Many times, cooperatives and condominiums have commercial retail spaces connected to or below their building. These are immensely valuable as a result of the income generated by these stores and restaurants. Ergo, the importance of a new decision from the Appellate Division. Two decades ago, New York Courts allowed equity to trump the law and case precedents in many of its commercial leasing decisions. During the new millennium, the pendulum swung back to enforcing contracts and leases as they have been written no matter how painful and obtrusive the result. According to a recent commercial leasing decision by one of the Appellate Division’s most reputable judges, this pendulum may be swinging back to allowing empathy and sympathy override a contractual provision.
Equity in Leasing?
Is “equity” more powerful than enforcing the terms of a renewal lease option in a lease between two sophisticated business entities? In 135 East 57th Street LLC v. Daffy’s Inc., the Appellate Division, First Department, signaled that it is.
It has long been the law that a notice exercising an option to renew a commercial lease is ineffective if it is not given within the time specified in the lease between the landlord and tenant. However, since the result—termination of the leasehold at the expiration date—can be extremely harsh, over the years the courts have created certain exceptions to the rule. Thus, a commercial tenant can be relieved of its failure to timely exercise its renewal option when (i) the failure to timely renew is caused by an honest mistake or inadvertence (ii) the landlord will not be prejudiced by the renewal and (iii) the non-renewal will result in a substantial forfeiture to the tenant. Regarding the third prong, courts will usually look to whether the tenant has made any substantial improvements to the space with the intent to renew in mind.
In Daffy’s, the lease provided the tenant with two five year renewal lease option periods. The option had to be exercised one year before the term was set to expire. The tenant provided notice four days late due to an error made by its comptroller. The landlord rejected the late exercise and immediately brought suit for a judgment declaring that the option terminated and that the lease would terminate at the expiration of its term. After a trial, where the court found for Daffy’s, the landlord appealed to the Appellate Division, First Department.