Scott E. Mollen

Commercial Landlord-Tenant—Tenant Breached Lease By Terminating the Lease on the Basis That an Anchor Tenant Vacated It's Store—Lease Barred Termination Where Landlord Signed Lease With New Anchor Tenant Within 365-Day Window

A plaintiff shopping center owner and a retail tenant entered into a lease. The tenant had exercised a renewal option in 2018, which made the applicable lease expiration date Feb. 28, 2023. On July 24, 2017, a supermarket "anchor tenant" vacated the premises. The defendant tenant "waited for a new tenant to begin operations in the vacant unit of the anchor tenant". When no new anchor tenant commenced operations in the vacant unit by July 24, 2018, the tenant wrote to the owner seeking to terminate its lease early. The owner rejected the tenant's notice and advised the tenant that it had entered into a lease with a new anchor tenant. The new lease was executed on May 10, 2018. Notwithstanding the forgoing, the tenant vacated its unit in July 2018.

The tenant moved for summary judgment seeking dismissal of several of the owner's causes of action. The owner opposed the motion and cross-moved for summary judgment on all of its causes of action. The court granted the owner summary judgment on each of its causes of action except its claim for specific performance and denied the tenant's motion in its entirety.

The pertinent provisions of the lease provided:

35. In the event that at any time or from time to time following the Rent Commencement Date, the ShopRite supermarket, or any substitute, successor, assign, or replacement supermarket (the "Anchor Tenant") shall vacate or cease business operations at the Shopping Center, for a period in excess of three hundred sixty-five (365) consecutive days, except in the event of casualty, condemnation, repairs or alterations, Tenant shall have the option…, exercisable upon written notice from Tenant delivered to Landlord effective as of the date of such notice…, to terminate this Lease, provided that (i) no Event of Default shall have occurred and be continuing on the date of exercise of such Section 35.01 Termination Option or on the effective date of such termination, and (ii) all obligations of Tenant under this Lease accruing or applicable to the period ending on the Section 35.01 Termination Date shall have been performed or satisfied in full by Tenant.

36. Notwithstanding any contrary provision of this Section 35.01, if within the 365-day period specified in Section 35.01A, Landlord shall execute a lease with or consent to an assignment to a substitute, successor, assign, or replacement tenant to or of the previous Anchor Tenant, then the Section 35.01 Termination Option shall apply only to such substitute, successor, or assign and shall commence on the date such successor, assignor, or replacement opens for business in the [shopping center].

The tenant argued that when the lease provisions are read together, they require "not only that a lease for a replacement anchor tenant be signed by plaintiff; rather, these sections require the new anchor tenant to begin business operations before the three hundred and sixty-five day window from the previous anchor tenant closes, activating Defendant's opt-out opportunity and their right to do so under the lease agreement."

The court explained that although such interpretation "may be considered a reasonable interpretation of the clause, such interpretation is contrary to the plain language of the contract." The court found that the "proper interpretation…is that three hundred sixty-five day window commences once the anchor tenant ceases business operations and continues until either the window to restart operations closes or plaintiff enters into a new lease agreement; furthermore, should plaintiff enter into a new lease agreement, a new three hundred sixty-five day window cannot commence until the replacement anchor tenant has opened for business." Thus, the court stated that "[p]laintiff need only enter into a contract with a new potential anchor tenant to prevent such an opt-out."

The court further noted that if the lease contained any ambiguity, "such ambiguity cannot be automatically construed against plaintiff as the likely drafter of the agreement, since the rule that ambiguous language in a contract will be construed against the drafter is not applicable to a contract resulting from negotiations between two commercially sophisticated entities."

Accordingly, the court denied the tenant's motion for summary judgment and granted the owner's cross motion for summary judgment as to liability on its breach of contract causes of action. The court exercised its discretion to dismiss the owner's cause of action for specific performance

Comment: If the owner signed a lease with a new anchor tenant, why did the tenant attempt to terminate its lease early? The tenant argued that pursuant to its interpretation of the lease, it had a right to terminate its lease early.

Perhaps the tenant did not believe that the new anchor tenant would have the same "drawing power" as the prior anchor tenant. Perhaps the tenant thought that it was paying above market rent and less expensive or better located alternative space was available in the neighborhood.

This decision illustrates, inter alia, that lawyers for smaller "satellite" retail stores that perceive a need to be near an anchor store and lawyers for shopping center owners must carefully address the possibility that an anchor may cease to operate its store. No matter how skilled counsel may be, the ability to negotiate favorable terms will usually depend upon which party has greater business leverage when the lease is negotiated.

Morton Vill. Realty Co. v. Sleepy's LLC, Supreme Court, Nassau Co., Case No. 610652/2018, decided Jan. 15, 2020, Diamond, J.

Administrative Law—Owner's Art. 78 Proceeding To Annul a NYC Environmental Control Board's Decision Affirming Decisions of the NYC Office of Administrative Trials and Hearings Dismissed—Owner Liable For Permitting Illegal Transient Use (Booked By Airbnb) and Failing To Provide Sufficient Egress and a Fire Alarm System—Agency Decisions Were Reasonable and Owner's Constitutional Arguments Were Rejected—ECB Lacks Authority To Review Constitutional Challenges to DOB Enforcement Practices

A building owner (owner) commenced an Article 78 proceeding seeking to annul a determination of the NYC Environmental Control Board (ECB) to sustain decisions which had been rendered by the NYC Office of Administrative Trials and Hearings (OATH). The subject proceedings involved violations of the NYC Admin. Code (AC) and the NYC Building Code (BC).

Although the building's certificate of occupancy (CO) permitted occupancy on certain floors for individuals on a "month-to-month or longer-term basis," the CO for the second-floor permitted occupancy of individuals "for shelter and sleeping accommodations on a day-to-day or week-to week-basis."

The NYC Department of Buildings (DOB) had issued summonses for "illegally using/converting the use of" certain apartments and permitting transient use with respect to a second-floor apartment. Violations also involved the failure to provide required egress and failure to provide a fire alarm system for transient use.

An issuing officer (IO) testified at a hearing that he gained access to four apartments, spoke with occupants and that they "stated they were temporarily staying in the apartment, booked via the 'Airbnb' (Airbnb) website, and were paying various amounts to rent the premises per night."

The owner had argued that the summonses should be dismissed on the grounds that "OATH and ECB refused to enforce the United States Constitution,… state and local laws; that the City of New York incorrectly holds property owners strictly liable for the actions of their tenants; that the structure of the OATH Appeals Unit and the use of ECB Commissioner's reviewers create due process conflicts; penalties are excessive; hearings are conducted behind closed doors; the premises are not subject to the 2008 BC; inspection of the cited locations was illegal; and lack of jurisdiction." The owner did not "contest the allegations contained within the summonses."

An OATH hearing officer (HO) credited the city's evidence and found that the owner had failed to rebut the allegations. She ordered the maximum daily penalties of $1,000 per day for 45 days, together with standard penalties, since there had been no evidence of correction.

An additional hearing was held. The owner raised similar grounds for dismissal and objected to the city's evidence. The owner argued that the IO's affidavit and photographs were inadmissible since the IO was not present at the hearing for cross examination, the summons failed to establish a prima facia case, the HO should have reopened two other defaulted cases, OATH "ran a kangaroo court" since it failed to recognize constitutional issues, the city failed to respond to a discovery request, transient use lacked a legal definition and is based on a "fabricated legal theory" and occupancy groups established by the 2008 BC are inapplicable to subject building, since the building had been constructed in 1910. The owner provided a certificate of correction, dated Sept. 25, 2017. The second HO found that the owner violated the AC and ordered daily penalties of $1,000 per day from Sept. 23, 2017 through Sept. 25, 2017, based on the certificate of correction.

The owner appealed the initial HO decision. The ECB affirmed that OATH decision. The ECB found that the owner failed to establish a defense to the charges or identify a basis to modify the hearing officer's decision. The ECB further held that it lacked authority to review the constitutional challenges to the DOB's enforcement practices or to the validity of search warrants obtained by the DOB to inspect the premises. The ECB noted that the owner's alleged "ignorance of its tenant's short-term rent activities is not a defense." Since "several jobs were filed at the cited premises to change the use or occupancy of the premises, including a job in 2013", the ECB found that the 2008 BC applies to the owner and the owner had "failed to establish grandfathering as an affirmative defense."

The ECB also rejected the owner's appeal from the second HO's decision. The ECB found that the HO had properly overruled the owner's objections and "relevant and reliable evidence may be admitted without regard to formal rules of evidence per 48 RCNY §6-12(c)." The ECB stated that the HO had discretion to continue the hearing without the IO present and the owner had failed to make a motion to seek the IO's presence. Since the owner had not offered evidence that certain defaulted cases had been restored, the ECB also found that the remaining summonses could not be adjudicated.

Additionally, the ECB rejected the owner's argument that OATH improperly held property owners "strictly liable for acts committed by their tenants," since the owner failed to offer evidence or argument that the tenant caused the violation and the HO did not find that the tenant caused the violation. Citing prior decisions, the ECB held that the OATH Hearings Division "is not the proper tribunal for adjudication of constitutional claims, nor is the Board itself, and that petitioner failed to raise defenses as to the merits of the violation."

With respect to subject Art. 78 proceeding, the city argued that the HO's decisions "were reasonable, rational and not contrary to law" and the owner failed to exhaust its administrative remedies for certain summonses by failing to appear at a hearing date and failing to move to vacate its default. The city also argued that "building owners have a non-delegable responsibility to maintain their buildings in a code-compliant manner, and petitioner's constitutional challenges were appropriately declined as the City Charter clearly enumerated the types of laws and regulation OATH is entitled to enforce…and an Article 78 proceeding is sufficient to address any constitutional claim against an administrative agency."

The AC provides that it is "unlawful for any person or entity who owns or occupies a multiple dwelling unit classified for permanent residence purposes to use or occupy, offer or permit the use or occupancy or to convert for use for occupancy such multiple dwelling or dwelling unit for other than permanent residence purposes…. A class "A" multiple dwelling is a multiple dwelling that is occupied for permanent residence purpose.…Permanent residence purposes are defined as occupancy of a dwelling unit by the same natural person, family, house guests, lawful boarders, roomers or lodgers for thirty consecutive days or more."

The AC permits an exception, which provides that "non-permanent occupants can stay for fewer than thirty consecutive days provided there is no monetary compensation paid to the permanent occupants for such occupancy." The AC requires that building owners maintain their buildings "in a safe and code compliant manner" and "an automatic smoke system shall be installed in any Group R-1 occupancy.… Group R-1 occupancy is defined as transient (less than 30 consecutive days) occupancy."

The court held that the ECB's decision to affirm the OATH determinations was "rational and reasonable." The evidence, including screen shots of Airbnb reservations, established that certain apartments had been "converted/used for non-permanent residential purposes." The owner had submitted a "certificate of correction to establish that illegal use ceased three days after" a summons had been issued. The court viewed the applicable rules relating to illegal use as "straight forward."

The court explained that the owner had not disputed the merits of the violation, an Art. 78 proceeding "provides an adequate post-deprivation forum in which petitioner's constitutional arguments can be raised or addressed" and the record was "devoid of any facts to support a violation of petitioner's [constitutional] rights."

The owner had not "proffered any evidence of an agent…or any other representative…(being) present on the date that the violations were issued that can establish that respondent violated its constitutional protections under the Fourth and Fourteenth Amendments."

With respect to due process, the court found that the owner had been afforded "multiple opportunities to be heard and failed to appear at a scheduled hearing, failed to vacate its default as to two summonses, and where the (IO) was not present, the petitioner failed to request same." The court reasoned that where "procedural protections have been made available and the petitioner has declined himself of same, respondent cannot be held liable." Thus, the court dismissed the petition.

156 W. 15^th St. Chelsea LLC v. City of N.Y., Supreme Court, New York Co., Case No. 153126/2019, decided Jan. 6, 2020, Saunders, J.

Landlord-Tenant—Chronic Non-Payment Claim Based on 14 Actions Dismissed—Eight Non-Payment Cases Had Been Commenced More Than Six Years Before the Case—Notice of Termination Lacked Sufficient Information as to Other Cases—Landlord Had Allegedly Failed To Pursue Prior Cases and Warranty of Habitability Claims Had Been an Issue in Four Actions

A landlord sought possession of a rent stabilized apartment alleging that the tenant violated a "substantial obligation of the tenancy by failing to make timely payment requiring the petitioner to bring numerous summary proceedings." The predicate notice listed fourteen index numbers, "with various dates listed alongside the index numbers; these dates could indicate the date the case appeared on the court calendar."

The tenant asserted four affirmative defenses and moved to dismiss the petition on the grounds the notice of termination failed to state a cause of action based on chronic rent delinquency. The court granted the tenant's motion to dismiss.

Decisional precedent held that in order to establish a chronic non-payment claim, the landlord had to show that it was compelled to "commence frequent nonpayment proceedings in a relatively short period of time and that the tenant's nonpayment was willful, unjustified, without explanation or accompanied by an intent to harass a landlord." Furthermore, a landlord may not rely on non-payment proceedings "commenced more than six years before the commencement of the holdover proceedings as a basis to support a chronic nonpayment holdover proceeding."

Here, "[e]ight of the nonpayment cases listed in the notice of termination and relied upon by the petitioner were commenced more than six years before the commencement of this case" and therefore, "cannot form the basis for a chronic nonpayment case." There were "six cases listed that were not barred by the statute of limitations." However, the notice of termination "provided no information with respect to these matters other than an index number and a date to the right of each index number."

The tenant asserted that the landlord had not pursued any of those cases. The court stated that when a landlord "has failed to pursue a nonpayment proceeding, the petitioner cannot rely on that case to substantiate a claim for chronic rent delinquency."

The tenant argued that with respect to two of the remaining six cases cited, there had been no court appearances. As to the remaining four proceedings, final judgments had been entered on the initial court dates and there had been no subsequent activity on any of the cases.

The court explained that the landlord may not, in trying to establish a chronic rent holdover, "rely upon a case when the respondent has raised warranty of habitability claims in an answer or signed a stipulation requiring the petitioner to make repairs." The court found that "since repairs were an issue in these four proceedings, these cases could not support a chronic nonpayment holdover proceeding."

The landlord had not disputed the tenant's assertions, had not provided sufficient information with respect to the prior proceedings and had failed to refer to the specific lease provision that the tenant had allegedly breached. Thus, the court held that the termination notice failed to set forth a sufficient basis to maintain a chronic non-payment proceeding and dismissed the petition.

Fieber Realty LLC v. Zamam, Civil Court, Bronx Co., Case No. 19/29495, decided Jan. 16, 2020, Spears, J.

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