Opinion
6408/08.
Decided December 1, 2010.
Plaintiff's attorney is Yehuda Nelenbaum, Brooklyn NY.
Defendant's attorney is Erez Glambosky, New York NY.
Recitation, as required by CPLR 2219(a), of the papers considered in the review of defendants' motion for summary judgment dismissing the complaint and other relief.
PapersNumbered
Notices of Motion, Affirmation, Exhibits Annexed ............................ 1-7 Affirmation in Opposition and Exhibits Annexed .............................. 8-13 Reply ....................................................................... 14Upon the foregoing cited papers, the decision/order on this motion is as follows:
Defendant 442 West 22nd Street LLC moves for summary judgment dismissing plaintiff's action on the grounds that the complaint does not state a cause of action [CPLR § 3211(a)(7)], because the plaintiff has failed to comply with the Court's Preliminary Conference Order, Defendant's Notice of Deposition and Demand for Documents [CPLR § 3126], and because that defendant has a defense founded upon documentary evidence [CPLR § 3211(a)(1)]. Defendant also requests summary judgment on its counterclaim for attorney's fees. Plaintiff opposes the motion.
For the reasons set forth herein, the defendants' motion is granted and the complaint is dismissed.
Plaintiff New York Spot, Inc. is a domestic corporation with offices in the City of New York. Defendant 442 West 22nd Street LLC is a domestic limited liability company with offices in the City of New York. On or about September 25, 2006, the defendant and an entity entitled Hadot, Inc. executed a contract for the sale of real property at 442 West 22nd Street in New York County, a 4 — story building on a 25 foot by 98 foot lot with 23 Class B apartments.
A Class B multiple dwelling is defined in the New York City Administrative Code, at 27-2004 (a) (9) as "a multiple dwelling which is occupied, as a rule, transiently, as the more or less temporary abode of individuals or families who are lodged with or without meals. This class includes hotels, lodging houses, rooming houses, boarding houses, boarding schools, furnished rooming houses, lodgings, club houses, and college and school dormitories".
The Certificate of Occupancy for this building, issued in 1968, states that the cellar contains a boiler room and storage; the basement five furnished rooms and the first to third floor contain six furnished rooms on each floor, for a total of 23 rooms.
Under the contract, Hadot Inc. agreed to buy and defendant agreed to sell said property. On or about March 5, 2007, pursuant to an assignment of the contract from Hadot Inc. to plaintiff, defendant transferred the property to plaintiff by bargain and sale deed. A copy of the assignment is provided as Exhibit 2 to the Closing Statement in Exhibit I to the moving papers. It was executed at the closing. It is noted that the contract has cross — default provisions, as principals of Hadot Inc. simultaneously contracted to purchase two other properties on the same block from defendant. Plaintiff's connection to these transactions is unknown.
It is alleged in plaintiff's verified complaint dated June 11, 2009, that defendant is obligated to plaintiff for $550,000, plus costs and disbursements. Plaintiff claims defendant charged rents to certain tenants which were lower than either market rent or the legally allowable rent, and that certain leases were in fact labeled with the notation "Preferential Lease." Plaintiff claims that defendant misrepresented and concealed a significant number of what it calls "initial" preferential leases as opposed to the "renewal" preferential leases they were shown. As a consequence of the lease terms, plaintiff claims it is not able to increase said rents to the amounts which would otherwise be allowed by the applicable laws and regulations. The Court finds plaintiff to be incorrect in this conclusion, as will be explained herein.
The action was commenced in February, 2008 by service of a Summons with Notice.
It is noted that Class B multiple dwellings are subject to Rent Stabilization pursuant to Title 26 of the NYC Administrative Code, the New York Unconsolidated Laws, § 2500.1 et seq., particularly § 26-504(b), and The Emergency Tenant Protection Act of 1974 (Unconsol. Laws § 8621 et seq). See also, Hickey v Bomark Fabrics, Inc., 120 Misc 2d 597 [App Tem 1st Dept 1983].
On January 14, 2010, defendant brought the instant order to show cause seeking dismissal and other relief. The motion was adjourned numerous times over a period of nine months before it was finally argued and submitted.
In seeking dismissal, defendant raises plaintiff's failure to comply with discovery, as well as the CPLR § 3211 reasons set forth above. Plaintiff's Summons With Notice (Exhibit D) cites breach of the contract as the sole basis for its cause of action (in its Affirmation in Opposition, plaintiff also mentions "fraudulent conduct", but also admits plaintiff is "entitled to a more specific pleading" and indicates that "plaintiff will be making a motion to amend the complaint to be more specific". It is noted that the Summons was served almost three years ago. Because the motion is granted under CPLR § 3211(a), the discovery issues are not discussed herein.
The Complaint is at Exhibit F of defendant's motion. It is two pages long, not including the signature and verification page. It claims defendant has misrepresented and concealed from plaintiff "the fact that a significant number of the initial preferential leases, as opposed to the renewal leases that were provided . . . were not designated as such . . . with a notation Preferential Lease.'" That as a consequence, plaintiff claims, plaintiff "was not able to increase the rents to the Legal Rent' plus the standard rent increase permitted by DHCR regulations." Plaintiff has "suffered and continues to suffer damages due to the loss of current and future rental income and the diminution in the value of the property."
Defendant notes that plaintiff has failed to cite the elements of any breach of contract (See, CPLR § 3013), which are: the formation of a contract between the parties, performance by plaintiff, defendant's failure to perform, and damage resulting from such failure. They also note that, to the extent there is a discrepancy between the rent roll and the actual legal rents, any breach of defendant's obligations is covered by the provisions of section 36(g) of the contract. Additionally, the court notes the standard contract clause, contained in paragraph 27 which states that "the acceptance of a Deed by Purchaser shall be deemed to be a full performance on the part of the Seller of its obligations under this agreement, except as to those items, if any, which are herein or hereafter specifically stated to survive delivery of the Deed." It is also noted that paragraph 39 (a) says "Purchaser has had an opportunity to review all lease material attached hereto prior to the execution of this agreement and Purchaser shall assume all obligations accruing thereunder after the Closing Date or as may be required by this Contract."
Whether plaintiff as assignee of the contract is an intended beneficiary of the provisions of paragraph 36(g) need not be determined, as plaintiff fails to state a cause of action, as explained below.
It is undisputed that paragraph 36 of the contract, entitled "Representations and Warranties," provides under section (g):
"The rents listed on Schedule B are the rents actually being collected. The annexed rent roll is true and correct. In the event there is any inconsistency between the rent terms set forth in the leases and Schedule B, the terms set forth in the leases shall prevail."
The contract provides, at the end of paragraph 36, that "The representations of paragraph 36 (g) shall survive closing for a period of one year." That date was March 4, 2008. The summons with notice was filed on February 27, 2008, which was timely.
Among the Riders attached to the contract is one denoted as "Exhibit B," apparently being the same as the aforementioned "Schedule B", which is handwritten and purports to be the building's rent roll. For each of the 23 apartments, it lists the lease expiration date, the current rent, what is purported to be the legal registered rent, and sometimes miscellaneous notes.
For example, for apartment #3, it is noted on the rent roll that the lease expired 8/31/06, that the current rent is $927.33 and that the "legal registered rent" is $1,555.96. There is also a miscellaneous note "renewal offered at legal rent."
"Exhibit B" also includes a certified copy of the 2006 Registered Rent Roll Report Effective 4/01/06, from the NYS Division of Housing and Community Renewal (DHCR), which reflects that Apartment #3 is rent stabilized, that the legal registered rent is $1,555.96, that the tenant is Andrew Thompson, that the lease began 9/01/05, and that the lease ends 8/31/06. This tenant is further discussed infra.
Also in the contract's Riders are some, but not all, of the other leases for the building. A contract rider provision notes that the leases appended to the contract are "similar in form" to leases not provided. The absence of a complete set of leases is not explained by either side, nor is there any statement as to whether an up to date set of leases was delivered at the closing, as contemplated by paragraph six of the contract. The only leases included in the Exhibit containing the Closing Statement, follow the Contract of Sale, and are identical to those annexed to the contract contained in Exhibit G.
With reference to Unit #3, Mr. Thompson's initial lease, dated August 27, 2002, between the defendant's predecessor in interest, West 22nd Street Properties, and Mr. Thompson, ran for one year from September 1, 2002 to August 31, 2003 at a monthly rent of $900. The lease is part of Exhibit G of defendant's motion as part of the contract of sale to which it had been annexed. The initial lease makes no mention of a preferential rent. There is also a renewal lease, dated May 25, 2005. In the section of the renewal lease form denoted as "Offer To Tenant To Renew," clause #2 states "You may renew this lease, for one or two years, at your option, as follows." Under column B it states, "Preferential Rent on Sept 30th Preceding Commencement Date of this Renewal Lease." It is noted that the word "Preferential" is in a different type face, apparently typed in over the printed lease boilerplate. Underneath the word "Preferential," the word "Legal," which appears in the boilerplate's original printed typeface, has been struck out. The rent is filled in, in a different typeface, as $927.33. It is noted that the printed form's Column G states "New Rent (if lower rent to be charged check box and see item 5 below)." The number typed in this column is also $927.33. The box is not checked. Item 5 states "Lower Rent to be charged, if any $. The words "Agreement Attached" follow that notation, with boxes labeled "Yes" and "No." It is noted that no number is filled in for item 5, and neither box is checked. The tenant responded favorably to the offer, and signed it on June 9, 2005, and the owner's agent then signed in on June 10, 2005. On the date the contract of sale was signed, this lease had expired. On the date of the closing, the tenant had still not renewed the lease. Plaintiff is incorrect that with these facts the Landlord was entitled to raise the rent to $1,555.96. Plaintiff's reliance on defendant's representation that the lease would be renewed at the legal rent was a mistake of law on plaintiff's part, as defendant had renewed the lease after the law changed in 2003, without specifying the legal rent, so § 2501.2(b)(2) below would not be applicable.
Preferential rents are defined and regulated under 9 NYCRR § 2501.2 (2010) of NY State's Emergency Tenant Protection Regulations, which says, in pertinent part:
(a) Where the amount of rent charged to and paid by the tenant is less than the legal regulated rent for the housing accommodation, such rent shall be known as the "preferential rent." The amount of rent for such housing accommodation which may be charged upon renewal or vacancy thereof may, at the option of the owner, be based upon either such preferential rent or an amount not more than the previously established legal regulated rent, as adjusted by the most recent applicable guidelines increases and other increases authorized by law. [emphasis added] (b) Such legal regulated rent shall be "previously established" where: (1) the legal regulated rent is set forth in either the vacancy lease or renewal lease pursuant to which the preferential rent is charged; or (2) for a vacancy lease or renewal lease which set forth a preferential rent and which was in effect on or before June 19, 2003, and the legal regulated rent was not set forth in either such vacancy lease or renewal lease, the legal regulated rent was set forth in an annual rent registration served upon the tenant in accordance with the applicable provisions of law, except that the rental history of the housing accommodation prior to the four-year period preceding the filing of a complaint pursuant to section 2506.1 or 2502.3(a) of this Title shall not be examined. [emphasis added]
(c) Where the amount of the legal regulated rent is set forth either in a vacancy lease or renewal lease where a preferential rent is charged, the amount of the legal regulated rent shall not be required to be set forth in any subsequent renewal of such lease, except that the rental history of the housing accommodation prior to the four-year period preceding the filing of a complaint pursuant to section 2506.1 or 2502.3(a) of this Title shall not be examined. [emphasis added].
The New York City Rental Stabilization Code states, in pertinent part at § 26 — 511(c)(14):
(c) A code shall not be adopted hereunder unless it appears to the division of housing and community renewal that such code (14) provides that where the amount of rent charged to and paid by the tenant is less than the legal regulated rent for the housing accommodation, the amount of rent for such housing accommodation which may be charged upon renewal or upon vacancy thereof may, at the option of the owner, be based upon such previously established legal regulated rent, as adjusted by the most recent applicable guidelines increases and any other increases authorized by law.
This amendment to the law, which went in to effect in 2003, permitted a landlord who offered a preferential rent to return the rent, in a subsequent renewal lease, to the legal rent, if both amounts were disclosed in any prior lease, initial or renewal, or, for leases in effect on June 19, 2003, the date the new law was passed, if the Landlord did not put the legal rent in the lease but served the tenant with notice as required by § 2501.2(b)(2) above, unless, regardless of the date of the lease, the lease stated specifically either that the preferential rent was for the duration of the tenancy or the duration of that lease, or something else clearly specified. See Davis v Roland, 54 AD3d 944 (2d Dept 2008). Prior to the enactment of this amendment, the issuance of a lease with a preferential rent required all renewals to be based on it, with the legal increases applied to the preferential rent amount, until there was a vacancy, regardless of whether the legal registered rent was disclosed in the lease, unless the lease clearly specified a termination date of the preferential rent, i.e. the end of a year or the end of the lease. This was because the courts held that ambiguities must be construed against the Landlord as drafter of the lease. See East Side Mgrs Assoc Inc. v Goodwin, 26 Misc 3d 1233A (Civil Ct NYCo 2010); Missionary Sisters v DHCR, 283 AD2d 284 (1st Dept 2001).
As such, the $1,555.96 legal registered rent listed on the rent roll for apartment #3 is not the collectible rent for that apartment, as to its current occupant, since neither the initial lease nor the 2005 lease renewal mentions it, and therefore, it is not "previously established". It would seem that it could have been raised after the law changed, pursuant to § 2501.2(b)(2), but the prior owner failed to do so, and by renewing the lease in 2003 and 2005 without any reference to the legal rent, the owner waived the right to increase it to the legal rent.
Plaintiff says that based upon the representation in the rent roll concerning apartment #3, "renewal offered at legal rent," litigation brought by plaintiff after taking title ensued, which eventually resulted in a decision from New York County Housing Court in Ind. No. 57026/08, wherein the Housing Court ruled, in compliance with the law summarized above, that the legal rent for Apartment #3 was $927.33. Plaintiff did not appeal, apparently. It is noted that in an affidavit filed in Housing Court and annexed as part of Exhibit 7 to plaintiff's papers, the tenant states that he indeed was offered a renewal at the rate of $1,555.96 by the landlord, but he never signed the renewal lease document (See, Exhibit 7).
It is clear to the court that 1) plaintiff misunderstood the applicable law, and 2) plaintiff confuses their claims in the complaint to such an extent that the complaint does not state a cause of action. Plaintiff's mistakes of law cannot be blamed on defendant in a commercial real estate transaction. A mistake of law is not a misrepresentation of fact.
There are 23 Units in the building, numbered 1-24 (there is no Unit 13). The contract included a lease for most of them. Six Units were vacant at closing. A review of the leases, the rent roll provided by defendant and the DHCR 2006 rent registration, all annexed to the contract of sale, reveals the following. Defendant delivered the property to plaintiff on March 5, 2007. On that date, six Units were vacant (1, 5, 6, 7, 18, 19) and plaintiff was free to rent them at the legal registered rent. Four Units (12, 14, 18, 24) were at that time rented at the legal registered rent. Eight Units were rented at preferential rents, and this fact and the legal rent were both disclosed in the applicable leases, with the legal rent indicated in the lease more or less matching the legal registered rent. Plaintiff was free to increase the rent for these Units to the legal rent after closing, or the legal rent indicated on the latest renewal plus the permitted Rent Stabilization increase, as all leases had expired or would expire in a few months. Two Units had leases which may have failed to mention the legal rent, for units granted preferential rents, number 3 and number 17. But both are missing the rider to the original lease, which is specifically mentioned as being annexed and comprising six pages. Without the riders and copies of all renewals, it cannot be determined whether the owner could or couldn't revert to the legal rent at the next renewal.
Units 2, 4, 10, 15, 16, 20, 21, 22. Two units had a lease which disclosed a legal rent approximately $200 lower than the DHCR registration, but it may be that the registration reflects annual increases permitted, but not imposed and as such, are errors as to the tenant in residence but could be used for setting the rent for any future tenant after a vacancy occurs. . For number 4, it lists $948.66 instead of $1,149.39. This lease expired August 31, 2006. Number 20 states $961.20 and the registration $1,206.81. This lease expired May 31, 2005.
Finally, there are 4 tenants who are listed on the rent roll as paying rents of under $300.00 per month. These are the tenants of Units 4, 8, 9 and 23. The tenant of number 4 (counted above as well) was residing at the premises on his first lease, from September 1, 2004 and which expired on August 31, 2006. His lease discloses it is preferential, and states a legal rent of $948.66. The rider is not provided, which might contain relevant provisions to explain the low rent. The legal rent on the DHCR print-out is $1,149.39 for 2006. For Unit number 8, the lease states that "landlord guarantees that upon signing this lease, all rights and protections that tenant possessed under his tenancy of room number 4C at 236 West 22nd Street are transferred to Room number 8 at 442 West 22nd Street. Landlord further represents that Unit number 8 at 442 West 22nd Street is covered by the same Hotel Stabilization Rules and Guidelines that cover former Unit 4C at 236 West 22nd Street". The legal registered rent for Unit 8 on the DHCR rent roll is $261.44. The other two Units, number 11 and number 23 say "not applicable" in the column on the rent roll entitled "lease expiration", which would imply the tenant is rent controlled and has occupied the premises from a date prior to the expiration of Rent Control. No leases are provided for these two Units, which also supports this conclusion. The legal registered rents for these two units is $746.06 and $262.55 respectively.
Lastly, for Unit number 9, indicated on the rent roll as being a Unit with a rent of $173.31 per month pursuant to a lease which expired September 30, 2004, and which states on the DHCR registration that the tenant is named Taylor and the legal rent is $200.39, is probably also covered by rent protections similar to the tenant of number 4, but, in any event, plaintiff was clearly on notice that such tenant's maximum legal rent is $200.30 per month, pursuant to the DHCR print-out annexed to the contract of sale.
The fact that the plaintiff and/or its counsel did not engage in a sufficient review of the leases furnished by defendant prior to the closing and determine what laws apply to them does not give rise to a cause of action against defendant for any damages which may have resulted from their malfeasance. The purchaser of commercial property must conduct its due diligence evaluation of the property and its books and records, not to mention any issues which might affect the property in the near or distant future, such as temporary tax abatements, proposed zoning changes and the like, prior to signing the contract of sale, or if negotiated for, between contract and closing, with a right to terminate the contract for reasons enumerated therein, such as extraordinary expenses to cure violations of record. Failure to do so does not give rise to a post-closing cause of action for the purchaser's misunderstanding of the law.
Whether or not one believes defendant's assertion that it provided all leases within its possession, and whether or not defendant's failure to provide all of them was wilful and intentional is irrelevant to resolution of this motion. This is because the leases defendant did provide should have been sufficient notice that defendant had offered preferential leases to some of the tenants. Either plaintiff did not examine the documents annexed to the contract, or plaintiff did not comprehend their significance. If defendant left the legal registered rent off of one lease renewal for one unit, defendant may have done so for more than one Unit. If the legal rent is not stated on either the initial or the current renewal lease, this is binding with regard to rent increases for that tenant. 88 Blue Corp. v Reiss Plaza Associates, 183 AD2d 662 [1st Dept 1992]; Nestler v Whiteside, 162 AD2d 845 [3rd Dept 1990].
Defendant took title to the property in 2004.
New York adheres to the doctrine of caveat emptor and imposes no duty on a seller to disclose any information concerning the property in an arm's length commercial real estate transaction. Boyle v McGlynn , 28 AD3d 994 , 995 [3rd Dept 2006]. This is the applicable law. Unless some conduct, more than mere silence, on the part of the seller, rises to the level of active concealment, a seller has no duty to disclose information concerning the property. Matos v Crimmins , 40 AD3d 1053 [2nd Dept. 2007]. A buyer has the duty to satisfy itself as to the quality of the bargain. Commander Terminals, LLC v Estate of Shapiro, 20 Misc 3d 1110A [Sup Ct Nassau Cty. 2008].In business transactions, a party is ordinarily under no duty to disclose material facts unless (1) there is a fiduciary relationship between the parties or (2) one party has superior knowledge that is not readily available/accessible to the other party and that party knows the other party is acting on the basis of mistaken knowledge. Stevenson Equip., Inc. v Chemig Constr. Corp., 170 AD2d 769, 771 [3rd Dept], aff'd., 79 NY2d 989. Where there is no fiduciary relationship that would impose a duty to disclose, a party's mere silence without some act which deceived the other party cannot constitute a concealment that is actionable as fraud. Mobil Oil Corp. v Joshi, 202 AD2d 318 [1st Dept. 1994]. There is nothing in the record before the Court to indicate that the dealings between the parties were anything other than an arm's length negotiation, making applicable the customary rules of commercial transactions. Defendant did not owe plaintiff a fiduciary duty with regard to the transaction at issue. The seller of commercial real property is under no duty to speak when parties deal at arm's length. Simone v Homecheck Real Estate Services, Inc. , 42 AD3d 518 , 520 [2nd Dept 2007]; London v Courduff, 141 AD2d 803, 804 [2nd Dept 1988]. Thus, the doctrine of caveat emptor is applicable, imposing a duty on the purchaser to satisfy itself as to the quality of the bargain. Under this doctrine, it is only when the defect in the property is peculiarly within the knowledge of the seller, and is not likely to be discovered by a reasonably prudent purchaser, that a duty to disclose will be imposed. Stambovsky v Ackley, 169 AD2d 254, 261 [1st Dept. 1996]. The mere silence of the seller, without some act or conduct which deceived the buyer, does not amount to a concealment that is actionable as fraud. Slavin v Hamm, 210 AD2d 831, 832 [3rd Dept 1993]. To sustain a claim of active concealment in the context of a fraudulent non-disclosure, the buyer must show, in effect, that the seller thwarted the buyer's efforts to fulfill its duty to conduct its due diligence. See, Jablonski v Rapalje , 14 AD3d 484 , 485, [(2nd Dept. 2005]. To state a prima facie claim of fraudulent concealment, a complaint must allege: (1) concealment of a material fact which defendant was duty bound to disclose due to a confidential or fiduciary relationship between the parties (See, Spencer v. Green, 42 AD3d 521 [2nd Dept. 2007]); (2) defendant intended to defraud the plaintiff thereby ( Glazer v LoPreste, 278 AD2d 198 [2nd Dept. 2000]); (3) the plaintiff reasonably relied on the representation ( Spencer v. Green, supra); and (4) resulting injury ( Jablonski v Rapalje, supra at 487). See also, Lama Holding Co. v. Smith Barney Inc., 88 NY2d 413.
Here, the problem with the leases was plain on the face of those leases and should have been apparent to any buyer who had checked the law concerning preferential leases. To be clear, defendant provided as a rider to the contract of sale a rent roll for these 23 units, which has one column for "actual rent", and one for "legal rent," the latter reflecting the legal rent permissible under the laws and regulations of the NYS Division of Housing and Community Renewal. Plaintiff does not claim that any of the information contained in that rent roll is inaccurate. Plaintiff instead claims that plaintiff erroneously assumed that post — closing renewal leases for these same tenants could be based upon the legal rent instead of the preferential rent indicated on the lease. Plaintiff made this assumption in spite of the clear language of the Rent Stabilization Code. Now plaintiff claims this error is defendant's fault, but under New York law, it is not.
Plaintiff has failed to state a cause of action upon which relief may be granted. The complaint is dismissed in its entirety. The court need not deal with issues of discovery. Defendant's counter-claim requesting attorney's fees for this frivolous action is granted.
Paragraph 54 of the contract provides that "In the event that any litigation arises under this Agreement, the prevailing party, (which term shall mean the party which obtains substantially all of the relief sought by such party), shall be entitled to recover, as part of its judgment, reasonable attorney's fees." Therefore, defendant is entitled to recover reasonable fees arising from the defense of this action.
A hearing will be scheduled to determine the reasonable amount of such fees before a Judicial Hearing Officer. The court's referral order shall be to hear and determine, unless the parties do not agree to permit the J.H.O. to hear and determine, in which case it will be to hear and report. The J.H.O. Part shall notify the attorneys for both parties of the date of the hearing.
Any relief requested but not specifically addressed herein is hereby denied.
The foregoing constitutes the Decision and Order of this Court.