Opinion
L T 87103/07.
Decided on February 11, 2008.
Plaintiff represented by: Cyruli Shanks Zizmor LLP, 420 Lexington Avenue, New York, NY 10170, Tel: 212-661-6800, by Marc J. Schneider, Esq.
Defendant represented by: Roberts and Roberts,401 Broadway, New York, NY 10013, Tel: 212-226-4925 or 212-966-6532, by Michael J. Roberts, Esq.
Introduction
Courts are often called upon to determine the respective legal and equitable interests of the parties. Particularly poignant is the balancing of equities between the landlord's right to timely payment of rent and the tenant's severe prejudice in possibly forfeiting a negotiated reimbursement sum and the cost of substantial improvements that the tenant made to the premises. Under the circumstances presented below, this Court finds that the tenant's legal and equitable interests clearly outweigh the landlord's legal entitlement of timely payment of rent under the extant stipulation.
Relief Requested
Respondent JOG, LLC (d/b/a Joe O's) ("respondent" or "Joe O's") moved by Order to Show Cause to vacate and set aside the notice of default dated October 16, 2007 and to stay the enforcement and execution of the warrant of eviction. Petitioner 401 Commercial L.P. ("petitioner" or "401 Commercial") opposes the motion.
Issues
On the return date of the motion, this Court set this matter down for a hearing on January 24, 2008 to determine the following two issues:
(1)Can the respondent show "good cause" to offer a valid excuse for its alleged failure to tender payments under the parties stipulation dated August 22, 2007 ("Stipulation") (Exhibit "B" to the Motion), and to ultimately continue the stay of enforcement of the warrant of eviction upon the payments conditioned thereon; and
(2)What is the amount that is currently due under the terms of the Stipulation.
This issue is now moot as the parties stipulated on the record to resolve it by consenting that $132,734.64 is due for respondent to become current in rent and additional rent and arrears through January, 2008 under the terms of the Stipulation.
Hearing/Witnesses
The hearing was conducted on January 24, 2008. Respondent called three witnesses: Larrica M. Porter ("Ms. Porter"), a secretary employed by Giaimo Associates, LLP; Cintra Garcia ("Ms. Garcia"), a paralegal and office manager of Giaimo Associates, LLP and bookkeeper for Joe O's; and Joseph O. Giaimo, Esq. ("Mr. Giaimo"), a partner in the firm of Giaimo Associates, LLP, the designated attorney for the respondent and the sole principal of Joe O's, which bears his name. Petitioner did not call any witnesses. This Court credits the uncontroverted testimony of Ms. Porter, Ms. Garcia and Mr. Giaimo.
Applicable Law
It is well settled law that stipulations of settlement are essentially contracts which must be construed in accordance with contract principles and the intent of the parties. Sharp v Stavisky, 221 AD2d 216 (1st Dept 1995) lv dismissed 78 NYS2d 968 (1996); Davis v Sapa, 107 AD2d 1005 (3rd Dept 1992). Stipulations of settlements are favored by the courts and will not be set aside except for sufficient cause including fraud, collusion, mistake or accident. Hallock v State of New York, 64 NY2d 224 (1984). Various terms of extensively negotiated stipulations of settlements such as time of essence and de minimis clauses have been strictly enforced. 1029 Sixth, LLC v Riniv Corp. , 9 AD3d 142 , 145 (1st Dept 2004) ("no shortage or payment or delay in vacating the premises shall be considered to be de minimis").
However, this does not end the inquiry since RPAPL § 749(3) provides the courts with the express authority to vacate a warrant of eviction for "good cause shown." The courts are not divested with authority to act when the parties enter into a stipulation of settlement wherein the tenant agrees to surrender possession, to issue a warrant of eviction and stay enforcement based on certain delineated conditions. Quite to the contrary, it is well settled that a stipulation's enforcement remains "subject to the supervision of the courts." Malvin v Schwartz, 65 AD2d 769 amended 67 AD2d 1115 (2nd Dept 1978) aff'd 48 NY2d 693 (1979). In Malvin, the Court held that it was an abuse of discretion for the court to enter judgment based on the terms of the stipulation where the failure " was inadvertent and was promptly cured." (Citation omitted and emphasis added). 65 AD2d at 769. Relief may also be appropriate upon a finding of "substantial compliance" with a stipulation. J H Management Corp. v W.W.R.S. Automotive Inc. , 7 Misc 3d 134(A) (App Term 2d 11th Jud Dists 2005); Hitchcock Plaza, Inc. v Willard, 8 Misc 3d 127 (A) (App Term 1st Dept 2005).
Courts may relieve a party from the consequences of strict enforcement of stipulations where it would be " unjust or inequitable or permit the other party to gain an unconscionable advantage." (Emphasis added). Bank of New York v Forlini, 220 AD2d 377, 378 (2nd Dept 1995). Similar to the holding in Malvin, the Appellate Division in Forlini found that the defendant's default was inadvertent and promptly cured with a replacement check after defendant's last check had been returned for insufficient funds until after the ten-day cure period set forth in the stipulation had elapsed. However, the inability to pay or fiscal hardship alone is not a valid excuse for a failure to tender payments under a stipulation. City of New York v 130/40 Essex Street Development Corp., 302 AD2d 292 (1st Dept 2003). Both the Malvin and Forlini courts weighed the nature of the default against the harsh result which would inevitably follow if you strictly enforce the default provision contained in the stipulation.
Another well established principle is that the law abhors the forfeiture of a lease. Mooney v Bryne, 163 NY 86 (1900). In order to avoid a forfeiture, the Court of Appeals considers the tenant's excuse and weighs the prejudice of the parties. Where the tenant's fault was "as Cardozo says mere venial inattention' . . . [no forfeiture is warranted because] the gravity of the loss is certainly out of all proportion to the gravity of the fault." J.N.A. Realty Corp. v Cross-Bay Chelsea, Inc., 42 NY2d 392, 399 (1977). The courts are reluctant to enforce a forfeiture of a leasehold interest and loss of substantial improvements under varying circumstances. For instance, the Appellate Division stated in Lake Anne Realty Corp. v Sibley, 154 AD2d 349, 351 (2nd Dept 1989), as follows:
[W]here . . . no substantial injury resulted to the landlord for the failure to comply strictly, the tenant should not be unduly penalized. A forfeiture of the lease herein, particularly after the tenant's [substantial] expenditure . . . for improvements, would be unduly harsh. . . . Where the covenants of lease are substantially performed and no substantial injury results to landlord from the failure to comply strictly, the tenant should not be subject to the severity of a forfeiture.
Based on the above case law, there appears to be three elements or considerations in determining the "good cause" standard under RPAPL § 749(3) as follows:
1)valid excuse (inadvertence or "venial inattention" as opposed to fiscal hardship alone);
2)substantial compliance (prompt payment or present ability to pay or cure the default); and
3)prejudice (weighing the gravity of the loss in proportion to the gravity of the fault and considering whether the result would be unjust, inequitable or permit the other party to gain an unconscionable advantage).
Findings of Fact
The facts are uncontroverted. Petitioner and respondent entered into a lease agreement dated January 30, 2003 ("Lease") to lease portions of the ground floor and basement space located at 401 7th Avenue, New York, New York in the Hotel Pennsylvania ("subject premises") for a "first class" restaurant known as Joe O's. (Exhibit "A" and "F" to the Motion). The Lease was to expire on March 31, 2013. However, Article 41 of the Lease provided petitioner with an option for an early termination upon payment of between $500,000.00 to $2,000,000.00 based on certain specified conditions. Respondent infused at least $1,500,000.00 in capital improvements in Joe O's restaurant and expended more that $200,000.00 in radio and print advertising.
The parties entered into a "Cancellation Agreement" dated August 22, 2007, wherein the parties agreed to cancel the Lease subject to certain conditions described therein, including a Tenant Reimbursement Fee set forth in paragraph 3 thereof. (Exhibit "G" to the Motion). Paragraph 3 states as follows:
3. Tenant Reimbursement Fee.
Notwithstanding anything contained in the Lease, as consideration for Tenant's surrender of the Premises to Landlord in accordance with the provisions of this Agreement, as same may be modified by the Stipulation. Landlord shall pay to Tenant the amount of $500,000.00 (the " Tenant Reimbursement Fee"), representing a reimbursement for Tenant's cost of the existing improvements made by Tenant in the Premises as of the date hereof, provided and on condition that Tenant fully and timely complies with the terms of this Agreement and the Stipulation, including but not limited to, Tenant's vacating the Premises to Landlord at the time and in the condition required by the Stipulation, time being of the essence.
Simultaneous with the Cancellation Agreement, the parties executed the Stipulation (which was not so-ordered by the court) in this holdover proceeding providing for a final judgment of possession in the sums of $113,911.84 and the immediate issuance of the warrant of eviction with the execution of the warrant stayed through April 30, 2008 for respondent to vacate the subject premises. (Exhibit "B" to the Motion). Paragraph 5 of the Stipulation further provided for a payment of $13,911.84, bringing the arrears through August 2007 to $100,000, which would be paid in five monthly installments of $20,000 per month on the first day of each month for October 2007 through February 2008. In addition, paragraph 6 of the Stipulation provided for payment of use and occupancy from September 2007 through April 2008 by the tenth day of each month in the same amount of rent and additional rent reserved in the Lease. Paragraph 7 provided for a ten-day cure period for a default in which the respondent may "cure the default alleged therein with said ten (10) day period." Any notice under the Stipulation had to be sent to respondent "by personal delivery or by other nationally recognized overnight courier service, to Respondent's counsel, Joseph O. Giaimo at Giaimo Associates, LLC, 80-02 Kew Gardens Road, Kew Gardens, New York 11415."
Respondent paid $13,911.84 at the time of execution of the Stipulation. Respondent also allegedly paid the September 2007 use and occupancy late, but it was voluntarily accepted by petitioner. (Exhibit "F" to the Opposition papers). However, Mr. Giaimo testified that it was paid within the ten-day cure period required under the Stipulation.
By letter dated October 16, 2007, petitioner's counsel notified Mr. Giaimo that respondent failed to pay the October 2007 use and occupancy payment of $27,392.77 as well as the first arrears payment of $20,000 under the Stipulation. Petitioner's counsel provided that payment must be made by October 29, 2007, which was at least ten days from the date of service of the notice. (Exhibit "B" to the Motion). Ms. Porter accepted and signed for the Federal Express package containing the above notice from petitioner's counsel. Ms. Porter opened the package, placed it on her desk which was cluttered with files and legal papers, and forgot to give it to Mr. Giaimo or Ms. Garcia. On November 5, 2007, in the process of removing papers from her desk, Ms. Porter discovered the letter and immediately gave it to Ms. Garcia.
On November 5, 2007, Ms. Garcia reviewed the letter and immediately called petitioner's counsel to inform him that she would be delivering the total of $47,329.77 to the petitioner in two checks of $23,664.88 and $23,664.89, both dated November 9, 2007 and November 19, 2007, respectively. (Exhibit "C" to the Motion). Petitioner's counsel did not object to the late tender of the checks and stated he would have to consult with the petitioner. By letter dated November 7, 2007, petitioner's counsel returned the post-dated checks and declared respondent in default under the terms of the Stipulation and Cancellation Agreement. (Exhibit "D" to the Motion). Ms. Garcia then immediately personally delivered full payment of $47,329.77 by good funds to the petitioner. By letter dated November 9, 2007, petitioner again returned and rejected respondent's tender of payment. (Respondent's Hearing Exhibit "D").
Mr. Giaimo went on vacation to Florida from October 31, 2007 through November 6, 2007. He did not know of the October 16, 2007 notice to cure letter which expired on October 20, 2007, until his return on November 7, 2007. Mr. Giaimo credibly testified and averred that he did not intentionally miss the deadline to make payments under the Stipulation, but it was a mere inadvertence as follows:
I certainly would have put a full check into the hands of the Landlord within ten days following a notice of default, which appears to be no more than a letter to "Dear Joe" if there was any thought that I would be evicted from the restaurant and suffer the loss of the $500,000.00 equipment reimbursement. I have been paying rent to the Landlord since February 2003 even [though] I did not open for business until September 2003 and would certainly not wilfully take a chance at losing my lease or the $500,000.00 reimbursement.
(Giaimo Aff. at ¶ 16).
Conclusions of Law
Time of Essence Clause
While the Cancellation Agreement has a time of the essence clause regarding the timely vacature of the subject premises, the detailed and lengthy Stipulation contains neither a time of the essence clause nor a de minimis clause relating to prompt payment of rent and arrears. Significantly, the Stipulation provides for an express extension of time to pay ten days after written notice to cure to respondent. There is no limit for the notices to cure in the Stipulation. It is apparent that a time of the essence clause regarding other obligations under the August 22, 2007 Stipulation was specifically omitted as two prior stipulations between the parties contained language with stringent time of the essence clauses as follows:
10.Respondents acknowledge that time is of the essence with respect to its compliance with all of the terms, covenants and conditions of this stipulation and with respect to all dates set forth herein. (Emphasis added).
Valid Excuse
While respondent's conduct was not exemplary in failing to make the payments under the Stipulation, it was clearly and simply an "inadvertence" or "venial inattention" that was not intentionally calculated to result in a default triggering the severe loss of the $500,000.00 reimbursement fee. See, e.g., Malvin v Schwartz, supra, and J.N.A. Realty Corp v. Cross-Bay Chelsea, Inc., supra. Specifically, Ms. Porter inadvertently, through human error and without any malice, mislaid the October 17, 2007 notice to cure with the clutter on her desk. Ms. Garcia did not intentionally avoid the notice due to the inability to pay or fiscal hardship, but as soon as she discovered Ms. Porter's error, she in good faith notified petitioner's counsel. Similarly, Mr. Giaimo was not informed of the notice until after he returned from vacation on November 7, 2007 and certainly did not intentionally default knowing that he would lose the negotiated $500,000.00 reimbursement fee.
Substantial Compliance
The Stipulation itself provides a remedy for a missed payment, to wit: the service of a requisite notice to cure. There is no "de minimis clause" in the Stipulation which may abrogate the party's right to reasonably rely on "substantial compliance" for a minimal delay in paying sums owed pursuant to the precise terms of the Stipulation.
As stated above, Ms. Garcia immediately contacted petitioner's counsel once she discovered the inadvertent error to pay the sums owed under the Stipulation. While Ms. Garcia initially sent post-dated checks, petitioner's counsel did not initially object to the tender of post-dated checks and Ms. Garcia reasonably relied on petitioner's counsel's acknowledgment of receipt as an acceptance of the tender. As soon as petitioner's counsel rejected the payment, Ms. Garcia immediately replaced the post-dated checks with good funds. This prompt payment constituted "substantial compliance."
Moreover, not only is respondent in substantial compliance due to the above tender, it is uncontroverted that respondent also has the present ability to pay $132,734.64 to become current in rent and additional rent and arrears through January, 2008 (the date of the hearing) under the Stipulation.
Prejudice
To determine the prejudice to a party, courts must weigh the gravity of the loss in proportion to the gravity of the fault and consider whether the result would be unjust, inequitable or permit the other party to gain an unconscionable advantage.
The possible loss in this case is substantial. Respondent is in jeopardy of losing a reimbursement fee of $500,000.00 which represents a partial reimbursement for respondent's cost of existing improvements valued in excess of $1,500,000.00. Respondent's fault is that Ms. Porter mislaid the notice to cure on her cluttered desk, which was only discovered after the ten days to cure had expired. Respondent's fault was mitigated by Ms. Garcia's attempt to make prompt payment and the respondent's present ability to make full payment to become current through January, 2008 under the terms of the Stipulation. The fault is insubstantial compared to the substantial loss.
Petitioner has the reserved right under Article 41 of the Lease to prematurely terminate this long-term Lease under certain payments between $500,000.00 and $2,000,000.00 to reimburse respondent for improvements that respondent made to the restaurant. In other words, petitioner can not terminate the Lease unless it pays a price that was negotiated and designed to reimburse respondent for its substantial "out of pocket" costs. To permit petitioner to both terminate this long-term Lease and to avoid its responsibility to pay the substantial reimbursement fee of $500,000.00 would be unjust, inequitable and unconscionable under the circumstances.
Conclusion
Respondent's motion is granted. Respondent must pay petitioner $132,734.64, representing use and occupancy and arrears to become current through January, 2008 under the Stipulation within one day after service of notice of entry of this decision and order and petitioner is directed to accept the tendered payment. If said sum is paid, the terms of the Stipulation remain in full force and effect, including but not limited to the stay of execution of the warrant of eviction conditioned upon payment of the sums set forth therein. If it is not paid, petitioner must re-serve the marshal's notice on the respondent.
The foregoing constitutes the decision and order of this Court. Courtesy copies of this decision and order have been mailed to counsel for the parties.