BHMC Enters., Inc. v Budget Wines & Liquors, Inc.
Annotate this CaseDecided on October 3, 2006
Supreme Court, Kings County
BHMC Enterprises, Inc., Plaintiff,
against
Budget Wines and Liquors, Inc., et ano., Defendants.
33513/04
Counsel for Plaintiff:
Anthony T. Scotto, Esq.
585 Stewart Avenue, Suite 306
Garden City, New York 11530
Counsel for Defendant:
Osman Dennis, Esq.
Peter Axelrod & Associates, P.C.
800 Third Avenue
New York, New York 10022
Carolyn E. Demarest, J.
Defendants Budget Wines and Liquors, Inc. (Budget) and its sole shareholder, John J. Martinucci, move for an order, pursuant to CPLR 3212, granting summary judgment dismissing the complaint. Plaintiff BHMC Enterprises, Inc. (BHMC) cross-moves for an order, pursuant to CPLR 3212, granting summary judgment on its complaint.
Facts
Budget is the owner of a commercial property located at 2460 Flatbush Avenue in Brooklyn. On October 15, 1994, BHMC entered into a twenty-year commercial lease with [*2]Budget for use of the entire building as medical and administrative offices. In conjunction therewith, BHMC remitted to Budget a security deposit in the amount of $212,500.00. Under the lease terms, BHMC was obligated to pay additional sums toward the security deposit after each year, in an amount equal to the amount by which the rent was increased for the new year under the rent schedule (the difference between the monthly rental rate from the previous year and the monthly rental rate for the new year) multiplied by twelve. At the time the lease was signed, the premises consisted of three floors, including a basement, ground floor and second floor, with each floor containing three suites. In 1995, BHMC received permission from Budget to reconfigure the ground floor to create one large suite. According to the affidavit of Budget president John Martinucci, permission was granted subject to the provisions in the lease which required BHMC to restore any structural alterations to the building's original layout at the expiration of the lease.
The landlord-tenant relationship between Budget and BHMC continued for the next eight years without any apparent discordance. However, Mr. Martinucci avers that beginning in early 2003, when Budget was seeking to refinance the property, he made several written and oral requests to BHMC to execute an estoppel certificate, to which BHMC never responded. Exhibit A to Defendants' Reply Affidavit of Osman Dennis is a letter dated October 30, 2002 from Budget's counsel to BHMC, indicating that the estoppel certificate had been sent to BHMC "several weeks" prior and that BHMC was already in default of Article 58 of the lease in failing to respond within 15 days.
On December 3, 2002, Budget's counsel again notified BHMC of its default in failing to provide the estoppel certificate indicating that Budget's "rights under its loan documents" were thereby in jeopardy. (Exhibit B to Reply Affidavit). By letter dated February 25, 2003, Mr. Martinucci notified BHMC of various defaults under the lease including: 1) BHMC's use of Budget's Con Edison account and failure to pay electric charges directly to Con Edison in violation of Article 38; 2) BHMC's failure to maintain an elevator service contract with the designated company pursuant to Article 37; 3) failure to execute the estoppel certificate as required under Article 58; 4) failure to remove violations as required in Article 76 and failure to maintain the building and sidewalks pursuant to Article 46 thereby incurring the violations; 5) failure to obtain consent to sublets as required in Article 54; 6) occupancy of Suite 10 by BHMC in violation of Budget's right to such occupancy pursuant to Article 78; 7) failure to provide keys pursuant to Articles 44 and 83; 8) failure to obtain consent to install signs as required in Article 45; 9) failure to comply with Article 46 by storing rubbish within or in immediate proximity to the building; 10) failure to provide adequate security resulting in vandalism to the building and failure to clean windows in violation of Article 47; 11) failure to paint every 5 years as required under Article 65; and 12) failure to provide security in common areas as required by Article 75. The letter concludes with a demand to cure such defaults immediately and states that "any rights or options granted to
Tenant under the Lease" are deemed void as of the date of the letter based upon such defaults.
[*3]
By letters dated March 5, April 2, June 5, June 18 and July 21, Mr. Martinucci supplemented and reiterated the various alleged defaults of BHMC, occasionally annexing documentation to support his complaints. On August 21, 2003, Budget's counsel again communicated with BHMC requesting the execution of the attached estoppel certificate. It is not disputed that none of these communications were ever answered by BHMC.
Budget did subsequently obtain refinancing despite the failure of BHMC to provide an estoppel certificate. Nonetheless, in October 2003, Mr. Martinucci, who states that he was "determined to address BHMC's refusal to communicate" with him, approached his counsel "with a laundry list of BHMC's defaults" under the lease, including those contained in his letter of February 25 to BHMC.
By notice dated October 31, 2003, Budget demanded that it be given possession of suite No.10 as set forth in paragraph "78th" of the lease and that Budget be provided with "a key to gain access to the subject leased space" as provided in paragraph "44th" of the lease as well as "keys to the two (2) gates, nine (9) suites, and the elevator, gas meter, electric meter, water and telephone rooms" as stated in paragraph "83rd" of the lease. Upon BHMC's failure to respond to or comply with the October 31, 2003 demand notice, Budget delivered a notice of termination dated November 14, 2003 which terminated the lease effective November 24, 2003 and directed that BHMC surrender the premises on or before said date. The notice of termination states that it was brought pursuant to paragraph "17th" of the lease, which provides in relevant part:
"It is expressly understood and agreed that . . . if default be made in the performance of any of the covenants and agreements in this lease contained on the part of the Tenant to be kept and performed, or if the Tenant shall fail to comply with any of the statutes, ordinances, rules, orders, regulations and requirements of the Federal, State and Local Governments or of any and all their Departments and Bureaus, applicable to said premises . . . the Landlord may, if the Landlord so elects, at any time thereafter terminate this lease and the term hereof, on giving to the Tenant five days' notice in writing of the Landlord's intention so to do, and this lease and the term hereof shall expire and come to an end on the date fixed in such notice as if the said date were the date originally fixed in this lease for the expiration hereof..."
The notice of termination further listed the various defaults allegedly committed by BHMC, specifically the failure to maintain the elevators in violation of the Administrative Code of the City of New York, resulting in a violation against the building, failure to turn over possession of suite #10, failure to provide keys as required by paragraphs "44th" and "83rd" of the lease, and the failure to provide an estoppel certificate in violation of paragraph "58th" of the lease.
Mr. Martinucci states that while BMHC did not contest the notice of termination, it did not vacate the building by November 24, 2003, requiring the commencement of a summary proceeding by Budget. The proceeding was resolved by stipulation of settlement, [*4]dated December 12, 2003, wherein BHMC consented to a judgment of possession and agreed to vacate the building by February 15, 2004. Certain issues other than possession, including the parties' claims to the security deposit, were preserved.
On December 5, 2003, Budget's counsel notified counsel for BHMC that subtenants of BHMC were complaining of the removal by BHMC of structural components of the building in a "salvage operation", cautioning that under Article 2 of the lease, the building was to be returned in "good order and condition". That letter demands that BHMC "restore the building to its original condition pursuant to Article 70th' of the lease." (Exhibit I to Reply Affidavit). In response, by letter of December 8, 2003, BHMC's attorney advised that it "fully intends to comply with the terms of the Lease related to delivery of the premises in the condition required upon expiration of the Lease". (Exhibit J to Reply Affidavit).
By letter dated February 18, 2004, Budget's counsel, Osman Dennis, notified BHMC's attorney, John Lynch, that BHMC was in default of the stipulation of settlement in the summary proceeding in that BHMC had failed to vacate and surrender possession on February 14 and that BHMC's subtenants remained in possession. No leases had been successfully negotiated with the subtenants at that time. The letter contains a request for keys to Suite #1 so that it could be shown to prospective tenants in mitigation of Budget's losses. Counsel for Budget notes: "Our client reserves its claims arising out of your client's failure to restore the premises to the condition it was in when it was let", specifically citing to the remodeling of the ground floor so as to combine three units with three separate bathrooms into a single unit with only one bathroom (Exhibit K to Reply Affirmation). Mr. Lynch responded on February 19 that the requested keys had been delivered to Suite 9 for delivery to Budget, thus essentially conceding the merit of Budget's complaint regarding the failure to supply keys during the lease term. Mr. Lynch further asserted that all subleases had been terminated upon termination of BHMC's lease and that BHMC was no longer responsible for those premises still occupied. (Exhibit L to Reply Affirmation). On February 19, 2004, Mr. Dennis reiterated his demand that the premises be restored and responded that BHMC remained liable upon continued occupancy by its subtenants. (Exhibit M to Reply Affirmation). On March 3, 2004, a warrant of eviction was issued. Under threat of eviction, the subtenants executed leases with Budget and Budget finally recovered full possession in late March 2004.
On October 18, 2004, BHMC commenced the instant action seeking return of its security deposit in the amount of $303,876.60, with interest from September 26, 2003, which Budget claims it is entitled to retain under the lease terms as liquidated damages for BHMC's default. Budget seeks summary judgment dismissing BHMC's action to recover the security deposit, citing paragraphs "84th" and "15th" of the lease which provide, respectively:
84th .It is understood and agreed that in the event of a default by the Tenant during the term of this lease, then and in that event, the security deposited hereunder shall revert to the Landlord as part of the liquidated damages sustained by the Landlord. Under no conditions shall any part of this security be returned to Tenant in the event of a default by Tenant. No [*5]accrual of interest on security to be paid to Tenant in the event of a default by Tenant.
15th . The Tenant will deposit [the specified sum of security] for the full and faithful performance by the Tenant of all the terms, covenants and conditions of this lease upon the Tenant's part to be performed, which sum shall be returned to the Tenant after the time fixed as the expiration of the term herein, provided the Tenant has fully and faithfully carried out all of said terms, covenants and conditions on Tenant's part to be performed. . .
In opposition to Budget's motion for summary judgment, BHMC submits the affidavit of Vito Buccellato, its "Vice President of Clinical Services and Long Term Care." Mr. Buccellato states that BHMC received Budget's request for an estoppel certificate on or about August 21, 2003, and sent the request to its attorney "for review and advice." It is not known from the papers how or if BHMC's attorney responded to the request. Mr. Buccellato acknowledges that BHMC received Budget's demand to vacate suite #10 and provide keys to the entire premises, which he maintains was "odd" since he claims, Budget always had keys to the premises and access to suite #10, which was not occupied and only contained a desk belonging to Budget. Mr. Buccellato contends, in sum and substance, that Budget was seizing upon minor issues to terminate the lease in order to prevent BHMC from exercising an option to purchase the building, which would have become effective on the tenth year of BHMC's tenancy, and that, while BHMC disputes the alleged defaults listed in the November 14, 2003 notice of termination, "in light of what had transpired over the previous two months and what it anticipated would continue to occur, BHMC reluctantly decided that [Budget's] Termination of the Lease would not be opposed."
BHMC argues that since Budget terminated the lease pursuant to paragraph "17th," which provides that the lease "shall expire and come to an end on the date fixed in such notice as if the said date were the date originally fixed in this lease for the expiration hereof" (emphasis added), the security deposit must be returned to BMHC as if the lease had run its full twenty year term. It is the contention of BHMC that if Budget wished to continually hold BHMC liable past the termination date, then it should have given notice pursuant to paragraph "8th" of the lease, which provides in relevant part:
[I]f any default be made in the performance of any of the covenants herein contained, the Landlord or representatives may re-enter the said premises by force, summary proceedings or otherwise, and remove all persons therefrom, without being liable to prosecution therefor, and the Tenant hereby expressly waives the service of any notice in writing of intention to re-enter, and the Tenant shall pay at the same time as the rent becomes payable under the terms hereof a sum equivalent to the rent reserved herein, and the Landlord may rent the premises on behalf of the Tenant, reserving the right to rent the premises for a longer period of time than fixed in the original lease without releasing the original Tenant from any liability, applying any moneys collected, first to the expense of resuming or obtaining possession, second to restoring the premises to a rentable condition, and then to the payment of the rent and all other charges due and to grow due to the Landlord, any surplus [*6]to be paid to the Tenant, who shall remain liable for any deficiency.
Further, BHMC maintains that the security deposit far exceeds any actual damages suffered by Budget as a result of the alleged defaults, and therefore Budget's retention of the full security deposit constitutes an unenforceable penalty.
Legal Conclusions
A lease, like any other contract, is to be interpreted in light of the purposes sought to be attained by the parties (Farrell Lines v City of New York, 30 NY2d 76, 82 [1972]). When interpreting contracts, the law is clear that "when parties set down their agreement in a clear, complete document, their writing should . . . be enforced according to its terms" (W.W.W. Assoc. v Giancontieri, 77 NY2d 157, 162 [1990]; see Reiss v Financial Performance Corp., 97 NY2d 195, 198 [2001] ). "In interpreting the provisions of a lease, the court should refrain from rewriting the lease under the guise of construction, should not construe the language of the lease in such a way as would distort its meaning, and should not construe the language in a manner that would render one or more of its provisions meaningless" (Poughkeepsie Sav. Bank v G.M.S.Y. Assoc., 238 AD2d 327 [1997]). "All parts of an agreement are to be reconciled, if possible, in order to avoid inconsistency" (National Conversion Corp. v Cedar Bldg. Corp., 23 NY2d 621, 625 [1969]).
To the extent BHMC argues that Budget's choice of terminating the lease under paragraph "17th" as opposed to paragraph "8th" precludes Budget from retaining the security deposit, because paragraph "17th" deems the termination date equivalent to the expiration date of the lease, such a contention is flatly negated by the unequivocal language of paragraph "15th", which expressly conditions the return of the security deposit following the lease's expiration date on BHMC's compliance with all the terms and conditions of the lease. This provision is consistent with paragraph "84th" which states that in the event of a default the security deposit shall revert to Budget as liquidated damages, and that "[u]nder no conditions" shall any part of the security deposit be returned to BHMC in the event of a default. All relevant provisions of the lease are consistent in providing that the security deposit is forfeit as liquidated damages to the landlord upon tenant's default Such provisions are not negated by paragraph 8th which permits landlord to remove tenant upon default and continue to receive rent due under the lease, off-setting any rent received from a new tenant against BHMC's liability under the lease.No mention is made in paragraph 8th of the security deposit; that paragraph relates exclusively to recovery of possession upon default and landlord's right to mitigate its damages by re-renting the premises. Paragraph 8th in no way contradicts the right of the landlord to retain the security upon tenant's default or entitle BHMC to recover the security deposit meant to compensate Budget for losses sustained due to BHMC's default.
Other than the bare denials by BHMC's counsel and Mr. Buccellato, whose personal knowledge of the facts and circumstances relating to the underlying controversy is not readily established in his affidavit, BHMC has not offered evidence which sufficiently controverts Budget's allegations of default on the part of BHMC. In fact, the correspondence submitted [*7]by defendant in Reply belies the contentions of plaintiff and supports Budget's allegations that plaintiff was in substantial default under the lease. It is clear from the language of the lease that in the event of any default by BHMC, Budget would have the right to retain the security deposit as liquidated damages.
Plaintiff argues that its security deposit far exceeds the actual losses sustained by Budget and permitting Budget to retain it works an inequitable penalty. It is true that"equity abhors forfeitures and courts will examine the sum reserved under an instrument as liquidated damages to insure that it is not disproportionate to the damages actually arising from the breach or designed to coerce the performance of a party" (Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 NY2d 573, 577 [1979]). "Generally whenever the damages flowing from a breach of a contract can be easily established or where the damages fixed are plainly disproportionate to the injury the stipulated sum will be treated as a penalty. So where a strict construction would result in absurdity. There must be some attempt to proportion these damages to the actual loss. The parties must not lose sight of the principle of compensation" (Seidlitz v Auerbach, 230 NY 167, 174 [1920]).Thus, while the terms of the lease clearly allow Budget to retain the security deposit as liquidated damages, the amount of liquidated damages must bear some fair relation to the amount of damages actually suffered by Budget as a result of the defaults.
Paragraph 42nd provides:
Tenant shall deliver the leased space, including but not limited to the heating, plumbing, electrical and airconditioning/ventilation systems in leased spaces, to Landlord, at the expiration of the term of this lease, in the same condition as first rented, wear and tear excepted.
Paragraph 70th permits tenant to make structural alterations with landlord's consent but provides:
At expiration of this lease, any structural alterations so made by Tenant shall be restored to building's original condition, if Landlord so desires.
It is undisputed that, among other major structural changes, plaintiff substantially re-configured the ground floor of the premises, eliminating two bathrooms. It is also clear that defendant Budget made numerous demands upon plaintiff to restore the premises as required in paragraphs 42nd and 70th. Attached to defendant's moving papers as Exhibit J is an estimate of the cost of restoring the premises at $348,000, well in excess of the security retained by Budget. In addition, although they did not contest or resist the termination of the lease, plaintiff did not vacate the premises either on the original termination date of November 24, 2003, or on the date agreed in the stipulation of settlement in the summary holdover proceeding, February 16, 2004, but remained in occupancy well into March 2004. Use and occupancy would therefore be accruing to defendant, less any sums paid by subtenants to Budget.Budget has indicated that it has not recouped the value of [*8]plaintiff's lease in the new leases in part due to the failure of BHMC to restore the premises. The actual damages sustained by defendant thus actually appear to substantially exceed the value of the security retained under the terms of the lease. There is no basis to even suggest that the liquidated damages provided here constitute a penalty. The terms of the lease are clear and unequivocal and far from inequitable to plaintiff. The lease terms should therefore be enforced. See Fifty States Mgt Corp., supra, 46 NY2d 573.
Accordingly, Budget's motion for summary judgment dismissing the complaint is granted and BHMC's cross motion for summary judgment is denied. Defendant did not seek severance of its counterclaims in its motion. If it intends to pursue such counterclaims, a proposed order to that effect should be submitted for the Court's signature, upon notice to plaintiff within 30 days.
The foregoing constitutes the decision and order of the court
E N T E R,
J. S. C.
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