D.C., S.D.N.Y., Case No. 91-cv-5930, decided July 8, 2019, Rakoff, J.

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