November 21, 2011
The Commercial Observer
While I’m not looking to take business from the mouths of the real estate bar, let’s face it: if you’re serious about being a player in this real estate game, there’s a fundamental body of law you must be familiar with. And the court’s interpretation and reinterpretation of that “corpus juris” is what requires us to visit important cases from time to time.
Over the next several months, The Commercial Observer will be reviewing 10 of the most significant leasing cases in ascending order of importance.
Today we’ll look at the Kronish Lieb case (technically, Kronish Lieb Weiner & Hellman LLP v. Tahari Ltd., 2006 N.Y. App. Div. Lexis 15862). This is a 2006 New York appellate court ruling that a commercial tenant who holds-over after the end of its lease term may be liable in damages to both its landlord (under lease contract law) and the incoming tenant (under the legal theories of trespass and tortious interference with contract rights) whose occupancy is frustrated by the failure to timely vacate in accordance with the lease.
The Kronish Lieb law firm (now Cooley LLP, for those into NYC law firms’ DNA) had taken an option on penthouse space at the Class A Grace Building on 42nd Street, then occupied by fashion design house Tahari Ltd., and was planning to occupy this space once Tahari’s lease term expired. Well, Tahari did not move as expected, and in fact waged an 18-month battle in landlord-tenant court, and so really frustrated Kronish Lieb and Trizec, the landlord. Kronish, sidelined and seemingly powerless, took a novel approach to this very costly impasse—it sued Tahari for damages based on the ancient doctrine of trespass. And the court agreed. Thus a holdover tenant was, in addition to traditional liability to its landlord under the no-holdover lease clauses, held liable in substantial monetary damages to the “new,” incoming tenant. While not unheard of, this was big news in the leasing community. For a tenant inclined to march to its own drummer in terms of vacating space at the end of the term, there was now a powerful incentive to get out on time.
Clearly this was a win for landlords and for incoming tenants who crave the comfort of contractual certainty. Now some details.
I’m sure we’ve all seen tenants come up with any number of reasons for not having the moving truck front and center at 11:59 p.m. on the last day of the lease term. For example, the tenant’s new space might not be ready, or the tenant hopes to negotiate a favorable extension or—for those who appreciate irony—perhaps the space the tenant plans to relocate to is not available as the tenant of that space has failed to move out. Here Tahari—in Guinness record book fashion—prolonged Kronish Lieb’s and its landlord’s agony for some 18 months, until it was finally evicted.
For those interested, here is the chronology:
May 2003: Tahari lease expiration
May 2003: Kronish Lieb exercised its option to lease the Tahari space
June 2003: Effective date of Kronish Lieb option
March 2004: Court orders Tahari to vacate; Tahari appeals
December 2004: Tahari loses appeal and vacates space
EIGHTEEN MONTHS: TOTAL TIME KRONISH DELAYED
But delay here was an expensive proposition for Kronish. As reported, Kronish spent substantial sums leasing temporary space during this period and also got hit with a significantly higher construction bill once the space was made available, as costs had spiked during the years of delay. So Kronish sued for these and other specified and unspecified damages.
Interesting that the court held Tahari liable to Kronish under the “tort” (wrongful civil action) doctrine of trespass, as the traditional view has been that trespass involves an entry onto the lands of another. Here, Kronish did not “possess” that 48th-floor penthouse space, so the court ruled that even though Kronish lacked physical possession, it had standing to commence a legal action sounding in trespass based on its “right” to possess the space.
As the court said: “Contrary to defendant’s [Tahari’s] contention, as here the parties’ rights to possession have already been determined [Trizec, the landlord, had gotten a court ruling that Tahari had no right to stay in the space] it is not necessary that plaintiff be in actual possession.”
By the way, Kronish nailed the legal coffin shut with a second successful claim—that Tahari had engaged in “tortious interference” with the contractual relationship (i.e., the option to take the Tahari space) between Kronish and its landlord by intentionally holding over. Therefore, Kronish could seek recovery of damages from Tahari on this basis as well.
Knowledgeable readers might be wondering about the arsenal of traditional remedies commercial landlords have to prod that recalcitrant tenant out into the street—like double or triple rent during the holdover period, damages for loss of the bargain made with the new tenant (i.e., where new tenant’s rent was higher), guarantor liability or the cost of defending a losing battle in landlord-tenant court.
Well, to state what the Kronish Lieb case makes obvious, sometimes it just don’t matter a damn. Some tenants do what they will regardless of the consequences. The import of this case is that future Taharis will have to think twice, or at least move more cautiously, when the frustrated incoming tenant can sue for (substantial) damages. In the few years since this case was decided, the leasing community seems to be in accord that the decision benefits both landlord and tenants by creating a greater sense of certainty as to tenants honoring their legal commitments to move out the end of the term. As Trizec’s in-house counsel was reported to say after this decision came down, “The good news is tenants can’t game the system and just stay there and try to negotiate a better deal, because they know they’ve got the landlord over a barrel.”
This is the first in a series of articles profiling important lease law cases.
jmargolis@newyorkleaselaw.com
Jeffrey A. Margolis, Esq., is founding principal of the Margolis Law Firm in New York City, where he specializes in “dirt law”—buying, selling and leasing. He writes monthly for The Commercial Observer on legal issues.
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