Commercial leases often include options to renew or extend the term of the lease.  The option clauses also often contain time-sensitive or notice-specific provisions for the exercise of the option.  Needless to say, options to renew are a fertile source of litigation.

Our examination starts with the seminal case of J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc., decided by our Court of Appeals in 1977; followed by J.N.A. progeny and decisions on other variations of option to renew disputes.

J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc., 42 N.Y.2d 392, 397 N.Y.S.2d 958 (Court of Appeals, June 16, 1977)

The Court of Appeals summarized the prior proceedings:

J. N. A. Realty Corp., the owner of a building in Howard Beach, commenced this proceeding to recover possession of the premises claiming that the lease has expired. The lease grants the tenant, Cross Bay Chelsea, Inc., an option to renew and although the notice was sent, through negligence or inadvertence, it was not sent within the time prescribed in the lease. The landlord seeks to enforce the letter of the agreement. The tenant asks for equity to relieve it from a forfeiture.

The Civil Court, after a trial, held that the tenant was entitled to equitable relief. The Appellate Term affirmed, without opinion, but the Appellate Division, after granting leave, reversed and granted the petition[.]

The questions presented:

Two primary questions are raised on the appeal. First, will the tenant suffer a forfeiture if the landlord is permitted to enforce the letter of the agreement. Secondly, if there will be a forfeiture, may a court of equity grant the tenant relief when the forfeiture would result from the tenant’s own neglect or inadvertence.

The evidence established at trial:

At the trial it was shown that J. N. A. Realty Corp.…originally leased the premises to Victor Palermo and Sylvester Vascellaro for a 10-year term commencing on January 1, 1964. Paragraph 58 of the lease, which was attached as part of a 12-page rider, granted the tenants an option to renew for a 10-year term provided “that Tenant shall notify the landlord in writing by registered or certified mail six (6) months prior to the last day of the term of the lease that tenant desires such renewal.” The tenants opened a restaurant on the premises. In February, 1964 they formed the Foro Romano Corp.…and assigned the lease to the corporation.

By December of 1967 the restaurant was operating at a loss and Foro decided to close it down and offer it for sale or lease. In March, 1968 Foro entered into a contract with Cross Bay Chelsea, Inc.…to sell the restaurant and assign the lease. As a condition of the sale Foro was required to obtain a modification of the option to renew so that Chelsea would have the right to renew the lease for an additional term of 24 years.

The closing took place in June of 1968. First JNA modified the option and consented to the assignment. The modification, which consists of a separate document to be attached to the lease, states: “the Tenant shall have a right to renew this lease for a further period of Twenty-Four (24) years, instead of Ten (10) years, from the expiration of the original term of said lease * * * All other provisions of Paragraph #58 in said lease, * * * shall remain in full force and effect, except as hereinabove modified.” Foro then assigned the lease and sold its interest in the restaurant to Chelsea for $155,000. The bill of sale states that “the value of the fixtures and chattels included in this sale is the sum of $40,000 and that the remainder of the purchase price is the value of the leasehold and possession of the restaurant premises.” At that point five and one-half years remained on the original term of the lease.

In the summer of 1968 Chelsea reopened the restaurant. JNA’s president, Nicholas Arena, admitted on the stand that throughout the tenancy it regularly informed Chelsea in writing of its obligations under the lease, such as the need to pay taxes and insurance by certain dates. For instance on June 13, 1973 JNA sent a letter to Chelsea informing them that certain taxes were due to be paid. When that letter was sent the option to renew was due to expire in approximately two weeks but JNA made no mention of this. A similar letter was sent to Chelsea in September, 1973.

Arena also admitted that throughout the term of the tenancy he was “most assuredly” aware of the time limitation on the option. In fact there is some indication in the record that JNA had previously used this device in an attempt to evict another tenant. Nevertheless it was not until November 12, 1973 that JNA took any action to inform the tenant that the option had lapsed. Then it sent a letter noting that the date had passed and, the letter states, “not having heard from you as prescribed by paragraph #58 in our lease we must assume you will vacate the premises” at the expiration of the original term, January 1, 1974. By letter dated November 16, 1973 Chelsea, through its attorney, sent written notice of intention to renew the option which, of course, JNA refused to honor.

At the trial Chelsea’s principals claimed that they were not aware of the time limitation because they had never received a copy of paragraph 58 of the rider. They had received a copy of the modification but they had assumed that it gave them an absolute right to retain the tenancy for 24 years after the expiration of the original term. However, at the trial and later at the Appellate Division, it was found that Chelsea had knowledge of, or at least was “chargeable with notice” of, the time limitation in the rider and thus was negligent in failing to renew within the time prescribed.

Chelsea’s principals also testified that they had spent an additional $15,000 on improvements, at least part of which had been expended after the option had expired. Toward the end of the trial JNA’s attorney asked the court whether it would “take evidence from” Arena that he had negotiated with another tenant after the option to renew had lapsed. However, the court held that this testimony would be immaterial.

The settled law with respect to options:

It is a settled principle of law that a notice exercising an option is ineffective if it is not given within the time specified…”At law, of course, time is always of the essence of the contract”…Thus the tenant had no legal right to exercise the option when it did, but to say that is simply to pose the issue; it does not resolve it. Of course the tenant would not be asking for equitable relief if it could establish its rights at law.

The obstacles to equitable relief:

The major obstacle to obtaining equitable relief in these cases is that default on an option usually does not result in a forfeiture. The reason is that the option itself does not create any interest in the property, and no rights accrue until the condition precedent has been met by giving notice within the time specified. Thus equity will not intervene because the loss of the option does not ordinarily result in the forfeiture of any vested rights…The general rule is customarily stated as follows: “There is a wide distinction between a condition precedent, where no title has vested and none is to vest until the condition is performed, and a condition subsequent, operating by way of a defeasance. In the former case equity can give no relief. The failure to perform is an inevitable bar. No right can ever vest. The result is very different where the condition is subsequent.  There equity will interpose and relieve against the forfeiture”…It has been suggested that even when the option has been paid for, nothing is forfeited when it expires, because the amount paid “is the exact agreed equivalent” of the power to exercise the right for the time allotted[.]

The forfeiture scenario:

But when a tenant in possession under an existing lease has neglected to exercise an option to renew, he might suffer a forfeiture if he has made valuable improvements on the property. This of course generally distinguishes the lease option, to renew or purchase, from the stock option or the option to buy goods…More recently it has been noted that “although the tenant has no legal interest in the renewal period until the required notice is given, yet an equitable interest is recognized and protected against forfeiture in some cases where the tenant has in good faith made improvements of a substantial character, intending to renew the lease, if the landlord is not harmed by the delay in the giving of the notice and the lessee would sustain substantial loss in case the lease were not renewed”[.]

Addressed concerns about willful or gross neglect:

On occasion the court has cautioned that equitable relief would be denied where there has been a willful or gross neglect…but it has been reluctant to employ the sanction when a forfeiture would result[.]

*     *     *

There are several cases in which this court has denied a tenant or mortgagor equitable relief because of his own neglect to perform within the time fixed in the lease or mortgage, but only when it has found that there was “no penalty, no forfeiture”…Cardozo took a different view. He felt that even though there may be no penalty or forfeiture “in a strict or proper sense” equity should “relieve against it if default has been due to mere venial inattention and if relief can be granted without damage to the lender”. Even in those cases he would apply the general equitable principle that “the gravity of the fault must be compared with the gravity of the hardship”[.]

Concluding that:

Here, as noted, the tenant has made a considerable investment in improvements on the premises — $40,000 at the time of purchase, and an additional $15,000 during the tenancy. In addition, if the location is lost, the restaurant would undoubtedly lose a considerable amount of its customer good will. The tenant was at fault, but not in a culpable sense. It was, as Cardozo says, “mere venial inattention.” There would be a forfeiture and the gravity of the loss is certainly out of all proportion to the gravity of the fault. Thus, under the circumstances of this case, the tenant would be entitled to equitable relief if there is no prejudice to the landlord.

However, it is not clear from the record whether JNA would be prejudiced if the tenant is relieved of its default.  Because of the trial court’s ruling, JNA was unable to submit proof that it might be prejudiced if the terms of the agreement were not enforced literally.  Its proof of other negotiations was considered immaterial.  It may be that after the default the landlord, relying on the agreement, in good faith, made other commitments for the premises.  But if JNA did not rely on the letter of the agreement then, it should not be permitted to rely on it now to exact a substantial forfeiture for the tenant’s unwilling default.  This, however, must be resolved at a new trial.

Omansky v. 160 Chambers St. Owners, Inc., 2017 NY Slip Op 07958 (App. Div. 1st Dept., November 14, 2017)

In a landlord-tenant dispute concerning ground floor commercial space in a cooperative building, Supreme Court entered judgment evicting the plaintiff-tenant based upon a holdover petition.

The First Department, as follows, summarily affirmed:

Plaintiff’s attempt to renew the lease by letter in December 1992 — over 15 years prior to its expiration — failed to comply with the lease’s condition that the option to renew be exercised “within (60) days before the end of each twenty-five year term.” As such, the renewal was not effective. Even if a Cooperative representative countersigned the renewal letter, that did not waive this condition, as the acknowledgment was expressly limited “to the extent permitted by the applicable lease.”

Although the Cooperative failed to comply with its obligation to notify plaintiff of his right to exercise the renewal option within 15 days of expiration of the lease, this failure did not have the effect of automatically renewing the lease. Nor did the Cooperative somehow waive the right to object to the failure to renew by accepting rent checks from Omansky post-termination, as continued acceptance of rent post-lease termination merely creates a month-to-month holdover tenancy[.]

Because the lease was never validly renewed, it expired at the end of its initial 25 year term in June 2008. As a result, plaintiff’s leasehold interest ceased to exist[.]

Plaza Collectibles Corp. v. Directors Guild of Am., Inc., 2017 NY Slip Op 08196 (App. Div. 1st Dept., November 21, 2017)

Supreme Court denied plaintiffs’ motion for Yellowstone relief and denied plaintiffs’ request for a declaration that the party’s lease had been renewed.

The First Department, as follows, summarily modified to declare that the lease had not been renewed:

The court properly denied plaintiffs’ motion for a Yellowstone injunction and granted defendant’s motion to vacate the temporary restraining order because plaintiffs no longer held a lease to the premises…Alternatively, plaintiffs failed to demonstrate their readiness to cure any claimed default.

The court erred in finding that plaintiffs did not validly exercise the option to renew the lease on the ground that the letter declaring their intent to do so was not sent more than 180 days before the lease’s expiration. As the parties admit, the lease was set to expire on December 31, 2014, not September 19, 2014. Thus, plaintiffs’ April 12, 2014 letter was timely. Nevertheless, plaintiffs did not validly exercise the renewal option, because the letter did not strictly comply with the written notice requirements of the lease…In any event, defendant was permitted to cancel the renewal option, because, at the time they sought to exercise it, plaintiffs were in incurable breach of the lease[.]

Fane v. Chemung Canal Trust Co., 2017 NY Slip Op 05300 (App. Div. 3rd Dept., June 29, 2017)

Supreme Court denied defendant’s motion for summary judgment dismissing the complaint, and granted plaintiff’s motion for summary judgment, in a dispute involving defendant’s exercise of a renewal option under a lease.

The Third Department summarized the facts:

The parties’ predecessors entered into a 20-year lease in 1985 for property located in the City of Ithaca, Tompkins County. Plaintiff acquired the property in 1997. In 2005, plaintiff and Bank of America, N.A. entered into a second amendment extending the lease for 10 years until December 31, 2015, with the tenant retaining “the right to extend the term of this [l]ease for a single additional period of [10] years from January 1, 2016 through December 31, 2025.” To exercise this right, the tenant was required to send written notice to plaintiff no later than December 31, 2013. Bank of America assigned the lease to defendant in November 2013.

The issue on appeal:

At issue on this appeal is whether defendant’s ensuing letter of December 19, 2013 served to exercise the renewal option. That letter, addressed to plaintiff and referenced as a “Lease Renewal Notice,” stated as follows: “Please allow this letter [to] serve as formal notification that [defendant] wishes to exercise its right to extend the term of the lease referenced above for an additional period of 10 years, to begin January 1, 2016 and continue until December 31, 2025. Said option to extend [as] provided in amendment to lease dated July 14, 2005. Specific terms and details of this extension to be determined prior to December 31, 2015. Although we regard our option to renew as exercised, we request that you also please acknowledge receipt of this notice by signing below and returning a copy” (emphasis added). The letter was hand delivered and its receipt was acknowledged by plaintiff that same day.

The prior proceedings:

In March 2016, plaintiff commenced this action alleging that defendant had exercised the renewal option but had defaulted under the lease, as amended, by failing to pay the rent due since January 2016. Plaintiff sought a declaratory judgment that the lease had been extended through December 31, 2025, and damages for defendant’s anticipatory breach. Defendant moved to dismiss the complaint, asserting that the December 19, 2013 letter was simply an agreement to agree, or a counteroffer, and that the lease had not been renewed. Supreme Court granted plaintiff’s motion to convert defendant’s motion to dismiss into a motion for summary judgment and to treat plaintiff’s responding papers as a cross motion for summary judgment. Defendant, in turn, further responded in opposition and in support of its own motion for summary judgment. Supreme Court partially granted plaintiff’s cross motion, finding that the lease had been extended and that defendant breached the lease by its nonpayment of rent. The court also determined that defendant anticipatorily breached the lease, and that an inquest on damages would be scheduled at a later date[.]

And, as follows, affirmed:

It has long been established that “a tenant’s election to renew a lease must be timely, definite, unequivocal and strictly in compliance with the terms of the lease”…In our view, the December 19, 2013 letter meets this standard — it is captioned as a “Lease Renewal” and described as a “formal notification” to extend the term in accord with the second lease amendment. We are not persuaded by defendant’s assertion that the underscored last sentence of the first paragraph — “Specific terms and details of this extension to be determined prior to December 31, 2015” — makes this a qualified, conditional offer to extend the term. Significantly, the very next sentence includes the affirmative statement that “we regard our option to renew as exercised.” While it is undisputed that defendant engaged in ongoing discussions with plaintiff over the next two years to explore changes to and reductions in the leased space, that effort does not change the unequivocal, definitive declaration that “we regard our option to renew as exercised”[.]

We further reject defendant’s contention that the renewal was indefinite and unenforceable because the essential term of rent was not defined. Where, as here, the parties did not leave the rental amount for the renewal period open to negotiation, we look to the terms of the original lease, as amended…The premise for doing so is that “[o]nce the option is exercised, the original lease is deemed a unitary one for the extended term”…Notably, the second lease amendment included a rent formula covering the five-year period up to December 31, 2015. Under the principles stated, this formula defines the rent due during the extension period.

Finally, inasmuch as defendant acknowledged that it “peacefully quit the premises on or before May 31, 2016 and turned the keys over to” plaintiff’s agent, Supreme Court did not err in finding an anticipatory breach[.]

Waterfalls Italian Cuisine, Inc. v. Tamarin, 119 A.D.3d 773 (App. Div. 2nd Dept. July 16, 2014)

Plaintiff-tenant sued its current and former landlords seeking a declaratory judgment that it was entitled to continued possession of the premises after title was transferred.  Supreme Court granted the current landlord’s motion to dismiss.

The Appellate Division summarized the facts:

In July 2002…Waterfalls Italian Cuisine, Inc.…by its president…Dennis Zollo, Sr., entered into a 10-year commercial lease pursuant to which Waterfalls, as tenant, leased certain premises owned by…Robert P. Tamarin…Lloyd B. Tamarin, Grace Golad, and Steven Lasher to operate a restaurant. The lease provided that Waterfalls had the option to renew the term of the lease by written notification. In April 2011, Tamarin, among others, executed a deed transferring title of the subject premises to nonparty 2008 Victory Boulevard, LLC…In October 2012, Victory executed a deed transferring title of the subject premises to the defendant Venetian Circle, LLC[.]

The prior proceedings:

In November 2012, the plaintiffs commenced this action, inter alia, for a judgment declaring that they are entitled to continued possession of the subject premises. The plaintiffs alleged, among other things, that Zollo had advised Tamarin, who acted as the plaintiffs’ agent, of the plaintiffs’ intent to exercise the option to renew the lease, and that Tamarin provided assurance that the lease term would be renewed, although no exercise of the option was made in writing. Thereafter, the plaintiffs moved to preliminarily enjoin the defendants from taking any steps to terminate their occupancy of the premises during the pendency of the action. Venetian cross-moved…to dismiss the complaint insofar as asserted against it based on documentary evidence. In an order dated March 22, 2013, the Supreme Court, among other things, granted that branch of Venetian’s cross motion…to dismiss the complaint insofar as asserted against it, and the plaintiffs appeal from that portion of the order.

The applicable law:

“A motion to dismiss based on documentary evidence may be granted only where such documentary evidence utterly refutes the plaintiff’s factual allegations, resolves all factual issues as a matter of law, and conclusively disposes of the claims at issue”…Although the documentary evidence conclusively established that the plaintiffs failed to exercise the option to renew in accordance with the express terms of the lease…contrary to Venetian’s contention, that evidence failed to conclusively establish that the plaintiffs were not entitled to equitable renewal of the lease. Equity will intervene to relieve a commercial tenant’s failure to timely exercise an option to renew in accordance with the terms of the lease where “(1) the tenant’s failure to exercise the option in a timely fashion resulted from an honest mistake or inadvertence, (2) the nonrenewal of the lease would result in a substantial forfeiture by the tenant, and (3) the landlord would not be prejudiced by the renewal”[.]

Concluding that:

Here, the record reveals the existence of issues of fact as to whether the plaintiffs’ failure to exercise the option in accordance with the terms of the lease resulted from their mistaken belief that alleged discussions with Tamarin were sufficient to exercise the option, whether nonrenewal of the lease would result in the plaintiffs’ substantial forfeiture of a benefit as a result of the loss of valuable goodwill that they established at the present location, and whether Venetian would suffer prejudice if the lease were renewed[.]

5 East 41 Check Cashing Corp. v. Park & Fifth Owner, 44 A.D.3d 373 (App. Div. 1st Dept. October 9, 2007)

Tenant brought an action against landlord seeking a declaratory judgment that an option to renew a commercial lease had been effectively exercised.  Supreme Court denied the tenant’s motion for a preliminary injunction.

The First Department, as follows, summarily affirmed:

Plaintiff failed to timely exercise a renewal option from its lease with defendant’s predecessor, defendant Tommy Hilfiger 485 Fifth. When the present landlord rejected plaintiff’s belated attempt to exercise the option, plaintiff sought a declaratory judgment, inter alia, that it had effectively exercised its option to renew for an additional five-year period.

The notice exercising the option was ineffective because it was not given within the specified period…An equitable interest may be recognized and protected against forfeiture where the tenant has in good faith made substantial improvements to the premises with intent to renew the lease, the landlord is not harmed by the delay in notice, and the tenant would sustain substantial loss if the lease were not renewed. Plaintiff failed to set forth sufficient evidence of any such improvements made with intent to renew the lease…To the contrary, there is record evidence that the tenant made no improvements that would otherwise invoke equitable relief…Plaintiff has thus shown no equitable interest that would warrant protection against forfeiture.

Defendant landlord demonstrated prejudice by producing evidence that it had hired an architect to construct an interior staircase on the premises, such plans having been drawn during the period when plaintiff could have exercised its option to renew until when it belatedly attempted to exercise the option[.]

Foscarini, Inc. v. Greenestreet Leasehold Partnership, 2017 NY Slip Op 31493(U) (Sup. Ct. N.Y. Co., July 13, 2017)

Supreme Court entertained the motion of plaintiff-tenant (Foscarini) to dismiss the claims of defendant-landlord (Greenestreet) for breach of the implied covenant of good faith and fair dealing.

Supreme Court summarized the facts:

Greenestreet is the owner of the building located at 15-17 Greene Street, New York, New York 10013. On January 16, 2011, Foscarini leased the “ground floor storefront unit” for a five-year term, expiring on January 16, 2015. The lease provided that Foscarini could renew the lease for an additional five years upon written notice of its intent to renew given between six and twelve months prior to the initial expiration of the lease.

On January 2, 2015, Foscarini wrote a letter to Greenestreet in which it informed Greenestreet of its intention to renew the lease. Greenestreet alleges that the notice was defective, in that it was addressed and sent to the wrong party, and was equivocal regarding Foscarini’s intent to renew. Greenestreet further alleges that the letter marked the beginning of “a pattern of behavior in which Foscarini pretended to be renewing while never binding itself to anything, a pattern that continued up to, and through, its initiation of this lawsuit.” It argues that this pattern is allegedly borne out by an email from June 2015, in which Foscarini’s principal, Glenn Ludwig, informed a broker at Coldwell Banker that “Foscarini is at the stage now where we need to renew our lease and or look to buy/lease somewhere else.” Thus, Greenestreet alleges, Foscarini merely acted as though it were renewing to give it time to seek alternate premises and to cloud title to the space.

The parties negotiated regarding the renewal term for several months. Greenestreet alleges that when Foscarini was unable to obtain a renewal on acceptable terms, it commenced this lawsuit on November 20, 2015.

The subsequent developments:

Upon the expiration of the initial term on January 15, 2016, Foscarini failed to vacate the premises. On February 17, 2016, the parties entered into a so-ordered stipulation setting use and occupancy for the premises while Foscarini still occupied it. The stipulation provided that Foscarini would pay $25,000 per month until otherwise ordered, or the court determined that the lease renewal was valid, or Foscarini vacated the premises. Further, the stipulation provided that Foscarini could leave before the end of a month voluntarily, or by court order, at which point Greenestreet would return a pro-rated portion of that month’s use and occupancy. Greenestreet alleges that, having agreed to the stipulation, Foscarini continued to search for alternate commercial space without telling Greenestreet that it was doing so.

On August 9, 2016, Foscarini told Greenestreet that it was vacating the premises on August 31, 2016, and that it was withdrawing its cause of action for a declaratory judgment. Greenestreet alleges that three weeks’ notice was insufficient notice to vacate, as it left it unable to quickly locate a new tenant for the premises. Foscarini vacated the premises on August 31, 2016, and, thereafter, demanded the return of its security deposit. Greenestreet disputed Foscarini’s right to vacate the premises, to withdraw its cause of action, and to recover the security deposit.

The applicable law:

“[A]ll contracts imply a covenant of good faith and fair dealing in the course of performance”…”To state a claim of breach of the implied covenant of good faith and fair dealing, a party must allege [1] a specific implied contractual obligation, [2] a breach of that obligation by the defendant, and [3] resulting damage to the plaintiff”…”A claim for breach of the implied covenant of good faith and fair dealing cannot substitute for an unsustainable breach of contract claim”…Further, a claim for breach of the implied covenant cannot survive where it is duplicative of a breach of contract claim[.]

The contentions of the parties:

Greenestreet alleges that Foscarini breached the implied covenant in three ways. First, that Foscarini commenced “a litigation it knew to be without merit” to gain a negotiating advantage over Greenestreet and to continue paying “under-market use and occupancy” while looking for a new location. Second, that Foscarini failed to vacate the premises when the lease expired. Third, that Foscarini sent a renewal notice that it knew was defective.

Foscarini claims that, to the extent this counterclaim is premised on its commencement of this action, the claim is, in fact, a malicious prosecution claim, the elements of which have not been pleaded. Further, Foscarini states, this counterclaim is duplicative of Greenestreet’s counterclaim for breach of the lease, as both claims allege that Foscarini failed to comply with the lease by sending a proper renewal notice or by vacating the premises when the lease expired. Finally, Foscarini claims that dismissal is warranted because Greenestreet has not been denied the fruits of its bargain.

In response, Greenestreet argues that the claims are not duplicative because Foscarini sent a renewal notice in bad faith, when it had no intention of staying in the premises. Further, Greenestreet contends that Foscarini acted in bad faith by refusing to vacate the premises at the end of the lease term, and then, by leaving on only twenty days’ notice, depriving Greenestreet of the six-month notice period provided for in the lease, and the ability to timely market the premises or obtain a new tenant[.]

Concluding that:

With respect to the third basis for the implied covenant counterclaim, Foscarini’s alleged bad faith attempt to renew the lease when it had no intention of staying in the premises, Greenestreet has successfully pleaded a cause of action. Greenestreet argues that, implied from the strict conditions for renewing the lease, was an obligation that Foscarini only send a renewal notice if it truly intended to renew. Greenestreet alleges that Foscarini purposefully sent a faulty renewal notice, not to renew the lease, but to make Greenestreet believe that it was renewing while it was searching for an alternate property.

The strict notice period provided for renewing the lease is alleged to have been part of the fruits of Greenestreet’s bargain, allowing it the necessary time to relet the premises if Foscarini decided not to renew the lease. Foscarini’s faulty notice impeded Greenestreet’s ability to lease the premises once the lease expired. Indeed, Greenestreet alleges that the faulty renewal notice was merely the beginning of Foscarini’s attempts to prolong its occupancy while searching for new space, as shown by Foscarini’s principal telling a real estate broker in June 2015 that it would either renew the lease or look for new space. Greenestreet has successfully alleged that Foscarini breached its implied obligation to send a renewal notice only if it genuinely meant to renew the lease, and that Greenestreet was damaged in its inability to relet the premises upon Foscarini’s departure. These allegations are sufficient, on a motion brought under CPLR 3211 (a)(7), to sustain the counterclaim. Foscarini’s factual arguments to the contrary go to the merits of the counterclaim and cannot be resolved on a motion addressed to the sufficiency of the pleadings.  These allegations are sufficient.

Further, Greenestreet does not claim that the improper renewal of the lease is a basis for both its breach of contract and implied covenant counterclaims, only the implied covenant counterclaim. While Foscarini is correct that the claims may be duplicative if they arise out of the same facts and seek the same damages…Foscarini’s proposed interpretation of “arise out of” is so broad as to prevent there ever being an implied covenant claim that runs in tandem with an express breach claim.

Greenestreet’s claim of a bad faith renewal could not be brought as an express breach claim. The lease does not place any express, stated conditions on Foscarini’s decision to exercise its right to renew, nor, despite Greenestreet’s argument to the contrary, does the lease provide that Foscarini’s exercise of its right to renew the lease is irrevocable. While Greenestreet pleads similar damages for both claims, the factual bases thereof are distinct and independent such that they may be pleaded together[.]

Madangsui, Inc. v. Crystal Props. LLP, 2017 NY Slip Op 50333(U) (Sup. Ct. N.Y. Co., March 20, 2017)

Supreme Court summarized the facts:

On or about December 22, 2004, Crystal, as owner, leased the premises to Mr. Kabob Café, Inc.…The lease was to expire December 31, 2016.…Paragraph 87 of the lease provided, in pertinent part, that:

Tenant shall have the right to extend the term of this lease for an additional five years, from January 1, 2017 [until] December 31, 2021 (the Extension Term), provided that a) Tenant is in compliance with all the terms and conditions of this lease both at the time of Tenant’s exercise of this option and at the time the Extension Term is to commence, b) Tenant shall exercise this option by giving Landlord not less than twelve (12) months’ written notice of its intent to extend the term of the lease, in the manner prescribed in Paragraph 51, above and c) Tenant is not in violation of local safety ordinances, health laws, or building codes[.]

Paragraph 51 of the lease required that all notices pursuant to the lease, except for the payment of rent or additional rent, “must be in writing and must be sent by registered or certified mail”[.]

On April 24, 2005, the lease was modified to include additional basement space and to adjust the rent…The lease was assigned by Mr. Kabob Café, Inc. to Jazzy’s Food Emporium on December 30, 2005…On January 11, 2007, Jazzy’s Food Emporium assigned the lease to plaintiff Madangsui, Inc.…The assignment was executed on behalf of plaintiff by its president and sole owner, Sang Woo Kim[.]

In April of 2014, plaintiff’s attorney, Samuel Ahne, contacted Steve Cytryn, Director of Leasing and Management for Crystal, to advise the latter that plaintiff was seeking to extend its lease, that it needed a bank loan, and that its bank required that the new lease term be at least 10 years…Cytryn responded that he would discuss a 10-year extension with Crystal’s principals…On July 21, 2014, Ahne once again asked Cytryn whether plaintiff’s lease could be extended for 10 years…The same day, Ahne advised Cytryn that plaintiff needed a loan to “have [its] restaurant updated” and that plaintiff’s bank required that, in order to obtain such a loan, the restaurant needed a lease with a minimum term of 10 years…On August 12, 2014, Ahne asked Cytryn if the latter could provide plaintiff’s bank with a letter stating that Crystal intended to extend the lease to facilitate plaintiff obtaining a loan…On August 13, 2014, Cytryn wrote to Ahne representing that “[Crystal does] plan to offer an extension to plaintiff’s lease” and he apologized that Crystal “[has] not been able to do so already” because its principals had been traveling during the summer…On September 30, 2014, Ahne again wrote to Cytryn stating that plaintiff needed his help so that the restaurant could obtain the loan it needed to undergo a renovation[.]

In early October, 2014, Kim asked Cytryn to email him a letter addressed to Woojin Choi, a loan officer at plaintiff’s bank, to assist Kim in obtaining a loan…On October 15, 2014, Cytryn sent an email to Choi, advising that Crystal was in the process of preparing a lease extension agreement for plaintiff…Cytryn further stated in the email that plaintiff was “an excellent tenant” and that Crystal hoped to keep Sangwoo Kim as a tenant “for a long time to come[.]”

In January of 2016, Kim was contacted by a restaurateur who expressed interest in purchasing plaintiff restaurant and assuming its lease…The prospective buyer said that he would need a 10-year lease…In March of 2016, Kim accommodated Cytryn’s request for a walk-through of the premises and they discussed the 10-year extension at that time…Thus, alleged Kim, Cytryn knew at that point that plaintiff intended to remain in the premises for no less than an additional 5-year term[.]

By email dated May 13, 2016, Cytryn asked Kim if the latter would be “making the deal [he had been considering] with [another] Korean restaurant owner.”…Cytryn further stated that, since plaintiff’s lease was to expire on December 31, 2016, he needed to know whether the lease would be renewed “as soon as possible.”… On May 15, 2016, Kim advised Cytryn by email that he was “definitely going to sign to extend the term of the lease” regardless of the actions of the potential buyer…By email dated May 26, 2016, Kim asked Cytryn if plaintiff could have a 10-year lease extension…Cytryn responded on June 10, 2016 that the landlord proposed a 10-year lease extension but that the agreement would not be possible unless all outstanding charges were paid by plaintiff…Cytryn’s email stated that the proposal was “non-binding and for discussion purposes only[.]”

On July 19, 2016, Cytryn advised Kim that a new lease was being prepared but that “there [was] a problem-it seem[ed] there [were] unpaid charges [of $29,430.74] on [plaintiff’s] rent statement.”…On or about August 19, 2016, Crystal delivered to plaintiff a 10-year renewal lease for the premises…In his email to plaintiff that day, Cytryn wrote, inter alia, that Crystal “shall not have any legal obligation to [plaintiff] with respect to the matters set forth in the attached proposed lease unless and until a lease agreement is fully negotiated, executed, and delivered by [Crystal] to [plaintiff].”…The letter further stated that either party could “discontinue negotiations with or without cause at any time with no resulting obligation to the other.”…Cytryn conceded that he withdrew the proposal before it was accepted by plaintiff because plaintiff failed to exercise its right to a 5-year lease extension pursuant to paragraph 87 of the lease…Instead, on September 20, 2016, Crystal executed a new lease for the premises with 35 West Enterprises, Inc.…According to Cytryn, as a result of executing the lease with 35 West, Crystal became obligated to pay its broker, defendant PDP Properties LLC…a $245,000 fee[.]

According to Kim, he contacted Cytryn immediately upon his receipt of the renewal lease to advise the latter that he would be in South Korea until after Labor Day and that he would have his attorney review the lease in the interim…Kim further stated that his return from Korea was delayed approximately one week and that, when he returned, he met with Cytryn on or about September 21, 2016, at which time plaintiff paid Cytryn $7,108.04, the amount of arrears plaintiff allegedly owed Crystal, and that Cytryn accepted this amount in satisfaction of the debt…The motion papers do not contain any indication that plaintiff was in arrears to Crystal after that payment was made. Kim claims that in September, 2016, while plaintiff’s counsel was in the process of reviewing the proposed lease sent by Crystal, Cytryn advised plaintiff that it had found a new tenant for the premises for a term commencing January 1, 2017 at a higher base rent of $36,000 per month[.]

By correspondence dated October 20, 2016, counsel for plaintiff wrote to Crystal and its attorney giving formal notice of its intention, pursuant to paragraph 87 of the lease, to extend the lease term from January 1, 2017 until December 31, 2021…On November 4, 2016, Cytryn advised plaintiff’s attorney that:

Because [plaintiff] failed to timely elect to renew its lease, and did not enter into any extension agreement nor a new lease with the landlord, the landlord has changed its position and entered into a new lease with a new tenant. The landlord now has a contractual obligation to a new tenant and to a broker for a brokerage commission[.]

By correspondence dated October 28, 2016, plaintiff’s attorney wrote to Crystal requesting that the latter execute a 10-year renewal lease based on the fact that a 10-year lease had been sent to plaintiff by Crystal for execution[.]

On or about November 8, 2016, Cytryn emailed Kim the terms of a proposed agreement extending the lease term through the end of 2026…Cytryn stated in the email that the proposal was “non-binding and for discussion purposes only” and that “[t]he [l]andlord shall not have any legal obligation to the [t]enant with respect to the matters set forth [in the proposal] unless and until a lease or lease modification agreement [was] fully negotiated[.]”

The pending action:

On December 21, 2016, plaintiff commenced the captioned action against Crystal, PDP, and John Does “1-10”, which fictitious defendants were intended to represent unknown individuals or entities who or which may have entered into a new lease with Crystal for the use and occupancy of the premises.…In the complaint, plaintiff asserted claims against Crystal, which, it claimed, owned and/or managed the premises, seeking: a declaration that the lease is valid through the end of 2021; specific performance of the lease through the end of 2021; damages for breach of contract; estoppel of Crystal from evicting plaintiff from the premises pending the outcome of the captioned action; damages for breach of the covenant of good faith and fair dealing; and a permanent injunction preventing Crystal from terminating the lease until the end of 2021…Plaintiff also claimed a breach of fiduciary duty against PDP for using financial information it obtained from plaintiff to help a competitor restaurant secure financing to lease the premises…PDP allegedly obtained this information beginning in 2013, when it began assisting plaintiff in exploring the possibility of opening another restaurant at 306 Fifth Avenue[.]

And prior proceedings:

The same day, plaintiff filed the instant order to show cause seeking the relief set forth above. Crystal, which filed its answer to the complaint with this Court on January 19, 2017…opposes the application. Although PDP was served with the complaint and the instant application on December 22, 2016…it has failed to respond to either.

At a preliminary hearing held in connection with the OSC on December 22, 2016, this Court issued a temporary restraining order granting the relief demanded pending the hearing of the application…At oral argument of the application on January 23, 2017, this Court directed that plaintiff post a $50,000 bond pending the outcome of the motion. Although a bond has not been posted, plaintiff has deposited $50,000 in escrow.

By stipulation dated February 14, 2017, the parties agreed that plaintiff would pay Crystal $16,500 per month, plus additional rent, for use and occupancy of the premises pending the determination of this application[.]

The position of plaintiff/tenant:

Plaintiff argues that it is entitled to specific performance of the 5-year lease extension because it timely exercised its option to such an extension. It maintains that this Court has the discretion to award specific performance and that it is entitled to the same because it has made substantial improvements to the premises and has developed a substantial clientele and reputation at the site. Plaintiff further asserts that, if specific performance is granted, Crystal would not be prejudiced.

Alternatively, plaintiff asserts that, even if it failed to provide timely notice of its extension to extend its lease, equity should intervene to allow it such an extension since this Court’s refusal to do so would result in plaintiff’s forfeiture. It further asserts that, if there had been a forfeiture by plaintiff, Crystal waived the right to enforce the same by waiting until November 4, 2016 to reject the lease extension.

Plaintiff maintains that it is entitled to a preliminary injunction enjoining Crystal from removing it from the premises since it is likely to succeed on the merits of its claims. It maintains that it would suffer irreparable harm, i.e. the loss of its leasehold, in the absence of the granting of equitable relief.  Further, plaintiff maintains that the equities weigh in its favor since it has been an excellent tenant and has even been offered a leasehold longer than 5 years by Crystal.

Additionally, plaintiff argues that it is entitled to a declaratory judgment determining that Crystal is estopped from rejecting plaintiff’s proposed lease extension since Crystal led plaintiff to believe that it would be able to sign a lease extension.

The contentions of defendant/landlord:

[C]rystal argues that plaintiff is not entitled to a preliminary injunction. Crystal maintains that plaintiff rejected the 5-year renewal lease it was offered and, in 2014, sought a 10-year lease, and did not seek a 5-year lease again until after Crystal signed a lease with a new tenant. It asserts that the 10-year lease extension was not a renewal of the prior lease but rather a new lease. Additionally, Crystal maintains that it would be prejudiced if plaintiff were entitled to a lease extension since it is contractually obligated to pay its broker $245,000.

Plaintiff’s reply:

In a supplemental affidavit in support, submitted to refute Crystal’s argument at the January 23, 2017 hearing before this Court that Kim did not make substantial improvements to the premises, Kim asserts that, on September 12, 2013, plaintiff was approved for a $100,000 line of credit by PNC Bank, which he personally guaranteed. Plaintiff used $50,000 to ship and install 22 individual table barbeque units. He used the remaining $50,000 to repair and replace the electrical, plumbing and gas systems at the premises. On August 12, 2015, plaintiff obtained a $150,000 loan from FC Marketplace, LLC, which he also personally guaranteed, to replace the entrance to the restaurant, improve the appearance of the premises, purchase and install new freezers, and remove and replace the electrical systems and plumbing.

In its supplemental memorandum of law in support, plaintiff argues that it is entitled to a preliminary injunction since it will suffer a forfeiture if it does not obtain the lease extension.

Noting that:

“A preliminary injunction substantially limits a defendant’s rights and is thus an extraordinary provisional remedy requiring a special showing. Accordingly, a preliminary injunction will only be granted when the party seeking such relief demonstrates a likelihood of ultimate success on the merits, irreparable injury if the preliminary injunction is withheld, and a balance of equities tipping in favor of the moving party.”…Whether to grant a preliminary injunction is a matter to be determined in the discretion of the court[.]

This Court finds that plaintiff has established its entitlement to a preliminary injunction based on the facts herein.

The general rule is that a tenant who fails to timely exercise an option to renew a lease is without a remedy at law. However, equity will intervene to relieve a tenant from the consequences of the tenant’s inadvertence or neglect to timely exercise a renewal option so long as there is no prejudice to the landlord…A landlord suffers prejudice when, after the tenant’s default, the landlord, in relying on the agreement, in good faith, makes other commitments for the premises…The inability to consummate a valuable lease because of the unavailability of the premises would clearly be prejudicial to the [landlord][.]

Adverting to J.N.A. Realty:

In J.N.A. Realty, the Court of Appeals found that, in determining whether to grant equitable relief to a tenant which failed to timely exercise its option to renew a lease, one of the “primary questions” raised was whether “the tenant [will] suffer a forfeiture if the landlord is permitted to enforce the letter of the agreement.”…The Court stated that a tenant in possession who has made a “considerable investment improvements on the premises” and who “would undoubtedly lose a considerable amount of its customer good will” if it lost its location, would suffer a forfeiture if equity did not relieve it if its failure to exercise its option[.]

Nevertheless, the Court of Appeals has authorized equitable relief against untimely renewal where there was no indication that substantial improvements had been made. Indeed in J.N.A. Realty the Court cited [a case] in which it had affirmed the grant of equitable relief to the commercial tenant, not because the substantial improvements to the premises would otherwise be forfeited, but to preserve the tenant’s interest in a `long-standing location for a retail business’ because this is `an important part of the good will of that enterprise, [and thus] the tenant stands to lose a substantial and valuable asset’…The equivalent circumstance is presented here[.]

Concluding that:

The foregoing facts establish that, despite plaintiff’s failure to provide the required written notice, it clearly made Crystal aware of the fact that it wished to exercise its option to extend the lease. Not a single communication from Crystal — from 2014 until the time it notified plaintiff that the premises had been rented to another tenant — contained an insistence that plaintiff strictly comply with the notice requirements of the lease. Instead, Crystal continued to negotiate the terms of an extension with plaintiff, ultimately resulting in Crystal sending plaintiff a 10-year lease extension for execution. It was not until after plaintiff sent Crystal an October 20, 2016 letter asking it where to send the executed lease that Crystal finally objected to the fact that plaintiff had not complied with the notice requirement of the lease.

Thus, this Court finds that plaintiff has set forth the likelihood of success on its claim for equitable relief. Plaintiff’s delay or failure to give timely written notice of its intention to renew the lease was clearly excusable given the lengthy communications it had with Crystal between 2014 and 2016 about the length of the lease extension. Indeed, Crystal’s failure to insist on formal written notice throughout the course of these lengthy, ongoing communications was tantamount to a waiver of the notice requirement.…Further, should plaintiff not be able to renew its lease at the location where is has conducted a retail business since 2007, it will lose its “valuable business” and “well-known Korean barbecue restaurant” which it has operated at the premises for 9 years…and will thus suffer a “forfeiture of its interest in the substantial and valuable asset of [its] goodwill” at the premises[.]

Although Crystal asserts that it would be prejudiced if it were not permitted to proceed with the lease it entered into with its new tenant since it now owes its broker a fee of $245,000 in connection with the new tenancy, any such prejudice arose from Crystal’s own actions in entering into a lease with a new tenant after it was aware that plaintiff wished to extend its term. Thus, no “prejudice resulted from the breach” of the notice provisions in the lease[.]

Additionally, the alleged breach did not arise from any bad faith on the part of plaintiff given the long-term communications between the parties leading plaintiff to believe that it would be entitled to extend the lease term.…If anything, Crystal’s “conduct effectively mis[led plaintiff]”…into believing that it would be able to extend the term of its lease without providing formal written notice as required by the lease.  Since Crystal’s rental of the premises to a different tenant willing to pay a higher rent after stringing plaintiff along for months, at almost exactly the same time plaintiff paid off its arrears to Crystal, and while Cytryn knew plaintiff’s execution of the renewal lease may have been delayed by Kim’s trip to South Korea, was conduct that, at the very least, raises doubts about whether it acted in good faith…the balance of the equities weigh in plaintiff’s favor and it is therefore entitled to the injunctive relief it seeks.

Finally, this Court notes that Crystal’s assertion at oral argument that plaintiff did not make substantial improvements to the premises is belied by Kim’s supplemental affidavit in support of plaintiff’s motion and the exhibits annexed thereto. In his supplemental affidavit, Kim asserts that, in 2013, plaintiff was approved for a $100,000 line of credit from PNC Bank, which he personally guaranteed.…Plaintiff used $50,000 of the loaned money to import from Korea and install 22 individual, custom-made table barbeque units. Kim used the remaining $50,000 to repair and replace the electrical, plumbing and gas systems in order to operate the barbeque units. On or about August 12, 2015, plaintiff obtained a $150,000 loan from FC Marketplace, LLC, which he personally guaranteed.…Plaintiff used the money loaned by FC Marketplace to “replace the entrance to the restaurant, improve and replace the restaurant’s interior design, to move the location of the cashier station, to purchase and install new freezers, as well as improve and replace the electrical systems and plumbing.”…Given the aforementioned improvements, it is even clearer to this Court that plaintiff would suffer a forfeiture if it were to lose its lease[.]

315 West 48th Street Realty Corp., v. Maria’s Mont Blanc Restaurant Corp., 47 Misc.3d 65 (App. Term, 1st Dept. March 13, 2015)

Civil Court awarded landlord a judgment of possession in a summary (holdover) proceeding.

Appellate Term, as follows, summarily affirmed:

Tenant operates a restaurant in commercial space demised in two separate lease agreements. The trial evidence presented by landlords established that each lease, as previously renewed for one five-year term, expired on August 31, 2010. Tenant’s unpleaded contention that its predecessor validly exercised a second option to renew both leases through August 31, 2015, even if properly raised at trial…should have been rejected on the merits, since tenant failed to establish that the second renewal option was properly exercised. No evidence was adduced to show that notice of the prior tenant’s intention to exercise the renewal option was served on landlord by regular or certified mail, as required by the clear terms of the lease agreements[.]

Nor was the purported notice exercising the second renewal option timely served, where it was allegedly sent simultaneously with the notice exercising the first renewal option. Significantly absent from either lease was language authorizing tenant to exercise two renewal options at one time…To the contrary, the two distinct renewal options were clearly intended to be separate and successive, and a fair reading of the relevant lease provisions compels the conclusion that the parties intended the second renewal option to be exercised during the first renewal term provided for in each lease. Since the purported notice of the second renewal was not given within the time prescribed, it was ineffective[.]

Lessons learned:

Time is of the essence for the exercise of a lease renewal option.  And an option to renew must be exercised in strict accordance with the provisions in the lease.