Scott E. Mollen

Partition—Sale Pursuant to RPAPL Art. 9 Conditioned on Accounting as to the Parties' Respective Financial Entitlement—RPAPL Art. 9—Although Building Could Be Divided into 4 Condominium Units, Forcing the Plaintiff To Participate With the Defendant in the Conversion Process and To Continue to Interact With the Defendant Following the Conversion Would Cause Plaintiff Great Prejudice—Divorced Couple Seemed Unable To Collaborate

A plaintiff commenced an action for partition and sale of real property, pursuant to Article 9 of the N.Y. Real Property Actions and Proceedings Law (RPAPL). The plaintiff moved for summary judgment granting the partition and sale and, if necessary, the "appointment of a referee to accomplish partition and sale and conduct in accounting with respect to proper distribution of the sale proceeds." The court granted the plaintiff's motion for summary judgment.

The parties were married in 2000 and divorced in 2009. They had entered into a "Separation and Settlement Agreement" (agreement). The agreement was incorporated by reference into a judgment (divorce judgment).

The divorce judgment provided that the parties are each entitled to a 50% interest in the subject building (building). However, the plaintiff alleged that the defendant husband had refused to transfer a 50% interest in the building and that she had to bring an enforcement proceeding in Florida. That proceeding resulted in the dissolution of the corporate entity (corporate owner) that owned the building.

At that time, the defendant had still not transferred any interest in the corporation to the plaintiff. The defendant, pursuant to a court order, thereafter transferred to the plaintiff a 50% interest in the building. However, although the defendant signed the deed, he had not executed transfer tax returns and other documents required before the deed could be filed. The plaintiff invoked the Florida court's assistance and received permission to sign the documents necessary to file the deed. The defendant claimed that he refused to sign the documents because he would have had to attest, under penalty of perjury, to facts not within his knowledge.

The defendant argued that there were genuine issues of fact that needed to be tried. He asserted that he paid the full purchase price of the property, $264,000 in 2000 and that the building contains four apartment units. He resides in one of the units and operates his business out of the building as well. He also claimed that in 2006, the building needed "extensive renovations" and he alone funded those renovations. He also stated that he had delivered a share certificate to the plaintiff. He cited a letter from the plaintiff's lawyer which claimed that the plaintiff was a 50% shareholder in the corporate owner and demanded to see the company's books and records.

He further claimed that the plaintiff had not made any contributions towards payment of the mortgage which encumbered the building, or for insurance, utility, taxes, maintenance, repair and other carrying costs, other than purchasing a "few cans of paint on one occasion," notwithstanding an alleged "oral agreement to split costs evenly with defendant." The plaintiff conceded that she did not pay for the renovations.

The defendant further alleged that he had satisfied the mortgage in August 2015 and that the plaintiff had "interfered with his access to the property and efforts to show the property to prospective investors and tenants, and 'consistently acted in a way towards defendant which could be described as acting in bad faith, being harassing and oppressive.''"

The defendant claimed that the property was appraised in 2018 for $3,000,000 and that "much of the value of the property" was derived from the renovations and repairs that he funded and oversaw.

Additionally, the defendant argued that the building's apartments "could be converted into separate condominium units and that doing so would substantially increase the property's value."

The court explained "[a] person holding…real property…as tenant in common…may maintain an action for partition …, and for a sale if it appears that a partition cannot be made without great prejudice to the owners…. A court overseeing a partition action will enter an 'interlocutory judgment,' which (1) 'shall determine the right, share or interest of each party in the property, …'; (2) '[w]here the property…is so circumstanced that a partition…cannot be made without great prejudice to the owners[,]… shall direct that the property…be sold at public auction'; and (3) when the judgment is in favor of the plaintiff, 'shall direct that partition be made between the parties according to their respective rights, shares and interests.'"

"'The tenant seeking the partition need not be in actual possession of the property to bring such an action, but instead need only have a right to possession of the property pursuant to the property's title.'… Nonetheless, '[t]he right to partition is not absolute,…and while a tenant in common has the right to maintain an action for partition …, the remedy is always subject to the equities between the parties.'…Accordingly, 'the statutory right of partition…may be precluded by the equities presented in a given case.'"

The court further explained that "'[a] partition action, although statutory, is equitable in nature and an accounting of the income and expenses of the property sought to be partitioned is a necessary incident thereof.'…Generally, an accounting 'should be had as a matter of right before entry of the interlocutory or final judgment and before any division of money between the parties.'… New York common law with respect to the timing of an accounting relative to the granting of partition is somewhat unclear, though, and it appears that whether an accounting must be held prior to the entry of an interlocutory judgment is a matter within the discretion of the trial court."

With respect to the issue of actual partition or sale, the court considered "whether physical partition could be accomplished without great prejudice to the parties." The plaintiff argued that the building is residential in nature and "contains a structure that cannot be physically divided without great prejudice to the owners." The defendant countered that "physical partition can be had without great prejudice to the owners by converting the property into four condominium units, with plaintiff and defendant each owning 2 units."

The plaintiff argued that going through the "process of conversion would itself be prejudicial because she would have to work together with defendant in coming to a negotiated agreement regarding the contents of a condominium declaration…and by-laws…, compiling a book of accounts and financial statements…and overseeing repairs…." The plaintiff also was concerned about "exposure to liability as a sponsor or board member of the contemplated condominium."

The court found that although it "may be possible to convert the property into four distinct condominium units, it is clear from the undisputed facts that forcing plaintiff to participate with defendant in the conversion process, and requiring her to continue to interact with him once each owned two of the four converted units within the same building, would cause plaintiff great prejudice." The plaintiff had accused the defendant of having failed to comply with the agreement and that led to further litigation between the parties even after their divorce had been finalized. Even after signing the deed, the defendant had apparently refused to sign additional necessary documentation in order to transfer the plaintiff's ownership interest. Moreover, in June 2013, the plaintiff had been arrested and detained over the weekend by police based on a complaint made by the defendant. The parties disputed the basis for the defendant's complaint. The plaintiff alleged that the defendant claimed that the plaintiff was trespassing at the property. The defendant argued that he had her arrested and jailed for the weekend because the plaintiff was "'interfering with the business of the Company, …, by seeking to preclude a prospective tenant for the property…from entering into a tenancy at the Property.'"

The court reasoned that regardless of which version was accurate, the "episode makes plain that it would be unfairly prejudicial to plaintiff if she and defendant were compelled to maintain a relationship as owners of separate condominium units located in the same building."

The court also noted that the defendant could "easily minimize the prejudice he claims he would suffer if the property were partitioned and sold simply by purchasing the property outright." The defendant did not argue that he lacked the resources to acquire the building himself. The court stated that if the defendant purchased the building, he could continue to live in the building, operate his business there and have no "impediment…to convert the property to condominium units and could himself reap all of the substantial profit he anticipates would ensue as a result of the conversion."

Judicial precedent held that partition could involve conversion of a building into condominium units. However, a prior case was based on facts that were very different from the subject facts. In the prior case, the plaintiffs did not live in the subject building and the trial court had left it to a referee to ascertain whether partition could be accomplished "without great prejudice." Here, there was a dispute between an ex-wife and an ex-husband who remained hostile to each other, and a complaint to the police had triggered the wife's arrest and detention.

As to the defendant having paid the initial purchase price for the building in 2000, the court presumed that the divorce court had considered such fact in rendering a decision as to the equities between the parties. Thus, the initial purchase price contribution was "not properly before the Court on this motion and is likely to be irrelevant to any accounting." The subject court also lacked jurisdiction to review the adequacy of a distributive award made in the divorce proceeding.

With respect to the defendant's financial contributions necessary to maintain and improve the building, such assertions "pertain[ed] to what the amount of each party's share…in the proceeds of a sale of the property should be, and not to whether plaintiff is entitled to have the property sold rather than physically partitioned."

New York courts "generally hold that an accounting should be conducted prior to entry of an order directing the sale of property." However, the timing of an accounting is "within the trial court's discretion" and may be "altered" where "a different approach would be more equitable." Here, the court determined that an accounting should precede the partition and sale. The court's decision to require a sale rather than a physical partition was based partly on the defendant's "ability to purchase plaintiff's share of the property." The court reasoned that before the defendant decides whether to purchase the plaintiff's share in the building, the defendant "would…benefit from knowing the results of an accounting." Accordingly, the court granted the plaintiff's motion for summary judgment and directed that the building should be partitioned and sold following an accounting of the party's respective interests in the building.

Comment: Findings as to who had engaged in improper conduct during and after the divorce were unnecessary, since it was clear that the condominium conversion process required substantial cooperation and the uncontested record established that the ability to cooperate was not the hallmark of the parties' relationship. The conversion process involves a plethora of actions, in addition to the preparation of organizational and offering documents, necessary decisions typically include, without limitation, decisions as to retention of an architect, engineer, appraiser, marketing team, attorney, accountant, insurance, contractors and counsel, as well as decisions as to pricing, interior design, possible additional financing, etc.

These kinds of decisions have sometimes led to rifts between partners who are experienced in condo conversions and who normally like each other and get along. Here, the parties seemed to have trouble agreeing on the time of day.

Chasewood v. Kay, U.S. District Court, E.D.N.Y., Case No. 18-CV-623, Decided Jan. 6, 2020, Gold, J.

Commercial Landlord-Tenant—Lease Renewal Clause Required Exercise Prior to Lease Expiration

A landlord commenced a summary holdover proceeding. The landlord alleged that the subject lease had expired pursuant to its terms and the tenant had failed to timely exercise an option to renew (option). The landlord moved for summary judgment and the tenant had cross moved to dismiss pursuant to CPLR § 3211(a)(1), asserting that the lease, together with other documents, established that the tenant had timely exercised the option. The court granted the landlord's motion and denied the tenant's cross motion.

The court explained the rules of contract construction, including that "the intent of the parties is to be given paramount consideration, which intent is to be gleaned from the four corners of the agreement, and…the court may not rewrite the contract…under the guise of construction, nor may it construe the language in such a way as would distort the contract's apparent meaning…." Additionally, "courts should refrain from interpreting agreements in a manner which implies something not specifically included by the parties, and may not, by construction, add or excise terms, nor distort the meaning of, those used and thereby make a new contract…under the guise of interpreting the writing…." These rules preserve "stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses and infirmity of memory…." Courts will decide, as a matter of law, whether a contract is "ambiguous." Only when a contract is ambiguous will courts consider "evidence outside (a contract's) four corners."

The court further explained that "generally, the failure to exercise an option within the time specified by the relevant agreement precludes the exercise of the option…." Where the failure to timely exercise an option to renew a lease "results in forfeiture, equity prevents such forfeiture if (1) the tenant's failure to exercise the option in a timely fashion resulted from an honest mistake or inadvertence, (2) the nonrenewal of the lease would result in a substantial forfeiture by the tenant, and (3) the landlord would be prejudiced by the renewal."

The lease ran for a 10-year period ending on April 31, 2019. The tenant had an option to extend the lease for an additional five years. A lease rider provided that if the tenant "agrees to exercise 5-year option, beginning with the 11th year of lease, tenant will remit to the Landlord $5,000." A lease addendum added additional space to the lease at a prescribed rent and made the term of the new space coterminous with the original lease. The addendum provided that "all other terms, conditions and tenets of the original lease…shall apply and remain in effect." With respect to the additional space specified in the addendum, the term was for 10 years. However, paragraph 40 of the addendum stated that "the term was to begin May 1, 2011 and end on April 31, 2019, making the term of the addendum eight years." The addendum provided that the tenant had the right to renew the lease for an additional 5-years, with a new term beginning on May 1, 2019 and ending on April 31, 2024.

The landlord had sent a letter to the tenant, which stated that since the tenant had failed to exercise the option, the tenant "forfeited the right to such renewal" and the tenant was now a month to month tenant.

Applying the rules of contract construction and considering the conduct of the parties, the court found that "notwithstanding that the rider appended to the lease contains an error with regard to the date upon which the lease expired, listing that date at April 31, 2019 rather than April 30, 2019, the lease is nevertheless clear and unambiguous." The lease listed each "yearly term separately" and specified that the lease would commence on May 1, 2009 and would end in April 2019. The lease also clearly stated that the five-year additional term would begin May 1, 2019 and end in April 2024. The lease specified that if the tenant "agrees to exercise 5-year option, beginning with the 11th year of lease, tenant will remit to the landlord $5,000." The court stated that if the tenant intended to exercise the option, it had to do so by "remitting a check to the landlord for $5,000" and that the "only fair interpretation of the…agreements is that (the exercise) had to be done prior to the expiration of the original lease term."

The tenant argued that the option could have been exercised after expiration of the lease term. The court found that such interpretation would "run afoul of well settled principles of contract interpretation." Giving plain meaning to the words of the operative language of the option, it was "clear that reference to the 11th year does not mean that the option could be exercised in year 11 after the expiration of the lease, but rather, that if respondent wanted to remain in possession in year 11 it had to tender $5,000 to petitioner on or before the end of year 10." The court further stated that the exercise had to be done prior to the lease expiration because the tenant's term, "per the clear language of the lease, was 10 years, making it impossible for it to be legally in possession in year 11 absent having already exercised the option." The court also noted that "no clause in a contract should be interpreted in a way that renders another clause meaningless …" and the tenant's interpretation "would render meaningless every part of the lease which limits the lease's term to 10 years."

The court held that the option was not ambiguous to tenant. The tenant had argued that the lease must be construed strictly against the landlord, whose predecessor had drafted the lease, and be interpreted "to mean that the renewal option could have been exercised in year 11."

The court acknowledged that although the option was not timely exercised, it could "exercise its equitable powers" to allow the option to be exercised. However, the tenant neither sought such relief, nor submitted evidence in support thereof. The tenant failed to show that the failure to timely exercise the option "resulted from an honest mistake or inadvertence." Rather, the tenant argued that the exercise of the option was timely. The tenant also failed to establish that non-renewal of the lease "would result in a substantial forfeiture by the tenant…." Accordingly, the court granted the landlord's motion for summary judgment.

The tenant had also asserted that the lease's cure provision should save the tenant's right to renew the lease. The option had been exercised on May 14, 2019, within 20 days of the lease expiration. However, the court found that the lease's cure provision was inapplicable to the renewal clause. The cure period related to the tenant "failing to fulfill 'any of the covenants of this lease,' or for vacating or deserting the premises." Thus, the court held that the intent of the parties was that the cure provision would not apply to the option and would only apply to the tenant's "failure to perform the other covenants of the lease." The court believed that to hold otherwise, would "render the entire agreement relatively meaningless" since the lease provided that absent exercise of the option, the lease was to expire on April 30, 2019.

The court also noted that the purpose of an end date to a lease and to renewal before such date is to afford a landlord "ample notice that the premises will have to be relet, thereby allowing the landlord to undertake efforts related thereto, or that because of the intent to renew the lease, the tenant will remain in possession by virtue of renewal, thereby obviating the foregoing efforts by the landlord."

Accordingly, the court denied the tenant's cross motion and granted the landlord's motion for a judgment of possession.

Comment: Occasionally, and especially when dealing with relatively small commercial landlords and tenants, options to renew will lack precise terms as to exactly when and how such option must be exercised. In many such instances, the option to renew was drafted without the benefit of counsel.

For example, during the term of a lease, a landlord may ask a tenant for something and the tenant agrees to such request and in exchange for agreeing the tenant requests an option to renew. Given the lead time needed to market vacant space, negotiate a lease with a new tenant and to fix up recently vacated space, landlords generally require that the exercise of an option to renew be well before lease expiration.

In many cases involving late exercises of options to renew, tenants cite substantial investments for improvements they made in reliance on their right to renew their lease. Landlords often counter that the tenants' excuses are not reasonable, and the improvements were made towards the beginning of the lease and have been amortized.

Riverdale Realty Dev. v. EJM Rest. Corp., Civil Court, Bronx Co., Case No. 900970/19, decided Dec. 25, 2019, Gomez, J.

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