Scott E. Mollen

Commercial Landlord-Tenant—Tenant Failed to Timely Provide Required Itemized List of Expenses To Receive Tenant Improvement Allowance—Lease Did Not Authorize Submission of Combined Expenses Relating to Two Separate Leases

An office building owner (owner) moved for summary judgment dismissing a complaint. The plaintiff, a commercial tenant, opposed the motion and cross-moved for summary judgment on its causes of action and to dismiss the owner's counterclaims. The parties had executed a lease for part of the twelfth floor of the subject building (building). At the same time, the parties entered into a separate lease with a related, but different entity, for part of the eighth floor of the same building. Each lease required the owner to reimburse the tenant for all improvements made by the tenants, pursuant to a tenant improvement allowance (TIA) agreement. To receive the TIA, the tenants were required to request reimbursement and submit documentation to the owner within eighteen months of the commencement of the leases.

On Aug. 13, 2014, a manager for the tenants' "parent" corporation submitted a combined reimbursement request for both leases, totaling approximately $2 million. On the same day, the owner advised the tenants' project manager that the tenants' TIA reimbursement request had to be separated since they involved two separate leases. The owner also advised that the request was to be on company letterhead, the request appeared to exceed the combined amount for the leases' TIA and "soft costs" were not to exceed 20% of the requested TIA payment.

For several months, the tenants did not send additional documentation or object to the owner's demand that the TIA requests be separated. In December 2014, the owner advised the tenants' agent that if the tenants anticipated sending requests for TIA, it would have to be received "by this Friday in order to submit for payment in 2014."

On Dec. 4 and Dec. 5, 2014, the tenants purported to submit separate reimbursement requests. The owner promptly advised the tenants that the second reimbursement request was still not in compliance with the lease obligations. The tenants did not make any further TIA reimbursement requests prior to the Jan. 1, 2015 deadline.

Thereafter the building was sold. The tenants submitted a third reimbursement request to the original owner on April 23, 2015. The tenants stated that they had separated the invoices by floor and prepared separate requests "which will be printed on company letterhead." The tenants also provided final lien waivers and asked if the owner needed anything else in order to get the TIA paid. The tenants had unsuccessfully attempted to recover the TIA reimbursements from the new owner.

The tenants then commenced an action against the prior and the new owner for breach of the leases. The new owner and the prior owner had moved to dismiss the complaint. The court had previously dismissed the complaint against the new owner but denied a dismissal motion against the prior owner.

The prior owner denied the allegations and asserted counterclaims seeking a declaration that the tenants were barred from seeking TIA reimbursement on the grounds that they signed tenant estoppel certificates, had breached the leases and based on promissory estoppel based on the tenant estoppel certificates.

The prior owner had moved for summary judgment dismissing the complaint.

The tenants argued that the leases did not contain an "express provision requiring separate TIA reimbursement requests" and the prior owner was put on notice that the tenants were treating the tenant improvements "in connection with the Leases as a single project." The tenants asserted that the prior owner's silence with respect to the tenants' such expectation cannot bar the TIA reimbursement, since that would "frustrate the purpose of any implied condition precedent" and the prior owner may not rely on the "non-occurrence of the implied condition, which it frustrated, to excuse its own breach."

The tenants further argued that any non-compliance with the lease language was "merely technical in nature, not material." The prior owner countered that separate documentation was not a "mere technical requirement," but necessary to submit to the prior owner's lenders for TIA reimbursement. The tenants also argued that requiring the tenants to submit separate TIA reimbursement requests would result in "an unjust, multi-million-dollar windfall" to the prior owner and forfeiture to the tenants.

The court granted summary judgment to the prior owner. Although the leases may have been negotiated jointly, "two separate leases were executed by the parties for separate areas of the building." The tenant entities and the amount of square footage differed for each lease and the leases did not embody any cross-default provisions, nor any provisions indicating that the two leased premises "were treated as one leasehold."

Moreover, the tenants had not submitted separate TIA reimbursement requests prior to the Jan. 1, 2015 cutoff date and immediately after the tenants had submitted their first reimbursement request, the prior owner advised the tenants that the reimbursement requests had to be submitted separately for each lease.

The court explained that each lease required each tenant to provide "certain documentation pertaining to the respective lease's alteration work for that premises," each lease had a different TIA maximum allowance and nothing in either of the leases "permitted plaintiffs to submit a combined TIA reimbursement request."

The court emphasized that both leases were "separate, clear, unambiguous contracts" and the court was required to enforce such contracts "according to the plain meaning" of their terms. The court held that the requirement to submit separate TIA requests did not amount to an implied condition precedent, "the imposition of which must be excused." The express language of the leases required that the TIA reimbursement be requested "for each lease." The court also found that the default was not de minimus. The record did not support such argument and the prior owner had consistently requested that the TIA requests be treated as separate requests. The court also held that a prior failure to object in 2013 to combining architectural plans and various applications "waived the plain terms of the leases…."

Additionally, the court held that the tenants would not suffer an unfair loss of their bargained for TIA reimbursements. The court stated that the leases were separate, the tenants failed to timely comply with the lease requirements and "[u]nder these circumstances the (tenants) were not unfairly denied the opportunity to receive their TIA reimbursements."

Accordingly, the court, inter alia, granted summary judgment to the prior owner and denied the tenants' cross-motion. The court also granted the prior owner summary judgment on its counterclaim for attorney fees as the prevailing party in this litigation. The issue of reasonable attorney fees was referred to a special referee to hear and report.

Aerotek, Inc., Teksystems, Inc. v. MEPT 757 Third Avenue, LLC, 757 3^rd Avenue Associates, LLC, Supreme Court, New York Co., Index No. 654294/2016, decided September 25, 2019, Scarpulla, J.

Commercial Landlord-Tenant—1.5 Use and Occupancy Liquidated Damage Clause Valid—Not an Unenforceable Penalty—Assignment Violated Lease—Attorney Fees Award Modified

A tenant and a sub-tenant appealed to the Appellate Term (court) from a trial court order and final judgment which had been entered after a non-jury trial. The trial court awarded possession to the landlord, a hospital, in a summary holdover proceeding. The trial court also awarded the landlord attorney fees in the amount of $335,212.24 and awarded the landlord use and occupancy (U&O) in the amount of $431,560.23 against the tenant. The court affirmed, but reduced the amount of attorney fees to $249,000.

The underlying commercial lease prohibited the tenant from assigning the lease without the landlord's prior written consent. The lease defined an assignment as a transfer of "'controlling interest,' meaning 'more than a fifty percent (50%) interest in the [stock of the corporate tenant]' or 'the ability to control the decisions or affairs of the [corporate tenant].'" The lease also required that assignee be an active member of the hospital landlord's medical staff with admitting privileges.

The trial court found that the tenant had breached the no assignment provision of the lease. The court found that such finding was supported by "fair interpretation of the evidence." In April 2015, a sub-tenant had "in effect, acquired tenant without notice to, or authorization by landlord." The April 2015 transaction, which included a purchase agreement and ancillary documents, "effectively gave (sub-tenant) 'the ability to control the decisions or affairs of [the tenant]' within the meaning of the plain terms of the lease…, and gave 'A,' (the sub-tenant's) medical director and board member, the absolute right to restrict the tenant shareholders' ability to exercise their own rights and interests as shareholders, and board members." "A" never had admitting privileges at the landlord hospital.

The court stated that the tenant and sub-tenant had "attempted to structure their transaction in a way to circumvent the lease's no-assignment provision…." However, it opined that they had "ultimately achieved what the lease prohibited, an unauthorized sale of tenant to an unrelated third party." Although there had been no transfer of stock between the tenant and the sub-tenant, evidence demonstrated that "all of the tenant's stock was irrevocably transferred into escrow, while tenant's shareholders relinquished their right to sell or transfer their shares without the prior written consent of ('A')."

Moreover, although the underlying lease between the landlord and the tenant had been excluded from the purchase agreement, the sub-tenant's subsidiary, and not the tenant, "was obligated to pay 'real…property lease cost payments and expense' for the subject premise…."

The court further held that the lease's liquidated damage clause, which provided for use and occupancy at 1.5 times the rent in the event of a holdover or upon the tenant's failure to timely surrender the premises, "was not an unenforceable penalty, since damages could not be anticipated in 2010 when the lease was executed, and the amount fixed was not plainly or grossly disproportionate to the probably loss…."

The court also stated that the underlying notice of default which had been served by the landlord was "reasonable," that the tenant had not cured the violation and its application for Yellowstone relief had been dismissed as untimely.

Based on the "nature and extent of the services, the actual time spent, the necessity therefor, the nature of the issues involved, the professional standing of counsel and the results achieved," the court held that the attorney fees award was excessive, and it reduced the $335,212.24 attorney fees award to $249,000.

St. Luke's-Roosevelt Hosp. Cntr. v. Westside Radiology Assocs., Appellate Term, 1st Dept., Case No. 570215/18, decided Oct. 1, 2019, Shulman, P.J., Cooper, Edmead, JJ., All concur.

Landlord-Tenant—Rent Stabilization—High Rent Deregulation

A landlord commenced a non-payment proceeding. The tenant moved to dismiss pursuant to CPLR §3211(a)(7), arguing that the petition failed to state a cause of action. The tenant also sought summary judgment on its "counterclaims" pursuant to CPLR §3121. The landlord cross-moved to amend the petition to correct the basis for the landlord's assertion that the apartment was deregulated.

The petition incorrectly stated that the subject building had been built after 1974. The court granted the motion to amend, citing the absence of prejudice in permitting the amendment. The amended petition asserted that the apartment was not subject to rent stabilization (stabilization) due to "high rent" deregulation.

The tenant argued that the landlord cannot deregulate the premises under the high rent deregulation in 2017 "through application of a vacancy increase and Individual Apartment Increases (IAI's)." The tenant asserted that under the Rent Act of 2015, "high rent deregulation only occurs when an apartment is vacated after reaching the threshold of $2.700, plus any applicable one-year renewal increases." The tenant cited Rent Stabilization Law of 1969, §26-504.2, which in part exempts housing accommodations: "with a legal regulated rent of two thousand five hundred dollars or more per month at any time on or after the effective date of the rent act of 2011, which is or becomes vacant on or after such effective date, but prior to the effective date of the rent act of 2015,": "or, any housing accommodation with a legal rent that was two thousand seven hundred dollars or more per month at any time on or after the effective date of the rent act of 2015, which becomes vacant after the effective date of the rent act of 2015…."

The tenant contended that the Legislature, by failing to "include the words 'is or' in the Rent Act of 2015, unlike earlier acts, effectively removed the ability of landlords to use vacancy increases and/or IAI's to push a vacant unit above the threshold rent of two thousand seven hundred dollars threshold, as increased."

The court noted that in Altman v. 285 W. Fourth LLC, 31 NY 3d 178 (2018), the Court of Appeals upheld "the landlord's right to deregulate an apartment through a pre-2011 vacancy increase which resulted in a rent exceeding the then applicable threshold rent of $2,000." The tenant in Altman, like the tenant in the subject case, argued "that the apartment had to be above the threshold when vacated and not as a result of increases undertaken after the vacancy."

In permitting vacancy deregulation, Altman noted that the Rent Act of 1997, which governed that case, "included two separate and distinct factual scenarios leading to 'high rent' deregulation." The court stated that those "two parts specifically excluded from rent regulation: 'any housing accommodation which becomes vacant on or after April 1, nineteen hundred ninety seven and before the effective date of the rent act of 2011 and where at the time the tenant vacated such housing accommodation the legal rent was two thousand dollars or more per month, or for any housing accommodation which is or becomes vacant on or after the effective date of the rent regulation act of 1997 and before the effective date of the rent act of 2011.'" Altman "reasoned that these two separate and distinct clauses under which high rent deregulation could occur pre 2011 applied separately to vacant apartments where the threshold rent had already been met (becomes vacant) and those where vacancy increases and/or IAI's where applied after the vacancy to reach a rent beyond the threshold rent, ('is or becomes vacant')."

The subject court explained inter alia, that the Rent Act of 2015, "under which petitioner deregulated the subject premises, fails to contain the two different clauses in Altman." Therefore, the court held that the landlord "could not deregulate the vacant subject premises in 2017 by raising the rent above the threshold through a vacancy increase and IAI's."

Thus, the court held that the tenant was a stabilized tenant and granted that part of the tenant's motion which sought to dismiss the petition for failure to state a cause of action, on the grounds that the petition failed to "properly set forth respondent's regulatory status…." The court denied the tenant's motion for summary judgment on its counterclaims, without prejudice to asserting such claims in any future proceeding or action.

No counterclaims were delineated in the tenant's answer which only raised rent overcharge and attorney fees as affirmative defenses. The word counterclaim only appeared in a "wherefor" clause. Even if the court interpreted the affirmative defense as counterclaims, which the court had not done, there was no affidavit of the tenant with personal knowledge of the facts that had been submitted to establish overcharges, "supported by admissible evidence." Additionally, in the absence "of an admissible lease provision establishing a reciprocal right to legal fees no such award can be made."

People's Home Improvement LLC v. Kindig, Civil Court, Kings Co., Case No. 65421/19, decided September 26, 2019, Barany, J.

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