National Conversion Corp. v. Cedar Bldg. Corp.

• Decision Date: 19 February 1969
• Citation: 298 N.Y.S.2d 499,246 N.E.2d 351,23 N.Y.2d 621
• Parties: , 246 N.E.2d 351 NATIONAL CONVERSION CORP., Respondent, v. CEDAR BUILDING CORP. et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 499

298 N.Y.S.2d 499

23 N.Y.2d 621, 246 N.E.2d 351

NATIONAL CONVERSION CORP., Respondent, v. CEDAR BUILDING CORP. et al., Appellants.

Court of Appeals of New York.

Feb. 19, 1969.

Milton S. Gould, Martin I. Shelton and Leon P. Gold, New York City, for appellants.

Philip Kazon, John A. Young and Donald L. B. Baraf, New York City, for respondent.

BREITEL, Judge.

A former tenant of industrial premises sued its landlords for damages in fraud and for breach of warranty. The landlords counterclaimed for subsequent rents and for use and occupation, and also brought a summary proceeding to recover possession which was consolidated with this action. After a trial without a jury the tenant recovered a judgment for $70,086.81 and defendant landlords appeal, the Appellate Division having affirmed, two Justices dissenting.

There is no dispute that the lease contained a false representation that the demised premises were situated in an unrestricted zone. The primary contention made by landlords is that in the same lease the tenant covenanted that the operation of its business would produce no objectionable odors or gases and that, therefore, the false representation by landlord and broken covenant by the tenant nullified one another, disentitling the tenant to remedies for fraud. There are also auxiliary issues with respect to the fixation of damages. As will be seen, landlords distort the issue in the case. The tenant's inability to continue its business as it contemplated is not determined solely by the presence or avoidability of offensive odors from the operation of its enterprise. In short, tenant did not receive the unrestricted premises for which it bargained and as landlords represented was the situation. Consequently, judgment was properly rendered in favor of tenant for fraud in the inducement.

Tenant, intending to engage in the conversion of restaurant garbage into fertilizer, entered into a five-year lease with landlords. The lease contained a representation that the demised premises were in an unrestricted zone and that the proposed use would not be in violation of the zoning ordinance. Concomitantly, the lease contained a covenant by tenant that the operation of its business would produce no objectionable odors or gases.

After alteration of the premises, installation of a equipment, but before the initial operation of the enterprise, violations were filed by the City of New York. In due course, the enterprise was terminated, tenant moved out, and this action for fraud was instituted. The judgment recovered included all rent previously paid by tenant, the cost of installation of equipment, and the cost of removal.

The lease was executed March 4, 1964 for a five-year term commencing March 9, 1964. Prior to December 15, 1961, the premises, located in Brooklyn in New York City, were in an unrestricted zone. On that date, however, a new zoning resolution took effect and the premises were placed in an M--1 district allowing light manufacturing uses. Under the new resolution, however, garbage conversion would be permitted in an M--1 district provided odors did not become readily detectable at the lot line, and provided various other performance standards not confined to odors were satisfied. In contrast, in an M--3 district, which would also permit a garbage conversion use, odors were objectionable only if they created a public nuisance or hazard, and the other nonodor performance standards were considerably lower.

Concededly, the premises were never adapted to control odors in order to comply with an M--1 standard, or to satisfy nonodor performance standards required in an M--1 district. The violations filed, despite contrary interpretations given by the parties, covered both the failure to engage in a permitted use and to obtain a certificate of occupancy permitting the actual use and reflecting M--1 standards required for the actual use. Undisputed in the case is that a significant added expense would be required to adapt the premises to an M--1 conditionally permitted use, an expense which would not be entailed if the premises were in a wholly unrestricted area or, for that matter, if the premises were in an M--3 (heavy manufacturing) district.

The cross covenants of the landlords and the tenant in the lease are not contradictory but are reconcilable. All parts of an agreement are to be reconciled, if possible, in order to avoid inconsistency (Corhill Corp. v. S. D. Plants, Inc., 9 N.Y.2d 595, 599, 217 N.Y.S.2d 1, 3, 176 N.E.2d 37, 38; see, also, 4 Williston, Contracts (3d ed.), § 619, p. 731). But the cross covenants present no problem, and, as a practical matter, their reconciliation in this lease involves no straining of language. Even in an unrestricted zone there is an obligation on the part of landowners and users not to permit objectionable odors. Anterior to zoning requirements there is the common law of nuisance (see, generally, Prosser, Torts (3d ed.), p. 611 et seq., esp. 612 620--621). Hence the tenant's covenant is a rational inclusion even in a lease covering premises in an unrestricted zone.

Such reconciliation, however, does not dispose of the main problem. Landlords argue that tenant, represented by a lawyer, was just as much on notice, as they, the landlords, were, that the premises were located in a restricted zone. Ergo, they invoke the familiar rule that one may not charge another with fraud if one knew, or should have known, the actual situation.

True, both sides were represented by lawyers. But tenant's testimony is that when it sought an adjournment of the negotiations in order for its lawyer to check whether the premises were located in an unrestricted zone, landlords' lawyer, who was also one of the principals, said that it would not be necessary, that they (landlords) 'own the property, and we know the area', that it is in an unrestricted zone, and 'We (landlords) guarantee it.' (Landlords' testimony denied ever making such statements.) The discussion was resolved only by including the representation in the lease. Tenant contended and proved that it had not actually known of the zoning requirement and had relied on what it was told. This proof, if accepted (as it was in the affirmed finding of the trial court), made out a classic instance of fraud in the inducement, for landlords intentionally or recklessly made false representations either as to their knowledge of the facts or the facts themselves (for the significance of recklessness as equivalent to Scienter, see 24 N.Y.Jur., Fraud and Deceit, §§ 150--151, and cases cited).

To recapitulate: Tenant was induced to make a lease for use of the premises for garbage conversion on the representation that the premises were in an unrestricted district. That representation, or its practical effect, are not negated by the tenant's covenant not to cause objectionable odors, a requirement obtaining to avoid nuisance even in an unzoned or unrestricted area. The representation has fraudulent consequence even if tenant, by additional uncontemplated expense, could have adapted the premises to the use for which the premises had been leased. The added expense was not a burden tenant would have incurred in an unrestricted district or even in a restricted M--3 district. ^* Nor does it avail landlords that even in an M--3 district tenant would have to control odors, anymore than it would avail landlords that tenant would have to avoid nuisance in an unrestricted district. The point is that there is a different level of expense or added expense in each of the instances. True, tenant would have been happy to have complied with M--3 restrictions because, for its purposes, they were almost identical, if not indeed identical, with the requirements in an unrestricted area; but the harm of the fraud and its materiality are incurred by the higher and more expensive requirements of an M--1 district. Moreover, the harm to tenant was not limited to the problem of odor control but extended to the other zoning requirements for M--1 districts. These other requirements were not developed in the record, although urged in the briefing. Hence, landlords'...