Court Interprets Real Property Law Section 223

On October 28, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in W.D.G.R. Properties, LLC v. Reich, 2014 NY Slip Op. 32799(U), interpreting Real Property Law S 223.

In W.D.G.R. Properties, the plaintiff sued for money due under a commercial lease. The court rejected the argument that the action should be dismissed because the plaintiff lacked standing, explaining:

As an initial matter, defendant argues that the plaintiff’s action should be dismissed pursuant to CPLR 3211 (a)(3) because the plaintiff lacks standing to commence this action . . . [because] the plaintiff fails to set forth how it is the successor in interest to the original landlord, and therefore cannot establish that it has a lease agreement with the defendant upon which it can seek relief.

In opposition, plaintiff maintains that it has standing to sue for unpaid rents under the lease agreement because the lease was “assigned” to it as well as to its prior successors in interest by operation of law pursuant to Real Property Law S 223. That statute provides, in pertinent part . . . :

The grantee of leased real property, or of a reversion thereof, or of any rent, the devisee or assignee of the lessor of such a lease, or the heir or personal representative of either of them, has the same remedies, by entry, action or otherwise, for the nonperformance of any agreement contained in the assigned lease for the recovery of rent, for the doing of any waste, or for other cause of forfeiture as his grantor or lessor had, or would have had, if the reversion had remained in him. A lessee of real property, his assignee or personal representative, has the same remedy against the lessor, his grantee or assignee, or the representative of either, for the breach of an agreement contained in the lease, that the lessee might have had against his immediate lessor, except a covenant against incumbrances or relating to the title or possession of the premises leased.

It is well settled that Real Property Law S 223 gives the grantee or assignee of the landlord of property the same rights and remedies against the tenant for nonperformance of the agreements contained in the lease as the original landlord would have had.

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Reverter Provision Unenforceable if not Recorded within 30 Years; Action for Injunctive Relief or Money Damages can Proceed Regardless

On August 21, 2014, Justice Grays of the Queens County Commercial Division issued a decision in The Roman Catholic Diocese of Brooklyn, N.Y. v. Christ the King Regional High School, 2014 NY Slip Op. 32389(U), granting a motion to dismiss in part.

In 1976, the plaintiff Diocese of Brooklyn conveyed real estate to the defendant by deed, which provided that the defendant would retain the property “so long as the grantee continues the operation of a Roman Catholic High School upon the premises described herein, upon the cessation of which [title] shall revert to the grantor.” A simultaneously-executed agreement contained similar provisions, including provisions that the defendant would use the entire property only for a Catholic high school, and providing for automatic reverter if the plaintiff ceased to “operate said high school.”

In 2010, the defendant leased part of its property to a non-sectarian charter middle school. When the Diocese objected, the defendant asserted that the reverter was unenforceable. The Diocese then commenced the action, seeking declaratory judgments that the reverter was enforceable and also that the defendant had breached the contract, and the defendant moved to dismiss.

Judge Grays dismissed the first cause of action and held that the reverter was unenforceable because of “plaintiff’s failure to record a declaration of intention to preserve the restriction within the time specified therefor in Real Property Law § 345.” RPL 345 requires such a provision to be recorded within 30 years, which the Diocese failed to do. Judge Grays also rejected the Diocese’s argument that RPL 345 barred only the reverter in the deed, and not the reverter in the agreement, holding that RPL 345 applies to all reverters “regardless of the manner in which they came into being.”

On the other hand, Judge Grays refused to dismiss the second cause of action. She found that the language in the agreement regarding the use of the property “creates a restriction on use without a reversionary right that is distinct from the condition subsequent . . .” and that RPL 345 permits an action for injunctive relief or money damages to enforce such a covenant. Judge Grays also refused to apply—at least on the motion to dismiss—the general rule that an agreement of sale merges into a deed and cannot be enforced after closing of title:

In view of the language of the agreement showing the parties’ purpose in entering into the agreement, and considering that the obligation at issue could only be performed after the closing of title and that the agreement was executed the same date as the deed, the documentary evidence proffered does not demonstrate the absence of issues of fact as to whether the parties intended the use restriction to survive the closing.

Judge Grays rejected the argument that the statute of limitations in RPAPL 612 barred the second cause of action, because RPAPL only applies to claims for reverter, and that the six-year contract statute of limitations applied. Because the specific breach complained of—leasing part of the property to the charter school—happened in 2010, the Diocese was within the time limit.

Air Rights Real Property That Cannot be Converted

On September 3, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Harmit Realties LLC v. 835 Ave. of the Americas, L.P., 2014 NY Slip Op. 51349(U), holding that air rights were real property and thus not a permissible subject of a conversion claim.

In Harmit Realties, a dispute regarding air rights, the defendant moved to dismiss on statute of limitations grounds, arguing that notwithstanding how they were styled, the plaintiff’s claims were for conversion and for that reason were time barred. The court rejected the argument, explaining that air rights are real property, which is not subject to conversion:

Defendants move to dismiss the action on the ground that the causes of action sound in conversion and are time barred, because the statute of limitations for a conversion claim is three years which allegedly began to run from 2007.

The allegations are that the defendants misappropriated and used [the plaintiff’s] air rights in connection with the Owner Parcel. It is undisputed between the parties that air rights fall within the definition of real property. Air rights have been recognized as an inherent attribute of ownership of land.

[The plaintiff] contends that under New York law there exists no cause of action for the conversion of real property. This Court agrees since an action sounding in conversion does not lie where the property involved is real property.

Defendants cite to Sporn v MCA Records, Inc. (58 NY2d 482, 488 [1983]), for the proposition that if the plaintiff seeks to recover for amounts to the destruction or taking of the property, then the action is properly deemed one for conversion. That case concerned the unauthorized commercial exploitation of a master phonograph record which is not real property, and is inapplicable to this matter.

Defendants also rely on the case of Goulian v Gramercy 29 Apartments, Inc. (199 AD2d 98 [1st Dept 1993]), which cites Sporn (58 NY2d at 488). The court in Goulian found that plaintiff’s complaint alleging appropriation of the right to build on their roof space does not state a cause of action for trespass. The conversion claim was barred by the statute of limitations but the court did not conduct an analysis as to why the claim for trespass fails and the claim for conversion upheld. In the instant matter the complaint does not specifically state a cause of action for conversion and as such Goulian does not apply.

(Internal quotations and citations omitted) (emphasis added).

Personal Guaranty Unenforceable Because Loan was Usurious

On June 3, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Sasidharan v. Piverger, 2014 NY Slip Op. 50890(U), refusing to enforce a personal guaranty because the loan it guaranteed was usurious.

In Sasidharan, the plaintiffs sued a guarantor for payment on a guaranty. The trial court granted the guarantor’s motion to dismiss, explaining:

Under New York law, usurious contracts are unenforceable. A usurious contract is void and relieves the obligor thereunder of the obligation to repay principal and interest thereon.

A transaction is usurious under civil law when it imposes an interest rate exceeding 16% per annum, and it is criminally usurious when it imposes an interest rate exceeding 25% per annum. While the defense of civil usury is unavailable to a corporation or an individual guarantor of a corporate obligation, a corporation or a guarantor of a corporation’s debt may assert a defense of criminal usury. Thus, Piverger, as a guarantor of ACI’s obligation, who was not involved in the drafting of the note, and did not obtain any direct benefit from the loan transaction, may raise the defense of criminal usury.

Here, since the note was extended to January 18, 2012, it was a one-year loan of $150,000 with interest of $32,000 (plus the $7,500 extension fee) resulting in interest of $39,500 for one year, which is in excess of 25% annual interest (which would be $37,500), rendering it criminally usurious. In addition, the sums retained by a lender are included as interest. Thus, since ACI never received the amount of $63,000 of the $150,000 loaned which was held in escrow and later released to plaintiffs, this effectively resulted in an annual interest of $39,500 on disbursed funds of $87,000, rendering it further in excess of the rate of 25% established for criminal usury.

(Internal quotations and citations omitted) (emphasis added).

This decision illustrates that in analyzing whether a loan is usurious–and thus unenforceable–courts look to the substance of the transaction, including all fees, and not simply whether a loan recites an interest rate above the legal maximum. It also shows the draconian penalty for making an usurious loan–not reformation to the maximum rate, but unenforceability. Given the stakes, counsel should take particular care not to cross the usury threshold.

Unilateral Mistake Insufficient to Justifiy Reformation of Deed Without Clear and Convincing Evidence of Fraud

On May 22, 2014, the Third Department issued a decision in Timber Rattlesnake, LLC v. Devine, 2014 NY Slip Op. 03718, affirming the refusal to reform a deed.

In Timber Rattlesnake, the plaintiff was the assignee of a contract to purchase real estate. After the plaintiff discovered that “the deed contained a restrictive covenant that had not been referenced in the contract of sale, [the plaintiff] requested that decedent correct the deed. Decedent refused and plaintiff commenced this action seeking, among other things, reformation of the deed.” The trial court (Supreme Court, Sullivan County) held that the plaintiff had not established grounds for reformation of the deed. The Third Department affirmed, explaining:

A party seeking reformation must establish, by clear and convincing evidence, that the writing in question was executed under mutual mistake or unilateral mistake coupled with fraud. The burden is on the proponent of reformation to establish, by clear and convincing evidence, that the relief is warranted.

Here, it is undisputed that the deed’s restrictive covenant was not set forth in the contract of sale and [the plaintiffs assignor] testified that he first became aware of it when he received the deed after the closing. Thus, plaintiff established the existence of a unilateral mistake regarding whether the restrictive covenant was intended to be included as a condition of the sale. Nonetheless, plaintiff’s proof fell short of establishing fraud on decedent’s part, which requires a misrepresentation that is false and that the defendant knows is false, made to induce the other party to rely on it, justifiable reliance on the misrepresentation by the other party, and injury. Decedent’s attorney testified that he believed the parties had intended to include the restrictive covenant in the deed and that he added it to the proposed deed after he realized that it had been omitted therefrom. Prior to the closing, decedent’s attorney had his legal assistant send the deed containing the restrictive covenant to the title insurance company by facsimile and contact plaintiff’s attorney regarding the deed. Although some negative inferences could be drawn from the fact that decedent and his representatives failed to ensure that plaintiff’s attorney was actually informed of the addition to the deed before the closing, other credible evidence suggested that decedent’s counsel made efforts to so inform plaintiff. The attorney who appeared for decedent at the closing further provided the deed to plaintiff’s attorney at the closing. Notably, the restrictive covenant language is clearly evident on the face of the executed deed and would easily have been discovered with even a cursory examination. Decedent’s attorney testified that he had no intention of deceiving plaintiff. Under these circumstances, plaintiff failed to establish that decedent intended to induce its reliance on any misrepresentation.

(Internal quotations and citations omitted) (emphasis added).

Sale of Realty Company’s Office Building Was Not in the Due Course Because it Was Not in Business of Selling Property

On May 22, 2014, the First Department issued a decision in Theatre District Realty Corp. v. Appleby, 2014 NY Slip Op. 03749, holding that a realty company’s sale of its office building was not in the due course because the company was not in the business of selling property.

In Theatre District Realty Corp., the First Department reversed a summary judgment declaring “that the sale of” a corporation’s building “does not require the consent of a super-majority of its shareholders pursuant to Business Corporation Law (BCL) § 909(a),” and instead declared “that the sale of the building requires the consent of a super-majority of the shareholders pursuant to BCL § 909(a).” The reason for the reversal was that

BCL § 909(a) governs the disposition of all or substantially all of a corporation’s assets, if not made in the usual or regular course of the business actually conducted by such corporation. Since plaintiff has never been engaged in the business of selling real estate, the sale of its building would not be made in the regular course of the business it actually conducts.

(Internal quotations and citations omitted) (emphasis added).

Broker Entitled to Commission When it has Direct and Proximate Link to the Transaction

On May 20, 2014, the First Department issued a decision in SPRE Realty, Ltd. v. Dienst, 2014 NY Slip Op. 03642, clarifying “the standard by which a broker may be found to have been the ‘procuring cause’ of a real estate transaction.”

In SPRE Realty, the plaintiff real estate broker sued the defendants alleging breach of implied contract and unjust enrichment because the defendants refused to pay a buyer’s broker commission. The trial court denied the defendants’ motion to dismiss. The First Department affirmed, explaining:

In this appeal, we must determine whether plaintiff broker has alleged facts sufficient to establish its entitlement to a commission on the sale of real estate, where it expended significant effort locating an apartment for buyers who abandoned the transaction and purchased another apartment in the same building 18 months later. In addition, we take this opportunity to clarify the standard by which a broker may be found to have been the “procuring cause” of a real estate transaction.

. . .

In the absence of an agreement to the contrary, a real estate broker will be deemed to have earned his commission when he or she; produces a buyer who is ready, willing and able to purchase at the terms set by the seller. A broker does not earn a commission merely by calling the property to the attention of the buyer. But this does not mean that the broker must have been the dominant force in the conduct of the ensuing negotiations or in the completion of the sale. Rather, the broker must be the procuring cause of the transaction, meaning that there must be a direct and proximate link, as distinguished from one that is indirect and remote, between the introduction by the broker and the consummation of the transaction.

The Departments of the Appellate Division, this Court being no exception, have applied varying language in elaborating on that standard. For example, the three other Departments have stated that if a broker does not participate in the negotiations, he must at least show that he created an amicable atmosphere in which negotiations went forward or that he generated a chain of circumstances which proximately led to the sale.

Although this Department has cited, and even quoted from, cases that have used the phrase “amicable atmosphere,” we have not gone so far as to adopt that specific standard. However, this Court has suggested that a broker can be the procuring cause if he or she brought the parties together in an amicable frame of mind, with an attitude toward each other and toward the transaction in hand which permits their working out the terms of their agreement. The use of th[is] language . . . appears to be an aberration in this Department, though, because we have more frequently and recently applied the “direct and proximate link” test.

The Court of Appeals has not sanctioned the “amicable atmosphere” or “amicable frame of mind” language. It has, however, affirmed without opinion a finding that a broker was the procuring cause where it generated a chain of circumstances which proximately led to a lease transaction. In any event, the Court has stated that however variable the judicial terminology employed to express the requirement that the broker must be the procuring cause, it has long been recognized that there must be a direct and proximate link, as distinguished from one that is indirect and remote, between the bare introduction and the consummation.

We regard the “amicable atmosphere” and “amicable frame of mind” standards as somewhat broader and more amorphous than the requirement of a “direct and proximate link,” or even a requirement that the broker “generated a chain of circumstances which proximately led” to a transaction’s consummation. Although courts have attempted to harmonize the continued use of the “amicable” phrases discussed above with Court of Appeals precedent articulating the “direct and proximate link” standard, the former phrases are not precise enough terms by which to determine whether a broker is the procuring cause of a transaction. Reliance on the creation of an “amicable atmosphere in which negotiations went forward” seems to ignore the proximity element of the “direct and proximate link” test. Furthermore, we think that this continued deviation from the standard set forth by the Court of Appeals . . . has led to some confusion. Yet litigants, and the bar, deserve a greater level of certainty.

Therefore, in order to reduce the confusion that has arisen from the more nebulous terminology heretofore employed by the Departments of the Appellate Division, we reiterate that the “direct and proximate link” standard . . . governs determinations of circumstances under which a broker constitutes a procuring cause within the First Department. This standard requires something beyond a broker’s mere creation of an “amicable atmosphere” or an “amicable frame of mind” that might have led to the ultimate transaction. At the same time, a broker need not negotiate the transaction’s final terms or be present at the closing.

(Internal quotations and citations omitted) (emphasis added).  The First Department went on to agree with the trial court that the plaintiff had adequately met the “direct and proximate link” standard.

This decision provides useful clarity–although no bright-line rule–on what a broker must do to be entitled to a commission.

Airbnb Subpoena Quashed as Overbroad

On May 13, 2014, Justice Connolly of the Albany County Supreme Court issued a decision in Airbnb, Inc. v. Schneiderman, Index No. 5393-13, quashing a much-publicized subpoena by the State Attorney General’s Office on Airbnb, Inc. seeking information on its clients that rent apartments in New York state.

Justice Connolly rejected most of the arguments advanced by Airbnb, including that the subpoena was an “unfounded fishing expedition,” that the subpoena was being used to enforce “unconstitutionally vague” laws, that the subpoena was “burdensome,” and that the subpoena impermissibly sought “confidential, private information from” Airbnb’s users.  Further, to the extent the subpoena related to Airbnb clients that rented apartments in New York City, the court found the subpoena appropriate.  However, because, the subpoena was not limited to Airbnb hosts whose activities would be covered by the Multiple Dwelling Law or the New York City Hotel Occupancy Tax (potential violations of which the Attorney General was investigating), it was quashed as overbroad.

This decision–which is reported as an Airbnb victory in some press reports–stands more properly as an example of the large permissible breadth of Attorney General investigative subpoenas in the commercial context.  Ultimately, all the court asked of the Attorney General was to limit the subpoena to exclude information about hosts that could not possibly have been breaking the laws at issue.

Court of Appeals Invites Amici Curiae on Real Property Law Issue

The Court of Appeals recently posted the following Notice to the Bar – Court Request for Amici Curiae on a real property law issue:

On April 3, 2014, this Court granted leave to appeal in Flushing Savings Bank, FSB v Bitar. The case is being treated as a normal-coursed appeal (see section 500.12 of this Court’s Rules of Practice).

In March 2010, plaintiff commenced this action against the defaulting note obligor and mortgagor, to foreclose a mortgage on certain real property. In June 2010, an order of reference was granted to plaintiff and a referee was appointed to compute the amount due to plaintiff and to conduct the sale of the property. Thereafter, plaintiff was granted a judgment of foreclosure and sale, which provided that should the proceeds of the foreclosure sale be insufficient to pay the amount reported due to plaintiff, that plaintiff may recover the amount of the deficiency from defendant upon a properly made motion for deficiency pursuant to RPAPL 1371.

In August 2011, the property was sold at a public auction to the highest bidder, plaintiff, for $125,000.00. In September 2011, the referee rendered his report of sale, which determined that at the time of sale, plaintiff was owed $793,724.75, leaving a deficiency of $668,724.75.

In October 2011, plaintiff’s certified appraiser inspected the property and determined that the fair market value of the property on the date of sale was $475,000.00. The appraiser prepared a one and a half page affidavit in which he stated that he “made a personal exterior and interior inspection of the [mortgaged] premises” and that he set the value of the property based on this “inspection and after review[] [of] comparable sales, examination of the neighborhood, market and general economic trends, comparable rentals, expense data and subject to the reasonable assumption that there [had] not been substantial changes in occupancy and condition.” Plaintiff moved to confirm the report of sale and for leave to enter a deficiency judgment against defendant in the amount of $318,724.75, which is the alleged amount due pursuant to the judgment minus the fair market value given by the appraiser. Defendant did not oppose plaintiff’s motion.

Supreme Court confirmed the referee’s report of sale but denied the branch of plaintiff’s motion which sought a deficiency judgment. The court held that plaintiff did not establish prima facie proof of fair market value of the property. The court concluded that plaintiff did not submit any appraisal, and instead plaintiff relied on the “appraiser’s conclusory four-paragraph affidavit which [did] not contain any specific information regarding how he reached his fair market value determination.”

Plaintiff appealed from that portion of the April 2012 order that denied its motion for permission to enter a deficiency judgment, and the Appellate Division affirmed. The court determined that plaintiff failed to make a prima facie showing of the value of the mortgaged premises. The court noted that, “the appraiser did not describe the subject premises or the results of his inspection and failed to append any of the evidence of comparable sales and market data upon which he relied in arriving at his opinion. Nor did plaintiff submit an actual appraisal report.”

The issues presented are (1) whether the courts below properly concluded that the affidavit of plaintiff’s appraiser was too conclusory to establish a prima facie showing of the fair market value of the property as of the foreclosure sale date; and (2) assuming that the affidavit was insufficient, whether the courts could deny plaintiff’s unopposed application for a deficiency outright, without making any express finding as to the value of the property, without holding a hearing on the value of the property, or without in some way affording plaintiff an opportunity to cure the alleged insufficiency in its proof.

The Court invites amicus to address these issues. Amicus motions must comply with section 500.23 of the Court’s Rules of Practice. Particular attention should be paid to section 500.23(a)(2) of the Rules. The text of the Rule is available on the Court’s website at:  http://www.courts.state.ny.us/ctapps/500rules.htm#Amicus

Questions may be directed by telephone to the Clerk’s Office at (518) 477-7705.

Lost Rent Not Available Remedy for Tenant’s Failure to Repair

On March 11, 2014, a divided panel of the First Department issued a decision in Building Service Local 32B-J Pension Fund v. 101 Limited Partnership, 2014 NY Slip Op, 01544, addressing issues arising from a commercial tenant’s breach of duty to repair its premises.

Building Service Local 32B-J Pension Fund arose out of a commercial lease that required the tenant to keep the premises in repair and to surrender it to the landlord in good condition. The landlord sent the tenant a notice stating that the tenant had violated its duty to repair and that it intended to enter the premises and conduct the repairs itself. In response, the tenant commenced the action and obtained a Yellowstone-type preliminary injunction—supported by a bond in excess of $4m—prohibiting the landlord from entering the premises to make repairs. After the lease expired, the landlord counterclaimed for damages arising from tenant’s failure to repair, seeking, inter alia, damages for lost rent because the tenant’s actions had delayed the landlord in repairing and re-leasing the premises. The tenant moved to dismiss that claim and to dissolve the bond, both of which were granted by the motion court.

The majority affirmed dismissal of the claim for delay damages, holding that:

It is well settled that lost rent is not recoverable as damages for breach of a lease covenant requiring a tenant to keep the premises in good repair . . . . If the action is brought before the lease expires, a landlord can recover the injury done to the reversion, i.e. the difference between the value of the premises with the improvement and absent the improvement . . . . if the action is brought after the expiration of the lease term, the measure of the damages is the cost of putting the premises into repair.

(Internal citations and quotations omitted.)

The majority also relied upon the fact that the lease nowhere provided that “additional rent beyond the term of the lease” would be available as a remedy for failure to repair.

However, the majority did hold that lost rent may be available “as damages against the undertaking” under CPLR 6312(b), which provides for “all damages and costs which may be sustained by reason of the injunction,” and reversed the motion court’s release of the bond for failure to consider whether the preliminary injunction was warranted.

The dissent agreed that delay damages would be available against the bond, but also would have held that delay damages were available under the lease:

The lease contains no limitation on landlord’s right to recover damages for a default under the Upkeep Clause or from tenants’ blocking landlord’s contractual right to perform the system repair work itself if tenants fail to do so. Thus, landlord is entitled to recover its economic losses, including delay damages, if proven, that were caused by tenants’ breach and that the parties had reason to foresee as a likely result of the breach.

This case illustrates both the need for leases to specify that lost rent will be an available measure of damages, and also the need for a sufficient bond. Setting aside questions of proof, if not for the substantial bond obtained, the landlord might have been left without a remedy for any lost rent.