Kramer Levin Naftalis & Frankel, LLP v. Metropolitan 919 3rd Ave., LLC, 2004 NY Slip Op 24510 (NY 4/6/2005)

• Decision Date: 06 April 2005
• Citation: 2004 NY Slip Op 24510
• Parties: KRAMER LEVIN NAFTALIS & FRANKEL, LLP, Plaintiff, v. METROPOLITAN 919 3RD AVENUE, LLC, Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 1

2004 NY Slip Op 24510

KRAMER LEVIN NAFTALIS & FRANKEL, LLP, Plaintiff, v. METROPOLITAN 919 3RD AVENUE, LLC, Defendant.

Supreme Court of the State of New York, New York County.

April 6, 2005.

Stempel Bennett Claman & Hockberg, New York City, for defendant.

OPINION OF THE COURT

EDWARD H. LEHNER, J.

Before me are motions for summary judgment: (i) by defendant to dismiss the complaint, and (ii) by plaintiff to grant it a declaration that it is entitled to a credit against its base rent and to dismiss the counterclaim.

Defendant is the landlord of the building located at 919 Third Avenue, New York, New York (the building), having acquired it from the bankruptcy estate of the former owner on October 30, 2000. Plaintiff is a law firm that occupies several floors, amounting to 11.47% of the building, pursuant to a lease with the former owner dated December 22, 1983, which was modified on May 1, 1993 (the first lease amendment), and on July 1, 1994 (the second lease amendment). Plaintiff commenced this action on December 16, 2002, seeking damages for breach of the lease in the amount of $684,471. In its amended complaint it withdrew the claim for money damages and in lieu seeks a declaration that it is entitled to a rent credit in that amount.

The lease included a provision for a fixed amount of annual rent, defined as "Base Rent," which was increased in both the first and second lease amendments. The lease also included a rent escalation rider that designated a "Base Year" and provided in clause RE (11) that:

"Nothing contained in this Rent Escalation Rider is intended to reduce the annual rate of Base Rent, as the same is fixed by the lease and modified by any provision of the lease other than this Rent Escalation Rider, although credits against such Base Rent may be taken by Tenant as provided by this Rent Escalation Rider."

Other provisions of the lease provide:

"32. The term `Landlord' as used in this lease means only the owner . . . for the time being of the land and Building . . . so that in the event of any sale or sales of said land and Building . . . the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of landlord hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the transferee, at any such sale or other conveyance or transfer . . . that the transferee . . . of the Building has assumed and agreed to carry out any and all covenants and obligations of landlord hereunder.

"33. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors and except as otherwise provided, their assigns . . .

"63. rent credits

"If Tenant shall be entitled to credits against rental hereunder, whether by reason of a refund to Landlord of Taxes (after receipt thereof by Landlord) or a reduction or adjustment in Operating Expenses, and if this lease shall expire or terminate before Tenant shall have deducted the full amount of such credit from rental due hereunder, Landlord shall promptly pay to Tenant the full amount of any such unrecovered credit, and this obligation of Landlord shall survive the expiration or termination of this lease."

The first lease amendment extended the term of the lease until April 30, 2005, increased the base rent and amended the rent escalation rider to provide that the "Base Expense Year" shall be the calendar year 1994 and the base year shall be the 1993-1994 tax year. For the tax years 1994-1995 through 1999-2000 the real estate taxes were less than in the base year, and the decline was greater than the increase in operating costs during such periods. Plaintiff asserts that its proportionate share of such difference during those years is $684,471, and it seeks a declaration that it is entitled to a credit against its base rent in that amount. Defendant does not contest that mathematically the amount alleged is approximately correct (transcript at 61-62), and that the amount of alleged overcharges under the formula for the two months after defendant purchased the building is approximately $18,000 (transcript at 57-60).

On July 10, 2001, plaintiff sent an "estoppel letter" to defendant and Secore Financial Corporation in connection with financing being arranged by defendant stating that it "is not currently aware of the existence of any default on the part of any party under the Lease . . . [and it] assumes that no party currently has counterclaims, defenses or offsets under the Lease."

Plaintiff contends that the language of the lease is clear and unambiguous and that it is entitled to a rent credit against future base rent based on the assertion that when defendant purchased the building it assumed the obligations of the former owner. Defendant maintains that under the lease there can be no reduction in base rent; that as a successor owner it is not liable for any prior rental overcharges; that the claim is barred by the statute of limitations since the computational formula that allegedly caused the rental overcharges was first applied more than six years prior to commencement of the action; and that plaintiff waived any claim for a future rent credit when it executed the estoppel letter.

While, as noted in Citibank, N.A. v. 666 Fifth Ave. Ltd. Partnership (2 AD3d 331 [1st Dept 2003]), the trial evidence before me in that case showed that the custom in the real estate industry was that decreases in real estate taxes would not cause a reduction in base rent, there is nothing to prevent parties from contracting for such a reduction. Here a plain reading of the above quoted clause RE (11) contemplates "credits against such Base Rent . . . as provided by this Rent Escalation Rider." Although defendant argues that such clause only contemplated credits on what it calls "true ups" (meaning modifications of operating cost escalations based on actual costs as opposed to estimated costs), there is nothing in the language of the provision to so limit the credits to which plaintiff was entitled. Thus, I agree with plaintiff that under the terms of the lease, it was entitled to a credit against base rent when the aggregate of its obligation in any year for real estate taxes and operating costs resulted in an amount lower than that set forth for the base year.

However, no credit was ever given to plaintiff for the reductions nor ever demanded by it. Rather, the papers show that the former owner took the position that under the lease there could be no lowering of the base rent based on any such reduction. On November 9, 1995, the former owner's managing agent sent a letter to plaintiff that stated: "In accordance with the escalation clause of your lease, we render herewith our bill for additional rent due to the increase or decrease in Real Estate Taxes and Operating Expenses as follows: A) 1995/1996 Real Estate Tax Escalation . . . Limited Tax Credit (Limited to total operating escalation calculated below)." Each of the subsequent statements sent by the former owner's managing agent for the tax years through 1999-2000 also expressly stated that the credit for the real estate tax decrease in relation to the base year was limited to the operating cost escalation.

This brings me to the defendant's affirmative defense that this action, commenced in December 2002, is barred by the six-year statute of limitations. In Goldman Copeland Assoc. v. Goodstein Bros. & Co. (268 AD2d 370 [1st Dept 2000], lv dismissed 95 NY2d 825 [2000], lv dismissed 96 NY2d 796 [2001], rearg denied 96 NY2d 897 [2001]), the First Department, in concluding that the tenant's claim for wage escalation overcharges was time-barred, stated (at 371):

"It is undisputed that the landlord gave the tenant detailed yearly porter wage escalation statements for the years in question, which were paid by the tenant without protest. Since such statements consistently used the same formula in determining the escalation, the tenant's overcharge claim accrued upon its receipt of the first statement almost 12 years before it commenced this action. At that time it had all of the information it needed to contest the manner in which the landlord computed the escalation. The tenant's alternative argument that the yearly increase due under the porter wage escalation clause created a new cause of action each and every year is unpersuasive in the context of a dispute involving a computational methodology that remained constant over the years for which the computation is being challenged."

Similarly, in Matter of 100 William Co. v. Aetna Ins. Co. (163 AD2d 170 [1st Dept 1990]), it was ruled (at 171):

"In addition, respondent was clearly...