Civil Court of the City of New York, Queens County
October 31, 2013
149-05 Owners Corp., Petitioner,
Ira Phillips, D.D.S. — Tenant, PHYLLIS PHILLIPS — Occupant, JEDARI, LLC — Occupant, ALBERT FUZAILOF, D.D.S., A/K/A JEDARI DENTAL, PLLC d/b/a CENTRAL QUEENS DENTAL — Occupant, "JOHN AND JANE DOE"-Occupant., Respondent.
Attorneys for Plaintiff 149-05 Owners Corp. Gutman, Mintz, Baker & Sonnenfeldt, PC
Attorneys for Defendant Ira Phillips, D.D.S and Phyllis Phillips Weisberg & Weisberg
Attorneys for Defendant Jedari, LLC and Albert Fuzailof, D.D.S. a/k/a Jedari Dental, PLLC d/b/a Central Queens Dental Lawrence G. Nusbaum.
HARRIET L. THOMPSON, J.
On March 24, 2010, the Petitioner, 149-05 OWNERS CORP., prepared and had served on the above named Respondents a 30-Day Termination Notice without the assistance of counsel. Subsequently, the Petitioner retained the law office of Gutman, Mintz, Baker & Sonnenfeldt, P.C., as counsel. Based on the failure of the Respondents to vacate, a Notice of Petition and Petition was prepared and served on the Respondents seeking to recover possession of the premises known as 149-05 79th Avenue, Apt. A, Kew Gardens, New York on the ground that the Respondents held over at the end of their lease agreement and were month to month tenants. The Petition was noticed to be heard on June 1, 2010 in Commercial Part 52 under L & T Index No. 063289/2010.
By Notice of Motion returnable on July 27, 2010, the undertenant, ALBERT FUZAILOF, D.D.S., JEDARI LLC, JEDARI DENTAL, PLLC d/b/a CENTRAL QUEENS DENTAL, moved to dismiss the petition on the grounds that the court lacks personal jurisdiction over the Respondents based on improper service of process and the 30 Day Termination Notice was facially defective in that it did not contain a termination date in contravention of well settled case authority.
By Notice of Cross Motion, the prime tenants, IRA PHILLIPS, D.D.S. and PHYLLIS PHILLIPS, moved to dismiss the petition on the grounds of improper service of process and that a nonpayment proceeding was pending between the same parties which would defeat the holdover proceeding.
In a Decision and Order, dated November 23, 2010, the Hon. Joseph J. Esposito granted both motions and dismissed the holdover proceeding without prejudice.
By Notice of Petition and Petition, dated July 29, 2010 and filed on August 3, 2010, the prime tenant, PHYLLIS PHILLIPS, commenced a summary proceeding for non-payment of rent in the amount of $34, 498.46 against her sub-tenant, ALBERT FUZAILOF, D.D.S., JEDARI, LLC., JEDARI DENTAL, PLLC d/b/a CENTRAL QUEENS DENTAL under L & T Index No: 70918/10.
On August 11, 2009, the Respondent appeared by counsel and interposed an answer which alleged various affirmative defenses and counterclaims. The Clerk noticed the Petition for September 14, 2010.On that date, the Respondent moved to dismiss the petition asserting that the pleadings were defective and the court lacked in personam jurisdiction over the Respondents since service of process was not in conformity with the law. (The record shows that there was a second motion made by the subtenant in which he also sought to vacate a default judgment pursuant to §5015(a)(5) but the record did not dispose of this motion; presumably it was disposed of by the attorneys).
The parties engaged in motion practice; both parties agreeing that opposition papers and reply papers would be served and filed by dates certain.
On January 18, 2011, the Hon. Joseph J. Esposito in a Decision and Order denied the Respondents' Motion to dismiss. The court found that the pleadings were sufficient to state a cause of action and deemed service was proper to "confer jurisdiction on the court".
After a court conference, on January 26, 2011, the parties entered into a stipulation in which they agreed to these terms and conditions: the case was adjourned for a final trial date to March 22, 2011; all subpoenas were required to be served by a date certain; the Respondents were required to serve and file an answer by February 18, 2011; and agreed to pay rent for January, February and March 2011 by personal delivery to Petitioner's attorney's office by the tenth day of each month with the exception of January 2011, which was to be paid by February 3, 2011. This aforesaid case between the prime tenant and subtenant was on the court calendar simultaneously with the instant holdover proceeding.
The Petitioner commenced this second Holdover proceeding in or about November 29, 2010 by the service of a 30 Day Termination Notice terminating the alleged month-to-month tenancy of the prime tenants and undertenants. The prime tenants and undertenants were required to surrender possession on or before December 31, 2010 and on their failure to surrender possession, the Petitioner would serve a Notice of Petition and Petition. Suffice it to say, the Respondent failed to vacate and the Petitioner served the petition made returnable on February 1, 2011 at 2 o'clock p.m. in Commercial Part 52.
The Respondents, IRA PHILLIPS and PHYLLIS PHILLIPS, appeared by counsel and interposed an answer with five affirmative defenses, namely, improper service of process of the pleading (stricken as stated below), the option to renew was properly exercised by the Respondents without objection by the Petitioner, waiver of any defects in the option to renew by the acceptance of rent prior to and subsequent to the termination notice and equitable estoppel.
The Respondents elected to defend this summary proceeding instead of commencing an action in Supreme Court for declaratory and for injunctive relief. The answer by the prime tenant asserts equitable defenses, and it is well-settled that the Civil Court and the Housing Part of the Civil Court may entertain equitable defenses in a summary proceeding (see RPAPL §743).
The undertenant, JEDARI, LLC, ALBERT FUZAILOF, D.D.S., JEDARI DENTAL, PLLC d/b/a CENTRAL QUEENS DENTAL also appeared by counsel and interposed an answer alleging that the Petitioner failed to name and serve a necessary party, failed to state a cause of action, improper service of process (stricken as stated below), partial constructive eviction and related counterclaim of $42, 000.00, negligent operation of the boiler by the Petitioner and related counterclaim for $42, 000.00, waiver of objection to the option by the acceptance of rent from the prime tenant and no prejudice to the landlord, and a third party beneficiary claim with claims of a wrongful rejection of the option by the Petitioner. The answer also alleges three cross claims by the undertenant against the prime tenant, namely, asserting all claims against the prime tenant alleged in the above nonpayment proceeding by the prime tenant against the undertenant for $42, 000.00; breach of contract for the same claim; and for $500, 000.00 for the failure to properly exercise the option to renew. In addition to these claims and cross claims by the undertenant, it appears that the undertenant served a demand for a jury trial.
It appears that the holdover proceeding was mistakenly placed on the residential Housing Part calendar and on the return date of February 1, 2011, the case was transferred to Commercial Part 52 and adjourned to February 18, 2011. On February 18, 2011, this case was adjourned to March 22, 2011.
On March 22, 2011, the Petitioner, by Notice of Motion, moved to strike the Jury Demand and the affirmative defense of the improper service of process of both the prime tenant and undertenant. After oral argument on the Motion date, this court issued a third Order striking the Jury Demand and the defense of improper service of process of both tenants and granted the parties a trial date for May 3, 2011.
It was uncontrovertible that all of the rights, title and interest in the leasehold was transferred from IRA PHILLIPS to his wife, PHYLLIS PHILLIPS, pursuant to an assignment and assumption of lease, dated September 22, 2005, with the written consent of the Petitioner. Thus, the Order also provides that the Petitioner withdrew all claims in this proceeding against IRA PHILLIPS, D.D.S. (deceased). All other parties remained in the case. Additionally, the Respondents were ordered to pay use and occupancy by the 7th day of each month until there was a final determination in this proceeding.
All parties including this court were in accord that the holdover proceeding under L & T Index No: 51616/2011, as more fully discussed below, should proceed to trial prior to the nonpayment proceeding between the prime tenant and the undertenant.
For several months, this court exhausted a considerable amount of time in a good faith effort to resolve the underlying proceeding between the parties. The trial date was adjourned from May 3, 2011 to May 13, 2011; then from May 13, 2011 to May 25, 2011 for a continued court conference. From that date, the parties stipulated to adjourn the case to June 9, 2011 and then subsequently to July 21, 2011 for a continued conference. On July 21, 2011, the court conference was then adjourned to September 21, 2011. From September 21, 2011, to a final adjourn date on November 2, 2011. After a lengthy conference with the court, the parties were unable to resolve this matter amicably and the parties insisted on a trial in this matter. A trial date was set for November 17, 2011 and November 18, 2011. After several consent adjournments, the parties proceeded to trial on March 21, 2012.
TRIAL ON THE MERITS On March 21, 2012, the Petitioner commenced its case-in-chief. The Petitioner admitted into evidence the first lease agreement involving the subject premises, dated August 1, 1984, between 149-05 OWNERS CORP., as the Landlord and N.A.H. Realty Corporation, as the Tenant, for the premises known as 149-05 79th Avenue, Professional Apt. A, Kew Gardens, New York for a term of 25 years which commenced on September 1, 1984 and terminated "to the end on the [blank] day of August 2009 * 19 [blank], upon the conditions and covenants " as stated in the lease (the court intentionally left these spaces blank exactly as it appears on the lease agreement). A review of the lease shows that there is a small * between 2009 and 19 (The parties apparently did not delete 19 from the lease.) The asterisk directs the parties to the bottom of the page which states:
" * with a renewal option on the part of the tenant for an additional twenty-five (25) years upon the same terms and conditions as are contained herein, such option to be exercised no later than sixty (60) days prior to the expiration date." (Petitioner's Exhibit "1" in evidence).
Subsequently, by assignment and assumption of lease, dated March 16, 1987, N.A.H. Realty Corporation transferred all rights, title and interest in the aforementioned lease, dated August 1, 1984, to IRA PHILLIPS, D.D.S. for the sum of $55, 000.00. The assignment provides, in pertinent part, as follows: "$27, 500.00 in cash paid this date to assignor; the balance by the giving of a note to assignor by assignee in the form attached hereto " (There was no promissory note attached to the assignment.) (Petitioner's Exhibit "2" in evidence.) The assignment further stated that "IRA PHILLIPS, D.D.S., successors and assigns from the 19 day of March, 1987 for all the rest of the term of the lease and option period years mentioned in the said lease, subject to the rents, conditions and provisions therein also mentioned." (this language is handwritten on the assignment in the space provided in the Blumberg Form). 147-05 OWNERS CORP., on February 12, 1987, consented to said assignment (Petitioner's Exhibit "3" in evidence).
Again, the lease was assigned by IRA PHILLIPS, D.D.S., to PHYLLIS PHILLIPS, his wife, pursuant to an assignment and assumption of lease, dated September 22, 2005. (Petitioner's Exhibit "4" in evidence). In correspondence, dated September 22, 2005, the Board of Directors of the Petitioner corporation acknowledged that no Board approval was required for this assignment between husband and wife. (Petitioner's Exhibit "5" in evidence).
Lastly, PHYLLIS PHILLIPS on September 22, 2005, afterwards changed to September 27, 2005, executed a Sublease Agreement which transferred all rights, title and interest in the leasehold from PHYLLIS PHILLIPS to JEDARI, LLC. and ALBERT FUZAILOF, D.D.S. (Petitioner's Exhibit "6" in evidence). Provision 7 of the Sublease Agreement states, in relevant part, that the "SubLessee shall have the right to renew said lease for five (5) successive five (5) year terms following the expiration of the initial term of this sublease provided that the exercise of each option shall be exercised in writing by the Sub-Tenant no later than ninety (90) days prior to the expiration of the term of the sublease currently in effect". The Board of Directors of the 149-05 OWNERS CORP. consented to the assignment of the Sublease Agreement from PHYLLIS PHILLIPS to Dr. ALBERT FUZAILOF, D.D.S. and JEDARI, LLC. on September 6, 2005, prior to the assignment (Petitioner's Exhibit "7" in evidence.)
According to the Petitioner's business records, the Respondent owed monthly rent at $951.95 from January 1, 2007 through April 1, 2008. Notwithstanding the claims for late fees, the Petitioner's records did not prove that late fees were assessed against the Respondent's account for this time period. A copy of the rent ledger and written rent demand from the Petitioner were admitted into evidence as Petitioner's Exhibit "10" and Petitioner's Exhibit "8", respectively. Petitioner's Exhibit "10", a rent ledger from the registered managing agent, First Management Corporation, dated June 7, 2011, shows payments and nonpayment of the monthly maintenance, late charges and other additional rent for the subject premises from December 1, 2004 to May 11, 2011. The balance on the account is $10, 471.45.
Lastly, the Petitioner offered into evidence a certified copy of the deed of ownership for the subject premises, dated July 17, 1984, showing a transfer of ownership from Roy Alpert, as executor of the Will of Edward Albert, as Grantor to 149-05 OWNERS CORP., as Grantee. (Petitioner's Exhibit "9" in evidence.)
The aforementioned evidence was admitted by the Petitioner without objection by either Respondent.
The Petitioner called Zinodkumar Shangwani, the Property Manager for 10 years for the subject premises. He was very familiar with the case at hand and testified that the basis for the commencement of the holdover proceeding against Dr. IRA PHILLIPS and his wife, PHYLLIS PHILLIPS, was their failure to exercise the option set forth above. He testified that notwithstanding the service of a Notice of Petition and Petition, the Respondents remained in possession and the landlord sought a final Judgment of Possession and a Warrant of Eviction in the underlying proceeding.
On cross-examination, the witness testified that he started working for the company in 2001 and worked for various departments at the company. He is a licensed real estate broker and has held the license for over 30 years. He is involved in the everyday management of the building and affirmed that he has custody and control over the business records of the co-op as their authorized agent.
He further testified that Felix Langer, President of the Board of Directors, and the other Board members authorized and retained counsel in this proceeding to commence a lease expiration holdover against the Respondents. He concluded that the prime tenant, PHYLLIS PHILLIPS, had to exercise the option on or before June 30, 2009 and he affirmed that he never gave notice to PHYLLIS PHILLIPS about the exercise of the option.
At the conclusion of his testimony, the Petitioner rested and asserted that the Petitioner had sustained its prima facie case. At that juncture, the prime tenant, PHYLLIS PHILLIPS, moved to dismiss the petition on the grounds that the option has been properly exercised, albeit, untimely, and claimed that PHYLLIS PHILLIPS is not a month-to-month tenant. The Petitioner, on the contrary, argued that the Petitioner has substantiated the elements of RPAPL §741 and asserted that the option to renew was untimely and was not properly exercised. After argument, this court ruled that the motion to dismiss was premature and directed a continuation of the trial.
PHYLLIS PHILLIPS testified in her case-in-chief as a fact and material witness. PHYLLIS PHILLIPS testified that she was a New York City school teacher for many years. She was promoted to the Director of Math and Science within the New York City Board of Education. She was married to Dr. IRA PHILLIPS, D.D.S., for 52 years until his death, approximately 2 years ago. To the best of her knowledge, she testified that her husband had a small office at the subject premises as early as 1955 or 1956. She acknowledged that "he was there before her by a few years". She was familiar with the various transactions regarding the lease but was not, herself, involved except as stated above. She was involved intimately with the transfer from herself to her subtenant, Dr. FUZAILOF. She testified that she had obtained the prior approval of the co-op board before she sublet the premises to the undertenant and there was no charge for the sublet agreement. She understood the lease terms to be identical to the lease that the parties had negotiated on September 1, 1984.
She stated that the subtenant paid the monthly rent faithfully from the commencement of the Sublease Agreement until in or about 2007. At that time, the public areas fell into disrepair; heating problems in the building also precipitated the installation of a new boiler in the basement. The boiler installation had plumbing defects which created excessive heat in the subject unit. The excessive heat caused irreparable harm to the subtenant and his dental equipment.
The prime tenant was forced to repair this condition at her own cost and expense because the Managing Agent and the Petitioner failed to timely correct the condition. Her subtenant withheld rent and she was "forced" to correct the condition and incurred costs in excess of $20, 000.00. She then had to engage in a legal battle with her subtenant and her landlord. She claims that this proceeding is retaliatory.
At the continuance of the trial on March 23, 2012, PHILLIPS testified that her husband occupied the subject premises from 1984 to 1992 where he owned and operated a dental office. Her husband retired from dentistry in 1992 due to a chronic illness.
The primary issue in this case involves the 25 year option for the subject unit. According to Mrs. PHILLIPS, she was given a copy of the master lease agreement, dated August 1, 1984, from her husband's attorney, Alvin Sobell, Esq. She stated that Mr. Sobell retained the original lease and gave her a copy of the lease. She introduced into evidence a copy of the lease that was provided to her by Mr. Sobell (Respondent's Exhibit "E" in evidence). The witness testified that the option to renew paragraph described above was excluded from her copy. The first time that she examined the lease, she was not aware that this paragraph was inadvertently missing. She further testified that although she read the lease, there was no reference to the option.
She further stated that Mr. Sobell was a retired attorney, and he maintained the lease and other important documents for her husband in a metal safe/container in his office. She further testified that the first time that she had knowledge about her failure to exercise the lease extension was when the managing agent contacted her regarding non-payment of the maintenance in the amount of $10, 471.45. She testified that when two of her rent checks were returned to her with the sticky note instructing her to contact their legal department, she called immediately. When she contacted the legal department in the management office, she was informed that she had not exercised the option to renew the lease and was expected to vacate the dental office. She was informed that the dental office was no longer hers, but they would accept the three (3) months rent that she owed for April, May and June 2010. She could not recall the name of the person that she spoke with in the management office. Notwithstanding the fact that the landlord returned the checks in April 2010, she returned all the checks to the landlord and all of those checks were cashed.
She further testified that on May 17, 2010, she signed a notice prepared by her present attorney that exercised the renewal option and explained in the notice the quagmire of the omitted option provision on the bottom front page of the master lease. Respondent's Exhibit "B" shows that PHYLLIS PHILLIPS exercised the option by sending the notice to the law firm of Gutman, Mintz, Baker & Sonnenfeldt in or about May 17, 2010. The witness further testified that her husband told her about the twenty-five (25) year option but she did not know how to exercise the option.
On cross-examination, PHYLLIS PHILLIPS claimed that she had properly exercised her option almost immediately when she discovered the omission of the option language. She did, however, acknowledge that she had never paid her rent to the law offices of Gutman, Mintz, Baker & Sonnenfeldt, P.C. and knew that this law firm was not the law firm retained by the coop for business purposes. She acknowledged that the law firm is the eviction attorneys.
Additionally, the witness was questioned about her ability to enter into a lease with the subtenant that was beyond the time period that was allotted to her in her lease. She stated that the subtenant never questioned her about it, and she did not know that the lease had not been renewed and therefore she had the right to rent the space to the subtenant. She had never received any notice of any kind from the landlord regarding the option when they consented to the sublease.
Additionally, she testified that her husband spent over $160, 000.00 in the subject premises and paid it over the course of the first 5 years. This claim presumes to include the $55, 000.00 paid for the assignment of the lease to her husband and the costs for the conversion of the residential apartment to a dental office. However, no documentary evidence was presented to substantiate this claim.
Mrs. PHILLIPS continued to state that she has paid her rent from 2009 to 2012. She contended that the coop waived any rights to evict her by the acceptance of her rent in this case and she believes this proceeding should be dismissed.
Dr. FUZAILOF, D.D.S. testified that he has practiced dentistry at this address since 2005. Dr. FUZAILOF denied any knowledge of the issues with the option to renew. He testified that he was only concerned with exercising his 5-year options for his lease and that was acceptable to him. He further claims that he had properly exercised his options during his tenure at the space.
On cross-examination, he testified that he intended to remain in possession of the premises and he properly exercised his options. He further indicated that he never saw the lease with the option and when he did see the lease, he did notice that there was an asterisk on the document as described above but he ignored it. He asserted that the master lease that he saw at the execution of this sublease did not have the option language, however, he was assured that he had a 25-year option period for his sublease agreement and would receive a copy. Dr. FUZAILOF testified that he had waited to close "this deal for a long time" and did not want to delay his lease execution because they did not have a copy of the master lease. He asserted that had he known of this issue, he would not have invested his time and money in the sublease agreement. He stated that he never received a copy of the master lease. It was not until 2009 that he finally saw a complete copy of the lease. He was advised by Mrs. PHILLIPS that she was trying to resolve this legal issue with the assistance of her attorney.
After this witness, the Respondent rested and the Petitioner elected not to present any rebuttal testimony.
In closing, the Respondent seeks to persuade this court that the evidence proved that the bottom of the lease given to the Respondent, PHYLLIS PHILLIPS, did not contain the option to exercise the lease. Once a complete copy of the lease was given to her, she timely and properly exercised the option pursuant to the terms of the lease agreement. The Respondent asserts that the Petitioner has waived any objection to the exercise of the option since the Petitioner continued to accept rent after the expiration of the lease agreement and even after notice of her alleged default, the Petitioner continued to accept rent. The Respondent further asserts that the twenty-five (25) year sublease agreement, that was approved by the Petitioner, recognized her tenancy and no objection was made by the Petitioner at that time. Additionally, it is argued that since substantial improvements have been made by the prime tenant and the subtenant to the subject property, it would be inequitable for the Petitioner to have a "windfall".
The Respondent further claims that there is no prejudice to the Petitioner that the option was not exercised timely and argues that the equities are in her favor. The Respondent seeks a finding that the option was exercised timely and properly and the Petitioner waived any objection to the continuance of the tenancy by the acceptance of monthly rent after the leasehold interest allegedly terminated by its own terms.
The Petitioner, in closing, argues that the prima facie case has been established by documentary evidence. The Respondent has admitted in evidence an option that was untimely and not served on the proper party. The Petitioner states that as a matter of law, judgment should enter in favor of the Petitioner with the Warrant of Eviction to issue forthwith and the execution stayed five days. After closing arguments, this court reserved decision.
Both parties agreed to submit post-trial law memorandums. In their memorandum of law, the Respondent argues that this court should find that the prime tenant and/or the subtenant exercised the option to extend the lease for an additional 25 years. The Respondent relies upon case authority which supports the general policy of the courts that abhors the forfeiture of commercial lease agreements particularly under certain circumstances. The Respondent argues that sufficient facts and circumstances were established at trial for this court to excuse the default by the Respondent under principles of equity, and find that the Respondent properly exercised the option. The Respondent claims that this court should apply the three (3) prong test established by the Appellate Division, Second Department, which relieves a defaulting tenant under similar circumstances (1) where the failure to timely give notice of a lease renewal is a result of inadvertence, neglect or "venial inattention", (2) the tenant has made valuable and substantial improvements to the property with the intent to renew the lease and the tenant will sustain a substantial loss if the lease is not renewed, and (3) the landlord is not prejudiced by the delay in giving notice. The Respondent also argues that the Petitioner waived any claim to object to the lease extension based on its acceptance of rent after the termination of the lease and without objection. The tenant states that the Petitioner should be estopped from denying the validity of the lease.
The Respondent also seeks to persuade this court that the Petitioner confirmed the tenancy by the commencement of a non-payment proceeding after the dismissal of the holdover proceeding; thus, acknowledging that there was a landlord and tenant relationship between the parties. When the prime tenant exercised her option to renew the lease on May 17, 2010, the Petitioner accepted the renewal without objection. The Respondent contends that Petitioner should have served written objections to the renewal as allegedly required by the lease and based on the failure to act the Petitioner waived any and all objections. Accordingly, they confirmed the lease extension of the tenancy by their acts and omissions, and this court should exercise its discretion to declare the lease extension valid and binding on the Petitioner.
The final argument proffered by the Respondent PHILLIPS is that the subtenant had a right to exercise the option. According to her, the obligation to pay rent and additional rent is a covenant that runs with the land and as a covenant that runs with the land, the subtenant has the right to exercise the option as well as the prime tenant. The subtenant, by letter dated May 23, 2007, allegedly exercised the option to renew the lease. With all of the above claims in their favor, the Respondents request that this court find that the Respondent timely and properly exercised the option to renew the lease for an additional 25 years and dismiss the petition.
The Petitioner, on the other hand, in a separate after trial memorandum of law asserts that the subtenant does not have the right to exercise the option on behalf of the tenant because it clearly is not one of the terms and conditions in the sublease or in the master lease. The Petitioner argues that the sublease agreement is just that, a sublease and not a full assignment of the lease which may grant the subtenant a right to exercise the option. The owner relies upon the language in the sublease which specifically requires the prime tenant to elect the extension in the master lease agreement and not the sub-lessee. (See paragraph 8 of the sublease and its respective provisions admitted as Petitioner's Exhibit "6"). The Petitioner further argues that the sublease was never intended to allow the subtenant the right to exercise the option to renew.
The Petitioner argues that the prime tenant never exercised the option to renew the lease and therefore the lease was not renewed. In essence, the Petitioner rightly contends that the rights between the prime tenant and the subtenant are derivative rights; consequently, since the prime tenant failed to renew, the tenancy is terminated and the subtenant no longer has any rights to remain in possession.
Finally, the Petitioner, contrary to the Respondent's claim that the failure to exercise the option has not prejudiced the rights of the Petitioner, argues general economic hardship suffered by the Petitioner for the inability to market the property for profit because the occupants are still in possession.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In this case, two competing commercial businesses claim rights to possession of a leasehold interest. A business can be defined as a commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities. (InvestorWord.com). The location of a business is often the cornerstone of its success. More than half of all small businesses rely on the rental of commercial property for the sale, distribution, manufacturing and production of goods and/or the distribution of services. In those rentals, many commercial tenants invest substantial sums of money in renovations and thus, enter into long term leases to recover the investment made in the property over the course of the lease.
A lease is a contract, in essence, a form of agreement made by a landlord with a tenant for the use and occupation of real property (Rasch, NY Landlord and Tenant Section 1:1-1:2). Therefore, it is no surprise that the principals of contracts govern landlord and tenant commercial leases; both legal and equitable principles of contract law govern the lease agreement between parties.
In the case at bar, two principles of law are at work. General contract construction and the application of equitable relief to relieve a defaulting party of the terms of conditions of the lease agreement.
Often, the first question of concern is whether the underlying agreement is unequivocal and contains the necessary provisions to constitute a meeting of the minds between the parties. In determining whether or not an agreement is ambiguous is a question of law to be decided by the courts and only after an analysis of the four corners of the instrument (see Kass v. Kass, 91 N.Y.2d 554, 566, 673 N.Y.S.2d 350 ; Todd v. Grandoe Corp., 302 A.D.2d 789, 790, 756 N.Y.S.2d 658 ). Suffice to say, if any ambiguity exists in the instrument, then the courts will look to extrinsic evidence and may consider such facts in its analysis of the terms therein (see F & K Supply v. Willowbrook Dev. Co., 288 A.D.2d 713, 714, 732 N.Y.S.2d 734 ; Ruthman, Mercadant & Hadjis v. Nardiello, 260 A.D.2d 904, 906, 688 N.Y.S.2d 823 ).
Furthermore, a fundamental tenent of contract law is that the agreements are construed in accordance with the intent of the parties and the best evidence of the parties' intent is what they express in their written contract. Thus, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms, without reference to extrinsic material outside the four corners of the document [internal quotation marks and citations omitted]. Goldman v. White Plains Center for Nursing Care, LLC, 11 N.Y.3d 173, 176 (2008); MHR Capital Partners L.P. v. Presstek, 12 N.Y.3d 640 (2009); Van Shift Holdings Ltd. v. Energy Improve Structure Acquisition Corp., 65 A.D.3d 405 (1st Dept., 2009).
In addition, "it is a recognized rule of construction that a court should not adopt an interpretation which will operate to leave a provision of a contract without force and effect. An interpretation that gives effect to all the terms of an agreement is preferable to one that ignores terms or accords them an unreasonable interpretation [internal quotation marks and certain citations omitted]." Ruttenberg v. David Data Systems Corp., 215 A.D.2d 191, 196 (1st Dept., 1995).
In negotiating any contract, the courts will not look outside of the four corners of the instrument especially "where the instrument was negotiated between sophisticated, counseled people negotiating at arm's length [internal quotation marks and citations omitted]." Tag 380, LLC v. ComMet 380, Inc., 10 N.Y.3d 507, 513 (2008); Logiudice v. Logiudice, 67 A.D.3d 544 (1st Dept., 2009). In addition, see the most recent matter of Colonial Pacific Leasing Corp. v. Brown, 28 Misc.3d 1214 (a), 2010 WL 2927283 (N.Y.Supp.) in which the court denied a motion for summary judgment and granted Defendant's motion for summary judgment dismissing the complaint based on various ambiguities in the underlying documentary evidence submitted by the Plaintiff.
An agreement "is unambiguous if the language it uses has a definite a precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion'" (Greenfield v. Philes Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, , quoting Vreed v. Ins. Co. of North America, 46 N.Y.2d 351, 355, 413 N.Y.S.2d 351 ; see Williams v. Village of Endicott, 91 A.D.3d 1160');"> 91 A.D.3d 1160, 1162, 936 N.Y.S.2d 759 ).
Secondarily, in commercial transactions, in the case law below, for over a period of fifty years, the courts have answered the proverbial call to rescue valuable commercial tenancies by developing various equitable remedies to level the playing field between the owners and tenants to avoid the forfeiture of valuable leasehold interests by tenants that have been noncompliant with the specific terms of the lease agreement, namely the timely and proper exercise of lease renewal extensions.
A search of our rich history revealed that there are several Court of Appeals decisions in the early 1970's that created the foundation for many of the underlying principles and rationale of the courts that overlook defaults in lease agreements to avoid forfeiture of commercial tenancies.
In the earlier case of Jones v. Gianferante, 305 NY 135, 138, 111 N.E.2d 419, 420, the Court of Appeals recognized that equity will relieve a tenant against forfeiture of a valuable leasehold interest when the default in notice has not prejudiced the landlord and thus, resulted from an honest mistake, or similar excusable fault. In order to invoke the relief under Jones, it is incumbent upon the party to establish that (1) there was an honest mistake or similar excusable fault; (2) by the tenant; and (3) no damage to the landlord'."
In S.Y. Jack Realty Co. v. Pergament Syosset Corp., 27 N.Y.2d 449, 264 N.E.2d 462, 318 N.Y.S.2d 720 (1971), the Court of Appeals further developed and expanded the above rule of law to rescue yet another commercial tenancy in which the United States Postal Service failed to deliver a properly mailed notice to renew. The court determined that "if reliance on the United States mail could possibly be characterized as "fault", it was in excusable fault' and, the tenant which had timely mailed a letter making known its desire to renew a 5-year lease for a store building in which it had conducted its retail business for more than 15 years, should not be deprived of a valuable asset because of the failure of the post office to deliver the letter, where the landlord did not suffer any damage or prejudice because of the delay."
There were some specific findings that the court relied on that were significant. It was undisputed that when a notice is required to be given by a certain date, it is insufficient and ineffectual if it is not received within the time specified in the lease (See e.g.., Peabody v. Sapterlee, 160 NY 174, 59 N.E. 818; Kantrowitz v. Dairymens's Lead Corp. Assn., 272 App.Div. 470, 71 N.Y.S.2d 821, aff'd, 297 NY 991, 80 N.E.2d 366; Boyce v. Nat'l Commercial Bank and Trust Co., 41 Misc.2d 1071, 247 N.Y.S.2d 521, aff'd., 22 A.D.2d, 848, 254 N.Y.S.2d 127; See also Restatement, 2d, Contract (Pent. Draft No. 18 1964), Section 64, Subdivision B); 1A Corbin, Contracts (1963), Section 264; I Williston, Contracts (3d Edition 1957), Section 87).
Additionally, since the landlord took no steps to find another tenant or to lease the space, it was found that the Appellate Division appropriately relieved the tenant of its default to give the requisite timely notice of the renewal of its lease or to perform some other condition precedent to renewal; no harm or prejudice befell the landlord and it was not due to bad faith. (Citing Jones v. Gianferante, 305 NY 135, 111 N.E.2d 419; Rizzo v. Morrison Motors Inc., 29 A.D.2d 912, 289 N.Y.S.2d 903; Ringelhein v. Karsch, 112 N.Y.S.2d 130; Application of Tott, Sup., 81 N.Y.S.2d 344; see also I Corbins I, Contracts (1963), Section 35, p.146; MacNeil, Time of acceptance, 112 U. Pa. Law Rev. 947, 975; Rash, NY Landlord & Tenant in Summary Proceedings (1950), 1970 Supp., Section 210, p.116; I Williston, Contracts (3d Edition, 1957), Section 76, p.249).
The court further established that "a longstanding location for a retail business is an important part of the goodwill of that enterprise, so the tenant stands to lose a substantial and valuable asset". Moreover, as was conceded in that case, the landlord did not suffer any damage or prejudice because of a delay resulting from the non-delivery of the letter to the landlord. The court specifically finding that the default was "excusable" fault and should not operate to deny the Defendant of a valuable asset.
Later in the 70's, in the often cited case of J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., 42 N.Y.2d 392, 366 N.E.2d 1313, 397 N.Y.S.2d 958 (1977), the Court of Appeals determined that improvements in real property, coupled for the first time with the concept of goodwill as a valuable asset, rescued yet another commercial tenancy based on principles of equity. New York courts have recognized that the right to renew a lease is a vested equitable right (J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., supra). Where a tenant assignee had made considerable improvements in the premises, $40, 000.00 at the inception of the purchase and an additional $50, 000.00 during the tenancy and where its location was lost, the restaurant would undoubtedly lose a considerable amount of its customer goodwill, the tenant assignee who failed to renew the lease at the proper time would be entitled to equitable relief if there is no prejudice to the landlord. It was particularly significant that the tenant had invested $15, 000.00 in improvements, at least part of which was expended, after the option had expired (emphasis added).
In that case, the court had not been asked to consider whether a tenant would be entitled to equitable relief from the consequences of his own negligence or "mere forgetfulness" as the court had held in the Fountain case, supra. In Gianferante, the default was due to an ambiguous lease and in S.Y. Jack, the notice was mailed but never delivered. In the past, equitable relief was often denied if it appears that there was a willful or gross negligence by the tenant versus a forfeiture as a result of the tenant's own negligence or inadvertence. The matter was remanded to determine whether the owner, in fact, suffered a prejudice as a result of the late filing of the notice of option to renew.
One of the primary questions raised in J.N.A. Realty, supra, and similar cases upon which it relied, is whether the tenant would suffer a forfeiture if the landlord is permitted to enforce the letter of the agreement. The fact that the tenant in possession had made a "considerable investment and improvements on the premises" and "would undoubtedly lose a considerable amount of his customer's goodwill if he lost his location, would suffer a forfeiture", constitutes sufficient grounds to relieve him of his negligence.
In sum, New York courts will intervene to relieve a commercial tenant from the forfeiture of the valuable leasehold resulting from the tenant's failure to exercise its option in a timely way if his failure to act was the result of an honest mistake or similar excusable default provided that the landlord is not prejudiced. The negligence in failing to exercise the options in the J.N.A. Realty case was extended for four and a half months. Other delays have been for less a period of time (S.Y. Jack Realty Co. v. Pergament Syosset Corp., supra) (37 days); (J ones v. Gianferante, supra, (13 days); Modlin v. Town and Country Tax, Inc., 42 A.D.2d 586, 344 N.Y.S. 703 (14 days); Rizzo v. Morrison Motors Inc., 29 A.D.2d 912, 289 N.Y.S.2d 903 (6 days).
Now looking further into the element of time, in Harlinton Realty Corp. v. Farmiloe-Burke Corp., 108 Misc.2d 690, 438 N.Y.S.2d 691, the court was called on to determine whether or not the passage of 17 months after the lease expiration could pass the test for equitable relief. Equitable relief must always depend upon the facts of a particular case (J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., supra, 42 N.Y.2d at 400, 397 N.Y.S.2d 958, 366 N.E.2d 1313).
The court found that the Respondent possessed a valuable lease interest and that it made considerable investments in the premises. The fact that the landlord made no particular commitments with respect to the property and would not be prejudiced if the tenant is relieved of its default, was evidence against forfeiture. Since the landlord continued to send rent notices to the tenant for 18 months requesting payment of the old rent and accepted the rent for the entire period of time, almost one-third of the renewal period, the landlord should not be permitted to require strict adherence to the notice requirements for exercising the options (relying on Modlin v. Town and Country Tax, Inc., supra).
As this rule of law has been perfected in the judicial system, the Appellate Division, Second Department, in Mass Properties Co. v. 1820 New York Ave. Corp., 152 A.D.2d 727, 544 N.Y.S.2d 180, found that the "the task for determining whether a tenant shall be relieved of a default in exercising an option is threefold. The tenant must show (1) that the default was excusable; (2) that the default will result in a substantial forfeiture by the tenant; and (3) that the landlord would not be prejudiced (J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., supra). The basis for the determination in that case was that the neglect was inadvertent, not prejudicial to the landlord but prejudicial to the tenant by forfeiture of a valuable interest invested in the diner enterprise operated by the tenant. See also P.L. Dev., Inc. v. T. Fetterman, 293 A.D.2d 657, 740 N.Y.S.2d 634, finding that the Plaintiff timely exercises option to purchase the Defendant's premises given that the Plaintiff's large expenditures on the property, the lack of prejudice of the Defendant that the option is given effect and the honest mistake would have led to the Plaintiff's short delay in exercising its options, equity compels specific performance of the option (Hirsch v. Lindor Realty Inc., 63 N.Y.2d 878, 484 N.Y.S.2d 196, 742 N.E.2d 1024; J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., supra; Pitkin Seafood v. Pitrock Realty, 146 A.D.2d 618, 536 N.Y.S.2d 527; 2M Realty Corp. v. Bochn, 204 A.D.2d 620, 612 N.Y.S.2d 207).
Furthermore, equity will save a long term tenant from a de minimus breach of a lease where there is no discernible prejudice to a landlord (40 61st St. Realty v. Dalton, 203 WL 21911088 (App. Term, 2d Dept., 2003) including where rent payments are fully tendered by the tenant though not always precisely on time (41st St. Ave. Realty LLC v. Choices Women's Medical Ctr., Inc., 188 Misc.2d 274, 276, 726 N.Y.2d 859, 861 (App. Term, 2d Dept., 2001).
See the application of this principle by Judge Singh in the matter of Rachel Bridge Corp. v. Dishi, 4 Misc.3d 1021(A), 2004 WL 2008629 (N.Y.C. Civ. Ct.), finding that the default of the tenant was inadvertent and excusable "and was caused in part by a contradictory document prepared by the landlord" [(citing Jones v. Gianferante, supra, where the tenant was excused for the failure to timely exercise renewal based on ambiguity in the renewal option)]. In the analysis of the substantial forfeiture by the tenant, the court concluded that the expenditure of $150, 000.00 for the granite storefront, the total cost of the construction being $480, 000.00 and the additional $60, 000.00 spent building by Rachel Bridge by the additional of new offices on the second floor was deemed a substantial forfeiture where the court intervened to excuse the default in the exercise of the option. In that case, the new use of the property as developed by the tenant necessitating a change in zoning, substantial construction and investment was also significant. (The court citing Nanuet Nat'l Bank v. Saramo Holding Co., 153 A.D.2d 927, 454 N.Y.S.2d 734 (2d Dept., 1989) which found that the expenditure of $180, 000.00 in construction of a two-story building and additional sums spent over the 20-year term constituted substantial improvements). Further, the amount of goodwill earned at the location over 20 years was reflected in the willingness by the new tenant to pay a tenfold increase for the space (S.Y. Jack Realty Co. v. Pergament Syosset Corp., supra, 27 N.Y.2d 449, 318 N.Y.S.2d 720, 269 N.E.2d 462 (1971) (loss of good will of a retail enterprise is a substantial and valuable asset)). Based upon those facts, Judge Singh dismissed the holdover proceeding with prejudice.
At the Appellate Term, Second Department in Brook v. Elabed, 7 Misc.3d 132(A), 80 N.Y.S.2d 230, 2005 WL 975680 (NY Sup. Ct., App. Term), a case similar to the case at bar, the landlord instituted a commercial holdover proceeding predicated upon a Notice of Termination of an alleged month-to-month tenancy. The commercial lease, which terminated on July 31, 2002, granted the tenant an option to renew for an additional five years at a 5% increase each year. Since no particular method for exercising an option to renew is prescribed in the lease, a tenant may adopt any reasonable method at the end of the term to indicate that the tenant elects to renew the lease. The tenant's election may be implied from continuing in possession after expiration of the lease (see Foster v. Stewart, 96 App.Div. 814 ; Schwalven v. Cholowaczuk, 75 Misc.2d 98 ), particularly when the tenant remains in possession and invests additional sums in the commercial space. Since the tenant not only remained in possession but tendered a check to the landlord in the amount required on the renewal, the court upheld the lower court determination that the lease was fittingly renewed, and affirmed the dismissal of the summary proceeding.
In Popyork, LLC v. 80 Court St. Corp., 23 A.D.3d 538, 806 N.Y.S.2d 606, 2005 N.Y.SlipOp. 08965, the Appellate Division, Second Department, found that the tenant, which operated a fast food restaurant, was entitled to relief from the consequences of its untimely renewal. The tenant paid $550, 000.00 to acquire the former tenant's rights over two years after the initial term of the lease had commenced as well as invested approximately $300, 000.00 in improvement. The court reasoned that the tenant stood to lose its goodwill that it shared with that local community as its customer base and the landlord offered no evidence that it was prejudiced by late notice of the lease renewal option which it received approximately four months before the fifth term of the lease was due to expire. The Appellate Division, relying on the three-prong test established above, and on Street Beat Sportswear v. Waterfront Realty, 6 A.D.3d 693, 775 N.Y.S.2d 160; Comprehensive Health Solutions v. TrustCo Bank Nat'l Assn., 277 A.D.2d 861, 715 N.Y.S.2d 796; O'Malley v. Ruggiero, 245 A.D.2d 1129, 667 N.Y.S.2d 531; Dan's Supreme Supermarkets v. Redmond Realty Inc., 216 A.D.2d 512, 628 N.Y.S.2d 790, determined that although it was undisputed that the Plaintiff failed to timely exercise its option, equity should intervene to relieve the tenant of the consequences of an untimely renewal where the elements of the three-prong test are found. The declaratory judgment action was remitted to the Supreme Court for an entry of a judgment declaring that the Plaintiff effectively exercised its option to renew the lease.
This court, in reviewing the case of 135 E. 57th St. LLC v. Daffy Inc., 91 A.D.3d 1, 934 N.Y.S.2d 112, 2011N.Y.SlipOp. 08497, interestingly for the first time observed that the court granted equitable relief in a case where no improvements were ever performed in the subject premises. In another well-written pivotal decision by Justice Saxe, writing for the majority, he traces the historical development of the rule of law in this area of lease extension options and the avoidance of lease forfeitures in commercial tenancies. As the presiding Justice, he emphasized that "the law generally exacts a high price for failure to comply with the precise language of a contract" (see e.g., Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 775 N.Y.S.2d 765, 809 N.E.2d 870 ). But, in some situations, principles of equity and the fundamental convenants of fair dealings have softened the often harsh results of common law rules of strict contract construction. "These equitable principles such as the doctrine of substantial performance, import the concept of fundamental fairness to the context of contractual dispute litigation. One equitable construction that has been used to protect parties from the harsh results of strict contract construction is the principle underlying this Appeal, that equity will intervene to avoid forfeiture". The main issue, as articulated by the majority, is "whether this exercise of equitable authority was proper, given that the tenant did not prove that it made substantial improvements in anticipation of continued occupancy." Id at pg 3.
The majority acknowledged and recognized the firm set of rules articulated by the landlord that when a contract required written notice to be given within a specified time period, the notice is ineffective unless it is received within that time (Oppenheimer and Co. v. Oppenheimer, Appel, Dickson and Co., 86 N.Y.2d 685, 693, 363 N.Y.S.2d 732, 660 N.E.2d 415 , Maxton Bldrs. v. Lo Galbo, 68 N.Y.2d 373, 378, 509 N.Y.S.2d 507, 502 N.E.2d 184 . But, in reply, the court reminded the landlord that there is an exception carved out by the court that apply equitable grounds where a forfeiture would result from the tenant's neglect or inadvertent (J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., supra).In Daffy's, it was determined that the four-day delay in providing the one-year's notice required by the lease did not prejudice the landlord in that case. The record showed that Daffy never claimed that it exercised the option timely based upon the date of the letter. "The option renewal letter emailed with the cover page, dated February 4, 2010, and the fax cover sheet was time stamped February 4, 2010. Moreover, the corporation controller who prepared the letter provided a credible explanation for the error. We accepted trial court's conclusion that the misdating was not prompted by either bad faith or an intent to defraud and that the four-day delay was an honest mistake."
As important, the court went on to indicate that as J.N.A. Realty Corp., supra explained, equity does not intervene when a party fails to timely exercise a contractual option because "the loss of the option does not ordinarily result in the forfeiture of any vested right" (42 N.Y.2d at 374, 397 N.Y.S.2d 958, 366 N.E.2d 1313). The reason is that the option itself does not create an interest in the property, and no rights accrued until the condition precedent has been met by giving notice within the time period specified", however, while options such as stock options or options to buy do not create a vested interest in the property so that the loss of the property may be treated as a forfeiture, lease renewal options are different. Equity may intervene where a tenant in possession of the premises under an existing lease neglected to timely exercise a renewal option because "he might suffer a forfeiture if he had made valuable improvements in the property" (Id.).
Furthermore, the court declared that in a case where improvements relied on by the tenant had been made during the first two years of the lease, they had already been amortized and depreciated by the time of the attempted renewal so that the tenant had "reaped the benefit of all initial expenditures, " and concluded that there was insufficient evidence that the tenant would suffer a forfeiture (see Soho Dev. Corp. v. Dean & DeLuca, 131 A.D.2d 385, 386, 517 N.Y.S.2d 498 , Wayside Homes v. Percelli, 104 A.D.2d 650, 659, 480 N.Y.S.2d 29  lv. denied, 64 N.Y.2d 602, 485 N.Y.S.2d 1024, 475 N.E.2d 126 ; Trieste Group, LLC v. Ark Fifth Ave. Corp., 13 A.D.3d 207, 787 N.Y.S.2d 258, ).
Although the Court of Appeals has authorized equitable relief against untimely renewal where there has been no indication that substantial improvements had been made in the premises, J.N.A. Realty Corp., supra, the Appellate Division, in reliance on S.Y. Jack Realty Co. v. Pergament, supra, affirmed the granting of equitable relief to the commercial tenant not because of substantial improvements to the premises would otherwise be forfeited but "to preserve the tenant's interest in a longstanding location for a retail business because this is an important part of the goodwill of that enterprise, [and thus] the tenant stands to lose a substantial and valuable asset" (J .N.A. Realty at 398, 397 N.Y.S.2d 958, 366 N.E.2d 1313; S.Y. Jack Realty at 453, 318 N.Y.S.2d 720, 267 N.E.2d 462). The court opined that "although there is evidence that Daffy's like Dean & DeLuca in Soho Dev. Corp. v. Dean & DeLuca, 131 A.D.2d 385, 517 N.Y.S.2d 498 (1987) supra, had widespread name recognition unrelated to any particular store location, the evidence was sufficient to support a finding that Daffy's 57th Street store, in particular, had garnered substantial goodwill in its approximate 15 years at the location, which goodwill was a valuable asset that would be damaged by its ouster from the premises. "[E]quity may intervene to protect against forfeiture of substantial and valuable asset of a business is goodwill." The court also found it significant that most of the store's 114 employees would lose their jobs and benefits if the store were to close and no alternate location was available as well as evidence of the mistake by the company's controller in failure to calendar the renewal deadline. Finally, the location was shown to be "one of Daffy's top producing retail locations and the landlord failed to establish any prejudice resulting from the breach" (see Cellular Tel. Co. v. 210 E. 86th St. Corp., 14 A.D.3d 305, 306, 787 N.Y.S.2d 284 ). The facts justified the finding in favor of Daffy's and the court allowed the tenant to remain in possession.
At this time, some discussion and review of the cases in which the court would not recognize a forfeiture is in order. It is clear that when the tenant has put the initial improvements in the property, the sums depreciated over the time of the lease and where no new additional improvements were made, equity will not intervene to prevent the forfeiture. In Soho Dev. Corp. v. Dean & DeLuca, 131 A.D.2d 385, 517 N.Y.S.2d 498, the Appellate Division, First Dept. found against the tenant and allowed their ouster. The evidence showed that "the majority cost of improvements made by the tenant were incurred during the first two years of the lease. Presumably, all of these improvements are effectively amortized and depreciated over the life of the lease. Consequently, the tenant has "reaped the benefit of any initial expenditures." (Wayside Homes v. Purcell, 104 A.D.2d 650, 651, 480 N.Y.S.2d 29 [2d Dept. 1984]) lv to appeal denied, 64 N.Y.2d 602, 485
N.Y.S.2d 1027, 415 N.Y.E.2d 126. In addition, the fixtures associated with the gourmet food could still be relocated. The relocation of Dean & DeLuca would have little effect on their business; particularly since there were other locations available in the Soho area and the tenant was not mislead by the landlord's conduct. More importantly, there was no ambiguity in the lease, no failure to timely deliver a lease renewal and accordingly, the tenancy did not mandate protection against forfeiture and the landlord was entitled to a judgment of possession. See also 5 East 41st Check Cashing Corp. v. Park and Fifth Owner LLC, 44 A.D.3d 373, 843 N.Y.S.2d 573 (App. Div., 1st Dept.) whereby the court determined that the Plaintiff failed to set forth sufficient evidence of any such improvements made with the intent to renew the lease (citing Soho Dev. Corp. v. Dean & DeLuca, supra, and held that "... there is record evidence that the tenant made no improvements that would otherwise invoke equity relief" (see e.g., 95 E. Main St. Svc. Sta. v. H & D All Type Auto Repair, 162 A.D.2d 440, 441, 556 N.Y.S.2d 385 ). The Plaintiff, thus, failed to show any equitable interest that would warrant protection against forfeiture.
In 221-06 Merrick Blvd. Assoc. v. Crescent Electrical Acquisition Corp., 24 Misc.3d 138 [A], 897 N.Y.S.2d 673, 2009 WL 2177839 (NY Sup. Ct., App. Term, 2d, 11th & 13th Jud. Dists.), the Appellate Term found that the tenant failed to offer sufficient proof that it made improvements in reliance on the lease renewal. According to the court, all of the tenant's witnesses and documentary evidence submitted failed to distinguish between repairs which the tenants were required to perform by the lease and any actual improvements made by the tenant. Moreover, the tenant did not allege it would lose any goodwill if it had to change location and accordingly, the tenant failed to establish that it would suffer forfeiture if the lease were not renewed.
Similarly, in Redlyn Electric Corp. v. Lewis Shiffman, Inc., 81 A.D.3d 621, 915 N.Y.S.2d 880, 2011N.Y.SlipOp. 00666, the Appellate Division, Second Department, in an action for a declaratory judgment seeking a finding that the tenant has validly renewed the lease by asserting various causes of action, the court declined to exercise its discretion to save the tenancy. Following a non-jury trial, the Supreme Court found that the renewal provision in the lease was not ambiguous because of the use of the word "or/and" in the renewal provision was a scrivenor's error and the Plaintiff had not validly renewed the lease and awarded the Defendant damages on a counterclaim. The court determined that the renewal provision was clear and unequivocal. "The lease provides that if the Plaintiff intended to renew the lease, " it was to notify the lessor "of its intention to exercise such option or by a written notice delivered to the lessor personally or by certified mail, return receipt requested, not less than 6 months prior to the end of the term of the lease". Such provision was deemed to contain no ambiguity and the tenant did not prevail in that proceeding.
In addition, in Marina Tower Assoc. Ltd. v. 325 Southend Corp., 2013 WL 2097572 (NY Sup. Ct., Appellate Term), the court found that the tenant's default in the exercise of the option was hardly inadvertent or technical but resulted from its apparent inability to afford the rental amount specified in the lease option provision or to successfully renegotiate the rental terms of the option.
In a very similar case to the case at bar, Baygold Assoc., Inc. v. Congregation Yetev Lev of Monsey, Inc., 27 Misc.3d 1202[A], 910 N.Y.S.2d 403, 2012 WL 1253477 (NY Sup. Ct., Rockland County) the court found that the tenant was not entitled to equitable relief excusing its failure to exercise the option. In that case, notwithstanding the fact that it was a sublease agreement not recognized by the landlord unlike the Respondent in this case, the court specifically found that "the forfeiture rule was crafted to protect tenants in possession who make improvements of a substantial character with an eye toward renewing the lease, not to protect the revenue stream of an out-of-possession tenant like Baygold". Similarly, it cannot be said that Baygold's improvements — made over 20 years earlier when it was a tenant in possession — was made with a view toward renewal of the lease such as Baygold's equitable interest in a renewal. The court held that J.N.A. Realty, supra, is restricted to tenants who made "considerable investment and improvements" to the premises in anticipation of the lease renewal or would lose a considerable amount of goodwill should the lease not be renewed. "This narrow equitable doctrine was never intended to apply in a circumstance like this, where the out-of-possession tenant failed to make any improvement in anticipation of the renewal and does not possess any goodwill in the location. Even assuming that the out-of-possession tenant's failure to comply with the commercial lease renewal provision was a result of an excusable default, non-renewal would not result in a forfeiture by the tenant as required for equitable relief excusing the tenant's failure to timely exercise its option to renew". The tenant had not made any improvements in the premises in over 20 years, had already reaped the benefits from any capital expenditures that it had made before that time and did not possess any goodwill in the "ongoing concern" of the business.
In this case, it would be more than fair to say that "what could go wrong, did go wrong." As this court now focuses on the case at bar, there are certain material and relevant facts that should be highlighted. The evidence in this case proved that on August 1, 1984, 149-05 OWNERS CORP. and N.A.H. Realty entered into a 25-year lease, which commenced on September 1, 1984 and terminated on August 31, 2009. The lease agreement does not contain the date that the term ended; it is blank. There is a minuscule asterisk after the year 2009 and that asterisk directs the reader to the bottom of the page of the original lease agreement which provides as follows: "with a renewal option on the part of the tenant for an additional 25 years upon the same terms and conditions as are contained herein, such option to be exercised no later than 60 days prior to the expiration date." As significant, the second paragraph provides as follows: "tenants shall use and occupy the demised premises for no purpose other than professional offices. Tenant shall have the right to alter the demised premises at the tenant's option and its sole cost and expense in order to obtain a residential (sic) (commercial) Certificate of Occupancy".
Subsequently, pursuant to an assignment of lease with assumption of lease, on March 19, 1987, N.A.H. Realty assigned all rights and interests to IRA PHILLIPS. The purchase price for the assignment of the lease was the sum of $55, 000.00; the assignee tendering the sum of $27, 500.00 in cash and the balance in a promissory note to the assignor. (A copy of the assignment was admitted into evidence as Petitioner's Exhibit "2.") It is undisputed that the owner of 149-05 Owner's Corp. consented to the assignment.
In applying the rules of law as described above, the questions of fact are whether the default is excusable, whether the failure to renew the lease would result in a forfeiture of a substantial loss, whether the "improvements" at the subject premises were made with intent to renew the lease, whether the subject premises should be recognized as an equitable interest that should be protected as a "longstanding location" for the dental office or is an important part of the goodwill of that office to warrant protection against forfeiture (J .N.A. Realty Corp., supra; S.Y. Jack Realty Co., supra; Nanuet Nat'l Bank v. Saramo Holding Co., supr a).
First, the Respondent argues that the acceptance of rent by the Petitioner for April, May and June 2010 constitutes a waiver by the Petitioner. The Respondent argues that the landlord's acceptance of rent after the termination of the lease was sufficient to waive the requirement of the written notice of the option to renew and that the court should find that the lease had been expressly or implicitly extended. The court completely disagrees with this proposition. Real Property Law Section 232-c provides that where a landlord accepts rent for any period after the expiration of a lease, "...unless an agreement either express or implied is made providing otherwise, the tenancy created by the acceptance of such rent shall be a tenancy from month-to-month " The lease specifically contains a non-waiver clause that has been repeatedly enforced by the courts (Citations omitted). Although the case law provides that where the landlord accepted rent for several months, "absent proof of any other understanding between the parties, " it was "presumed that the lease was renewed for another year at the same terms." (Watterman v. Falk, 11 Misc.2d at 1074, 174 N.Y.S.2d 88; see also Kennedy v. Kenderian, 187 Misc. 861, 863-864, 69 N.Y.S.2d 121 [Albany County Court, 1946]; Irish American Law Assn. v. Stanfield, 182 Misc. 363, 366, 50 N.Y.S.2d 494 [Sup. Ct., NY County), the evidence in this case does not support a finding that the Petitioner knowingly and intentionally waived the rights to object to the alleged lease extension. This intention was evidenced by the commencement of this second holdover, the rejection of the rent after notice of the expiration of the lease and then the acceptance of the rent thereafter. It is undisputed that the rent was not paid by the prime tenant in the sum of $10, 471.45; this court confirmed this sum with all parties at trial. Although the Petitioner's records show rent paid after the termination date, the tendered rent was not the increased rental amount due under the lease extension and was only accepted in court after this court ordered the payment of use and occupancy pending a final disposition. Therefore, the court does not find that the Petitioner waived its rights to object to the purported lease extension and did not reinstate the tenancy by the acceptance of rent under these facts.
It is the opinion of this court that the testimony of PHYLLIS PHILLIPS was credible and trustworthy. According to her testimony, the first sordid event occurred during the time that the lease was retained by her husband's attorney. She testified that she did not have a copy of the master lease in her actual possession since it was in his office. PHYLLIS PHILLIPS testified that her husband and herself had discussed the lease terms and she was aware that there was a twenty-five (25) year option but she had never physically had a copy of the lease agreement to confirm his verbal representations.
Although her testimony was unclear of the exact date when she requested a copy of the lease from this attorney, the copy of the lease, which was presumably made by a member of the staff of that attorney's office, was copied incompletely (Respondent's Exhibit "E" in evidence). The lease was incomplete because it omitted the 25 year option to renew provision.
She further testified that it was not until she attempted to pay her rent in or about April 8, 2010, which was returned to her by the Petitioner's legal staff, that she was notified that she had not exercised the lease option.
After examining the lease, the court finds that the lease and assignment, including the lease option provisions, are complete, clear and unambiguous on their face and will be enforced according to the plain meaning of their terms except as stated below. It is incontrovertible that the Respondent was required to notify the Petitioner, in writing, of her intention to exercise the option to renew six (6) months prior to August 31, 2009. Thus, the Respondent should have served written notice of the exercise of the option on or before March 1, 2009, that being at least six (6) months before the expiration date of the master lease. It is irrefutable that on May 17, 2010, PHYLLIS PHILLIPS had served on the law offices of Gutman, Mintz, Baker & Sonnenfeldt, P.C., at 813 Jericho Turnpike, New Hyde Park, New York 11040, a written notice of the option to renew (Respondent's Exhibit "B"). The lease mandated that the lease extension notice be served on or before March 1, 2009 but it was not served until May 17, 2010, nearly 16 months late.
It is firmly established in New York that a lease extension or an option to renew must be timely, definite, unequivocable and strictly in compliance with the terms of the lease (J.N.A. Realty Corp. v. Crossbay Chelsea, Inc., supra; Dan's Supreme Supermarkets v. Redmond Realty Inc., 216 A.D.2d 512, 628 N.Y.S.2d 790; American Realty Co. v. 64 B Venture, 176 A.D.2d 226, 227, 574 N.Y.S.2d 344). See also Redlyn Electric Co. v. Louis Shiffman, Inc., 81 A.D.3d 621, 915 N.Y.S.2d 880 (App. Div., 2d Dept., 2011). The exercise of this lease extension was completely ineffective since it was not made within the time prescribed in the underlying lease agreement.
The option in this case, although it stated the name of the owner, was served on the law office of Gutman, Mintz, Baker & Sonnenfeldt, P.C. at their principle place of business at 813 Jericho Turnpike, New Hyde Park, New York. Regrettably, the lease does not specify the manner of service such as certified mail return, receipt requested or any other specified method, however, the lease does sufficiently provide that any notice by the Petitioner and reciprocally, the Respondent, must be in writing (see "10 Day Notice provision") in the lease. Since this age-old dated lease, the predecessor to the modern Blumberg store/business lease and/or the NYC Real Estate Board lease, lacks any enumerated notice provisions, it is the opinion of the court that the option to renew must be served on the Landlord and/or the Managing Agent of the owner of the property and not the owner's attorneys - whether it is the cooperative attorneys or the eviction attorneys. The finding of this court is supported by the testimony and evidence at trial as revealed by the Respondent, to wit: all rent payments were made to the Petitioner, all of her legal inquiries were made to the Petitioner's office, all notices were from the Petitioner except the holdover notice of petition and petition, and the rejection of her rent were all made by the Petitioner and/or the Petitioner's managing agent.
Furthermore, there was no evidence proffered by the Respondent that a limited power of attorney or other notice from the Petitioner was provided to her that granted either of their attorneys authorization to accept service of the option to renew. Frankly, this is the only case in which this court has examined that a tenant exercised the option to the wrong party (emphasis added). In each of the above cases, the lease extensions were served, albeit, untimely or not in conformity with the lease, on the owner or authorized agent, and not to their attorney or any other party.
Moreover, Mrs. PHILLIPS never testified that she made an innocent mistake in this case. In fact, she made no mistake at all. Therefore, the court can not conclude that any inadvertence or mistake was made by her. It would be a hard stretch for the court to find that this default was excusable. The irreparable errors were not made by her but by those that she relied upon (see Baygold Assoc., Inc. v. Congregation Yetev Lev of Monsey, Inc., 27 Misc.3d 1202(A), 910 N.Y.S.2d 403, 2010 WL 12153477). Based upon the above facts, the exercise of the option cannot be classified as mere inadvertence or "venial inattention" and the failure to exercise the option to the proper party is fatal and inexcusable.
Even assuming arguendo that the default in the exercise of the option by some stretch of the imagination is excusable, the next query is: does the non-renewal of the lease create a substantial loss to the tenant. Notwithstanding the fact that the Respondent did not submit any documentary evidence to prove the initial investment in the property of the sum of $55, 000.00, Petitioner's Exhibit "2" acknowledges that at least the sum of $55, 000.00 that was paid by IRA PHILLIPS for the purchase of this lease. The testimony of his wife, although still unsupported by documentary evidence, asserted that this nine (9) room apartment was converted from a residential apartment to a dental office. Mrs. PHILLIPS informed the court that her husband created two lead-filled rooms for the purposes of dental x-raying, which cost substantial sums of money. Her testimony was that the costs were about $160, 000.00 and her credibility was solid, thus, this court will presume that this sum was accurate despite the lack of real evidence. However, this capital investment was made at the inception of the tenancy in 1984. As the court stated in Trieste Group, LLC v. Ark Fifth Ave. Corp., supra, Baygold Assoc., Inc. v. Congregation Yetev Lev of Monsey, Inc., supra, and as shown from the testimonial and documentary evidence here, these improvements were made nearly 30 years ago, at the inception of the tenancy, and as such, the Respondent has certainly recouped her and her husband's investment capital during the term of the lease and the value of the investment capital has depreciated over the course of the lease.
The second alleged financial investment by the Respondent was not made to the leased space. The witness testified that the sum of $20, 000.00 was paid to correct an excessive heat condition that was created by defective repairs performed by the Petitioner to the boiler of the building. As stated during the testimony of Dr. FUZAILOF, D.D.S., he suffered from excessive heat in the leased space due to the defective boiler installed in the basement of the property that was directly beneath the leased space. It is the opinion of this court that the sum of $20, 000.00 was not expended by the Respondent for the continuation of the tenancy or with the intent to renew the lease. This court cannot qualify the $20, 000.00 expenditure as an "improvement". Frankly, these sums were expended for the purposes of the Respondent protecting her source of income from the subject premises and not for the purposes of renewing the lease. Instead, the court designates this capital expenditure a "repair" and not an "improvement".
The testimony of Mrs. PHILLIPS also does not substantiate that these "improvements" were made for the purposes of renewing the lease. In the non-payment proceeding by the owner against her and the subtenant for their refusal to pay the rent, the Respondents claimed that the excessive heat constituted a partial constructive eviction. The strategy to withhold rent by both parties was intended to force the landlord to correct the excessive heat condition, not to extend the lease agreement (see Soho Dev. Corp. v. Dean & DeLuca, supra. Dr. FUZAILOF, D.D.S. testified that the Petitioner had not corrected the condition in a reasonable time and as such, Mrs. Phillips was literally forced to make these repairs. This court does not deem the evidence presented sufficient to substantiate that these repairs "were made in reliance upon the renewal of the lease." Moreover, the parties should be reminded that the alleged "improvements" were performed before the lease expired, not after the lease expired, which may have supported a presumption that the tenant performed those repairs in anticipation of the renewal of the lease.
In the case at bar, the subtenant has made no improvements, has not asserted that any improvements have been made by him, but has only claimed, in writing, that the improvements made by the landlord was, in fact, the basis for the reduction in his income due to excessive heating. Thus, neither party could claim any improvements in anticipation of the lease renewal. Since there is no record evidence that the tenants made any substantial improvements in the leasehold, the Respondent has not shown an equitable interest' that would warrant the invocation of any "equitable remedies" to protect against forfeiture.
Furthermore, as discussed above, in considering whether a tenant would "suffer a forfeiture, " courts have considered not only improvements made by the tenant to the premises, but also the tenant's "goodwill with the community and its customer base." (Popyork, LLC v. 80 Court St. Corp., 23 A.D.3d 538, 539, 806 N.Y.S.2d 606 [2d Dept. 2005]; see also S.Y. Jack Realty Co. v. Pergament Syosset Corp., supra; Nanuet Nat'l Bank v. Saramo Holding Co., supra).
Can it be said that the tenant will lose its goodwill that it shared with the community and its customer base if the relief sought herein is not granted? The evidence is to the contrary. Many of the commercial cases that have been discussed above deal with retail businesses. Although arguments could be made that the "services" of a dental office may have goodwill in the community, it is certainly not the equivalent of a retail business that relies on its location and its customers in the community. As the subtenant stated in his complaint letter to the management company and to the attorneys for the owner in this case, he has two other dental offices in two different locations. This particular dental office at this location can not be characterized as a unique commercial commodity'. Since this dental office is in a building that contains over 122 residential apartments, there was no evidence presented that the residents- locals' used this particular dental office as opposed to another dental office or that there would be any substantial loss in goodwill if it had to change locations.
Mrs. PHILLIPS nor the subtenant testified that this dental office had any widespread name recognition at this particular location. Neither testified that this particular location in and of itself garnered any substantial goodwill during the 25 years plus that the dental office has operated in this location. This court would be hard pressed to find that this dental office in this particular location garnered a goodwill that could be characterized as a valuable asset that would be damaged by its ouster from the premises. This court also cannot make any analogy to the commercial cases above that this premises must be preserved based on the longstanding location of the business and the goodwill of that business at the demised premises. On the contrary, it is nothing particular or unusual, unique or otherwise of this particular location. In addition, there was no testimony that any employees would lose their jobs and benefits if this location were closed or that there was no other location available for this dental office. There was absolutely no evidence that the subtenant was making "top dollar" at this third location of his dental practice which would create an inequitable forfeiture by the termination of this leasehold. Plainly, the facts here do not justify the relief requested by the Respondent.
Notwithstanding the fact that the agents of the landlord never testified regarding any prejudice to the landlord, the lack of this finding alone does not change the determination. Although the Respondent may have remedies for recovery for the irreparable errors made under the facts and circumstances in this case, the Petitioner should not be deprived of its rights to recover the demised premises. The landlord's inability to consummate another lease is prejudicial in and of itself. The monthly rent for the subject premises is $1075.86 as shown in Petitioner' Exhibit "10" and according to the testimony of the managing agent, a real estate broker, the dental office could be rented for at least $1, 500.00. The difference in the rental income would profit this coop around $500.00 to $600.00 a month. As the managing agent testified, this is a cooperative that has limited resources and would not be considered "high end". The tenant, herself, admitted that the landlord did not perform the services correctly to the boiler based on economic reasons; or at least that was the alleged excuse provided by the managing agent to her.
Although the Respondent asserted that the subtenant had the right to exercise the option to renew, no evidence was introduced which demonstrated that the subtenant had exercised the option to renew. The only option presented was the option by the prime tenant admitted into evidence as Respondent's Exhibit "B." Even Respondent's Exhibit "A, " a letter dated March 21, 2011, marked for identification only from ALBERT FUZAILOF, D.D.S., does not exercise the lease extension. The subtenant merely stated that "I wish to make this point clear; I intend to continue working at this location and renew my sublease." This language is certainly not definitive, precise or in conformity with the master lease or in conformity with the terms and conditions set forth in the sublease agreement which requires the exercise of his 5-year option to renew. Accordingly, although he may have exercised his option pursuant to his sublease agreement, he certainly did not exercise the option to renew under the master lease agreement.
In summation, notwithstanding the fact that it is undisputed that the Respondent failed to timely exercise the option to renew, this court in the exercise of its discretion holds that the prime tenant is not relieved of consequences of the untimely renewal notice herein. The facts show that (1) the late lease extension was the result of irreparable errors not made by the tenant herself, (2) the renewal will not result in a substantial loss and (3) the landlord will be prejudiced by any further denial of the right to possession.
Under these circumstances, it is the finding of this court that the relief sought herein should not be granted to the Respondents and accordingly, discretion will not be exercised to intervene to allow the tenant to remain in possession.
Based upon the fact that Commercial Part 52 does not have jurisdiction to entertain property damage claims, loss of profit and the like, and the leases between the parties prohibit the assertion of such counterclaims in a summary proceeding, the cross claims by the subtenant against the prime tenant and the claims by the prime tenant against the Petitioner are severed and transferred to the Civil Court of the City of New York in the County of Queens for a final disposition.
This court, in its discretion, waives any and all claims for the purchase of a Certificate of Trial Readiness and directs the Clerk of the Court of Queens County to place this case on the trial calendar with the appropriate notice to the respective parties for a trial date.
All of the parties agreed to stay the summary proceeding for nonpayment of rent by the prime tenant against the subtenant under L & T Index No:70918/2010. Based on this decision and order, the court restores this case to the calendar for trial and/or settlement in Commercial Part 52 in Queens County and the Clerk of the Court shall grant the parties a date certain for all proceedings.
For the reasons stated above, the Petitioner is awarded a final judgment of possession and for $10, 471.45 with the issuance of the warrant forthwith and the execution stayed until April 30, 2014 on the express condition that the prime tenant pays the above judgment within 20 days of the date of date of entry of this order with the Clerk of the Court and pay the monthly use and occupancy for the demised premises as stated in the expired lease by the 7th day of each month to commence in December 2013 (November 2013 to be paid by the 20th of the month).
As equally important, the subtenant is required to pay use and occupancy to the prime tenant in the same manner as described above pursuant to the sublease agreement. The court grants this six (6) month stay of the execution of the warrant of eviction solely to afford the subtenant an opportunity to wind down his business and relocate to an alternative location in the community and/or to absorb the patients of his dental practice at this location into his other two dental offices.
The Petitioner shall serve a copy of this decision and order and a copy of the underlying judgment of possession on the Respondents within thirty (30) days of the entry of this decision and order and judgment by the Clerk of Commercial Part 52 and shall file proof of service thereof with the Clerk of the Court.
In order to retrieve any and all of the exhibits that were admitted into evidence in the above captioned case, you may appear in Commercial Part 52 in Queens County and shall acknowledge receipt thereof in a form to be provided by the court.
This constitutes the Decision and Order of this court.