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Most Important Non-COVID Commercial Lease Decisions Since the Beginning of the Pandemic

By Adam Leitman Bailey and John M. Desiderio

 In the past two years, in litigations between commercial landlords and commercial tenants, New York courts continued to issue decisions on topics, unrelated to COVID questions, that should interest all real estate attorneys and their clients. We have reviewed all appellate cases since March 2020 and chose those, in our humble opinion, which are the most important commercial leasing decisions not related to the pandemic.

The decisions in most cases turned upon how the courts interpreted provisions of the parties’ leases, either by the plain meaning of the language employed or by how particular facts influenced the court’s application of the law to the parties’ lease obligations.

Yellowstone Injunctions:  Enforcement, Extention and Extinguishment of Cure Periods

The Gap, Inc. v. 170 Broadway Retail Owner, LLC, 195 AD3d 575, 151 NYS3d 37 (1st Dept. 2021). The commercial tenant in this case satisfied the requirements for obtaining a Yellowstone injunction, as set forth in Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Avenue, 93 NY2d 608, 692 NYS2d 91 (1999), i.e., (1) that it held a commercial lease, (2) the landlord had served it with either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to termination of the lease, and (4) it was prepared and maintained the ability to cure the alleged default by any means short if vacating the premises. On these facts, the trial court had granted the tenant’s request for a Yellowstone injunction.

However, the First Department noted that “this court has interpreted the third criterion to require a tenant to move before the cure period expired in the landlord’s notice expires,” and that the trial court “should not have granted a Yellowstone injunction because [tenant] failed to move before the cure period expired or argue that the cure period had been otherwise tolled.”

The court also held that, because tenant was still in possession, had never vacated the premises, and its lease was still in effect, the trial court should not have directed tenant to post a bond, but rather to “pay rent pendente lite directly to [landlord] in the amount specified in the lease while the Yellowstone injunction was in place.”

It should be noted that this is the first time we have seen a court or Appellate Division’s referral to “notice of default” as a proper prerequisite to obtain a Yellowstone injunction.   A notice of default does not include a cure period in it which is required by a Yellowstone Injunction.   Since mentioned in dicta and in list form, we cannot decipher from the decision how a notice of default would work under the current Yellowstone rules.

Audthan LLC v. Nick & Duke LLC, 183 AD3d 503, 121 NYS2d 245 (1st Dept. 2020). In contrast to 179 Broadway Retail Owner, supra, although the tenant in Audthan also did not move for Yellowstone relief before the expiration of the cure period, the First Department held that the tenant was nevertheless entitled to a Yellowstone injunction because the “[landlord] did not establish that the violations in the notice of default could have been cured within one year, particularly in light of the affidavit of [tenant’s] property manager attesting to his inability to obtain the violations from the New York City Fire Department to address them after the notice was served.”

The court noted that “this court has permitted tenants such as plaintiff to rely on a longer cure period under the lease where, as here, there is evidence that the cure could not be effected in the shorter period, and that the tenant has made a diligent effort to cure.” In addition, the court also stated: “Since there are questions as to whether the violations in the notice of default are plaintiff’s responsibility to cure under the lease, a Yellowstone injunction was properly granted to maintain the status quo until there is a hearing on the merits.”

JDM Washington Street LLC v. 90 Washington Street LLC, 200 AD3d 612, 160 NYS3d 27 (1st Dept. 2021). The First Department held that the trial court had properly granted a Yellowstone injunction to the tenant in this case, in which the landlord claimed that the tenant had failed to cure certain façade conditions.

The court held that “[a]lthough landlord disputes the effectiveness of plaintiff’s remediation work, this merely raises issues of fact which are not properly resolved on a Yellowstone application.” The court also noted that “issues of fact exist as to whether plaintiff’s time to cure has expired [under] the subject Lease, which automatically extends plaintiff’s time to cure for the amount of time reasonably needed to effect the cure, provided that plaintiff is proceeding with due diligence.”

The GAP Inc. v. 44-45 Broadway Leasing, Inc., 191 AD3d 549, 143 NYS3d 6 (1st Dept. 2021). The tenants in this case applied for and satisfied the requirements for obtaining a Yellowstone injunction while simultaneously alleging, in the alternative, that their leases had been terminated. The court held that “[c]ontrary to [landlord’s] contention, plaintiffs may plead in the alternative that the leases were terminated without abandoning their request for Yellowstone relief, as they asserted that if found in default, they were ready, willing, and able to cure, and the purpose of a Yellowstone injunction is to preserve the status quo, not to resolve the underlying merits of the parties’ dispute.”

“As Is” v.  “Broom Clean”

1710 Realty, LLC v. Portabella 308 Utica LLC, 189 AD3d 944, 138 NYS3d 532 (2d Dept. 2020). On Dec. 16, 2015, the parties in this case executed a lease which contemplated that the tenant was to undertake demolition and renovation work provided for in the lease. The lease further provided that “[landlord] agrees to deliver to [Portabella] the demised premises on the commencement date as is.” The commencement date was defined to mean “the date which is the later to occur of the date that (i) tenant is delivered occupancy of the demised premises in the delivery condition (hereinafter defined).”

In addition, the lease provided “[i]f the demised premises is not delivered within 90 days of the date of this lease, then tenant shall have the right to terminate the Lease. * * * * For purposes herein, the delivery condition shall mean vacant, broom clean and free or the prior tenant’s personal property and fixtures.”

On April 16, 2016, the tenant exercised its right to terminate the lease on the ground that the landlord had not delivered the demised premises broom clean within 90 days of the date of the lease. The landlord sued for breach of contract, and the tenant counterclaimed.

While acknowledging that some personal property of the prior tenant remained on a portion of the premises within the 90-day period, the landlord claimed that it was “de minimis” and that landlord had agreed only to deliver the premises “as is” and that neither party had intended the premises to be broom clean because of the contemplated demolition and renovation work.

The trial court held that “broom clean” was modified by the “as is” clause. The Second Department disagreed, stating that “[t]he interpretation of the lease urged by the [landlord], and accepted by the [trial] court, renders the delivery condition meaningless or without force or effect by excising the requirement that the plaintiff deliver possession vacant, broom-clean, and with the prior tenant’s property removed before [tenant’s] obligation to pay rent begins to run.”

The court reconciled “the two seemingly contradictory provisions” and gave effect to both by holding that the “delivery condition operated as a condition precedent to the triggering of the commencement date” at which point the landlord had to deliver the premises “as is” in broom clean condition. The court noted that “the commencement date would not arrive unless the premises were vacant, broom-clean, and free of the property of the prior tenant,” and added that “the fallacy in the [landlord’s] position is that the “as is” condition referred to…is the condition of the premises on the commencement date, not the condition of the premises on the date of the lease.”

The court held, therefore, that the tenant had validly exercised its right to terminate the lease and was entitled to return of its security deposit and first month’s rent, with interest.

Liquidated Damages v. Irreparable Injury

Eastview Mall, LLC v. Grace Homes, Inc., 182 AD3d 1057, 122 NYS3 846 (4th Dept. 2020). This case presented a sharp contrast between the majority’s and dissenting judges’ perspectives on the landlord’s claim of irreparable injury in support of its motion for preliminary injunction.

The “anchor” tenant of the mall in this case had the option of terminating its lease if its gross sales during the fifth year of the lease fell below a certain threshold amount. The tenant’s gross sales in the fifth lease year failed to meet the threshold; but the lease was modified by reducing the rent and extending the termination option for another year.

One year later, the tenant exercised its option to terminate, but the landlord claimed that the tenant had excluded certain sales from its “gross sales” calculation, and that therefore the gross sales threshold had been met and termination was precluded.

The landlord sued for a declaratory judgment and asserted causes of action for breach of contract and anticipatory repudiation, while seeking a preliminary injunction enjoining the tenant from ceasing business operations or otherwise taking steps to terminate the lease. The trial court granted the landlord’s motion for preliminary injunction.

The Fourth Department’s majority opinion reversed, noting that “preliminary injunctive relief is a drastic remedy [that] is not routinely granted,” and said further, “[e]ven assuming, arguendo, that plaintiff demonstrated a likelihood of success on the merits, we conclude that plaintiff did not establish that it would sustain irreparable injury without a preliminary injunction.”

The court noted that the lease contained a liquidated damages clause that entitled the landlord to money damages, which was intended as the sole remedy, and, therefore, the landlord had not suffered irreparable injury.

The court rejected the landlord’s contention that it would suffer irreparable injury from the loss of good will if the tenant were to cease operations by prematurely terminating the lease.

The court noted that loss of good will “may warrant a finding of irreparable injury in cases such as those involving unfair competition tort claims, the proposed demolition or alteration of the premises, or the issuance of a Yellowstone injunction” (internal citations omitted), but “[n]o such scenario is implicated here.”

To the contrary, the dissenting judges opined that the landlord had shown clear and convincing evidence of irreparable injury and that the trial court had not abused its discretion in considering, “for the purpose of determining whether provisional relief is warranted, if [landlord] will suffer irreparable injury not adequately remedied by monetary compensation if preliminary relief is not granted.”(Emphasis added).

There was evidence that the tenant was a “premier retailer” in the mall and that its tenancy impacted the leases of other tenants of the mall, who would not be required to continue to operate under their lease arrangements. “[T]he potential injury to [landlord] includes a domino effect involving other tenants in the mall…. Plaintiff’s other tenants in the mall whose cotenancy provisions in their leases depend on defendants’ continued occupancy in the mall throughout its lease term,…will have the ability to terminate their leases based on defendants’ premature departure, thereby causing irreparable harm to plaintiff,” i.e., “a loss of goodwill and damage to plaintiff’s customer relationships that will not be remedied by an award of liquidated damages.”

The Fourth Department’s decision obviously decided the issue against the landlord in this case; but it is certainly conceivable that another court in another case might adopt the reasoning of the dissenting judges in adjudicating “irreparable injury” in similar circumstances.

‘Tangible Assets’

Violet Realty, Inc. v. Amigone, Sanchez & Mattrey, LLP., 183 AD3d 1278, 123 NYS3d 384 (4th Dept. 2020). The tenant breached its commercial lease by abandoning the leased premises and ceased paying rent. The landlord moved seeking summary judgment (a) for past rent due with interest, (b) for accelerated future rent, and (c) for costs and attorney’s fees. The Tenant cross-moved seeking a determination that the term “tangible assets,” as used in the parties’ lease was limited to “furniture, fixtures, and equipment,” and did not include tenant’s accounts receivable, work in progress, or other physical property that did not have a physical presence on the leased premises. The trial court granted the tenant’s cross-motion.

The Fourth Department disagreed with the trial court, explaining: “We agree with [landlord]…that the court erred in granting [tenant’s] cross motion insofar as it seeks a determination that [tenant’s] accounts receivable are not ‘tangible assets’ under the lease.”

The court noted that it must enforce a written agreement according to the plain meaning of the language chosen by the contracting parties, and that “it is common practice of New York courts to refer to dictionaries to determine the plain and ordinary meaning of the words in a contract.”

The court then observed that Black’s Law Dictionary defined “tangible assets” to expressly include accounts receivable, and that the trial court’s contrary determination “does not ‘comport with [the] plain meaning’ of tangible assets.”

Renewal Options, Guaranty Viability, Res Judicata

In Karr Graphics Corp. v. Spar Knitwear Corp., 192 AD3d 673, 144 NYs3d 64 (2d Dept. 2021), the landlord rejected the tenant’s election to renew its lease in accordance with the terms of the lease. The landlord claimed that tenant’s prior default of the lease, which default the tenant had cured in the manner provided in the lease, precluded the tenant from exercising its right to renew the lease.

The Second Department affirmed the trial court’s order enjoining the landlord from taking any action to evict the tenant on the ground that the tenant’s exercise of its option to renew the lease was not valid.

The court held that the lease renewal provision, which granted the tenant the option to renew “[p]rovided tenant is not in default in the performance of its obligations under the terms of this lease,” could not “reasonably be interpreted as providing that the tenant’s default under the lease permanently extinguishes its option to renew regardless of whether the tenant cures the default.”

2402 East 69th Street LLC v. Corbel Installations, Inc., 183 AD3d 944, 124 NYS3d 632 (2d Dept. 2020). In Corbel the Second Department held that guarantors were bound to honor their suretyship and guarantor obligations for the tenant’s rent default, even though the original executed lease had incorrectly identified the owner of the property and incorrectly identified the leased premises, where the lease was amended by an email exchange that correctly identified the correct owner and correct premises, and the guarantee in the lease provided that (a) no amendments to the lease would relieve the guarantors of their obligations, and (b) notice to or consent by the guarantors was not required for any lease amendments.

The court held that the terms of the lease were amended by the email, and the amended lease did not change the risk that the guarantors had assumed in guaranteeing the lease. There was no ambiguity as to whose obligation was being guaranteed, there were no changes in the financial terms, and the guarantors had not raised any triable issues of fact.

In 231st Riverdale LLC v. Star Home Furniture, Inc., 198 AD3d 524, 152 NYS3d 820 (1st Dept. 2021), the First Department held that the trial court could not, on res judicata grounds, sua sponte dismiss a landlord’s Supreme Court action against a tenant because the landlord had obtained some relief in Civil Court as to accrued rent and a warrant of eviction. Civil Court lacked the jurisdiction to grant the full remedies to which the landlord was entitled under the terms of the parties’ commercial lease. The court held that there were no extraordinary circumstances to justify a sua sponte dismissal of the landlord’s action.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., and John M. Desiderio is the chair of the firm’s real estate litigation group.

Read the original article here.

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