Appellant Home Depot appeals from a judgment in favor of appellee ReliaStar in a suit brought by ReliaStar seeking payments owed pursuant to a lease and a recognition agreement. We conclude that: 1) New York's Uniform Commercial Code does not prohibit Home Depot from asserting constructive eviction as a defense to ReliaStar's claims arising from the lease; 2) if Home Depot was unaware of the faulty condition of the building pad when it executed the parties' recognition agreement and its lack of awareness was reasonable at the time, the estoppel certificate in the recognition agreement does not bar Home Depot's constructive eviction defense; and 3) if Home Depot was constructively evicted, the lease was terminated and Home Depot was relieved of its obligation to pay "rents" under the "hell or high water" clause of the parties' recognition agreement. Accordingly, we VACATE the judgment and REMAND the case for further proceedings.
BEFORE: JACOBS, Chief Judge and HALL, Circuit Judge.*fn1
Appellant Home Depot U.S.A., Inc. ("Home Depot") appeals from the December 20, 2006 judgment of the United States District Court for the Eastern District of New York (Platt, J.) in favor of appellee ReliaStar Life Insurance Company of New York ("ReliaStar") in a suit brought by ReliaStar seeking payments owed pursuant to a lease and a recognition agreement (the "Recognition Agreement"). See Home Depot U.S.A., Inc. v. G&S Investors/Willow Park, L.P., No. 98-CV-6719, 2005 WL 3018701 (E.D.N.Y. Nov. 7, 2005). Although the district court's decision addressed several claims against various parties, the only claims on appeal here are those made by ReliaStar against Home Depot. For the reasons that follow we conclude that: 1) New York's Uniform Commercial Code (U.C.C.) does not prohibit Home Depot from asserting constructive eviction as a defense to ReliaStar's claims arising from the lease; 2) if Home Depot was unaware of the faulty condition of the building pad when it executed the parties' Recognition Agreement and its lack of awareness was reasonable at the time, the estoppel certificate in the Recognition Agreement does not bar Home Depot's constructive eviction defense; and 3) if Home Depot was constructively evicted, the lease was terminated and Home Depot was relieved of its obligation to pay "rents" under the "hell or high water" clause of the parties' Recognition Agreement.
On February 27, 1989, Home Depot entered into a lease with landlord G&S Investors/Willow Park L.P. ("G&S") for premises in Farmingdale, New York, upon which Home Depot planned to construct a home improvement center. Under the terms of the lease, G&S was obligated to provide a "building pad," while Home Depot was responsible for building on the site. An earthen building pad was provided by G&S, on which Home Depot constructed a store which opened on December 27, 1990.
On October 19, 1993, G&S mortgaged the Farmingdale property to North Atlantic Life Insurance Company of America, to which ReliaStar is a successor in interest. The mortgage was guaranteed by an assignment of lease agreement (the "Assignment Agreement"), by which G&S assigned "[a]ll rents, income, contract rights, leases and profits now due or which may hereafter become due under or by virtue of any lease" to ReliaStar, including its lease with Home Depot. The Assignment Agreement further provided that the lessee (Home Depot) was required to recognize the assignment of the lease and to make all payments directly to the mortgagee.
In accordance with its obligations to recognize assignments as provided for in the lease, on October 19, 1993, Home Depot executed the Recognition Agreement, drafted by ReliaStar, acknowledging the assignment of Home Depot's lease with G&S to ReliaStar. The Recognition Agreement included a "hell or high water" clause in its paragraph 7(a). The "hell or high water" clause provided that:
Tenant understands that a substantial inducement for Mortgagee to purchase the Notes is the continuing existence of the Lease, the income stream payable therefrom and the direct payment to the Mortgagee of all rents and other payments due under the Lease and that in furtherance thereof the Mortgagor has by the Assignment assigned its interest in the Lease, the rents and all other payments due under the Lease to Mortgagee as security for repayment of the Note. Tenant agrees that notwithstanding anything in the Lease or this Agreement contained to the contrary, until Mortgagee notify [sic] tenant that the Assignment has been released, Tenant shall be unconditionally and absolutely obligated to pay to Mortgagee in accordance with the Assignment all rents, purchases payments and other payments of whatever kind described in the Lease without any reduction, set off, abatement, or diminution whatever.
(Emphases added). The agreement also included an estoppel certificate in its paragraph 8, which stated:
Tenant represents to Mortgagee as follows:
d. Tenant has fully inspected the Premises and found the same to be as required by the Lease, in good order and repair, and all conditions under the Lease to be performed by the landlord have been satisfied; including but not limited to payment to Tenant of any landlord contributions for Tenant improvements and completion by ...