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SCHECHTER v. CARTER

March 2, 1984

AL J. SCHECHTER, Plaintiff, against WILLIAM J. CARTER, et al., Defendants; AL J. SCHECHTER, Plaintiff, against WILLIAM J. CARTER, et al., Defendants.


The opinion of the court was delivered by: SAND

SAND, J.

These actions, in which this Court's jurisdiction is based upon the diversity of citizenship of the parties, involve the dispted construction of a provision in two leases executed in June 1962. The complaint in 83 Civ. 4267 relates to the premises at 237-239 East 58th Street, New York, New York. The complaint in 83 Civ. 4783 relates to the premises 343-345 East 51st Street, New York, New York. Both premises are apartment buildings. In all respects relevant to this controversy, the leases are identical. At the time of execution of these leases, two other leases for individual apartments were executed. All four leases contain a provision relating to "Rent increases Based on Consumer Price Index", a copy of which is annexed hereto as Appendix A, except that the individual apartment leases do not deal with renewal terms.

 The two premises leases were executed as part of a sale-lease back transaction pursuant to which defendants acquired the premises subject to the leases which had been entered into between the plaintiff-seller and his wife, and plaintiff leased back the premises. The apartment leases were between plaintiff as landlord, and William Carter and John Carter (now deceased), two of the defendants, as tenants.

 For twenty years, no dispute arose as to the construction of the consumer price index provision. In 1983, plaintiff negotiated for the sale of his interest in the 58th Street property. The prospective purchaser refuser to buy the property because of another provision in the lease to which the premises were subject. The initial term of the lease was from 6/1/61 to 5/31/92. The tenant had three options to renew for terms of 23 years each. The provision which dissuaded the prospective buyer related to the rental payable during the three 23 year renewal terms. It reads:

 Renewal Terms -- Fixation of Rents

 24. Whenever it is provided herein that the Tenant shall pay a net annual rent during the renewal terms, said net annual rent shall be a sum equivalent to six (6%) per cent of the fair market value of the demised land plus six (6%) per cent of the value of the building thereon less depreciation thereof at the rate of two (2%) per cent per annum, computed from the date of the commencement of this lease plus six (6%) per cent of the cost of any substantial alteration as defined in Article 7, less depreciation thereof at the rate of two (2%) per cent per annum computed from the date of the completion thereof; except that if the present building has been replaced, then such depreciation shall be computed on the cost of the new building from the date of the completion of such new building. For the purposes of the computation of depreciation it is agreed that the fair market value of the existing building as of the date hereof is $125,000 [in lease for 237-239 East 58th Street; $150,000 in lease for 343-345 East 51st Street], but if a new building has replaced the same, the cost of such new building as established by Tenant to Landlord's satisfaction shall be the fair market value of such new building. Said fair market value of the land and building shall be ascertained as of a date six (6) months prior to the date on which each newly fixed rental is to become effective hereunder.

 Plaintiff urges that this provision would enable defendants to "reap a double inflationary benefit -- the first time when the net annual rent is adjusted, which, in accordance with the reappraisal of the properties, will undoubtedly reflect the inflationary increase in the value of real property in this City, and the second time, if plaintiff's construction is not accepted, when reappraised price is multiplied by the percentage increase in the Consumer Price Index from May, 1962 to the beginning of each five year period of each renewal term." Affidavit of Stanley L. Kantor, Esq., pp. 8-9.

 The frustrated sale of the plaintiff's interest in the 58th Street premises allegedly caused plaintiff to reexamine the leases and caused him to conclude that the uniform and consistent interpretation of the consumer price index over the preceding twenty years had been erroneous. Thus, although the inquiry was precipitated by plaintiff's distress at the impace of the renewal term rental, which commences in 1992, this action is directed not at the renewal rent provision but at the consumer price index provision quoted above. The complaint seeks no relief vis-a-vis the renewal rent provision.

 The parties have construed the consumer price index provision to provide for an increment in the annual rent payable in each of the next five years. Plaintiff now asserts that the correct interpretation of the provision is to provide for a single increment equal to the product of the net annual rent for the initial five years multiplied by the percentage of increase in the consumer price index, which single increment is to be paid over the five years. Under plaintiff's interpretation, in each year, the landlord would receive only 1/5th of the increase reflected by the consumer price index rather than the entire increase annually.

 Defendants move for summary judgment and the motion is granted.

 Plaintiff's interpretation of the lease borders on the frivolous. Although it cannot be gainsaid that the consumer price rent increase provision is inartfully drafted and that the term "net annual rent" used elsewhere in the lease is not employed in this provision, the Court is not compelled to abandon common sense for the sake of literalism.

 The parties to this transaction were experienced real estate entrepreneurs. The purpose of a price escalation provision is, of course, to equate future dollars to the real value, measured in terms of purchasing power, of the dollar at the time of the agreement. Plaintiff's interpretation would be inconsistent with this purpose. If we look solely to the four corners of the lease in the light of the obvious intent of the parties, we would conclude that the motion should be granted. If the clause was intended to provide for only a 1/5th cost of living increment each year, specific language to that effect, negating the usual construction of such clauses, would be expected. If we look beyond the four corners of the lease this conclusion is significantly reinforced. For twenty years, these experienced real estate parties construed four leases in a uniform fashion. Plaintiff who was defendants' landlord with respect to the apartment leases, utilized the same construction of the provision as was utilized with respect to him as a lessee. When the parties modified the escalation provision in 1977, they explicitly referred to the provision as relating to increases in net annual rent. Plaintiff's claim that he should not be bound by this language because his wife was then extremely ill arouses compassion but is not of legal significance.

 Plaintiff's frustration at the decreased marketability of the property because of another provision, unchallenged here, which goes into effect in 1992, cannot serve as the excuse to adopt a strained, economically unrealistic interpretation of a clause the true intent of which has been well known to the parties for over 20 years.

 Defendants' Entitlement to Counsel Fees

 Defendants seek an award of attorneys' fees for their defense of the action. They claim such award pursuant to ...


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