Belkin Burden Wenig & Goldman, LLP

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1 E D I T O R S Magda L. Cruz Aaron Shmulewitz kara I. Rakowski Belkin Burden Wenig & Goldman, LLP UPDATE NOveMBeR 2012 volume 21 Inside This Issue TRANSACTIONAL UPDATE Negotiating a Tenant Release on Assignment of Lease: What to Look for From a Landlord s perspective...1, 2 LITIGATION UPDATE Liquidated damages...1, 3 Residential Tenants Liable for Future Rent...5 ADMINISTRATIVE LAW UPDATE Major Capital Improvement Rent Increases: Recouping Costs of Ancillary Work...3 NOTABLE ACHIEVEMENTS...4 TRANSACTIONS AND CASES OF NOTE...5 CO-OP / CONDO CORNER...6, 7 TRANSACTIONAL UpdATe NeGOTIATING A TeNANT ReLeASe ON ASSIGNMeNT OF LeASe: WHAT TO LOOk FOR FROM A LANdLORd S perspective By Allan L. Gosdin and Daniel T. Altman When negotiating and drafting a commercial lease, landlords typically reject the prospective tenant s request to be released from the lease in the event of an assignment of the lease to a third LITIGATION UpdATe LIqUIdATed damages party. When a landlord negotiates a lease with a particular tenant and its principals, the landlord has normally reviewed and has become comfortable with that tenant s financial information, business plan, industry experience and references. As such, a landlord has a justifiable expectation that such tenant will remain in the space for the duration of its lease. However, for any number of reasons (including market changes during the term of the lease), a tenant may have to assign its lease during the lease term. Accordingly, even many financially strong continued on page 2 WE RE GOING GREEN We are now offering the BBWG Newsletter online. If you would still like to receive a print copy, please contact Larry Tricerri at ltricerri@bbwg.com. By Martin Meltzer Q1: What are liquidated damages? Q2: Is a liquidated damages clause in a contract enforceable? A1: Liquidated damages are an amount of damages which has been agreed or fixed by the parties to a contract to be paid by the breaching party upon the occurrence of a breach of the contract. A basic example of a liquidated damages lease clause will provide: should the tenant hold over in possession of the premises after the end of the term of the lease, the tenant will be liable to the landlord for two times the last rent and additional rent due under the lease as liquidated damages. A2: Not all liquidated damages clauses are enforceable. Liquidated damages clauses have been recognized by the New York appellate courts as enforceable and generally uphold such liquidated damages clauses when contested or challenged by the breaching party. However, where the liquidated damages clause imposes a penalty upon a breaching party as opposed continued on page 3 Belkin Burden Wenig & Goldman, LLP 270 Madison Avenue New York, NY Tel Fax Attorney Advertising 1

2 TRANSACTIONAL Update NEGOTIATING A TENANT RELEASE ON ASSIGNMENT OF LEASE continued from page 1 and desirable tenants, while negotiating their leases, attempt to include a provision that addresses the issue of releasing the tenant in connection with an assignment. This issue typically arises in the context of a tenant selling its business as a going concern to another operator. This article examines various alternatives when negotiating on behalf of a landlord so that the lease provides for a tenant release while still protecting a landlord s financial interests. A landlord should strive to be in at least as good a financial position with the assignee as it was with the original tenant. This can be accomplished by incorporating the following concepts in the lease. 1. Assignee s Net Worth/Debt to Equity Ratio. Landlord should require that the assignee have a high net worth to ensure that, at least from a balance sheet perspective, the landlord is in at least as good a position as it is with the initial tenant. This can be accomplished either by requiring assignee s net worth to be as good or better than the current net worth of the tenant, or requiring a specific dollar amount. In addition, landlords may want to consider adjusting the net worth requirement depending upon how much time remains on the lease, i.e., a higher net worth requirement early in the term to compensate for higher risk of uncollected rent for the remainder of the term, and a lower net worth requirement if the assignment occurs later during the term. Also, the landlord may insist on a specific debt to equity ratio so that it ensures that the assignee is not cash poor and highly leveraged. 2. Assignee s Experience. To reduce the risk of an assignee s business failing at the location, the landlord should be satisfied that the assignee has an acceptable level of experience in the operation of its business. If the assignee is purchasing tenant s business, it should have a similar or better level of experience in the business as the tenant. 3. Tenant s Guarantor Remains Liable. In analyzing the original transaction, the landlord likely required a guaranty of lease from a financially responsible individual or entity. One way to remain protected is to release the tenant but require that the guarantor remain liable under the guaranty after the assignment. That way, if the assignee defaults under the lease, the landlord still has a remedy against the original guarantor. If the tenant and guarantor object to this, landlord should condition the guarantor s release on the tenant delivering a letter of credit or other form of security in an amount sufficient to cover the rent due under the lease for a certain amount of time. To make this more palatable to the tenant and guarantor, this amount can be reduced as the remainder of the term elapses. 4. Require Additional Security. Landlord should consider requiring the assignee to deliver an additional security deposit. Again, this should be in an amount landlord determines is sufficient to cushion it against lost rent should the assignee s business fail. 5. Assignee Providing a Guarantor. If the tenant and its guarantor object to keeping the guarantor on the hook after the assignment, an alternative would be to require the assignee to provide a replacement guarantor with an acceptable net worth level. For example, landlord might require the replacement guarantor to have a net worth equal to the greater of (i) a specific dollar amount (increased periodically during the remainder of the lease term to allow for increased rent); or (ii) the then tangible net worth of the initial guarantor. Although providing language in the lease prohibiting the release of tenant in an assignment is the best way to ensure that landlord preserves the financial deal for which it originally bargained, including any of the above requirements in an assignment clause would provide financial assurance to a landlord which could make up for releasing the original tenant. Specific lease language and provisions can be prepared to suit landlord s leasing needs. Allan L. Gosdin (agosdin@bbwg.com) is an associate in, and Daniel T. Altman (daltman@ bbwg.com) is the partner that heads, the firm s Transactional Department. 2

3 LITIGATION Update Liquidated Damages continued from page 1 to a fair approximation of damages to the non-breaching party, courts will generally declare the liquidated damages clause unenforceable. Liquidated damages clauses often are the subject of litigation in the commercial lease context. Commercial leases sometimes have a liquidated damages clause setting a holdover rent when a tenant does not timely vacate the premises at the lease expiration. The lease will set forth a fixed multiplier of the last rent and additional rent due under the lease. It is common to see a two or two and one-half times multiplier in commercial leases. The multiplier can be even higher. New York appellate courts have upheld liquidated damages clauses holding that a two times holdover rent was not an unenforceable penalty. Two to two and one-half times the rent and additional rent during the last year of the lease in the event of a tenant holding over was held to be enforceable because the tenant could not prove that damages could be established when the lease was executed or the amount fixed as the liquidated damage was grossly disproportionate to the probable loss of the landlord. Similarly, New York appellate courts have upheld liquidated damages provisions of commercial leases when an owner did not deliver possession of the premises to the tenant and the tenant was awarded liquidated damages. A liquidated damages provision will be enforced by the courts where: (1) the amount of liquidated damages bears a reasonable approximation of the probable loss and (2) the amount of actual loss is impossible or difficult to estimate precisely. In other words, the party seeking to escape the consequence of the liquidated damages contract provision has the burden of proving to the court (1) actual damages by reason of the breach were readily ascertainable at the time the parties entered into their agreement; or (2) the amount of liquidated damages is conspicuously disproportionate to such foreseeable losses. When drafting a liquidated damages clause in a contract it is important to be cognizant whether actual damages can be computed and the amount of the liquidated damages is not disproportionate to the foreseeable loss in the event the tenant holds over. Always confer with your attorney when drafting lease clauses. Martin Meltzer (mmeltzer@bbwg.com) is the head of BBWG s Non-Payment Department and a partner in the firm s Litigation Department. ADMINISTRATIVE LAW Update Major Capital Improvement Rent Increases: Recouping Costs of Ancillary Work By Paul Kazanecki Owners filing Major Capital Improvement (MCI) rent increase applications should include any ancillary work that was installed or performed in conjunction with the improvement. For example, if an owner performs an exterior restoration project and is required to erect a sidewalk bridge or retain a professional consultant such as an architect or engineer, the costs for these ancillary items should be included in an MCI application provided the services were performed contemporaneously with the eligible MCI. The Division of Housing and Community Renewal (DHCR) will consider and generally approve most ancillary work. One recent exception has been professional consulting fees performed with such projects as exterior restorations, elevator upgrades and heating system upgrades. Despite DHCR now tending to exclude such fees, it is, nonetheless, recommended that owners include these costs in an MCI application. DHCR for many years approved consulting fees and any denial may be appealed by the filing of a Petition for Administrative Review. In order to include any ancillary items in an MCI application, an owner must provide copies of a signed contract, itemized invoices and canceled checks. In addition, an owner must obtain a signed certification (DHCR Form RA- 79 Supplement 1) from each of the contractors or vendors. If approved, the MCI rent increase becomes a permanent part of the legal regulated rent. Paul Kazanecki (pkazanecki@bbwg.com) is a legal assistant in BBWG s Administrative Law Department. 3

4 BBWG NOTABLe ACHIeveMeNTS SHERWIN BELKIN, a partner in BBWG s Administrative Law and Appeals Departments, will be a panelist on Send Lawyers, Guns & Money: Rent Regulation and Property Tax at the Massey Knakal Multi-Family Summit on November 14. MR. BELKIN was also a panelist on Roberts v. Tishman Speyer: Three Years Later, a Continuing Legal Education course sponsored by the Rent Stabilization Association on October 23. MR. BELKIN also authored an article, Is the Deemed Lease Dead?, which appeared in the September edition of The Mann Report, and responded to an inquiry in the on-line edition of the Sunday Real Estate section of the New York Times on October 14 regarding an owner s right to require a pet deposit from a tenant. AARON SHMULEWITZ, head of BBWG s co-op/condo practice, was quoted in an article on co-op Boards rights to decline purchasers for low prices, which appeared in the Sunday Real Estate section of the New York Times on October 14. MR. SHMULEWITZ also responded to an inquiry in the on-line edition of the Sunday Real Estate section of the New York Times on October 14 regarding a co-op s right to impose different storage fees on renters than shareholders. A case being handled by JOSEPH BURDEN, co-head of the firm s Litigation Department, challenging the constitutionality of a 2010 amendment to the State s Loft Law, was featured in an article in The Rea l Deal on-line edition on September 14. DAVID SK ALLER, a partner in BBWG s Litigation Department, responded to an inquiry in the on-line edition of the Sunday Real Estate section of the New York Times on September 23 involving an owner s rights regarding a non-renewing tenant. MARTIN HEISTEIN, head of BBWG s Administrative Law Department, was quoted in an article in the September 19 edition of Real Estate Weekly on new City legislation increasing fines on owners who illegally convert residential units to hotel use. BRIAN HABERLY, a partner in BBWG s Litigation Department, was quoted in an article in the New York Law Journal on November 6 concerning conditions in the New York County Housing Court following Hurricane Sandy. SHERWIN BELKIN, JEFFREY GOLDMAN, STEVEN KIRKPATRICK and A A RON SH M U L EW ITZ have been named New York Super Lawyers for 2012, and CRAIG PRICE and MATTHEW BRETT have been named New York Rising Stars. 4

5 LITIGATION UpdATe ReSIdeNTIAL TeNANTS LIABLe FOR FUTURe ReNT By Joseph Burden In today s real estate market, residential apartments often rent for as much as, or more than, commercial spaces. Monthly rent over $10,000 per month for residential apartments and/or townhouses is no longer unusual. If a tenant signs a lease and then vacates the apartment before the lease expires, can the landlord hold the tenant liable for rent due under the balance of the lease? Must a landlord mitigate its damages by making an effort to re-rent the apartment in order to recover those damages? More than 10 years ago, the Court of Appeals ruled in Holy Properties v. Cole Products that a landlord of a commercial lease situation does not have a legal duty to mitigate its damages when a tenant vacates the premises before the expiration of a lease term. Does that same rule apply to residential tenancies? A recent decision from the Civil Court in Kings County held that a landlord of a residential apartment does not have a legal obligation to mitigate damages in order to collect rent under the terms of the lease, where the tenant never moved into the apartment. In Iliseva v. U-Buy-1 Realty, the Court held that the tenant could not recover the first month s rent, the security deposit and the credit check fee that she had paid. Further, the landlord was entitled to recover unpaid rent, administrative fees as provided by the lease and attorneys fees. Citing to appellate cases, the Court held that a residential landlord has no duty to mitigate damages. The result in this case should guide landlords of residential apartments where the tenant has vacated prior to the expiration of the lease. A landlord seeking to recover rent arrears should consult counsel to determine whether such an action is likely to succeed. Joseph Burden (jburden@bbwg.com) is co-head of the firm s Litigation Department. TRANSACTIONS ANd CASeS OF NOTe DANIEL T. ALTMAN and ALLAN L. GOSDIN represented the purchaser of an apartment building in Chinatown, involving several 1031 exchanges necessitating the formation of 1031 entities, the drafting of a co-tenancy agreement among four purchasers and the negotiation of purchasers loan documents. CRAIG INGBER represented a not-for-profit arts organization on the sale of its headquarters in Greenwich Village and purchase of a new location in the Flatiron District. MR. INGBER also represented the seller of a garden apartment complex in Westchester, as well as an institutional seller in the sale of an Astoria apartment building with a sales price in excess of $14 million. CRAIG PRICE represented the purchaser of a townhouse on the Upper West Side. SETH LIEBENSTEIN and JAMIE CHAPMAN represented numerous co-op corporations in the refinancing of their underlying mortgages. BRIAN EPSTEIN, a partner in the BBWG Litigation Department, recently obtained a final judgment of possession, money judgment and warrant of eviction in favor of an owner based on a tenant s failure to comply with a court order directing ongoing payments of use and occupancy in a commercial holdover proceeding in New York County. Of note is that this proceeding was scheduled for trial. However, due to the tenant s violation, the Court granted the owner the above relief without the need for a trial and required the tenant to vacate the premises in two weeks. MAGDA L. CRUZ and ROBERT JACOBS, partners of the firm, successfully represented the owner in prevailing in the appeal by celebrity Bianca Jagger to the Appellate Division, First Department, contesting attorneys fees and fair market use and occupancy awarded to the owner in a protracted non-primary residence case. The money judgment that was affi rmed by the Appellate Division in favor of the owner was in excess of $700,000. 5

6 Co-op Condo Corner By Aaron Shmulewitz Aaron Shmulewitz heads the firm s co-op/condo practice, consisting of more than 300 co-op and condo boards throughout the City, as well as sponsors of condominium conversions, and numerous purchasers and sellers of co-op and condo apartments, buildings, residences and other properties. If you would like to discuss any of the cases in this article or other related matter, you can reach Aaron at or ashmulewitz@bbwg.com. CONDO BUYER CAN SUE SPONSOR OVER MATERIAL DEVIATIONS IN APARTMENT The Plaza PH2011 LLC v. Plaza Residential Owner LP Appellate Division, 1st Dept. COMMENT The Court rejected the sponsor s reliance on a no representations merger clause in the purchase agreement, and held that the sponsor was obligated to amend the offering plan to disclose the material deviations. Board of Managers of The 129 Lafayette Street Condominium v. 129 Lafayette Street, LLC Supreme Court, New York County COMMENT This case continued the recent trend of decisions that bar Condominiums claims for redress against various parties over construction defects. ALLEGEDLY-DELINQUENT CO-OP SHAREHOLDER CAN STILL VOTE AT SHAREHOLDER MEETINGS Summer v. Ruckus 85 Corp. Supreme Court, New York County CONDO BOARD SUIT FOR BREACH OF CONTRACT AGAINST UNIT OWNER WHO REMOVED FLOOR SOUNDPROOFING INSULATION DISMISSED; CONDO FAILED TO PROVE DAMAGES Christina Condominium v. Lerner Supreme Court, Kings County COMMENT However, the Court denied the Unit Owner s claim for sanctions and attorney fees against the Board. CONDO LIABLE FOR DAMAGE ARISING FROM ITS FAILURE TO REPAIR SKYLIGHT Gordon v. Board of Managers of The 18 East 12th Street Condominium Supreme Court, New York County COMMENT The repairs were held to be the Board s obligation under its own Declaration and Bylaws. The Court also emphasized the Board s failed assurances of impending repairs for over one year. CONDO CANNOT SUE SPONSOR AGAIN FOR CONSTRUCTION DEFECTS AFTER PRIOR ACTION DISMISSED; CONDO CANNOT SUE SPONSOR S PRINCIPALS, ARCHITECT OR CONTRACTOR, SINCE THEY OWED NO DUTY TO CONDO OR PURCHASERS COMMENT The Court cited the Business Corporation Law, and the absence of any bylaw provision barring such voting rights. CONDO UNIT OWNER MUST ARBITRATE DISPUTE WITH BOARD OVER ELECTRICAL CHARGES, PER BYLAWS Grubin v. The Gotham Condominium Supreme Court, New York County COMMENT The Court held that the Condominium did not waive the right to insist on arbitration by making motions in the lawsuit. CO-OP ORDERED TO TRANSFER UNSOLD SHARES R & L Realty Associates v. 205 West 103 Owners Corp. Appellate Division, 1st Dept. COMMENT The Board s refusal to process the transfer was held not protected under the business judgment rule, since the refusal was beyond the scope of the Board s authority, especially since a prior Court decision had ordered the transfer, which the Board still refused to effect. 6

7 DISPUTED FACTUAL ISSUES BAR INJUNCTION AGAINST ALLEGED NOISE-MAKING BY CO-OP SHAREHOLDERS Williams v. Esplanade Gardens Inc. Supreme Court, New York County COMMENT The Court held that dueling affidavits warranted a trial on the issues. CO-OP BUYER IN BUSTED DEAL ENJOINS SELLER FROM SELLING TO ANYONE ELSE Gath v. Micali Supreme Court, New York County COMMENT The seller had attempted to terminate the contract due to his inability to clear IRS liens, but the Court held that not to be a permitted ground for termination, since the buyer intended to proceed. CONDO BOARD S ADOPTION OF MOVE-IN AND LEASING FEES, AND REPAYMENT OPTION, VALID UNDER BUSINESS JUDGMENT RULE Fernandez v. AKAM Associates Inc. Supreme Court, New York County COMMENT The Court rejected the Unit Owner s assertion of discrimination. CO-OP BUYER CANNOT SUE BROKER, BANK OR APPRAISER FOR OVERSTATEMENT OF APARTMENT SIZE IN APPRAISAL Estrada v. Metropolitan Property Group, Inc. Supreme Court, New York County COMMENT The Court held that the buyer could have measured the apartment himself before signing the contract. 7

8 New York Office 270 Madison Avenue New York, NY Tel Fax Connecticut Office 495 Post Road East, 2nd Floor Westport, CT Tel Fax Please Note: This newsletter is intended for informational purposes only and should not be construed as providing legal advice. This newsletter provides only a brief summary of complex legal issues. The applicability of any or all of the issues described in this newsletter is dependent upon your particular facts and circumstances. Prior results do not guarantee a similar outcome. Accordingly, prior to attempting to utilize or implement any of the suggestions provided in this newsletter, you should consult with your attorney. This newsletter is considered Attorney Advertising under New York State court rules. Belkin Burden Wenig & Goldman, LLP 270 Madison Avenue New York, NY 10016