Opinion
5955/05.
Decided July 30, 2009.
Plaintiff was represented by Philip C. Chronakis, Esq. and Caroline P. Wallit, Esq. of Garfunkel, Wild Travis, P.C., and Eli Feit, Esq. of Heller, Horowitz Feit, P.C. Defendants East Atlantic Properties, LLC, Miron Fayngersh, Frida Popilevsky, Nelly Vayner, Anatoly Popilevsky and Alex Vayner were represented by the Law Office of Roman Popik, P.C. and Alan Firestone, Esq. of counsel. Defendants Ramis Gimadeyev and Aramis Construction, Inc. were represented by Edward Rappaport, Esq. and Alan Firestone, Esq. of counsel.
Plaintiff 1523 Real Estate, Inc. is the tenant under a Lease dated October 3, 2002 for the occupancy of a commercial building at 1523 Voorhies Avenue, Brooklyn, owned by East Atlantic Properties, LLC. Plaintiff's Complaint alleges eight causes of action, sounding essentially in breach of lease and fraud. In addition to the landlord, East Atlantic Properties, the named defendants are the members of the limited liability company and spouses, i.e., Miron Fayngersh, Ramis Gimadeyev, Frida Popilevsky, Nelly Vayner, Alex Popilevsky, Anatoly Vayner (the "Individual Defendants"), and Aramis Construction, Inc., the corporate vehicle of defendant Gimadeyev.
The Complaint dated February 25, 2005 alleges in the First Cause of Action that East Atlantic breached the Lease; in the Second through Fifth and the Eighth Causes of Action that the Individual Defendants are liable for fraud and for breach of the Lease; in the Sixth and Seventh Causes of Action that Aramis Construction is liable for fraud and breach of the Lease; and in the Eight Cause of Action that East Atlantic and the Individual Defendants conspired to defraud Plaintiff. The Complaint alleges damages of various sorts.
At the conclusion of trial, Plaintiff moved to amend its Complaint so as to conform it to the proof at trial. ( See CPLR 3025 [c].) In a Decision and Order dated March 31, 2009, the motion was granted to the extent that the Complaint was deemed amended to allege a cause of action for fraud directly against defendant East Atlantic Properties. ( See 1523 Real Estate v E. Atl. Props., 22 Misc 3d 1102 [A], 2009 NY Slip Op 50539 [U], * 8 [Sup Ct, Kings County 2009].)
In its Post-Trial Memorandum of Law, however, Plaintiff points to no evidence that would sustain a claim for fraud against East Atlantic Properties, any of the Individual Defendants, or Aramis Construction, and points to no evidence that would sustain a cause of action for breach of the Lease against any of the Individual Defendants or Aramis Construction. In effect, Plaintiff has withdrawn all of the causes of action alleged in its Complaint, as deemed amended, except for the First Cause of Action against East Atlantic Properties for breach of the Lease.
Defendants' Verified Answer alleges three counterclaims on behalf of only East Atlantic Properties. One counterclaim is based upon the filing of a notice of pendency against the property located at 1523 Voorhies Avenue; the other two counterclaims allege unlawful occupancy of the property by Plaintiff.
The First Counterclaim in Defendants' Verified Answer dated April 12, 2005 alleges that Plaintiff's filing of a notice of pendency against 1523 Voorhies Avenue was "wrongful, frivolous, and intentionally malicious," and that the filing "encumbered the title to said property and made it unmarketable" (¶¶ 5, 6.) The Second Counterclaim alleges that Plaintiff "unlawfully and without authority took possession of the premises" and "unlawfully occupies the premises," causing unspecified damages to East Atlantic (¶¶ 9-11.) The Third Counterclaim alleges that Plaintiff "unlawfully and without authority . . . is in possession of the premises" and "has not paid any use and occupancy for the premises since taking possession" (¶¶ 13, 14.)
At the conclusion of trial, defendant East Atlantic Properties moved to amend its Verified Answer so as to conform it to the proof at trial. ( See CPLR 3025 [c].) In its March 31 Decision and Order, the motion was granted to the extent that the Second and Third Counterclaims, based upon "unlawful" occupancy/possession of the premises, and seeking use and occupancy and other unspecified damages, was deemed replaced with a counterclaim for breach of the Lease, seeking unpaid rent. ( See 1523 Real Estate v E. Atl. Prop., 2009 NY Slip Op 50539 [U], at * 8.)
In Defendants' Post-Trial Memorandum, East Atlantic Properties points to no evidence that would sustain a claim for damages based upon Plaintiff's filing of a notice of pendency. In effect, East Atlantic has withdrawn the First Counterclaim alleged in the Verified Answer.
The result is that the respective claims of Plaintiff and East Atlantic Properties are limited to breach of the Lease dated October 3, 2002. On the first day of trial, the parties stipulated that the Lease was enforceable at its inception, and has continued and remained enforceable through the trial. Indeed, the parties have acted toward each other since execution of the Lease to and through trial as if they have an enforceable Lease. As will appear, given the history of the parties' relationship and the provisions of Lease, the stipulation is highly important, if not necessary, to their respective claims against each other.
"Tenant" 1523 Real Estate leased from "Landlord" East Atlantic Properties "the property described on Exhibit A attached [to the Lease] and made a part [of the Lease], and located at 1523 Voorhies Avenue . . ., together with the buildings ( sic) and other improvements situated thereon" (Lease, Section I.1.) A "Definitions" provision defines "Premises" as "the land and the entire building known as: 1523 Voorhies Avenue . . . substantially as shown on Exhibit A". Although there is no "Exhibit A" except for a blank page with that heading and "(Description of the Premises)", the parties agree that the Lease extends to the entire building at 1523 Voorhies.
There is dispute, however, about "Exhibit B" to the Lease. In Section II. 3, "Landlord agrees to complete construction of the Building (the Landlord's Work'), at its sole expense, in accordance with the plans and specifications attached [to the Lease] as Exhibit B (the Plans')." There is no "Exhibit B" except for a blank page with that heading and "(Landlord's Work/Plans)." Indeed, the heart of the Plaintiff's claims and East Atlantic's counterclaims is their dispute about the intended content of "Exhibit B."
Essentially, Plaintiff contends primarily, and East Atlantic disputes, that East Atlantic was required to construct the first floor of the building, and obtain a certificate of occupancy, so that it could be used for diagnostic testing as part of Plaintiff's center for a range of medical and other health care services. The parties do not dispute, however, that, unless a variance is obtained, zoning regulations do not permit the first floor to be used for that purpose, because it must be reserved for parking. Related to the dispute about the use of the first floor, Plaintiff contends, and East Atlantic disputes, that Plaintiff was and is not required to pay East Atlantic for possession of the major part of the building, because a certificate of occupancy was not issued until September 28, 2006.
The parties' stipulation at trial that the Lease was enforceable at its inception and has continued and remained enforceable means, at the least, that neither party is contending that the Lease was not sufficiently definite in any material term because of the absence of the "plans and specifications" that were to be attached as Exhibit B ( see Behrends v White Acre Acquisitions, LLC , 54 AD3d 700, 701 [2d Dept 2008]), or that the parties proceeded on the basis of a mutual mistake about the ability to build the interior of the building so that it could be used as Plaintiff allegedly intended ( see County of Orange v Grier, 30 AD3d 556, 556-57 [2d Dept 2006].)
The stipulation, moreover, directs the Court to find agreement between the parties as to the proposed use of the first floor of the building, wherever the agreement might be found, without reference to the parole evidence rule ( see Bailey v Fish Neave , 8 NY3d 523 , 528; Harris v Hallberg , 36 AD3d 857 , 859 [2d Dept 2007]; see also A.H.A. Gen. Constr. v New York City Hous. Auth., 92 NY2d 20, 32); and without reference to the provision in the Lease that it "sets forth all of the agreements of the parties with respect to the subject matter" (Lease, Section XXI.6, Entire Agreement), which, decidedly, it does not. Although the Court may not "make a new contract for the parties" ( see Bailey v Fish Neave, 8 NY3d at 528 [internal quotation marks and citation omitted]), it is not constrained by the parties' respective versions of their agreement.
Landlord's Work/Exhibit B
As of October 3, 2002, the date the lease was signed, East Atlantic Properties had filed with the Department of Buildings plans dated December 13, 1999 for the construction of the building at 1523 Voorhies Avenue. The plans had been prepared by architect Arkady Zaltsman of AAZ Studio, and included Construction Plans for four interior floors and a mezzanine at the fourth floor (the "Zaltsman Plans.") According to Plaintiff, the Zaltsman Plans do not reflect the agreement between the parties as to the construction and use of the building in three important respects. First, the floor plan for the ground or first floor shows only a lobby, with most of the floor devoted to parking; according to Plaintiff, the first floor was to be constructed for use in part as a diagnostic facility. Second, the floor plans for the second, third, and fourth floors show that approximately one-half of the useable space on each floor would be used only for storage; according to Plaintiff, the entirety of each of the floors was to be constructed for use as medical offices and examining rooms, and for related purposes. Third, rather than a mezzanine at the fourth floor, according to Plaintiff, a full fifth floor was to be constructed, again for medical purposes.
East Atlantic contends that the plans and specifications that were referred to as "Exhibit B" in the Lease were intended to be identical to the Zaltsman Plans. Despite the importance of the issue to the dispute between the parties, and the extensive testimony at trial, East Atlantic fails, however, to proffer any reason why, if its contention is correct, the Zaltsman Plans, or plans identical to the Zaltsman Plans, were not made "Exhibit B" to the Lease. Indeed, East Atlantic proffers no explanation for the absence of "Exhibit B."
More importantly, moreover, it is undisputed that East Atlantic actually constructed a full fifth floor to the building, rather than a mezzanine at the fourth floor; and it constructed the third and fourth floors to be used entirely for medical offices, examining rooms, and related purposes, rather than equally for storage. (The second floor, as will appear, remains incomplete.) East Atlantic offers no explanation for the clear divergence from the plans that, it maintains, reflect the parties' agreement.
"The parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was'."( C.T. Chems [U.S.A.] v Vinmar Impex, 81 NY2d 174, 180 [ quoting UCC 2-208 , comment 1]; see also Insurance Co. v Dutcher, 95 US 269, 273 ["There is no surer way to find out what parties meant, than to see what they have done."]; Coliseum Towers Assocs. v County of Nassau , 2 AD3d 562, 564 [2d Dept 2003]; General Elec. Capital Commercial Automotive Fin. v Spartan Motors, 246 AD2d 41, 52 [2d Dept 1998].) Here, East Atlantic's contention that the Zaltsman Plans reflect the parties' agreement on what East Atlantic was required to build is belied by what it in fact did build.
East Atlantic's divergence from the Zaltsman Plans as to the third, fourth, and fifth floors of the building does not establish, however, its agreement to build something other than what the Plans depict as to the first floor. Although the design, construction, and use of all of the floors have consequences for compliance with applicable zoning law, the first floor presented issues of particular difficulty and significance, such that East Atlantic's willingness to accommodate Plaintiff as to the upper floors cannot fairly be used to establish an agreement as to the first floor.
Further to the intent of the parties as to what East Atlantic was supposed to build, other plans and drawings were introduced into evidence, and were the subject of extensive testimony by Dr. Elliot Meisenberg, Plaintiff's principal; John Rusk, a consultant retained by Plaintiff in Spring 2002; Dr. Miron Fayngersh, an East Atlantic member; and Ramis Gimadeyev, an East Atlantic member and principal of Aramis Construction. The plans and drawings made before and soon after the execution of the Lease are the basis of argument, primarily by Plaintiff, as to the parties' agreement or the nature and scope of "Landlord's Work" as it was intended to be described in "Exhibit B."
It should be noted that the Lease was drafted by Plaintiff's counsel, and there was no evidence at trial that an "Exhibit B" was ever prepared by either Plaintiff or East Atlantic. Only Plaintiff offered an explanation for the absence of an "Exhibit B." According to Dr. Meisenberg, East Atlantic did not want the "plans and specifications" drafted by anyone other than the architect of record for its application to the Buildings Department; Arkady Zaltsman perished on September 11; Sergey Mozer, a successor retained by East Atlantic, had apparently not proved satisfactory; and a further successor had not yet been retained. East Atlantic did not dispute Dr. Meisenberg's explanation, or offer an alternative.
Sergey Mozer, Mozer Design Studio, prepared plans dated May 2, 2002 that show a "ground floor plan," two versions of a "typical floor plan" for the second, third, and fourth floors, and a "mezzanine floor plan." The ground floor plan shows a lobby, two-car garage, and a large "proposed treating room." Dr. Meisenberg and John Rusk testified that Mozer expressed the opinion that the plan could be approved by the Buildings Department, although some additional, but limited, parking might be required.
In early August 2002, Larsen Shein Ginsberg Snyder, LLP, an architectural firm retained by Plaintiff for interior design that Plaintiff was responsible for, prepared drawings of the third, fourth, and fifth floors. The drawings are pertinent here because of handwritten notations by John Rusk": "1nd [ sic] 2nd — not sure yet. Ramis"; "1st Imaging"; "2nd Imaging, PT Admin [unintelligible] waiting." John Rusk testified that at that time he gave copies of the drawings, with the notations, to Ramis Gimadeyev. (In addition to constructing "Landlord's Work," Mr. Gimadeyev's company was retained by Plaintiff to construct the interior for which Plaintiff was responsible.)
Also during Summer 2002, Eugene Gorsh, a representative of medical equipment supplier Siemens, prepared a diagram of the first floor, showing the placement of diagnostic imaging equipment. John Rusk testified that he discussed the drawing with Ramis Gimadeyev, and Dr. Meisenberg testified that the diagram was discussed at a meeting on October 18, 2002 with Henry Radusky, of Bricolage Designs, the architect retained by East Atlantic after execution of the Lease. Dr. Miron Fayngersh was also at the meeting.
Henry Radusky, or his associate Renzo Bolarte, also of Bricolage, prepared plans after the October 18 meeting, presumably reflecting the agreements reached at the meeting. As to the first floor, three versions of a plan are in the record. Bearing the date December 4, 2002, and a stamp of the Buildings Department with the date September 29, 2003, a plan shows a lobby and open parking. (This plan was apparently submitted to the Buildings Department in connection with an application limited to the HVAC systems.) A second plan bearing the date December 4, 2002, but not the Buildings Department's stamp, shows instead of open parking at least 10 separate rooms, exclusive of toilets. A third plan, undated but sent by electronic mail from Renzo Bolarte to John Rusk on December 10, 2002, shows only six separate rooms, with three designated, respectively, as "X Ray Room," "CAT Scan Room," and "MRI Room." John Rusk testified that, like Sergey Mozer, Henry Radusky expressed the opinion that the first floor could legally be constructed for use as Dr. Meisenberg wished, but, unlike Mr. Mozer, Mr. Radusky did not think that any parking would be required.
Despite the documentary evidence supporting the testimony of Dr. Meisenberg and Mr. Rusk that East Atlantic was to construct the first floor to be used in part for diagnostic services, Dr. Miron Fayngersh and Ramis Gimadeyev testified definitively that use of the first floor would be limited to a lobby and parking. Dr. Fayngersh and Mr. Gimadeyev each insisted that he first became aware of Dr. Meisenberg's interest in using the first floor for diagnostic services in June 2004.
Notwithstanding that Mr. Radusky or Mr. Bolarte or both would be expected to have knowledge highly relevant to this dispute, neither Plaintiff nor East Atlantic called either to testify, nor made any explanation for not calling them, or any showing as to their availability. (The same might be said as to architect Sergey Mozer, although his involvement was not contemporaneous with the execution of the Lease or its implementation.) Plaintiff asks the Court to take a "missing witness" adverse inference against East Atlantic because of its failure to call any of these architects. ( See People v Savinon, 100 NY2d 192, 196-201.) Plaintiff does not cite to any place in the transcript where it notified the Court and East Atlantic that it would be requesting the inference ( see People v Gonzalez, 68 NY2d 424, 427-28), and fairness precludes granting a request made for the first time in a post-trial brief.
The Court concludes, nonetheless, that Plaintiff has sustained its burden in establishing that the parties intended that the "Landlord's Work" required by the Lease included construction of the first floor to be used in part for diagnostic testing services. The Court also concludes that the parties' agreement that the first floor be so constructed and used was not subject to any express condition that such construction and use be approved by the appropriate regulatory officials. The testimony of Dr. Fayngersh and Mr. Gimadeyev would exclude such a condition; each insisted that there was no agreement at all as to construction or use of the first floor other than for a lobby and parking as reflected in the Zaltsman Plans.
Other than denial of any agreement to construct the first floor for use as Dr. Meisenberg contends, East Atlantic argues only that "the inescapable fact is that the Building cannot exist legally without multi-parking on the first floor"; and that "[t]his has been known to Plaintiff all along, even before the Lease Agreement was signed." (Defendants' Post-Trial Memorandum at 26.) Certainly, Plaintiff's knowledge that an agreement as to construction and use of the first floor could not be consummated because of legal requirements would be relevant to whether it could reasonably understand that such an agreement had in fact been made. But East Atlantic cites to no evidence that Dr. Meisenberg did know, contemporaneous with the execution of the Lease, that his intended use could not legally be realized, and there is evidence that East Atlantic's architects of record, Sergey Mozer and Henry Radusky, expressed opinions to the contrary. (That testimony was not contradicted, of course, because neither Mr. Mozer nor Mr. Radusky was called to testify at trial.) That is not to say, however, that uncertainties about regulatory requirements were not in any way material to Dr. Meisenberg's expectations as the landlord/tenant relationship progressed, as will appear.
After execution of the Lease and the meeting with the architect, East Atlantic proceeded with "Landlord's Work" as to the third, fourth, and fifth floors of the building. "Landlord's Work" for the third floor was completed by December 1, 2002; for the fourth floor by January 10, 2003; and for the fifth floor by January 17, 2003. Plaintiff began paying rent, although, as will appear, not at the full amount called for by the Lease. At various times, the third and fifth floors have been occupied by Plaintiff's sublessee, Meisenberg Medical, P.C., providing medical services. As of the conclusion of trial, neither Plaintiff nor any sublessee has conducted any business from the fourth floor.
The second floor was treated as something of an afterthought by the parties at trial. For the present, it is enough to note that the parties agree that the "Landlord's Work" for the second floor has not been completed, although they disagree as to which party is responsible. There is no evidence, however, that there is any dispute about what is to be built, or that completion of the second floor in accordance with the Lease would violate any regulatory requirement.
The record is also sparse as to what efforts were made during calendar years 2003 and 2004 to obtain a certificate of occupancy for the building, either based upon plans that would reflect Plaintiff's understanding of the parties' agreement as to construction and use, or based upon plans that would reflect East Atlantic's understanding. In December 2004, East Atlantic retained architect Robert J. Palermo, of Corporate Design of America, to replace Henry Radusky and Bricolage. Plans prepared by Mr. Palermo, dated January 12, 2005, were the basis for issuance of a certificate of occupancy on September 28, 2006, almost four years after execution of the Lease in October 2002. For the first floor, those plans show a lobby and parking for five cars.
Again, Plaintiff and East Atlantic disagree as to which party is responsible for the delay in obtaining the certificate of occupancy. There is no doubt, however, that the plans upon which the certificate of occupancy was issued do not conform to the parties' agreement as to the construction and use of the first floor, as the Court has now determined that agreement to be. There is also no dispute that on August 22, 2007 the Buildings Department issued a Peremptory Vacate Order that prohibited occupancy and use of the building except for one floor, and that the prohibition remained in effect until a Rescission of Vacate Order was issued on February 11, 2008.
Plaintiff commenced this action on February 28, 2005. With a Notice of Termination of Tenancy/Occupancy dated March 7, 2005, East Atlantic sought to terminate the Lease, effective April 15, 2005. Plaintiff moved for a " Yellowstone injunction" ( see Post v 120 E. End Ave. Corp., 62 NY2d 19, 24-25), and an order dated June 22, 2005 of the Hon. Ira B. Harkavy "tolled and stayed [the Notice] pending resolution of the case or further order of the Court." Justice Harkavy also ordered payment of "use and occupancy" and the posting of an undertaking. In an order dated October 25, 2006, Justice Harkavy ordered Plaintiff to "commence rent payments under the parties' lease," and to increase the amount of the undertaking.
Plaintiff appealed Justice Harkavy's October 25, 2006 order. The Second Department affirmed, holding, among other things, that "Supreme Court providently exercised its discretion in granting those branches of the defendants' motion which were to direct the plaintiff to commence paying rent and real estate taxes pursuant to the lease on November 1, 2006." ( See 1523 Real Estate v E. Atl. Props., 41 AD3d 567, 567-68 [2d Dept 2007].)
While the appeal was pending, in an order dated March 7, 2007, Justice Harkavy ordered that, if the undertaking was not increased in accordance with his earlier order, the Yellowstone injunction "shall be vacated." Plaintiff acknowledges that the undertaking was not increased as ordered. In light of the stipulation at trial that the Lease continues in effect, the Notice of Termination and the Yellowstone injunction are moot.
East Atlantic argues that by reason of the Second Department's affirmance of Justice Harkavy's October 25, 2006 order, "Defendants' Counterclaims for Rent Have Been Already Adjudicated." (Defendants' Post-Trial Memorandum at 33.) East Atlantic cites Allison v Allison ( 60 AD3d 711 [2d Dept 2009]) for the proposition that "[a]n appellate court's resolution of an issue on a prior appeal constitutes the law of the case and is binding on the Supreme Court, as well as on the appellate court" ( see id. at 69.) It is clear, however, from the Second Department's opinion and the authority it cites that the appellate court merely confirmed the lower court's discretion to order payment from the tenant as a condition to the issuance of the Yellowstone injunction. Neither the Second Department nor Justice Harkavy undertook to resolve the parties' respective claims under the Lease. Indeed, had they, the trial would not have been necessary.
To recap up to this point, Plaintiff seeks damages for East Atlantic's alleged breach of the Lease, or payments pursuant to the Lease, for the landlord's failure to deliver the first and second floors of the building constructed for use as agreed; the landlord's failure to obtain a certificate of occupancy that would permit use of the first floor as agreed; the landlord's delay in obtaining a certificate of occupancy; and the tenant's restricted occupancy and use of a significant part of the building from August 21, 2007 through February 11, 2008 because of a Buildings Department vacate order. Plaintiff also claims breach of the Lease in that the certificate of occupancy does not allow for occupancy levels suitable to Plaintiff's use of the building, and East Atlantic's failure to install sprinklers on every floor and a fire alarm system.
Lease Provisions
The Lease carries an Initial Term of ten years, with monthly rent during the first and second Lease Years of $23,100.00, during the third and fourth Lease Years of $24,486.00, during the fifth and sixth Lease Years of $25,955.16, during the seventh and eighth Lease Years of $27,512.47, and during the ninth and tenth Lease Years of $29,163.22. Tenant is given the right to extend the Lease for four additional periods of five years each, and the Lease specifies the rent to be paid to and through the 30th year, should there be extension for the full period permitted. Tenant is also required to pay, as Additional Rent, real estate taxes, assessments, sewer rents, rates and charges.
The Initial Term is deemed to commence "on the earlier to occur of: (i) thirty (30) days after Landlord has substantially completed' Landlord's Work' (as such terms are . . . defined) and has given Tenant written notice of such substantial completion; or (ii) the day on which Tenant shall open for business in the Premises (the Commencement Date')." (Lease, Section I I.1.) The parties agree "to execute a certificate setting forth the Commencement Date and the Expiration Date of the Initial Term promptly following the Commencement Date." ( Id.) There is no evidence of any such "certificate" having been executed. It should be noted that, although "Commencement Date" is attached to only the second of the two described events, the intent must have been that it apply to both.
As to the first of the two described events, the Lease "defines" the term "substantial completion":
" II.7 Substantial Completion. Notwithstanding anything contained herein to the contrary, Landlord's Work shall be deemed Substantially Complete ten (10) days following completion of the Landlord's Work to the point where only minor details of construction or technical adjustments remain unfinished and all of the following conditions are satisfied:
(1)receipt by tenant of a Certificate of Occupancy or Certificate of Completion from the Approving Authorities evidencing the completion of the Landlord's Work in accordance with the Plans and which permits the use of the Premises for the Permitted Uses; and
(2)receipt by tenant of a certificate executed by Landlord and Landlord's architect certifying that Landlord's Work has been completed in accordance with the Plans (and any amendments thereto) and all Governmental Requirement [ sic]."
The term "Governmental Requirements" had been "defined" in a preceding Section of the Lease:
"II.5 Construction. Landlord shall, at its sole expense, execute the Landlord's Work in accordance with the Plans in good and workmanlike manner, and in full compliance with all building and zoning laws, rules and regulations and with all other laws, ordinances, orders, rules, regulations and requirements (collectively, the " Governmental Requirements") of all Approving Authorities and the New York State Board of Fire Underwriters."
As previously noted, no certificate of occupancy was issued until September 28, 2006. An "[a]rchitect's statement of completion," signed by Robert J. Palermo, was not provided to Plaintiff until November 3, 2006. Even putting aside the dispute about what was to be built, strict application of the "substantial completion" provision would mean that, under that alternative for determining the Commencement Date, the Lease term would not have commenced, at the earliest, until November 3, 2006. But by then the parties had been treating the Lease as in effect for four years. Plaintiff attempts to deal with this difficulty by applying "substantial completion" on a floor-by-floor basis. (Plaintiff's Post-Trial Memorandum of Law at 50-51.) East Atlantic contends that, "in the absence of specific instructions communicated by Meisenberg to East Atlantic in connection with the first and second floors, the Landlord substantially completed responsibilities under the Lease Agreement by January 2003." (Defendants' Post-Trial Memorandum at 10.) Neither view comports well with the language of the Lease or the facts.
As to the second, "open for business," alternative method of determining the Commencement Date, the Lease provides support for Plaintiff's floor-by-floor approach, and connects "substantial completion" to the payment of rent. Subsection (A) of Section II.6 speaks to an "Outside Date" for substantial completion, and rent forgiveness if the date is not met. Subsection (A) will be addressed below, and is quoted here as context for subsection (B), which creates a "Preliminary Commencement Date":
"II.6 Failure to Complete Construction.
A.Notwithstanding any contrary provision contained herein, if, for any reason, the Landlord's Work is not Substantially Complete (as such term is hereinafter defined) by October 1, 2002 (the " Outside Date"), Tenant may terminate this Lease upon ten (10) days prior written notice to Landlord and, if Landlord's Work is not Substantially Complete within said ten (10) day period, this Lease shall automatically be null and void and of no further force or effect. If Landlord's Work is Substantially Complete within said ten (10) day period, Tenant's termination notice shall be null and void. In addition, if the Landlord's Work is not Substantially Complete for any reason or cause on or before the Outside Date, the obligation of Tenant to make payments of Annual Rent and Additional Rent (as defined below) shall be forgiven at a rate of two (2) days for each day between the Outside Date and the occurrence of the Commencement Date.
B.In the event Landlord's Work is not Substantially Complete on or before the Outside Date, and Tenant does not elect to terminate this Lease pursuant to Section 2.6 (A) hereof, Tenant may accept delivery of that portion of the premises (the "Partial Premises") for which Landlord has obtained and delivered to Tenant an applicable certificate of use and occupancy or equivalent approval from the applicable government agency permitting Tenant's use and occupancy of the Partial Premises for the conduct of Tenant's business (the "Preliminary Commencement Date"), in which event the Commencement Date shall be deemed to have occurred as to the Partial Premises. The period commencing with the Preliminary Commencement Date, and ending when the Premises is Substantially Complete in accordance with section 2.7 hereof, shall be hereinafter referred to as the " Preliminary Term". During the Preliminary Term, the Rent (as hereinafter defined) shall be reduced to an amount equal to the Rent multiplied by a fraction the numerator of which shall be square footage of the Partial Premises and the denominator of which shall be the square footage of the entire Premises."
There was no "applicable certificate of use and occupancy or equivalent approval from the applicable government agency permitting Tenant's use and occupancy of the Partial Premises for the conduct of Tenant's business." There is no dispute, however, that beginning in April 2003, Plaintiff paid rent of $4,620 monthly only for the third floor, computed as one-fifth of the total monthly rent for the building of $23,100; that beginning in September 2003, Plaintiff paid rent of $13,360 only for the third, fourth, and fifth floors, computed at three-fifths of the total monthly rent; that rent was paid for the three floors only for several months; and that East Atlantic accepted the payments without written protest. (The period of time that elapsed between the completion of Landlord's Work for each of the three floors and the first rent payment for that floor is explained for the most part by Plaintiff's computation of a "rent credit" pursuant to Subsection I I.6 (A), quoted above.)
Further to Plaintiff's proferred floor-by-floor rationale, the Lease provides that, "in the event that Tenant shall be prevented from using all or any portion of the Premises," defined in Basic Lease Information as "the land and the entire building known as: 1523 Voorhies Avenue," "the Annual Rent and Additional Rent payable hereunder shall be proportionately abated during such period." (Lease, Section VIII.8.)
As to Plaintiff's proposed use of the building, Basic Lease Information defines "Permitted Uses" as "Medical and general offices (including use as an Article 28 Facility, as such term is defined in Article 28 of the Public Health Law)." Article 28 of the Public Health Law contains no definition of "Article 28 Facility." ( See Public Health Law § 2801.) East Atlantic does not contend, however, that any use Plaintiff proposed to make of the building, particularly the first and second floors, would not be a Permitted Use under the Lease.
The Lease is clear that, as between East Atlantic and Plaintiff, it was the landlord's obligation to obtain any required regulatory approval. In addition to the references to a certificate of occupancy and Governmental Requirements quoted above, the Lease provides:
"II.4 Building Permits. Landlord shall, at its sole expense obtain all permits, licenses and approvals (the " Building Permits") required by all federal, state, municipal and other governmental authorities having jurisdiction (the " Approving Authorities") to execute the Landlord's Work in accordance with the Plans and which authorize the Permitted Uses."
"IV.1 Permitted Uses. Tenant may use and occupy the Premises for the Permitted Uses enumerated in the Basic Lease Information, and for any other legal use. Landlord shall apply for and obtain all licenses, permits and other approvals which may be required for any of the uses included in the Permitted Uses. Landlord represents that the use of the Premises for the Permitted Uses complies with all applicable state and local codes and regulations, including local zoning codes and ordinances."
In another provision, East Atlantic represented that "the use of the Premises for the uses permitted hereunder complies with all applicable state and local codes and regulations, including local zoning codes and ordinances." (Lease, Section VIII.9.)
It is important to stress in assessing the parties' respective rights and obligation under the Lease that there is no contention, and no evidence, that Plaintiff's use of the building to provide diagnostic testing services would violate any code or regulation. Nor is there any contention, and no evidence, that use of the first floor of the building for those purposes would violate any code or regulation, if the requisite space for parking were also provided. To the extent, therefore, that construction and use of the first floor as the parties agreed would violate any code or regulation, or preclude obtaining any permit or regulatory approval, including a certificate of occupancy, it is only because the first floor must accommodate mandated parking spaces.
In any event, there is no warranty in the Lease that all or any part of the building might be used for diagnostic testing services without running afoul of zoning or other regulatory restrictions. ( See Municipal Metallic Bed Mfg. Corp. v Dobbs, 253 NY 313, 316 [1930]; Phillips Huyler Assocs. v Flynn, 225 AD2d 475, 475 [1st Dept 1996]; Feinsilver v Conrad, 9 AD2d 769, 769 [2d Dept 1959].) The representation quoted above can only be understood as referring to the Permitted Uses, again, "[m]edical and general offices (including use as an Article 28 Facility.") As such, it cannot be reasonably understood as a warranty as to every possible use that might be made of a building by an "Article 28 Facility." To say, however, that the Lease contains no warranty as to use for diagnostic testing services does not mean that Plaintiff's proposed use of a part of the building, particularly the first floor, is not the subject, expressly or by construction, of any covenant or condition found in the Lease.
The provisions of the Lease and the parties' relatively long course of performance under it must be assessed in the light of generally applicable legal principles. "[A] lease is subject to the rules of construction applicable to any other agreement." ( George Barker Mgmt. Corp. v Acme Quilting Co., Inc., 46 NY2d 211, 217; see also Farrell Lines v City of New York, 30 NY2d 76, 82-83.) "Generally, the aim is the practical interpretation of the expressions of the parties to the end that there be a realization of [their] reasonable expectations'." ( Brown Bros. Elec. Contrs. v Beam Constr. Corp., 41 NY2d 397, 400 [ quoting 1 Corbin, Contracts, § 1]; see also Uribe v Merchant Bank, 91 NY2d 336, 341-42; Madison Ave. Leasehold, LLC v Madison Bentley Assocs. LLC , 30 AD3d 1 , 6 [1st Dept], aff'd 8 NY3d 59; Del Vecchio v Cohen, 288 AD2d 426, 427 [2d Dept 2001].)
"[I]n determining what the construction of the agreement should be," "[i]t is not to be assumed that people act unreasonably to their own disadvantage, and an interpretation which assumes that they so acted is not favored." ( Brown v McGraw-Hill Book Co., Inc., 25 AD2d 317, 320 [1st Dept 1966], aff'd 20 NY2d 826.) "[A] construction of a contract which produces unreasonable results should be avoided, if possible, and . . . a more reasonable construction should be sought." ( Hsieh v Pudge Corp., 122 AD2d 198, 199 [2d Dept 1986] [internal quotation marks and citations omitted]; see also Tri-Messine Constr. Co., Inc., v Telesector Resources Group, Inc., 287 AD2d 558, 558 [2d Dept 2001].)
"[A] covenant of good faith and fair dealing is implied in all contracts," including leases, and "encompasses any promise which a reasonable person in the position of the promisee would be justified in understanding were included' in the agreement, and prohibits either party from doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract'." ( See 1-10 Indus. Assoc. v Trim Corp. of Am., 297 AD2d 630, 631 [2d Dept 2002] [ quoting Dalton v Educational Testing Serv., 87 NY2d 384, 389; see also Turkot v Lalezarion Developers, Inc., 52 AD3d 595, 596 [2d Dept 2008]; Charter One Bank, F.S.B. v Midtown Rochester, L.L.C., 284 AD2d 993, 994 [4th Dept 2001].) Of particular pertinence here, the obligation of good faith and fair dealing applies to a tenant's conduct in connection with a landlord's efforts to construct the premises in accordance with the lease. ( See 34-35th Corp. v 1-10 Indus. Assoc., LLC , 16 AD3d 579 , 580 [2d Dept 2005].)
Unless excused, a landlord's failure to complete construction in accordance with the lease will relieve the tenant of the obligation to occupy the premises and to pay rent. ( See University Plaza Tx. L.P. v Larry's Mexican Rest ., 32 AD3d 1328, 1329-30 [4th Dept 2006]; Nitti v Goodfellow, 256 AD2d 1082, 1083 [4th Dept 1998]; see also O'Connor v Collins, 239 NY 457, 459 [1925] [damages for breach].) Where the tenant takes or remains in possession notwithstanding the landlord's breach, the tenant's remedy is damages measured by the "difference between the value of the leased premises as they were intended and the value as a result of the breach." ( See West Broadway Glass Co. v I.T.M. Bar Inc., 245 AD2d 232, 232 [1st Dept 1997]; see also Creative Kids Enrichment, LLC v Yorktown Office Wharehouse, LLC, 41 AD3d 416, 417 [2d Dept 2007] [landlord's failure to complete construction by date certain]; Casa Bosco, Inc. v 118-01 Metropolitan Ave. Realty Corp ., 28 AD3d 698 , 699 [ 2d Dept 2006].)
Here, East Atlantic has failed to complete construction of a part of the premises in accordance with the Lease (at least the first floor), and Plaintiff has taken possession of only part of the premises (at least two of the top three floors.) Subsection II.6 (B) of the Lease, quoted above, envisions the possibility that Plaintiff might "accept delivery of that portion of the Premises (the Partial Premises') for which Landlord has obtained and delivered to Tenant an applicable certificate of occupancy," prescribing in that event, "the Rent . . . shall be reduced to an amount equal to the Rent multiplied by a fraction the numerator of which shall be square footage of the Partial Premises and the denominator of which shall be the square footage of the entire Premises." The Lease also provides that payment of rent "shall be proportionally abated during such period" that "Tenant shall be prevented from using all or any portion of the Premises" (Lease, Section III.8), without reference to a certificate of occupancy, but that provision might fairly be understood as applying only after the obligation to pay rent had previously and otherwise commenced.
As to commencement of the rent obligation, in addition to substantial completion of Landlord's Work, which includes receipt of a certificate of occupancy, and of which the Partial Premises provision must be deemed a qualification, the rent obligation commences "the day on which Tenant shall open for business in the Premises" (Lease, Section II.1), without any reference to a certificate of occupancy or a Partial Premises and proportional rent qualification. Presumably, the parties intended a difference in meaning between "open[ing] for business" and "accept[ance] [of] delivery," but Plaintiff's sublessee certainly "open[ed] for business" on two of the upper floors, albeit at different times.
East Atlantic does not argue that Plaintiff became obligated to pay the total rent under the express terms of the Lease when its sublessee "open[ed] for business" on one of the floors, notwithstanding that Landlord's Work may not have been complete on the other four and the lack of a certificate of occupancy, nor would such construction be reasonable. Rather, East Atlantic argues that, by its conduct Plaintiff waived receipt of a certificate of occupancy, which appears to be a condition of even the obligation to pay proportional rent for Partial Premises.
"In the case of a commercial lease where the landlord has made no covenant to obtain a certificate of occupancy and the tenant's right to possession is wholly undisturbed, the mere absence of a certificate of occupancy does not relieve the tenant of its fundamental obligation to pay rent." ( Silver v Moe's Pizza, Inc., 121 AD2d 376, 378 [2d Dept 1986].) But where the landlord is obligated to obtain a certificate of occupancy, its failure to do so will allow the tenant to recover damages, if in fact sustained from the breach. ( See Bialystoker Ctr. v Bikur Cholem, Inc. v Lower E. Side Health Care Holding Corp., 45 AD3d 569, 569-70 [1st Dept 2008]; Jordache Enterprises, Inc. v Gettinger Assocs., 176 AD2d 616, 617 [1st Dept 1991]; De Angelis v White-All Corp., 273 AD 873, 874 [1st Dept 1948]; Silverman v Isaac Goldman Realty Corp., 232 AD 292, 293-94 [1st Dept 1931].) Moreover, where the landlord breaches a covenant to obtain a certificate of occupancy, the tenant may vacate the premises and be relieved of its obligation to pay rent if the lease expressly or constructively conditions rent on a certificate of occupancy. ( See 56-70 58th St. Holding Corp. v Fedders-Quigan Corp., 5 NY2d 557, 563-64.)
Here, again, as between Plaintiff and East Atlantic, the Lease placed responsibility for obtaining a certificate of occupancy on East Atalntic, and obtaining a certificate of occupancy must fairly be understood a condition to the Partial Premises/proportional rent provision in the Lease. But the evidence at trial was that a floor-by-floor certificate of occupancy was not likely for this building, and, in any event, Plaintiff did not vacate after it "accept[ed] delivery" of three of the floors. As will appear, for at least that period of time that Plaintiff paid rent, and East Atlantic accepted it, the Court finds that both parties have waived any breach of the Lease.
Rent/October 2002 Through April 2004
"A waiver is an intentional abandonment or relinquishment of a known right or advantage which, but for such waiver, the party would have enjoyed." ( Alsens Amer. Portland Cement Works v Degnon Contr. Co., 222 NY 34, 37 [1917].) "It is essentially a matter of intention." ( Id.) "The evidence must have probative force sufficient to prove that there was in fact an intention to waive the right or benefit — — a voluntary choice not to claim it." ( Id.) "The acts and language of the party must be given, as evidence, their natural and logical effect under the circumstances of the case." ( Id. at 37-38.)
During the period October 2002 through April 2004, Plaintiff and East Atlantic each waived any alleged breach of the Lease by the other. By its acceptance of rent in the amount tendered by Plaintiff, East Atlantic waived any claim for breach by Plaintiff's failure to pay more. ( See Madison Ave. Leasehold, LLC v Madison Bentley Assocs. LLC, 30 AD3d at 2; Brook Shopping Centers, Inc. v F.W. Woolworth Co., 215 AD2d 620, 621-22 [2d Dept 1995]; Gingsberg v Lo Bright Mfg. Co., Inc., 2001 NY Slip Op 40147 [U] [Sup Ct, Nassau County 2001].) By its payment of rent, Plaintiff waived East Atlantic's breach of any covenant or condition as to the landlord's construction of premises in accordance with the Lease or its obtaining a certificate of occupancy. ( See Hall Co. of NY v Orient Overseas Assoc., 65 AD2d 424, 429-30 [1st Dept 1978], aff'd 48 NY2d 958; Silverstein v Empire State Shoe Co., Inc., 20 AD2d 735, 735 [3d Dept 1964]; Clements v Steinhauer, 15 AD2d 72, 77 [4th Dept 1961]; Elkar Realty Corp. v Kamada, 6 AD2d 155, 158-59 [1st Dept 1958].)
The testimony of Dr. Miron Fayngersh, one of East Atlantic's members, that the landlord accepted Plaintiff's rent payments for less than the total amount called for by the Lease because the money was needed to pay the mortgage ascribes a motivation, but does not vitiate the effect, of the landlord's acceptance of the payments. Dr. Meisenberg explained that rent was paid for the third, fourth, and fifth floors to "expedite the progress of the entire project," and because the parties "were on good terms and . . . trying to accommodate each other at least until certain point." (Transcript ["Tr."] at 558.) That "accommodation" constituted waiver.
Waiver may not be inferred "to frustrate the reasonable expectations of the parties embodied in a lease when they have expressly agreed otherwise." ( See Jefpaul Garage Corp. v Presbyterian Hosp., 61 NY2d 442, 446.) The Lease here contains "no waiver" provisions:
" No waiver.The failure of Landlord or Tenant to insist upon the strict performance of any obligation of the other under this Lease, or to exercise any right, power or remedy upon a breach hereof shall not constitute a waiver or relinquishment of any such obligation. A receipt of Annual Rent or Additional Rent by Landlord or a payment of Annual Rent or Additional Rent by Tenant, with knowledge of the breach of any obligation hereunder, shall not constitute a waiver or relinquishment of any such obligation." (Lease, Section XXI.3.)
These provisions, however, do not preclude waiver of a breach, rather than a waiver of the obligation breached, and the rent provision is reasonably understood as referring to an obligation other than to pay rent.
In any event, "it has long been the rule that parties may waive a no waiver' clause." ( See Lee v Wright, 108 AD2d 678, 680 [1st Dept 1985]; see also TSS-Seedman's Inc. v Elota Realty Co., 72 NY2d 1024, 1027; Madison Ave. Leasehold, LLC v Madison Bentley Assoc. LLC, 30 AD3d at 4; Dice v Inwood Hills Condo., 237 AD2d 403, 404 [2d Dept 1997].)
The more difficult question is whether these mutual waivers continued after April, 2004, when Plaintiff ceased paying any rent, until ordered to pay by Justice Harkavy. Any response to that question must "distinguish between an oral agreement that purports to modify the terms of a prior written agreement and an oral waiver by one party to a written agreement of a right to require of the other party certain performance in compliance with that agreement." ( See Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175, 183.)
"Modification of the terms of a [contract] requires consideration except when a statute . . . dispenses with the need for consideration when a writing . . . exists. Neither waiver . . . nor estoppel . . . rests upon consideration or agreement. A modification, because it is an agreement based upon consideration, is binding according to its terms and may only be withdrawn by agreement. An estoppel rests upon the word or deed of one party upon which another rightfully relies and so relying changes his position to his injury . . . While estoppel requires detriment to the party claiming to have been misled, waiver requires no more than the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable . . . A waiver, to the extent that it has been executed, cannot be expunged or recalled . . ., but, not being a binding agreement, can, to the extent that it is executory, be withdrawn, provided the party whose performance has been waived is given notice of withdrawal and a reasonable time after notice within which to perform." ( Id. at 183-84.)
Particularly pertinent here is the promisee's ability to withdraw or retract an executory waiver, or, perhaps more appropriately, a waiver of a contractual obligation to the extent it is executory. ( See also DeCapua v Dine-A-Mate, Inc., 292 AD2d 489, 491 [2d Dept 2002]; Matter of Mikal Realty Co. v Carreras, 268 AD2d 435, 435 [2d Dept 2000].) The ability to withdraw or retract is limited, however, to the extent that "the retraction would be unjust in view of a material change of position in reliance on the waiver." ( See Uniform Commercial Code § 2-209; see also Computer Strategies, Inc. v Commodore Business Machines, Inc., 105 AD2d 167, 174 [2d Dept 1984]; All-Year Golf, Inc. v Products Investors Corp., Ltd., 34 AD2d 246, 240-50.)
Here, by reason of mutual waiver, for the period October 2002 through April 2004, the amount paid by Plaintiff and accepted by East Atlantic, a total of $142,450, according to Plaintiff, is deemed the amount due under the Lease. (The Court notes that the computation of rent for this period included the so-called "rent credit" provided by Subsection II.6 (A) of the Lease, quoted above.) Rent was not paid again until Justice Harkavy ordered on June 22, 2005 that Plaintiff pay at the rate of $6,000 each month. On October 25, 2006, after issuance of the certificate of occupancy, Justice Harkavy ordered monthly payment at the full amount provided for the first year of the Lease term, $23,100. The Court has already determined that Justice Harkavy's orders are not "law of the case" as to any issue that must now be decided. Although Justice Harkavy's orders are not explicit that the payment and the acceptance of the amounts specified are without prejudice to the parties' respective positions as to the amount of rent due, that must be the fair import. Interim payments without prejudice during commercial landlord/tenant litigation is custom and practice in Kings County, and the Court has been given no reason to suspect that the custom and practice was not intended to be followed here. The rent payments pursuant to court order, therefore, cannot be the basis for a finding of waiver as to either party.
Although mutual waiver might constitute sufficient consideration to support a modification of a lease obligation with prospective effect, there is no basis for a finding here that the payment and acceptance of rent through April 2004 was such a modification of any of the terms of the Lease. It cannot fairly be understood that Plaintiff's payments evince an intention to permanently release East Atlantic from its obligations to construct the premises in accordance with the Lease and to obtain a certificate of occupancy; nor can it be fairly understood that East Atlantic's acceptance of the payments evince an intention to permanently reduce the amount due under the Lease, either directly or through "rent credit." This conclusion is reinforced by the Lease provision that it "may not be amended in any way, and no purported amendment shall be effective, except by a writing executed by Landlord and Tenant." (Lease, Section XXI.5; see also General Obligations Law § 15-301.)
Rent/ May 2004 Through September 2006
The question becomes, then, whether there was any waiver of the parties' respective obligations during the period May 2004 through February 2009, when trial concluded. This period should be divided by reference to the issuance of the certificate of occupancy on September 28, 2006 into two periods, from May 2004 through September 2006, and from October 2006 through February 2009. Since East Atlantic did not during either of these periods voluntarily accept rent in an amount less than called for by the Lease, and Plaintiff has not pointed the Court to any other statement or conduct by East Atlantic that might constitute a waiver, any waiver by East Atlantic would have to be based upon a failure to have effectively retracted its prior waiver. In the case of Plaintiff, however, a waiver might be based either upon a failure to effectively retract its prior waiver, or a continuing waiver, notwithstanding the non-payment of rent, by reason of Plaintiff's continued possession of the third, fourth, and fifth floors.
Certainly, Plaintiff and East Atlantic each acted to retract its waiver; Plaintiff ceased paying any rent; East Atlantic served a notice of termination. It is difficult to discern reliance by either on the payment and acceptance of rent, respectively, that would preclude retraction of a waiver based upon those acts alone. Moreover, it is in this respect, i.e., the prospective operation of a waiver as to obligations still executory, that a "no waiver" provision of the type quoted above is most effective. ( See Awards. Com, LLC v Kinko's, Inc., 42 AD3d 178, 188-89 [1st Dept 2007].) The inquiry reduces, therefore, to whether Plaintiff's continued possession of the third, fourth, and fifth floors constitutes a waiver of East Atlantic's obligation to construct the premises in accordance with the lease, or its obligation to obtain a certificate of occupancy as a condition to payment of rent, or both.
In considering those questions, the Court takes particular note of two factors that are often deemed material in the caselaw addressing lease obligations in the context of a failure or delay in constructing the premises or in obtaining a certificate of occupancy that allows the tenant's contemplated use. The first is whether the tenant knew or should have known of regulatory requirements or restrictions that preclude or limit the tenant's use. ( See Thriftway Services Corp. v Shevchenko , 35 AD3d 442 , 443 [2d Dept 2006]; Culver Theisen, Inc. v Starr Realty Co. [NE] LLC, 307 AD2d 910, 910-11 [2d Dept 2003].) Although this factor more often appears where the tenant's claim is based upon fraud, "the realities involved are the same whether the applicable category is contract or fraud" ( see National Conversion Corp. v Cedar Bldg. Corp., 23 NY2d 621, 629.) The second factor is whether the tenant enjoyed uninterrupted possession and use of the premises. ( See 56-70 58th St. Holding Corp. v Fedders-Quigan Corp., 57 NY3d 564-65; Bialystoker Ctr. Bikur Cholem, Inc. v Lower E. Side Health Care Holding Corp., 47 AD3d 569; Jordache Enterprises, Inc. v Gettinger Assocs., 176 AD2d at 617; Hall Co. of NY v Orient Overseas Assoc., 65 AD2d at 429-30.)
Taking the second factor first, there is no dispute that, except for the period of the Vacate Order (August 22, 2007 until February 11, 2008), Plaintiff enjoyed full and uninterrupted use of the third, fourth, and fifth floors. To the extent that Plaintiff did not "open for business" on any of the floors, the reason was primarily Plaintiff's business concerns about proceeding in light of the uncertainties surrounding its dispute with East Atlantic, including uncertainty about the certificate of occupancy. But before the Vacate Order, which was itself precipitated by Plaintiff's complaints to the Buildings Department, there was never any actual threat to Plaintiff's possession and use.
There was evidence at trial of delays in completing construction on the fourth and fifth floors after the completion of Landlord's Work, but even if the delays were caused by defendant Gimadeyev or defendant Aramis Construction, rather than Plaintiff, these Defendants were acting at that point for Plaintiff, and any fault on their part could not be attributed to East Atlantic. Plaintiff's "good business judgment" not to open for business, if that it was, cannot override the consequences of its conduct. ( See Dinicu v Groff Studios Corp., 257 AD2d 218, 222-23 [1st Dept 1999].)
The reasonable concerns Plaintiff had about the certificate of occupancy must have been present in some degree before Plaintiff executed the Lease. Plaintiff's principal, Dr. Elliot Meisenberg, was not a newcomer to the development of space for medical uses. He had previously developed a 24-hour dialysis center near the Voorhies Avenue site, and had developed "medical centers" in Queens and the Bronx of the type he hoped to recreate in Brooklyn. From Spring 2002, at least six months before the Lease was signed, he had the assistance of John Rusk, an experienced contractor. From their meetings with Sergey Mozer, East Atlantic's second architect — — the first, Arkady Zaltsman, having perished on 9/11 — — Dr. Meisenberg and Mr. Rusk knew that there might be regulatory difficulties in constructing and using the building as Dr. Meisenberg wished.
Both Dr. Meisenberg and Mr. Rusk acknowledged at trial that they were told by Mr. Mozer that some parking would be required on the first floor, perhaps for as few as two cars. Moreover, according to Rusk, Mozer "wasn't sure that we could do a full [fifth] floor" (Tr. at 933.) All knew that the Zaltsman Plans filed with the Buildings Department provided for parking for five cars on the first floor, and for only a "mezzanine" above the fourth floor. All knew that space for parking and the mezzanine, rather than a full fifth floor, had been dictated by Mr. Zaltsman's understanding of the regulatory requirements.
Although Dr. Meisenberg and Mr. Rusk testified to being assured in Fall 2002 by Ramis Gimadeyev, an East Atlantic member, that a certificate of occupancy was imminent, they all must have known that the forecast was highly optimistic. The inspection of the building that had been made by the Buildings Department had been based upon the Zaltsman Plans, which did not depict what was to be built; new plans were required, and East Atlantic no longer had an architect to draw them, because East Atlantic was not satisfied with Sergey Mozer. The drawings for the first and second floors prepared by Eugene Gorsh, representative of the equipment supplier Siemens, and for the third, fourth, and fifth floors prepared by the Larsen Shein firm, retained by Plaintiff essentially for interior design and decoration, had to be converted into a form that could serve as the basis for a certificate of occupancy.
Both Dr. Meisenberg and Mr. Rusk knew before execution of the Lease on October 3, 2002 that East Atlantic was having difficulties in arranging for a certificate of occupancy. Indeed, the landlord asked John Rusk to assist in identifying an architect who might be able to get the job done, and Rusk brought in Henry Radusky of Bricolage. Although it was Radusky's view that the building could be "reclassified as a community use facility" so as to avoid first-floor parking and allow for a full fifth floor (Tr. at 957-58), only the most inexperienced would have expected that, even if Radusky were correct, it could happen overnight, and neither Dr. Meisenberg nor Mr. Rusk were that inexperienced.
Indeed, notwithstanding the lack of any evidence that a certificate of occupancy was forthcoming — — which Dr. Meisenberg did not, in any event, seek — — Plaintiff took occupancy of the third, fourth, and fifth floors by January 2003, began paying rent later that year, and continued to pay through April the following year. In late 2004, having stopped paying rent, Plaintiff retained William Bernstein, an architect who specialized in health care facilities, to advise as to how a certificate of occupancy might be expedited. As Mr. Bernstein characterized at trial his conclusions, he "thought it would be very difficult to get a certificate of occupancy" for the building as Dr. Meisenberg wanted it built. (Tr. at 1149.)
Specifically as to Dr. Meisenberg's desire to put medical equipment on the first floor: "[T]here was no way at that point to do with that space configuration. The floor to floor wasn't there. It just wasn't there to do." (Tr. at 882-83.) As Mr. Bernstein explained in his February 9, 2005 report, the parking requirement for the first floor would have been even greater if Mr. Zaltsman had not designated approximately 60 percent of the building as "depositories" for medical records. As for the full fifth floor: "The zoning ordinance strictly forbids five floors. It's black and white. There is nothing more black and white in the whole world." (Tr. at 866.) And Mr. Bernstein said as much in his report.
In that February 2005 report, Mr. Bernstein suggested three options, only one of which would allow Dr. Meisenberg to achieve his "specific goals," "keep the 5th Floor as a full floor, build out the Ground Floor completely as a radiology facility, and eliminate the existing (5) parking spaces." That option would require two variances, but the "chances of success" in obtaining the variances were "questionable." At trial, Mr. Bernstein acknowledged that he "was not very helpful [to Dr. Meisenberg] because [he] frankly didn't understand how they would ever get the building that was built approved." (Tr. at 870.) Apparently Dr. Meisenberg got the message, because after the certificate of occupancy was issued, Mr. Bernstein was called in again. Dr. Meisenberg was "puzzled as to how the building could have gotten a C of O." (Tr. at 851.)
There is no evidence that Mr. Bernstein's report or his opinions were conveyed to East Atlantic. Dr. Meisenberg acknowledged that, even before it was suggested as an option by Mr. Bernstein, the possibility of a variance was discussed with Mr. Gimadeyev and with Plaintiff's lawyers, but there is nothing in the extensive record to suggest that any variance was ever pursued. Nor did Dr. Meisenberg, or Mr. Bernstein on his behalf, ever inquire of the Buildings Department as to the status of East Atlantic's efforts to obtain a certificate of occupancy, or the possibility or means of expediting it. This reticence must be contrasted with Dr. Meisenberg's response to the certificate of occupancy being finally issued, which was to send Mr. Bernstein to the Buildings Department to suggest that it shouldn't have been issued, prompting the August 22, 2007 Vacate Order.
Notwithstanding his awareness that a certificate of occupancy was, at best, problematic, prompting his ceasing rent payments in May 2004, and strongly confirmed by Mr. Bernstein in February 2005, Dr. Meisenberg continued doing business on one floor, and continued his construction and decoration of two others. As previously noted, he had retained Mr. Gimadeyev's corporation, Aramis Construction, to do that work. Mr. Gimadeyev testified that the work continued through 2005. "Change Orders" dated, respectively, January 12, 2005 and May 19, 2005 indicate work that was done on the fourth and fifth floors.
Dr. Meisenberg acknowledged at trial that he knew in Spring 2004 that a certificate of occupancy was not soon forthcoming, that the only plans that had been filed with the Buildings Department were still the Zaltsman plans, and that the full fifth floor that had been built was still in question. Plaintiff continued, nonetheless, to affirm the Lease by possession and control over the third, fourth, and fifth floors, at the least, and completing construction and decoration for use. Nor was Plaintiff dissuaded by Mr. Bernstein's dismal prognosis in the first part of 2005. When East Atlantic on March 7, 2005 served a Notice of Termination of Tenancy/Occupancy, effective April 15, 2005, Plaintiff sought and obtained a Yellowstone injunction ( see Post v 120 E. End Ave. Corp., 62 NY2d 19, 24-25.) Yet Plaintiff paid no rent since April 2004, until ordered by Justice Harkavy on June 22, 2005 to pay $6000 monthly, and to post an undertaking for $500,000.
Under Plaintiff's view, despite completion of Landlord's Work on the fourth and fifth floors by January 2003, no rent was due for his possession and control of those floors until March 14, 2008, more than five years later. Whether framed in terms of waiver, the duty of good faith and fair dealing, or other general applicable legal principles, that result cannot be required by reason of the lack of a certificate of occupancy. Even had Plaintiff succeeded on its claim that East Atlantic fraudulently induced its execution of the Lease, it would not have been permitted to remain in possession without paying rent, although it could still seek difference-in-value damages. ( See Pryor v Foster, 130 NY 171, 175 [1891]; R A Food Services, Inc. v Halmar Equities, Inc., 278 AD2d 398, 399 [2d Dept 2000]; Clearview Concrete Products Corp. v S. Charles Gherardi, Inc., 88 AD2d 461, 466-67 [2d Dept 1982]; Rosenwasser v Amusement Enterprises, Inc., 88 Misc 57, 64-65 [App Term, 1st Dept 1914] ["The tenant has ample remedies but the refusal to pay rent while continuing in possession is not one of them."].) Under the circumstances here, the Court sees no reason for a different result.
The result is consistent with general principles of landlord/tenant law. "[I]n an action for rent, it is not sufficient for the tenant to defend on the theory that there was a diminution of the beneficial enjoyment of the property." ( David Herstein Co., Inc. v Columbia Pictures Corp., 4 NY2d 117, 120-21.) "[T]here must be an abandonment of the premises by the tenant." ( Id. at 121; see also Duane Reade v Reva Holding Corp ., 30 AD3d 229 , 237 [1st Dept 2006].) "It has been said to be inequitable for the tenant to claim substantial interference with the beneficial enjoyment of his property and remain in possession without payment of rent." ( Barash v Pennsylvania Term. Real Estate Corp., 26 NY2d 77, 83; see also West Broadway Glass Co. v I.T.M. Bar Inc., 245 AD2d 232, 232 [1st Dept 1997] ["the tenant never did abandon the premises . . ., instead continuing its renovation on assurances from the landlord that the problem would be remedied"].)
"The absence of . . . a certificate of occupancy does not amount to a constructive eviction." ( Silver v Moe's Pizza, Inc., 121 AD2d 376, 377 [2d Dept 1986]; see also 56-70 58th Street Holding Corp. v Fedders-Quigan Corp., 5 NY2d at 564.) "Since [the tenant] received and exercised all its rights under the lease, there was no such failure of consideration as would excuse the payment of rent." ( Id.) Even where "the obligation to pay rent was dependent upon the [landlord's] covenant to obtain the certificate," the landlord might not "be allowed to recover the rent claimed for nonoccupancy" ( id. at 567 [Burke, J., dissenting].) But here Plaintiff does not contend that it did not have the right to lawfully occupy and use the third, fourth, and fifth floors, and it did in fact occupy them.
As established above, even where the landlord is obligated to obtain a certificate of occupancy, the tenant is only entitled to damages in fact sustained. But here, Plaintiff shows no damages as a result of the lack of a certificate of occupancy during the period before one was received in September 2006. Plaintiff had not suffered any interference with its possession and use of any part of the building, nor was there any official threat of interference, other than the possibilities inherent in regulatory requirements that had existed without change since before the Lease was executed. Plaintiff never gave up possession of any part of the building under the threat, real or supposed, of official intervention.
The Court notes for completeness, although not as the basis of the Court's determination, the evidence provided by East Atlantic through Dr. Fayngersh and Mr. Gimadeyev, supported by its expert, Robert J. Palermo, that Plaintiff itself contributed to the delay in obtaining the certificate of occupancy. That evidence, which was not effectively contradicted by Plaintiff, was of numerous "change orders" to the work of constructing and decorating the third, fourth and fifth floors, precluding official inspection of the building, which in turn precluded issuance of a certificate of occupancy. Although East Atlantic's charge is not without foundation, the evidence was amorphous as to the nature of the work and its time-frame. The only evidence that translated the work into time lost was Mr. Palermo's estimate of six months, which, in itself, cannot explain the lack of a certificate of occupancy for years. Indeed, in an action filed by East Atlantic against architect Henry Radusky, East Atlantic lays the blame for the failure to obtain a certificate of occupancy on him.
The Court concludes that, for the 29-month period from May 2004 through September 2006, Plaintiff was obligated to pay rent of at least $401,940 for its possession of the third, fourth, and fifth floors. The total is based on the per-floor rent of $4,620, the figure proffered by Plaintiff as one-fifth of the total monthly rent for the building of $23,100. The Court recognizes that East Atlantic claims that, pursuant to the rent escalation provision of the Lease, beginning December 2004 Plaintiff owed rent at the monthly rate of $24,486; that, beginning December 2006, the monthly rent increased to $25,955.16; and that, beginning December 2008, the monthly rent increased to $27,512.47. Plaintiff's rent computation, not surprisingly, assumes that the monthly rent has not increased above the initial rent of $23,100. Neither party has presented any argument to support its position, and the Court will defer a final determination until they have done so.
Also as to this 29-month period, there are the questions of the first and second floors. As to these floors, the questions are not resolved by a determination that Plaintiff cannot rely on the lack of a certificate of occupancy to avoid rent. The Court has determined that the first floor has not been constructed according to the Lease, although, as will appear, it has been used by Plaintiff since execution of the Lease. The parties agree that, even as of trial, Landlord's Work on the second floor had not been completed, although they do not agree on the reason.
As to the second floor, East Atlantic contends that Landlord's Work could not be completed because Plaintiff never provided information, in the form of plans or otherwise, as to Plaintiff's intended interior design and decoration of the space, so as to allow East Atlantic to complete its part. Although Plaintiff contends, without citation to any evidence in the record, that "[t]he Siemens and Bolarte Plans were more than sufficient to allow East Atlantic to complete the Landlord's Work" (Post-Trial Memorandum of Law of Plaintiff 1523 Real Estate, Inc. at 13), testimony of John Rusk, its own witness, is to the contrary:
"QI want to ask you a question about the second floor.
As you understand it, was the second floor ever finished in terms of what the landlord, as you understand, was supposed to do for this project?
AI would say no because — — no, in fact, no. The answer is quite clear, no.
The first and second floor had to be built in the same way that the third, fourth and fifth was, which is all the basic walls, basic electricity, basic plumbing, all of those things had to be done.
The first and second floor were still in their original states. The landlord never came in and starting reframing and doing them because they never had the go ahead from us; here are the final plans, lay them out, you know, 16 feet, two-and-a-quarter inches to this wall.
There was never the go ahead yet. We couldn't give them the go ahead because without the C of O we didn't have a final equipment plan from Siemens.
. . .
Until [Dr. Meisenberg] had a C of O in his hands, it would allow him to pick one these vendors; he would then have final plans which would then have final wall positions, which then the landlord would have built those final wall positions.
They never did that. But they never had the full go ahead from us for that because we didn't have the C of O; we couldn't buy the equipment so we didn't have the exact plans for them to build to.
. . .
QIsn't it true that it was Doctor Meisenberg's decision not to proceed on the first and second floor with any type of construction?
AAs I described earlier, absolutely. Until he had the C of O in his hands he wasn't going to spend — — he wasn't going to sign a contract with Siemens.
Until he signed a contract with Siemens, it was foolhardy to have the landlord put up walls which in fact may be 4 inches too far to the left or the right and then they'd have to tear down the walls to then correctly locate the machinery." (Tr. at 993-94.)
Even as to the first floor:
"AThey didn't build it. They couldn't build it. It was impossible to build it. They had no plans to build too, because it had to be final plans before they could build it." (Tr. at 999.)
Mr. Rusk did not explain further the importance of the certificate of occupancy to the design of the second floor. As to the first floor, there was the question, to the extent it really was a question as time progressed, of whether it could be used for anything other than a lobby and parking. But there was never a question about Plaintiff's ability to use the second floor for diagnostic imaging or any other medical service. To the extent, therefore, that Plaintiff's failure to provide East Atlantic with a design for the second floor was a result of the lack of a certificate of occupancy, a business decision was made by Dr. Meisenberg not to proceed. And since Plaintiff has not provided East Atlantic with a design for the second floor in the more than two years since the certificate of occupancy was issued, Dr. Meisenberg's business decision not to finish the second floor seems to be related more to Plaintiff's dispute with East Atlantic, and the uncertainties created by that dispute, than the lack of a certificate of occupancy.
"[A] party to a contract cannot rely on the failure of another to perform a condition precedent where he has frustrated or prevented the occurrence of the condition." ( Kooleraire Serv. Installation Corp. v Board of Educ. of City of NY, 28 NY2d 101, 106; see also ADC Orange Inc. v Coyote Acres, Inc ., 7 NY3d 484 , 490.) Specifically, where a landlord agrees to make alterations to the premises for the tenant's benefit, a duty of good faith and fair dealing applies to the tenant's role in getting the work done. ( See 34-35th Corp. v 1-10 Indus. Assoc., LLC, 16 AD3d at 580.)
Here, Plaintiff could not frustrate East Atlantic's ability to complete Landlord's Work as a condition to Plaintiff's obligation to pay rent. As with the third, fourth, and fifth floors, Plaintiff could not retain possession while refusing to pay rent. Plaintiff's use of the second floor as a "workshop" and for storage of tools and supplies, or its denial of access to East Atlantic or its agents, whenever and for whatever periods of time those conditions may have continued, admittedly in dispute, are merely manifestations of Plaintiff's complete and continuing possession under the Lease.
As for the first floor, it is clear that Landlord's Work has not been completed. But Plaintiff's failure to provide East Atlantic with a design for the floor to be used for diagnostic imaging cannot be said to have frustrated East Atlantic's performance of any condition to Plaintiff's rent obligation. John Rusk put it succinctly in a portion of his testimony quoted above, "It was impossible to build it."
Here, too, however, there is the effect of Plaintiff's continued possession and use. Only a part of the first was not constructed according to the Lease, i.e., the part that is reserved for parking. The other part, the lobby with access to the upper floors, was necessarily constructed, and there is no contention by Plaintiff that the lobby fails in any way to conform to the parties' intended plan for the first floor. From the beginning the lobby has been in use as intended. Dr. Meisenberg testified that the usable square footage of the entire first floor was used in computing the initial rent for the building (Tr. at 243), and Plaintiff's floor-by-floor, square-footage computations as to the amount of rent owed treat the first floor as one-fifth of the total, even though the actual square footage of the first is less than the upper floors.
Since the parties each take an "all or nothing" approach to the first floor, neither party has proffered a computation of rent for use of the lobby and associated areas of the first floor. Using architect Palermo's "as built" plans, the Court computes the lobby and associated area of the first floor at approximately 1200 square feet, one-third of the total square footage of the first floor of approximately 3600 square feet. The appropriate monthly rent for use of the lobby area, using $4,620 as the single-floor rent, would be $1,540.
For the 29-month period from May 2004 through September 2006, Plaintiff was obligated to pay rent of at least $133,980 for the second floor, and at least $44,660 for the first floor. Adding the amount determined to be due for the third, fourth, and fifth floors, $401,940, the total rent for this period would be at least $580,580. Again, the question would be the rent escalation.
Rent/ September 2006 Forward
The certificate of occupancy was issued on September 28, 2006, and 27 months transpired from October 2006 through February 2009, when trial was completed. Dr. Meisenberg testified that, after issuance of the certificate of occupancy, Plaintiff did not proceed to conduct business on all upper floors of the building because of concerns that the building was "unsafe." (Tr. at 522-24, 649-50.) But except for any period of restricted occupancy that resulted from the Vacate Order, and subject to offset for damages for East Atlantic's breach of the Lease, the Court finds no basis for relieving Plaintiff of its obligation to pay rent for this period based upon possession of one-third of the first floor and the four upper floors. The Court notes that Plaintiff requests reformation of the Lease, so that "[o]n a going forward basis, the annual rent for the Premises should be modified to four-fifths of the rent provided for in the Lease." (Post-Trial Memorandum of Law of Plaintiff 1523 Real Estate, Inc. at 66.)
Using again the initial rent specified in the Lease, the Court computes the monthly rent for this 27 month period at $20,020, and the total at $540,540. The Court has noted that Plaintiff has admittedly been using the first-floor parking spaces from the beginning. Because such use was not that contemplated by the Lease, it is insufficient to trigger Plaintiff's obligation to pay rent for the space. Assuming that East Atlantic might have been entitled to payment for such use at the fair rental value, no evidence was introduced to support an award.
An adjustment must be made, however, for the period of the Buildings Department's Vacate Order, i.e., August 22, 2007 until February 11, 2008, during which Plaintiff could only occupy one of the three floors that, both, were constructed in accordance with the Lease and were covered by a certificate of occupancy. For that five and two-thirds month period ( i.e., 21 days in August, five months from September through January, and 11 days in February), Plaintiff was deprived by an act of lawful authority of the beneficial use of two of the three floors.
"To be an eviction, constructive or actual, there must be a wrongful act by the landlord which deprives the tenant of the beneficial enjoyment or actual possession of the demised premises." ( Barash v Pennsylvania Term. Real Estate Corp., 26 NY2d at 82.) A "constructive" eviction differs from an "actual" eviction in the nature of the landlord's conduct that results in the eviction, but where the condition of the premises results in a judicial or administrative order prohibiting occupancy, there is at least a constructive eviction. ( See Frame v Horizon's Wine Cheese, Ltd., 95 AD2d 514, 516-19 [2d Dept 1983].) Provided that the tenant has abandoned the portion of the premises affected ( see Johnson v Cabrera, 246 AD2d 578, 578-79 [2d Dept 1998]), there will be a partial, constructive eviction, which is what Plaintiff appropriately claims here.
Contrary to East Atlantic's contention, it makes no difference for present purposes that the Vacate Order did not result in an actual interruption of Plaintiff's business. Assuming that Plaintiff might otherwise recover consequential damages, including lost profits, as a result of the eviction ( see P.W.B. Enterprises, Inc. v Moklam Enterprises, Inc., 243 AD2d 350, 350 [1st Dept 1997]; 487 Elmwood, Inc. v Hassett, 107 AD2d at 289; Frame v Horizons Wine Cheese, Ltd., 95 AD2d at 519), no such claim is before the Court. Nor is it material that the Vacate Order came after inquiry, if not complaint, by Plaintiff to the Buildings Department. Public policy would preclude inhibiting a tenant from bringing to the attention of the Buildings Department conditions, like those that prompted this Vacate Order, that would affect the health or safety of persons on the premises. And, despite the suggestions at trial, no evidence would support a finding that the Vacate Order was issued in error, or that the conditions that prompted this Vacate Order were caused by Plaintiff. Plaintiff cannot be charged with responsibility for the lack of sprinklers and a fire alarm system.
"When the tenant is constructively evicted from a portion of the premises by the landlord's actions, he should not be obligated to pay the full amount of the rent." ( Minjak Co. v Randolph, 140 AD2d 245, 248 [1st Dept 1988].) The appropriate remedy for a partial constructive eviction depends in great measure upon whether the tenant has paid the rent during the period of eviction. ( See Appliance Giant Inc. v Columbia 90 Assocs., LLC ., 8 AD3d 932 , 933-34 [3d Dept 2004]; 487 Elmwood, Inc. v Hassett, 107 AD2d 285, 288-89 [4th Dept 1985]; Ahern Realty Co. v Clay Craft Planters Co., Inc., 188 Misc 2d 314, 315-16 [App Term, 2d Dept 2001].) The varying remedies are explained as an election of remedies ( see 487 Elmwood, Inc. v Hassett, 107 AD2d at 288], which does not appropriately apply where, as here, the rent is paid under compulsion of court order.
The question need not be resolved here, however, because of the floor-by-floor/square footage structure created by the Lease. Whether considered an abatement of rent in defense of the landlord's claim for rent; or an abatement pursuant to the Lease itself because "Tenant [was] prevent[ed] from using all or any portion of the premises" ( see Lease, Section VIII.8); or damages on the tenant's claim for breach of the landlord's covenant of quiet enjoyment ( see 34-35th Corp. v 1-10 Indus. Assocs., LLC , 16 AD3d 579 , 580 [2d Dept 2005]), measured by the "diminution in the value of [the] premises" ( see Arhern Realty Co. v Clay Craft Planters Co., Inc., 188 Misc 2d at 315; see also Appliance Giant, Inc. v Columbia 90 Assocs., LLC, 8 AD3d at 932; 487 Elmwood v Hassett, 107 AD2d at 289); there should be deducted from the total rent owed by Plaintiff for the period October 2006 through February 2009, an amount representing the rent allocable to three floors for five and two-thirds months. Using the monthly per-floor rent of $4,620, the deduction would be $13,860.
In addition to its contentions based upon the lack of a certificate of occupancy during the greater part of its tenancy and East Atlantic's failure to construct the first floor in accordance with the Lease, Plaintiff alleges that East Atlantic materially breached the Lease in several respects: East Atlantic (1) "failed to honor its Lease representation that all of the Premises' systems were in good working order' as of the Commencement Date"; (2) "unilaterally lowered the Premises' occupancy levels to frustrate or preclude the Lease's Permitted Use provision"; (3) "failed to install sprinklers on each floor, as required by the Lease"; and (4) "failed to install a fire alarm as a required life safety' device under the Lease." (Post-Trial Memorandum of Law of Plaintiff 1523 Real Estate, Inc. at 61-62.)
Plaintiff's allegation that the building's systems were not in "good working order" as represented is based upon the Vacate Order ( id. at 40-41), and has been addressed by allowing Plaintiff a rent abatement/damages for the period of time the Vacate Order was in effect. Assuming that Plaintiff would be otherwise entitled to damages for any breach, there is no evidence of such damages.
Plaintiff's allegations that East Atlantic breached the Lease by failing to install sprinklers on every floor and failing to install a fire alarm are based upon East Atlantic's agreement "to complete construction of the Building (the Landlord's Work'), at its sole expense, in accordance with the plans and specifications attached as Exhibit B," with Landlord's Work defined as including "without limitation, the installation of all building systems (including, without limitation, the plumbing, electrical, mechanical, sprinklers, life safety and heating, ventilating, and air-conditioning systems, and the installation of all flooring, ceilings, and walls." (Lease, Section II. 3.) It should not be necessary to repeat that there is no "Exhibit B" to the Lease, and, therefore, the meaning of Landlord's Work as it relates to building systems must be established by extrinsic evidence. There is no evidence that the parties had an agreement or specific understanding as to a sprinkler system or a "life safety" system, and so, at most, the Lease could be understood as requiring East Atlantic to comply with statutory and regulatory standards and, perhaps, to comply with industry custom. As to the former, the evidence is that there is compliance; as to the latter, there is no evidence at all. Nor is there evidence of damages that would support an award for breach.
Plaintiff's allegation that East Atlantic "unilaterally lowered the Premises' occupancy levels" is not tied to any express promise or representation in the Lease. (Post-Trial Memorandum of Law of Plaintiff 1523 Real Estate, Inc. at 40-42.) Plaintiff cites to no provision in the Lease that East Atlantic obtain a certificate of occupancy that would permit occupancy by a specified number of persons. ( Compare Hall Co. of NY v Orient Overseas Assoc., 65 AD2d at 426.) The most Plaintiff can say is that the "Lease intends for the Certificate of Occupancy to cover the intended use and occupancy as per the parties' agreement." ( Id. a 42.) Factually, the allegation of breach is based upon a filing by East Atlantic on January 30, 2008, through its architect Robert Palermo, that reduced the maximum occupancy levels to 99, and the strong inference, at the least, that the reduction was made to avoid a requirement that a fire alarm be installed when permitted occupancy exceeds 100.
Plaintiff cites to no evidence that the parties agreed orally or in some writing extrinsic to the Lease to a specified occupancy level, or that they even discussed it. Nor does Plaintiff cite to any evidence of unlawful occupancy or damages as a result. ( See id. at 429-30.) There was much testimony, however, about the relationship between and among occupancy levels, the permitted number of floors in the building, and parking requirements. Mr. Palermo maintained that East Atlantic had not "lowered the Premises' occupancy levels" at all, since the permitted occupancy after his January 2008 filing was 99, an increase over the 80 that would have been permitted under the Zaltsman Plans. (Tr. at 1541-43, 1594-95.) Since Dr. Meisenberg had seen the Zaltsman Plans months before signing the Lease, occupancy levels could have been specified in the Lease, but were not.
Rent Forgiveness Provision
Finally, Plaintiff contends that any rent owed to East Atlantic must be adjusted pursuant to a so-called "Rent Credit Clause," which it fairly characterizes as a liquidated damages provision. The word "credit" does not appear in the provision at issue, Section II. 6 (A), quoted above, which speaks instead of rent "forgiveness"; and purists might have difficulty with an assessment of damages for breach of contract for any period of time before there was a contract.
"A contractual provision for liquidated damages will be upheld only if the amount fixed is a reasonable measure of the probable actual loss in the event of a breach, and the actual loss suffered is impossible or difficult to determine with precision." ( Central Irrigation Supply v Putnam County Club Assocs., LLC , 57 AD3d 934 , 935 [2d Dept 2008].) "If, however, the amount of actual damages that would be suffered on a breach is readily ascertainable when the contract is entered, or the amount fixed as liquidated damages is conspicuously disproportionate to the foreseeable losses, the liquidated damages provision is unenforceable as a penalty." ( Id.) "The burden is on the party seeking to avoid liquidated damages . . . to show that the stated liquidated damages are, in fact, a penalty." ( JMD Holding Corp. v Congress Fin. Corp ., 4 NY3d 373 , 380; see also Zeer v Azulay , 50 AD3d 781 , 785 [2d Dept 2008].)
The enforceability of a "rent abatement clause" in a lease will be assessed as a liquidated damages provision. ( See Bates Adver. USA, Inc. v 498 Seventh, LLC , 7 NY3d 115 , 120 [one-half day's rent or full day's rent, depending upon item not substantially completed by date specified]; Duane Reade v Stoneybrook Realty, LLC, ___ AD3d ___, 2009 NY Slip Op 4348 [1st Dept June 4, 2009].) A rent abatement clause is not unenforceable simply because "the clause was intended to incentivize' the landlord, and to provide a club over his head to make sure he gets the work done'." ( See Bates Adver. USA, Inc. v 498 Seventh, LLC, 7 NY3d at 120.) "Liquidated damages are not transformed into a penalty merely because they operate in this way . . ., so long as they are not grossly out of scale with foreseeable losses." ( Id.) East Atlantic makes no specific showing that the rent forgiveness clause here would be unenforceable as "conspicuously disproportionate" or "grossly out of scale" with Plaintiff's foreseeable losses.
In the first instance, however, there are questions of the applicability and meaning of the rent forgiveness clause. The most glaring question arises from the October 1, 2002 date specified as the "Outside Date" for East Atlantic to have Substantially Completed Landlord's Work throughout the building, in that the Lease was not executed until October 3, 2002. At the least, the right to terminate that the provision gives Tenant appears meaningless in such circumstances. Dr. Miron Fayngersh testified for East Atlantic that the October 1 date was a mistake, but failed to suggest any date that should have appeared in its place. Unless the Court is to simply ignore the entire provision, and there is neither evidence nor justification for that, the provision as written must be assumed to have a meaning and purpose.
Dr. Meisenberg testified that, indeed, the rent forgiveness provision was intended to provide strong incentive to East Atlantic to move quickly with Landlord's Work, and was prompted by several months' delay in the project since Spring when the parties had, in effect, agreed to proceed with Plaintiff's taking tenancy of the entire building. Dr. Meisenberg testified further that a quid pro quo for the rent forgiveness provision was the commencement of the rent obligation 30 days after Substantial Completion of Landlord's Work, even if Plaintiff had not completed readying the space for use. Dr. Meisenberg's account was not specifically disputed by East Atlantic's witnesses, and is not unbelievable on its face.
That is not to say, however, that the rent forgiveness provision can be fairly understood as continuing to operate indefinitely. The rent payments made by Plaintiff and accepted by East Atlantic through April 2004 included adjustment for the rent forgiveness provision, and to that extent East Atlantic has acquiesced. But Plaintiff's calculation of 566 months' forgiveness as of trial, i.e., almost 50 years, or as Dr. Meisenberg explained at trial, 113.2 months for the entire building, i.e., almost 10 years, strikes this Court as patently unreasonable. And given Plaintiff's view of the operation of the provision, "rent credits" are still accruing.
As previously noted, for the period October 2002 through April 2004, when "rent credits" were computed in the amount paid by Plaintiff and accepted by East Atlantic, the account book is closed. For the periods beyond, both before and after issuance of the certificate of occupancy, the relationship between the rent forgiveness provision and the obligation to pay rent, both textually and conceptually, requires the conclusion that the accrual of "rent credits," or the forgiveness of accrued rent, should be deemed to have ceased to the extent that the obligation to pay rent arose and continued. Put differently, the same considerations that lead the Court to conclude that, from May 2004 forward Plaintiff was required pay rent for four and one-third floors of the building, require the conclusion that no "rent credits" can apply.
The Court has determined, however, that there was no obligation to pay rent for the two-thirds part of the first floor that was not constructed according to the Lease. As to that part of the premises, there appears to be no principled basis for determining that the rent forgiveness provision has ceased to operate. Unlike the lack of a certificate of occupancy, which did not interfere with Plaintiff's beneficial use of almost the entire building as contemplated by the parties, Plaintiff's inability to use two-thirds of the first floor for medical services of any kind clearly constitutes a material breach of East Atlantic's obligation under the Lease to construct the premises as agreed — — an obligation that was made an express condition to the obligation to pay rent. East Atlantic offers no legal excuse for its failure to construct the premises as agreed, and does not establish that the rent forgiveness provision is unenforceable as a vehicle for compensating Plaintiff for damages resulting from that breach.
As a result, the rent that would otherwise have been due for the two-thirds of the first floor that is not constructed for medical use "shall be forgiven at the rate of two (2) days for each day" from May 2004 through February 2009. The Court disagrees, however, with Plaintiff's method of computing the amount of rent forgiven under this provision. Perhaps misled by its own construction of the term "rent credit," Plaintiff would relieve itself of the obligation to pay rent for each day until the rent obligation commenced, and then deduct from rent otherwise owed an amount representing rent for two additional days. That is not rent forgiveness at the rate of two days for one. Rather, the tenant is only properly relieved of its obligation to pay rent for two days, not three.
Again using $4,620 as the single-floor rent, the amount that would otherwise have been due for two-thirds of the first floor would be $3,080. Rent forgiveness at that rate from May 2004 through February 2009, a total of 58 months, would amount to $178,640.
To recap, for the period October 2002 through April 2004, the total of the amounts paid as rent by Plaintiff and accepted by East Atlantic ($142,450 according to Plaintiff) is deemed the amount owed; for the period May 2004 through September 2006, the amount deemed owed would be $580,580; for the period October 2006 through February 2009, the amount deemed owed would be $540,540; Plaintiff is entitled to a deduction of $13,860, representing a rent abatement/damages due to constructive eviction; and Plaintiff is entitled to rent forgiveness in the total amount of $178,640. All computations were made using the initial rent. As such, Plaintiff would owe as rent through February 2009, $928,620, subject to payments made pursuant to Justice Harkavy's June 22, 2005 and October 25, 2006 rent orders.
The Court has noted Plaintiff's request for "reformation" of the Lease, and the authority it cites for the general remedial powers of Supreme Court ( see Weil v Atlantic Beach Holding Corp., 1 NY2d 20, 29; Lirosi v Elkins, 89 AD2d 903, 907 [2d Dept 1982]; Bartley v Walentas, 78 AD2d 310, 314 [1st Dept 1980]; Ansonia Assocs. v Ansonia Residents' Assoc., 78 AD2d 211, 215-16 [1st Dept 1980].) Plaintiff cites no case, however, in which a court resolving a breach of contract claim articulated a privilege to rewrite the contract for the balance of its term. Particularly here, where the parties submitted written argument on their respective motions to conform the pleadings to the proof, without any request for "reformation," it would not be an appropriate exercise of discretion for the Court to undertake such a task.
The parties have clearly understood from the beginning of trial, because the Court addressed it on the record, that their proceeding as they have for more than six years without coming to terms with their serious disagreements, while at the same time insisting that their contract be applied as if it represented a true meeting of the minds, might lead to results that were commercially unsatisfactory and unrealistic. The Court addressed the problem again at the end of trial, when it exhorted the parties, in effect, to themselves "reform" their contract.
The parties shall submit supplemental post-trial memoranda addressing whether and to what extent the rent escalation provisions of the Lease should be given effect. The parties should also address the security deposit (Lease, Section V. 1) and the calculation of pre-judgment interest ( see CPLR 5001.) The Court notes also that the parties' respective rent payment charts do not agree as to the amounts paid, or are unclear as to the months for which payment was made, or both.
Supplemental post-trial memoranda shall be submitted to chambers no later than September 11, 2009. The supplemental memoranda are not to be deemed opportunities for further argument on the matters determined herein. The date for supplemental post-trial memoranda may be extended by the parties in a written stipulation "so ordered" by the Court.