Opinion
L & T 65377/19
01-02-2020
NOMAD 28TH STREET, LLC, Petitioner-Landlord v. W.J. ENTERPRISE INC., Respondent-Tenant, "XYZ Corp." Respondent-Undertenant.
LAROCCA HORNIK ROSEN & GREENBERG, LLP, Attorneys for Petitioner, By: AMY D. CARLIN, ESQ and FAISAL LATEEF, ESQ., 40 Wall Street, 32nd Floor, New York, New York 10005, 212.530.4835 PRYOR CASHMAN LLP, Attorneys for Respondents, By: RACHEL E. SHAW and KAVERI ARORA, ESQ., 7 Times Square, New York, New York 10036-6569, 212.421.4100
LAROCCA HORNIK ROSEN & GREENBERG, LLP, Attorneys for Petitioner, By: AMY D. CARLIN, ESQ and FAISAL LATEEF, ESQ., 40 Wall Street, 32nd Floor, New York, New York 10005, 212.530.4835
PRYOR CASHMAN LLP, Attorneys for Respondents, By: RACHEL E. SHAW and KAVERI ARORA, ESQ., 7 Times Square, New York, New York 10036-6569, 212.421.4100
Sabrina B. Kraus, J.
BACKGROUND
Petitioner commenced this summary nonpayment proceeding seeking to recover possession of the second floor at 6-8 West 28th Street, New York, New York 10001 (Subject Premises), based on the allegation that Respondent has failed to pay rent due pursuant to the parties' lease agreement.
PROCEDURAL HISTORY
Petitioner issued a Notice of Failure to Receive Rent Payments dated July 19, 2019. A fourteen day rent demand was issued on or about July 22, 2019, seeking $811,515.43 for rent and additional rent, as detailed in a ledger annexed to the demand.
The Petition was filed on August 8, 2019. Respondent appeared by counsel on August 22, 2019, and filed an answer asserting eight affirmative defenses, including failure to state a cause of action, laches and estoppel and unclean hands.
An initial court date was set for September 5, 2019. On October 2, 2019, Respondent moved to amend its answer to include the claim of constructive eviction. The motion was granted without opposition on the return date, and the proceeding was adjourned to November 12, 2019, for trial.
The trial commenced on November 12, 2019, continued on November 13, 2019 and concluded on November 14, 2019. On December 13, 2019, the parties submitted post trial memoranda, and the court reserved decision.
In Limine Motion
On the trial date, Petitioner moved for an order precluding Respondent from offering any evidence on its constructive eviction defense. Petitioner argued that Respondent should be precluded from offering any evidence regarding its affirmative defense of constructive eviction because it was pursuing relief for said claim in a prior pending plenary action in Supreme Court.
The court denied the motion, on the record on November 13, 2019, because Petitioner had consented to Respondent's motion to add the constructive eviction defense on the prior court date, by failing to oppose the motion to add the defense.
PRIOR PENDING ACTION
Respondent commenced an action against Petitioner in Supreme Court, New York County, under Index No 152208/19. The complaint asserts causes of action based on breach of contract and breach of good faith and fair dealing. Notably no claim is made in the Supreme Court pleading that Respondent was constructively evicted or ousted from possession. Rather the claim is that Petitioner breached its contract in relation to the fire alarm system which has delayed the opening of Respondent's business.
Respondent moved for an order consolidating this proceeding with the action in Supreme Court. Pursuant to a decision and order dated September 20, 2019, the motion was denied by the court (Barrok, J). The court noted that the lease between the parties provides that the rent must be paid without any set off or deduction and that the lease bars Respondent from interposing a counterclaim for damages in the summary proceeding.
The parties in the Supreme Court action stipulated to a discovery schedule, and adjourned the action to February 6, 2020 for a compliance conference.
FINDINGS OF FACT
Petitioner was the owner of 6 West 28th Street and 8 West 28th Street, New York, New York pursuant to deeds dated April 20, 2015 (Ex 1 & 2). Ownership was transferred from Petitioner to JTRE Nomad 8 West 28th LLC pursuant to a deed dated August 11, 2017 (Ex 3).
Respondent is the tenant of record of the Subject Premises pursuant to a lease dated June 2016 (Ex 4). Petitioner is the lessor pursuant to said lease. The lease is for a term from June 1, 2016 through November 31, 2028. The lease provides that rent was to commence on November 15, 2016, but further provided that if Respondent had not opened for business rent collection would be delayed until December 1, 2016.
The current fixed monthly rent under the lease is $44,204.17.
The lease was modified pursuant to a first amendment dated March 13, 2017 (Ex 6). Respondent made a payment of $145,833.33, upon execution of the amendment representing arrears due through said date. The amendment gave Respondent an additional free month of rent for March 2017, conditioned on timely payment of rent from April 2017 forward.
The first witness to testify at trial was Morris Terzi (Terzi). Terzi testified that he is employed by the owner of the building as a property manager. His duties include collection of rent, maintenance of the property, and oversight of repairs and construction.
Petitioner combined the two buildings and did significant renovations on the buildings over the last few years. The combined building forms a four story commercial premises totaling about 25,000 square feet.
Respondent occupies the second floor of the building. Terzi has primarily dealt with Anna Kim who acted on behalf of Respondent. Terzi credibly testified that Respondent has been in physical occupancy of the Subject Premises from the inception of the tenancy through the date of the trial.
Terzi testified that monthly invoices for Respondent are printed and mailed to two different addresses. Copies of the invoices from November 2018 through July 2019 were submitted in evidence (Ex 5). The invoices sent to Respondent had an open balance sheet attached to them, the copies submitted in evidence did not. The invoices submitted in evidence do not distinguish between the interest charges and the late fee charges, and calculate interest at a compounded rate. The lease does not state that the interest should be compounded.
Invoices for August 2019 through November 2019 were also submitted in evidence (Ex 15).
Terzi testified to amounts due for taxes, late fees and interest. Terzi testified that Respondent's last two rent payments were in October 2018 and August 2019.
Terzi testified that the amount in the rent demand includes legal fees of $22, 145.00 incurred in a prior rent dispute between the parties that never went to litigation. The amount also includes $18,900.00 for what Terzi called Respondent's portion of the fee for the Fire Alarm Consultant. This fee, referenced in a June 21, 2018 proposal, was for an amendment to the base building fire alarm system plan to accommodate Respondent's renovations.
The amount sought in the demand also includes $1,024.67 arising out of a March 2018 gas shut off caused by Respondent. The gas was off for a day or two.
The amount sought in the demand also includes $5000.00 for engineer and architect fees.
Terzi testified that through November 2019, calculating the interest without compounding it there was a total of $782,542.63 due. This included fixed rent in the amount of $524,769.58, additional rent totaling $123,914.31 and late fees totaling $133,858.75. These balance were reflected in Exhibit 16 which was submitted in evidence. This amount does not include attorneys' fees for this proceeding, which the court severed until after a determination was made as to who the prevailing party in the proceeding is.
Daniel Lee a/k/a Sungjin Lee (Lee) testified for Respondent. Lee is an interior designer and project manager. Lee is familiar with the Subject Premises, his company did the design for Respondent's space and managed the construction for it. Lee was hired by Respondent in December 2016. A copy of the contract between Respondent and Lee's company was submitted in evidence (Ex A).
Respondent asked Lee to design the Subject Premises for use as a Karaoke Bar. The contract was initially at a cost of $700,000.00, but there were additional costs of $50,000.00, after the project began. On January 10, 2017, there was a stop work order issued on Respondent's project because one of the applicant's on the job withdrew. The stop work order was not rescinded until February 28, 2017.
Respondent used multiple general contractors on the project.
Construction on the space began at the end of March 2017, and the build out was completed in March 2018. Through 2017, the architect working on the space was Daniel Kwu Lee (DKL) who was hired by Lee's firm. DKL was in charge of design, drawing and mechanical engineering for the design created by Lee. DKL prepared plans for the Subject Premises. The architectural drawing prepared by DKL was submitted in evidence (Ex B). The plan did not include a design for the fire alarm system in the tenant's space. In February 2018, Respondent changed architects.
In April 2017, Respondent replaced the general contractor they were working with and hired JSL Design.
Originally, Lee was not retained by Respondents to address the fire alarm system, but Respondent's contract with Lee was later amended to include that. Additional drawings were prepared in May or June of 2017. These drawings were submitted in evidence (Ex C) and include: amended architectural drawings; new mechanical engineering drawings; fire alarm system drawings; and structural drawings for the duct and mechanical engineering systems. The last three pages show the design for the fire alarm system which was designed by Respondent's engineer. The proposal was to connect Respondent's fire alarm system to the fire alarm control panel in the lobby of the building. These amended plans were sent to Edward Carol, the architect for the building and Petitioner's agents by email link in the middle of July 2017 (Ex E).
Respondent completed installation of the fire alarm system in its space in February 2018. Respondent's fire alarm engineer, Tim Smith from Advanced design Group, filed an application with DOB for approval of Respondent's fire alarm system along with Respondent's build out drawing. In response, the Fire Department of New York issued an objection letter dated April 25, 2018, stating that Respondent had to submit a letter of approval for the existing base building fire alarm system to proceed (Ex D). On May 9, 2018, Lee forwarded this document to Petitioner and its agents (Ex F). Lee acknowledged that he was always able to see the status of the base building fire alarm system by viewing the DOB website (Ex G).
In December 2016, Petitioner had submitted a permit application to DOB in connection with the fire alarm system pursuant to DOB Job No. 122814838. Petitioner's application was disapproved by DOB, on the following dates: December 15, 2016, October 25, 2017, December 29, 2017, January 2, 2018, April 2, 2018, January 2, 2019, February 19, 2019.
The facts in this paragraph are taken from Respondent's notice to admit and Petitioner's responses to same.
Petitioner's application for the base building fire alarm was approved on August 14, 2019.
Certificates of Occupancy for 6 West 28th Street and 8 West 28th Street were issued in July 1945 (Ex M). The use listed for the second floor of 8 West 28th Street is gelatine mixing and packing. The use listed for the second floor of 6 West 28th Street is office space.
As of the date of the trial of this proceeding no temporary certificate of occupancy had been issued for the building.
Respondent also called Timothy Cohen as a witness (TC). TC is the Director of marketing and business development for AIK Renovations. TC has been employed in this capacity for approximately one year. AIK Renovations acts a a General Contractor and TC does their marketing. TC worked as a consultant for Respondent from the inception of Respondent's tenancy. TC worked on helping Respondent get organized, but ultimately planned to work on getting the business up and running after the completion of construction. TC testified that Respondent does not have a Public Assembly Permit (PAP) and that in order to get such permit there would need to be a certificate of occupancy that allowed for use as a a bar and lounge which is Respondent's intended business.
TC met with Terzi and Petitioner and Respondent's architects in May 2018 to discuss the status of Petitioner's application for approval of the fire alarm system with DOB. Petitioner's architect advised that Respondent should have filed for a stand alone system instead of a system that tied into the fire alarm for the building. Respondent did not file for a stand alone system.
TC testified that in anticipation of opening its business Respondent leased equipment and hired staff. TC acknowledged that, as of the Fall of 2018, Petitioner was working with professionals to obtain approval of the fire alarm system. Respondent installed cooking equipment on the second floor. As of the time of the trial, Respondent's furniture was in the Subject Premises as well as television equipment.
Petitioner called Eun Joo Kim a/k/a Anna Kim (Kim) as a witness. Kim confirmed that a PAP was necessary for the operation of Respondent's business. Respondent's architect filed an application with DOB for the PAP, but as of the date of the trial due to remaining open items with DOB, the PAP had not yet been approved.
Kim acknowledged that Respondent had put pad locks on the door to the second floor but stated that when Terzi asked for a key she provided him with one. Kim testified that the pad locks were placed on the door as a result of the theft of some television equipment from the Subject Premises.
Kim testified that she believed Petitioner needed to obtain a temporary certificate of occupancy before Respondent would be able to open for business.
Miles Fisher (Fisher) was called as a witness by Respondent. Fisher is a licensed engineer in New York State, his company, Fire & Building Code Services, designs, files and inspects all types of fire alarm systems throughout the city. Fisher has a degree in electrical engineering, and is the President of the company. Fisher has been a licensed engineer for over 23 years, and his company, which opened in November 1996, does over one hundred jobs per year.
Fisher testified that he typically acts as a co-consultant for the owners of buildings. Fisher does a peer review of the fire alarm plans prepared by the owner's engineer. Prior to a building being occupied, the fire alarm plan has to be approved, so Fisher's company does a pre-inspection. The court deemed Fisher an expert in the process and installation of fire alarm systems in New York City.
Fisher was retained by Petitioner to address an issue with the approval of the fire alarm system for the building, do a cursory review of the fire alarm plans prepared by Petitioner's engineer, and assist in getting the plan approved. Fisher was also to analyze the issues with the second floor, and why the plans that Respondent had filed weren't getting approved. The goal was to get the fire alarm systems approved so Petitioner could get a TCO for the building.
Once hired by Petitioner, Fisher reviewed the plans, and had meetings at the building and with Respondent. Fisher's recommendation was to incorporate Respondent's plan with the base building plan being filed by Petitioner's engineer. Fisher marked up the plans for Petitioner's engineer and plans were drawn based on the mark ups, these were filed and then approved by the Fire Department. Fisher testified that an approved fire alarm plan is a necessary prerequisite to obtaining a TCO. Fisher testified that the Fire Department has recently been reviewing plans for fire alarm systems in a much more stringent fashion, and that its not unusual to have several rounds of objections before an approval is obtained.
Petitioner called Nathan Azizo (NA) as a witness. NA is a partner in ABCO Construction, which acts as a general contractor on projects. NA acts as a project manager. NA was hired by Petitioner to oversee the gut renovation which combined the two buildings. ABCO did all the structural work within the buildings, reframed the floors, installed a new roof, elevator and windows.
After Petitioner obtained a letter of approval from FDNY for the building fire alarm system, NA scheduled an inspection of the building with DOB. The inspector from DOB came and observed padlocks on the door to the Subject Premises. The inspector told NA that the building was not ready for inspection and that if the pad locks were on the door when he returned for inspection a vacate order would be issued for the building. A reinspection occurred towards the end of August 2019, and the building passed, after which Petitioner submitted an application for the TCO.
DISCUSSION
Respondent Failed to Establish its Affirmative Defense of Constructive Eviction
The court finds that Petitioner established a prima facie case for rent and that Respondent failed to establish its claim of constructive eviction.
It is well settled that the absence of a certificate of occupancy does not amount to a constructive eviction ( Silver v. Moe's Pizza, Inc. , 121 AD2d 376, 377 ). A constructive eviction exists where the landlord's wrongful acts substantially and materially deprive the tenant of the beneficial use and enjoyment of the premises ( Barash v. Pennsylvania Term. Real Estate Corp., 26 NY2d 77, 83 ). Moreover, the tenant must have been deprived of something to which it was entitled under or by virtue of the lease ( Id. at p. 82 ).
In this regard paragraph 6(d)(ii) of the lease provides:
As part of Tenant's work hereunder, Tenant shall obtain a public assembly permit ("PA") for the premises. Upon obtaining the PA, Landlord Shall commence and delegate prosecution, at Tenant's expense, the obtaining of a temporary certificate of occupancy permitting the use described in Article 4 above. Tenant shall reimburse Landlord for all of Landlord's reasonable expenses in connection therewith, within (15) days after demand.
It was undisputed at trial that Respondent had not obtained a PAP and despite same, Petitioner has a pending application for a TOC with DOB.
Additionally, Respondent failed to establish by a preponderance of credible evidence that it ever abandoned possession of the Subject Premises.
... constructive eviction exists where, although there has been no physical expulsion or exclusion of the tenant, the landlord's wrongful acts substantially and materially deprive the tenant of the beneficial use and enjoyment of the premises. The tenant, however, must abandon possession in order to claim that there was a constructive eviction.
Thus, where the tenant remains in possession of the demised premises there can be no constructive eviction. 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 Terminal Real Estate Corp. , 26 NY2d 77, 83 ).
In the case at bar, although Respondent never opened for business, the court finds that Respondent remained in actual physical possession of the Subject Premises through the date of the trial herein.
As the court finds there has been no constructive eviction, the balance of the issues raised pertaining to the fire alarm system, really are claims by Respondent of a breach of lease. There is no counterclaim in this proceeding for breach of lease, and Respondent's claims for damages in that regard are pending in Supreme Court and will not be addressed by this court.
The court notes in this regard that the lease provides for the payment of rent without set off or deduction.
Petitioner's Claim for Rent Arrears
Petitioner seeks a total of $524,769.58 for fixed monthly rent and CAM Charges for November 2018 through November 2019. The court finds Petitioner has established the right to a judgment for said amount.
This figure was what Terzi requested in his testimony and pursuant to the breakdown he submitted (Ex 16) and is the figure requested by Petitioner in its post trial memo.
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Petitioner Failed to Establish the Right to a Judgment for Taxes
Petitioner sues for taxes.
Paragraph 8 of the lease addresses taxes. Paragraph 8(A)(ii) states that Landlord's Statement shall mean a statement of Taxes for a Comparison Year and Base Tax Year.
8(B) of the lease states "Tenant shall pay to Landlord ... Tenant's Proportionate Share of the amount by which (I) Taxes assessed, levied or imposed during, or with respect to, such Tax Year or any part thereof exceeds (ii) the Taxes for the Base Year ("Tax Rent"). "
8(C)(i) of the lease states "At any time prior to, during or after any Tax Year or calendar year, Landlord may render to Tenant a Landlord's Statement or Statements showing the amount of Tax rent."
There were no Landlord' Statements as defined in the lease submitted in evidence. Petitioner did submit two sets of invoices. One set for November 2018 through July 2019 (Ex 5) and another set for August 2019 through November 2019 (Ex 15).
Exhibit 5 includes two invoices for taxes, one is an invoice dated March 2019, which includes $123.76 charge for BID taxes, and the other is an invoice for July 2019 which includes a charge fo $11,364.77 in taxes. However, as no evidence was provided that a Landlord's Statement was issued in conformity with the lease, Petitioner has failed to establish an entitlement to a judgment for taxes and said claim is dismissed. No tax bills were submitted in evidence showing the amount of taxes for the year billed nor any evidence as to how much said bill would have exceeded the taxes for the base year.
Based on the forgoing, Petitioner's claim for taxes is dismissed without prejudice.
Petitioner acknowledges the amount in the rent demand includes a claim for $22,145.00 in legal fees based on a prior rent dispute that never went to litigation.
Paragraph 37 of the lease states:
If Landlord is made or otherwise becomes a party to any litigation commenced by or against Tenant involving the enforcement of any of the rights and remedies of Landlord, or arising on account of the default of Tenant in the performance of Tenant's obligation hereunder, or otherwise, then Tenant shall pay to Landlord, as additional rent, the costs and reasonable attorney's fees incurred by Landlord in connection with such litigation.
This provision of the lease does not support landlord's claim for $22,145.00 in legal fees as it is acknowledged that the issue never went to litigation and there was no evidence at trial as to the reasonableness of said fee or even establishing that attorneys fees in said amount were billed or paid. Petitioner has failed to establish the right to a judgment for said claim, and the claim for prior fees is dismissed.
Petitioner did establish the right to collect $1024.67 for a gas shut off caused by Respondent in March 2018 (Ex 10).
Petitioner also seeks $500.00 for a fee from its engineer (Ex 12) which the court finds Petitioner is entitled to.
Petitioner seeks $18,900 for reimbursement for fees paid to Fire and Building Code services Inc (Ex 11). However, this amount represents the total paid for the entire building. Paragraph 6(A)(ii) of the lease only provides that Respondent is responsible for the portion of said bill "related solely to" the Subject Premises. Respondent has objected to the amount sought as Petitioner is seeking the entire bill. The lease further provides in regard to said charge "if the parties are unable to agree on the reasonable costs, they shall submit the dispute to arbitration before their architects for a decision, whose decision shall be binding." Based on the foregoing, the court finds Petitioner has failed to establish the right to a judgment for said fee and the amount is dismissed without prejudice to the parties rights to arbitrate the amount due.
Petitioner's remaining claims pertain to late fees and interest. Terzi testified that the amount in the rent demand included $133,858.75 in late fees. In fact the rent demand seeks $387,018.90 in late fees and another $37,016.22 in interest.
Paragraph 2(a)(ii) of the lease states:
In the event any installment of Fixed Rent of Additional Rent required pursuant to the provisions of this Lease to be paid by Tenant is not paid within ten (10) days after the date due, Tenant shall pay to Landlord as Additional Rent a late charge of five (5%) percent of the amount past due to cover Landlord's administrative expenses incurred in connection with such late payment. In addition, if such payment is not made within thirty (30) days after the date due, Tenant shall pay, upon demand, as Additional Rent, interest on such late payment, at the Interest Rate, from the date due, until paid ...
Petitioner thus seeks over $ 400,000.00 in late fees and interest, given the total amount proven due the court finds this claim excessive and unenforceable as applied by Petitioner.
As held by the Appellate Division:
Under these circumstances, we find the late fee provision of the subject lease to be unenforceable. "The charge, while not technically interest, is unreasonable and confiscatory in nature and therefore unenforceable when examined in the light of the public policy expressed in Penal Law § 190.40, which makes an interest charge of more than 25% per annum a criminal offense" ( Sandra's Jewel Box v. 401 Hotel, 273 AD2d 1, 3, 708 N.Y.S.2d 113 ). TY Builders II, Inc. v. 55 Day Spa, Inc. , 167 AD3d 679, 682(NY App. Div. 2018). Thus Petitioner's claim for legal and late fees is dismissed.
The Fact That the Amount Awarded to Petitioner Does Not Include All Sums Sought in the Rent Demand Does Not Warrant Dismissal for Failure to State a Cause of Action
Much of Respondent's post trial memorandum of law is based on the allegation that the rent demand herein is defective, can not be amended and thus the entire action must be dismissed. However, Respondent's answer contains no affirmative defense alleging that the rent demand is defective. While the answer herein does include a more general defense of failure to state a cause of action, this does not warrant dismissal of this proceeding, where a rent demand was made based on actual and significant failure by Respondent to pay any rents due under the lease for the relevant period.
The Court Finds Neither Party Is the Prevailing Party Entitled to Attorneys Fees
At the conclusion of trial, Petitioner reserved its rights to seek attorneys' fees incurred in this litigation. In its post trial memoranda and at the close of its case Petitioner requested a judgment for $1,569,783,78. As the amount actually awarded to Petitioner is substantially lower, the court finds petitioner has failed to establish it is the prevailing party in this action entitled to legals fees ( J.J. & P. Corp. v. Dune Deck Owners Corp., 10 Misc 3d 129(A) ; V & J Inc. v. 2320 Route 112, LLC , 13 Misc 3d 30, 32 ).
CONCLUSION
Based on the foregoing,
IT IS ORDERED that Petitioner is awarded a final judgment of money and possession in the amount of $ 526,294.25 for all rent and additional rent due through November 2019, issuance of the warrant is stayed five days for payment. The warrant may execute on Marshal's notice; and
IT IS FURTHER ORDERED that Respondent's defenses are dismissed.
This constitutes the decision and order of this Court.