Appellate Division Rules on Commercial Leasing When Sympathy Trumps Contractual Rights

 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.  

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