200 East 87th Street Associates v. MTS, Inc.

• Decision Date: 21 July 1992
• Docket Number: No. 92 Civ. 2681 (RWS).,92 Civ. 2681 (RWS).
• Citation: 793 F. Supp. 1237
• Parties: 200 EAST 87TH STREET ASSOCIATES, Plaintiff, v. MTS, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

793 F. Supp. 1237

200 EAST 87TH STREET ASSOCIATES, Plaintiff, v. MTS, INC., Defendant.

No. 92 Civ. 2681 (RWS).

United States District Court, S.D. New York.

July 21, 1992.

COPYRIGHT MATERIAL OMITTED

Michael B. Kramer, New York City (Artemis Croussouloudis, of counsel), for plaintiff.

Morrison & Foerster, New York City (Kim J. Landsman, Marc Schoenfeld, of counsel), for defendant.

OPINION

SWEET, District Judge.

This is a $32 million dollar landlord-tenant dispute involving a newly constructed building at 200 East 87th Street (the "Building"). The plaintiff, 200 East 87th Street Associates (the "Landlord"), seeks a declaratory judgment to enforce a March 17, 1989 agreement (the "Lease") between its assignor, Zemnor 87 Corp. ("Zemnor"), and defendant MTS, Inc. ("Tower") one of its tenants. By its counterclaims Tower seeks to break the Lease and to recover damages. Upon a bench trial, all prior proceedings and the findings of fact and conclusions of law set forth below, judgment will be entered enforcing the Lease and dismissing the counterclaims.

This fact-rich controversy involves the complicated relationship between a developer, his architects, his contractor and his tenants. It requires a determination of the meaning of the Lease provisions, whether or not Tower's acts constituted a waiver of its rights, and the adequacy of the Building under the terms of the Lease. Notwithstanding the skilled representation of both the Landlord and the Tenant here, the dispute has engendered the familiar emotional climate of lesser landlord-tenant disputes.

PRIOR PROCEEDINGS, THE PLEADINGS AND THE ISSUES

This action arises out of the Lease between the Landlord and Tower¹ dated as of March 17, 1989, which was for retail space in the Building. The Building consists of 25 stories for residential, educational, commercial and assembly use. Its top three floors are used for mechanical space. The residential units begin at the eighth floor. Tower served notice on April 7, 1992 terminating the Lease based upon the conceded failure of the Landlord to obtain a Temporary Certificate of Occupancy ("TCO") by March 17, 1992 as required by the Lease.

This action was commenced by the Landlord on April 13, 1992 by the filing of a verified complaint in New York State Supreme Court, New York County (the "Complaint"). Tower removed the action to this court, under its diversity jurisdiction, on April 14, 1992. On April 22, 1992, the Landlord moved by order to show cause for a preliminary injunction on the grounds that the holder of the underlying mortgage, the Manufacturers Hanover Trust Company ("MHT"), would foreclose upon the Building as a consequence of a certain notice to cure served upon MHT by Tower on March 17, 1992 (the "Notice to Cure"). The hearing on the preliminary injunction and the trial on the merits were ordered consolidated and expedited discovery was undertaken. MHT has taken no action as yet to foreclose on its mortgage, presumably abiding the event of this decision.

The Complaint seeks a declaration that the Landlord is not in violation of any of the provisions of the Lease based upon the failure to obtain a TCO for the Building by March 17, 1992, that the notice terminating the Lease is void, that the Landlord be afforded a reasonable opportunity to cure its breach and that Tower be enjoined and restrained from terminating the Lease based upon the March 17, 1992 Notice to Cure.

Tower's Answer asserts as an affirmative defense a right to terminate based upon Landlord's failure to obtain a TCO within three years of the date of the Lease. By its Answer, Tower has also interposed counterclaims asserting that the Landlord has repudiated or breached the Lease by failing to substantially perform because: (1) the slab-to-slab height on the first and second floors does not meet the requirement of ¶ 46(4) of the Lease; (2) the square footage of the second floor is less than that required under ¶ 46(3) of the Lease; and (3) the service vestibule is unusable and does not conform to Exhibit A of the Lease. Tower also claims that the Landlord has breached the covenant of quiet enjoyment because the floor between the gymnasia of the Dalton School ("Dalton") and Tower's second-floor space is insufficient to prevent transmission of noise and impact sound. On its counterclaims, Tower seeks a declaration that the Lease is terminated and of no further force and effect, damages sustained as a result of the Landlord's alleged breach of the Lease and attorneys fees and costs.

By way of a Reply, the Landlord has alleged that Tower has waived and is equitably estopped from claiming a default and under the TCO requirement. The Reply also asserts that Tower is estopped from asserting the ceiling-height requirement, that the dispute as to the square footage of the space is subject to arbitration and that the cause of action for noise from the Dalton School gym is premature.

The trial before the Court took place from June 1, 1992 through June 9, 1992. Final submissions were filed on June 16, 1992.

THE FACTS

The Parties

The Landlord is a New York partnership, the general partners of which are Norman Segal ("Segal"), a self-styled real estate developer, and ROC-87 Corp., a New York corporation owned and controlled by The Olnick Organization.

Tower is a California corporation with its principal place of business in Sacramento, California. Tower owns and operates over seventy record stores throughout the United States and the world under the trade-name Tower Records and claims distinction from its extensive offerings presented in a lively and compelling fashion. For all intents and purposes, the sole shareholder of Tower is and has been Russell Solomon.

The Lease and its Amendment

On or about November 1, 1988, Segal, through his wholly owned corporation Zemnor 87 Corp. ("Zemnor"), acquired a ground lease interest in the premises at 1531-1545 Third Avenue, New York, New York by executing a ground lease agreement with the fee owner, Ardmore Realty ("Ardmore"). In order to obtain the necessary construction financing from its lenders, Zemnor sought commercial tenants for the proposed mixed-use building which it sought to develop.

After negotiations with Dalton and the national retail chain, The Gap, Zemnor executed agreements with both Dalton and The Gap for space in the Building in early 1989. Dalton entered into an agreement to pay approximately $5 million dollars to Zemnor in exchange for a 195-year lease of the third, fourth and fifth floors of the Building. The Gap executed a Lease with Zemnor which provided for an annual rental of approximately $1 million dollars. The Gap leased approximately eight thousand square feet on the first floor and the basement level of the Building. The rent charged to The Gap was calculated solely upon the square footage of the ground floor space, having the greatest commercial space value, at the rate of $140 per square foot per year.

Negotiations between brokers for Zemnor and Tower began in late 1988 relating to the nature, size and location of the space to be leased by Tower as well as the rent. A general agreement was reached under which the Tower space was to be located at the southerly most portion of the Third Avenue side of the Building and below the space for Dalton gymnasia. Tower agreed to lease the entire second floor, and portions of the first floor, basement and sub-basement. Lawyers for both Zemnor and Tower then negotiated the terms of the Lease agreement over the next three to four months in approximately six drafts.

The Lease was a written lease agreement dated as of March 17, 1989 between Zemnor, as landlord, and Tower, as tenant. The Landlord is the assignee of all of the interests of Zemnor in and to the Lease and the ground lease covering the land on which the Building has been constructed pursuant to an agreement of lease dated as of July 26, 1990. The term of the Lease is eighteen years at an annual base rent payable in an amount of approximately $1,131,000. At Tower's insistence, the Lease was modified to provide for specifics of the work to be done by the Landlord relative to Tower's space. In addition, Tower requested the insertion of a provision acknowledging that Tower would be playing music in its space until midnight 365 days a year.

The Lease further provided that the Building would be constructed within three years and that rent would not commence until seven months after substantial completion of the Building. Commencement of the time to pay rent would be further deferred if the Landlord had not procured a TCO for the premises when Tower was ready to open for business.

Paragraph 59 contains the provisions relating to the commencement of the Lease. Paragraph 59(A) states in relevant part that:

The parties further agree that if Owner does not construct the Building and obtain a Temporary Certificate of Occupancy for the Building within three (3) years from the date hereof, for whatever reasons, including the Owner's decision to abandon the project, then either party may terminate this Lease by sixty days notice to the other....

Paragraph 59(C) states in relevant part that:

If, at the time that Tenant is ready to open for business, the Owner has failed to obtain a Temporary Certificate of Occupancy for the commercial space in the Building (Owner's TCO), or if obtained, the Owner's TCO is lost or suspended, and if such failure, loss or suspension shall prevent Tenant from proceeding with Tenant's work, or from obtaining a TCO or sign-off relative to Tenant's work (provided that such failure, loss or suspension has not been caused by acts or failures of Tenant), then the period of seven months set forth above shall be extended by the number of days from the date of prevention of Tenant's work or delay in opening until the Tenant is notified that the Owner's TCO has been obtained or reinstated.

Paragraph 44(C) states as follows:

In the event of any act or omission

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