Lease Extension Notices – New York Appellate Division Ignores Lease Text in Name of Equity

New York’s Appellate Division, First Department, in 135 East 57th Street LLC v. Daffy’s Inc. was faced with the following facts. A retail chain had occupied high profile space for about 15 years. The tenant had the right to renew by notice to the Landlord to be delivered by January 31, 2010, a year prior to lease expiration. For no reason other than a mistake by the tenant’s controller, notice was not timely given. However an email and fax was sent (dated January 30, 2010) on February 4, 2010, purporting to exercise the option. The landlord on February 5, 2010, rejected the notice as being late, and accused the Tenant of back-dating the notice for its own purposes.

The trial court, for reasons which are not set forth in the appellate opinion, determined the tenant was entitled to equitable relief, and determined the notice exercising the renewal period, although not timely, was nonetheless effective.

The Appellate Division, reviewed the existing law of New York on honoring technically defective lease extension notices and summarized same, quoting Vitarelli v. Excel AutomotiveTech. Ctr., Inc., 

Equity will relieve a tenant from a failure to timely exercise an option in a lease to renew or purchase if  (1) the tenant in good faith made substantial improvements to the premises and would otherwise suffer a forfeiture, (2) the tenant’s delay was the result of an excusable default, and (3) the landlord was not prejudiced by the delay.

The Court addressed these three tests in reverse order as follows:

1) Prejudice to Landlord – The Court seemingly took judicial notice of the fact the landlord was not prejudiced, which in all likelihood was true given the timing, i.e., tenant provided 11 months and 27 days notice rather than one year’s notice of the extension, but since there was apparently no evidence on the issue, not necessarily so.

2) Delay in Notice was due to an "excusable default" – The Court, in one sentence and virtually without discussion, equates the tenant’s Controller’s "honest mistake" with "excusable default". If an honest mistake constitutes an excusable default one is forced to wonder what set of circumstances would not constitute excusable default.

3) Tenant, in good faith, made substantial improvements that would be forfeited – The Court acknowledged the tenant did not do this, i.e., this prong of the test was not met. Instead, the Court interpreted “good will” associated with 15 years at the location to be a valuable asset that would be forfeited in the absence of equitable intervention.

Then, notwithstanding the dubious thought process as to test two and the outright acknowledgment that test three was not met, but after noting the profitability of the store and the large number of employees who would lose their jobs, ruled the notice was effective.

This case seems to be a tremendous expansion of the existing law, and to stand for the proposition that the Court is free to look at all the facts and do whatever it thinks is right, given all the circumstances. Indeed, seemingly highlighting the lack of predictability, the Court quoted the Court of Appeals in JNA Realty, "By its nature, equitable relief must always depend on the facts of the particular case and not on hypotheticals."

Although the power of the court to “do equity” has a certain appeal (for no one is for unjust results), a system which allows a panel of judges, after the fact, and on a case-by-case basis, to impose their personal set of morals in lieu of the agreement reached between the parties is a system that lacks predictability and precision. And it is a system which is only equitable in the eyes of the party to whom relief is granted – I assure you it isn’t viewed as the least bit equitable by the party who sought to do nothing more than enforce the precise terms of the agreement between the parties.

Shepard A. Federgreen is a Director in the Gibbons Real Property & Environmental Department.

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