In a late 2011 ruling that evidences the equitable powers conferred upon the courts, the Supreme Court, Appellate Division, First Department of New York upheld a trial court decision declaring that a tenant’s failure to deliver timely notice to extend the term of its lease was excused on equitable grounds and that the lease renewal notice, although delivered later than required under the lease, was valid.
135 East 57th Street LLC, the plaintiff– appellant and landlord, and Daffy’s Inc., the defendant-respondent and tenant, entered into a lease whose initial term commenced on November 7, 1994, and expired on January 31, 2011. The lease granted Daffy’s two options to renew the term for five years each, the first of which was required to be exercised on or before January 31, 2010. Due to its comptroller’s administrative error, Daffy’s delivered its election to renew the lease on February 4, 2010, via e-mail and facsimile. The landlord rejected Daffy’s notice on the grounds that it was late and that it was not delivered in the manner prescribed by the lease. Daffy’s subsequently delivered its election letter on February 9, 2010, in accordance with the lease. (The fact that Daffy’s February 4 notice was mistakenly dated January 30 did not factor into the Court’s decision.)
Two days later, the landlord instituted an action to obtain a declaration that Daffy’s had failed to renew the lease in a timely manner, that the renewal option was terminated, and that the lease would expire on January 31, 2011. Daffy’s answer to the landlord’s complaint sought a declaration that its election to exercise its lease renewal option was valid and effective. The nonjury trial resulted in a decision in favor of Daffy’s, entitling it to equitable relief under J.N.A. Realty Corp. v. Cross Bay Chelsea, 42 N.Y.2d 392 (1977), in which it was held that, although, as a rule, when a contract requires written notice to be given within a specified time, the notice is ineffective unless it is received within that time, an exception to that rule may be applied on equitable grounds where a forfeiture would result from the tenant’s neglect or inadvertence.
The Appellate Division’s analysis commenced by describing the standard that equitable relief in the event that a tenant fails to timely exercise a renewal option requires that “(1) the tenant in good faith made substantial improvements to the premises and would otherwise suffer a forfeiture, (2) the tenant's delay was the result of an excusable default, and (3) the landlord was not prejudiced by the delay.” Vitarelli v. Excel Automotive Tech. Ctr., Inc., 25 AD3d 691 (2006). In the instant matter, the Court found that requirements (2) and (3) above were satisfied – the Daffy’s comptroller’s failure to calendar the timing for delivery of the renewal notice was excusable and the fourday delay in providing the required notice did not prejudice the landlord. However, Daffy’s was not able to fulfill the elements of requirement (1) above because the substantial improvements inferred by the trial court occurred too early in the lease term and Daffy’s testimony as to improvements was limited to painting and flooring work.
However, the Appellate Division noted that the Court of Appeals, in a case cited in the J.N.A. Realty decision, authorized equitable relief against untimely renewal “to preserve the tenant’s interest in a ‘long-standing location for a retail business’ because this is ‘an important part of the good will of that enterprise, [and thus] the tenant stands to lose a substantial and valuable asset,’” notwithstanding that no forfeiture of substantial improvements would have occurred. In the instant case, Daffy’s introduced evidence that the store in question was popular and successful, creating goodwill, that the company could not identify comparable relocation space after conducting a search and that, even if relocation space was available, it would take close to a year for the new store to open. Based on the loss of goodwill, coupled with the predicted firing of the store’s employees, together with Daffy’s satisfaction of requirements (2) and (3) above, the Appellate Division upheld the trial court’s decision in favor of Daffy’s.
135 East 57th Street LLC v. Daffy’s Inc., 2011 NY Slip Op 08497, demonstrates once again the courts’ right to invoke equitable remedies. It also makes clear that the loss of goodwill, and not simply the forfeiture of substantial improvements, serves as a basis for granting a tenant equitable relief in the event that the tenant fails to timely deliver its election to renew a lease, and may open the door for tenants to expand the definition of valuable assets that may be forfeited in similar circumstances. Please feel free to reach out to one of the members of our Real Estate Practice Group to discuss the ramifications of this decision as they relate to your transactions.