172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass'n, Inc.
| Decision Date | 18 December 2014 |
| Citation | 2014 N.Y. Slip Op. 08872,24 N.Y.3d 528,25 N.E.3d 952,2 N.Y.S.3d 39 |
| Parties | 172 VAN DUZER REALTY CORP., Respondent, v. GLOBE ALUMNI STUDENT ASSISTANCE ASSOCIATION, INC., et al., Appellants. |
| Court | New York Court of Appeals Court of Appeals |
Herzfeld & Rubin, P.C., New York City (Linda M. Brown and David B. Hamm of counsel), for appellants.
Cox Padmore Skolnik & Shakarchy LLP, New York City (Noah B. Potter, Steven D. Skolnik and Sanford Hausler of counsel), for respondent.
This appeal involves a dispute over future rental payments sought under an acceleration clause from an out-of-possession tenant after termination of the leasehold agreement. The Appellate Division affirmed an order of Supreme Court which granted the landowner plaintiff summary judgment on the issue of liability, and affirmed a judgment for damages in accordance with the parties' stipulation. We conclude that the acceleration clause is not per se invalid merely because the landowner terminated the lease and the tenant is no longer in possession. However, defendants should have been permitted to present evidence in support of their contention that the undiscounted acceleration of all future rents constitutes an unlawful penalty. Therefore, we remit for a hearing, limited to that issue.
Real property owner, plaintiff 172 Van Duzer Realty Corp. (Van Duzer), and tenant, defendant Globe Alumni Student Assistance Association, Inc. (Association), entered into a one-year commercial rental lease agreement. The lease provided that defendant Globe Institute of Technology, Inc. (Globe) would use the property as a dormitory for Globe's for-profit educational institution. Prior to the end of the one-year term, Van Duzer and the Association extended the lease for a nine-year period, and Globe signed a guarantee that it would be jointly and severally liable for the Association's obligations under the lease. Van Duzer and the Association also executed a Student Dormitory Restrictive Declaration (Declaration) with the New York City Department of Buildings indicating, among other things, that the premises would be used solely as a student dormitory.
Several months after executing the lease extension, Van Duzer sent the Association a notice to cure for failure to maintain the premises in good order, citing several violations issued by the New York City Environmental Control Board, and demanding action be taken within a month's time. The Association failed to cure, and instead vacated the premises and ceased paying rent as of February 2008. Van Duzer terminated the lease, effective March 24, 2008, with notice to the Association, and commenced an action to recover possession and past due rent. In August 2008, Civil Court awarded Van Duzer possession of the premises with a zero dollar money judgment.
In September 2009, Van Duzer commenced the present action against defendants for rent arrears and an amount equal to the future remaining rent owed on the lease. Van Duzer thereafter moved for summary judgment based on an acceleration clause in the leasehold agreement which provides that upon the tenant's default the landowner may terminate the lease, repossess the premises, and “shall be entitled to recover, as liquidated damages, a sum of money equal to the total of ... the balance of the rent for the remainder of the term.” The provision also states that “[i]n the event of Lease termination Tenant shall continue to be obligated to pay rent and additional rent for the entire Term as though th[e] Lease had not been terminated.”*
Defendants objected to summary judgment, contending Van Duzer could not collect under the acceleration clause once it terminated the lease and retook possession of the property. Defendants also asserted that res judicata barred Van Duzer's damages claims because it could have obtained damages in the prior Civil Court action. Alternatively, defendants requested discovery in order to establish the lack of proportionality between Van Duzer's claimed damages and probable loss. Van Duzer counter argued that it had difficulty finding new tenants because the premises was subject to the Declaration's student dormitory-use limitation. With regard to the res judicata claim, Van Duzer alleged that Civil Court lacked jurisdiction to award damages based on the acceleration clause.
Supreme Court granted Van Duzer summary judgment on liability, finding the parties had clearly agreed that upon termination of the lease the Association would be liable for rent, and referred the matter to a Special Referee to determine damages. The court denied defendants' request for discovery, concluding that under New York law the landowner was entitled to collect full rent due under the lease with no obligation or duty to relet, or attempt to relet, the abandoned premises in order to minimize damages. Thereafter, upon the parties' stipulation, the court entered judgment for Van Duzer in the amount of $1,488,604.66, consisting of the rent remaining due under the lease, reduced by the amount of rent Van Duzer was able to collect by reletting the premises between August 2008 until February 2011, plus interest.
The First Department affirmed, concluding Van Duzer made a prima facie showing of entitlement to accelerated rent under the terms of the lease, and defendants failed to raise a triable issue of fact as to whether the liquidated damages constituted an unenforceable penalty (102 A.D.3d 543, 959 N.Y.S.2d 39 [2013] ). The court also rejected defendants' res judicata claim finding such damages were unavailable in the Civil Court summary proceeding.
On appeal to us, defendants reassert their res judicata argument and their challenges to the validity of the acceleration clause, claiming what amounts to a per se rule barring accelerated rent as damages when the landowner holds rightful possession of the property. We conclude that defendants' arguments are unpersuasive except for their contention that they were entitled to a hearing on their claim that the acceleration clause constitutes a penalty.
As an initial matter, we reject defendants' res judicata argument because the Civil Court was without authority to address a claim for the balance of rent due under the acceleration clause in Van Duzer's holdover proceeding (N.Y. City Civ. Ct. Act § 204 ; see also Ross Realty v. V & A Fabricators, Inc., 42 A.D.3d 246, 836 N.Y.S.2d 242 [2d Dept.2007] ; Marketplace v. Smith, 181 Misc.2d 440, 442–443, 694 N.Y.S.2d 893 [Henrietta Just.Ct., Monroe County 1999] ). Thus, Van Duzer was not barred from pursuing damages for defendants' breach.
[2] Turning to defendants' other arguments, defendants claim that Van Duzer is barred from collecting unpaid future rents pursuant to the acceleration clause because under this Court's decision in Fifty States Mgt. Corp. v. Pioneer Auto Parks, 46 N.Y.2d 573, 415 N.Y.S.2d 800, 389 N.E.2d 113 (1979), a landowner cannot claim accelerated rental payments when the landlord terminates the lease and retakes possession. Defendants' reliance on Fifty States is misplaced because the acceleration clause in that case was “intended to secure the tenant's obligation to” pay rent in the context of an ongoing leasehold, and the clause set the damages for a breach of that obligation (Fifty States Mgt. Corp., 46 N.Y.2d at 578, 415 N.Y.S.2d 800, 389 N.E.2d 113 ). The Court concluded that a lease term providing for accelerated rent upon a tenant's default in rent payment, as a condition of the tenant's continued possession of the property, is enforceable absent a claim of “fraud, exploitive overreaching or unconscionable conduct” (id. at 577, 415 N.Y.S.2d 800, 389 N.E.2d 113 ). Here, defendants do not argue that they want to be put back in possession. Moreover, Van Duzer sought damages in accordance with the acceleration clause after terminating the lease, once defendants defaulted and breached their leasehold obligations to maintain the property and pay rent. Thus, unlike the landowner in Fifty States, Van Duzer is not seeking to deploy the acceleration clause in the course of a continuing leasehold for purposes of ensuring the tenant's compliance with a material provision of the lease.
[3] Nor can defendants challenge the validity of the acceleration clause based on this Court's recognition in Fifty States that, “where a lease provides for acceleration as a result of a breach of any of its terms, however trivial or inconsequential, such a provision is likely to be considered an unconscionable penalty and will not be enforced by a court of equity” (id. at 577, 415 N.Y.S.2d 800, 389 N.E.2d 113 ; see also Seidlitz v. Auerbach, 230 N.Y. 167, 173, 129 N.E. 461 [1920] []; 884 W. End Ave. Corp. v. Pearlman, 201 App.Div. 12, 193 N.Y.S. 670 [1st Dept.1922] [], affd. 234 N.Y. 589, 138 N.E. 458 [1922] ). That rule addresses, in part, the inequities of damages disproportionate to the losses incurred as a result of a tenant's collateral or minor breach (Fifty States Mgt. Corp., 46 N.Y.2d at 577–578, 415 N.Y.S.2d 800, 389 N.E.2d 113 ). That rule continues in force, but is inapplicable to defendants, who committed material breaches of the lease by ceasing all rental payments as of February 2008 and simultaneously abandoning the premises.
[4] To the extent defendants suggest that a landowner should be subject to a duty to mitigate, we previously rejected this argument in Holy Props. v. Cole Prods., 87 N.Y.2d 130, 637 N.Y.S.2d 964, 661 N.E.2d 694 (1995). In that case the Court stated that once a tenant abandons the property prior to expiration of the lease, a “landlord [is] within its rights under New York law to do nothing and collect the full rent due under the lease” (id. at 134, 637...
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