Kaplan v Synergy, Inc.

[*1] Kaplan v Synergy, Inc. 2009 NY Slip Op 50902(U) [23 Misc 3d 1123(A)] Decided on April 28, 2009 Civil Court Of The City Of New York, Richmond County Straniere, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through May 19, 2009; it will not be published in the printed Official Reports.

Decided on April 28, 2009
Civil Court of the City of New York, Richmond County

Steve Kaplan and Kapwest Corp., Petitioner(s), Plaintiff(s),

against

Synergy, Inc. d/b/a SYNERGY FITNESS NYC LTD. and SYNERGY FITNESS FOREST AVENUE, INC., Respondent(s), Defendant(s)



L & T 53951/08



PETITIONER:

CONDON & FORSYTH LLP

7 Times Square

New York, New York 10036

RESPONDENT:

ROSENFELD & KAPLAN, LLP

535 Fifth Avenue

New York, New York 10017

Philip S. Straniere, J.

Petitioners, Steve Kaplan and Kapwest Corp., commenced this commercial summary proceeding against the respondents, Synergy Inc.(Synergy) d/b/a Synergy Fitness NYC Ltd.(Synergy NYC) and Synergy Fitness Forest Avenue, Inc. (Synergy Forest), alleging that the respondents failed to pay rent due and owing. A trial was held on March 11, 2009. Both sides were represented by counsel. [*2]

PRIOR LITIGATION:

In October 2006, petitioners commenced a summary proceeding against these respondents in Civil Court, Richmond County (L & T 53241/06), alleging that the respondents had failed to pay rent for the period August through October 2006. Thereafter the respondents commenced an action in Supreme Court, New York County (Index No. 115449/06) seeking damages for petitioners alleged breach of the terms of the lease. On September 5, 2007, the parties entered into a settlement agreement resolving both litigation matters. In that agreement the respondents acknowledged that the petitioners were due rent in the amount of $100,000.00 for the period August 2006 through February 2007. Petitioners agreed to accept $40,000.00 in full settlement of the rent arrearage claim. Respondents were to keep the monthly rent current and to pay the $40,000.00 arrearage in eight monthly payments of $5,000.00. Provided there were no defaults under the terms of the lease and the settlement agreement, the petitioners agreed to reduce the monthly base rent to $14,000.00 and defer an additional $2,000.00 a month in rent beginning September 2007 so that the current rent would be $12,000.00 a month. The abatement was negotiated between the parties because they had anticipated that "mezzanine" space at the premises would be available for the respondents' use. It was agreed that the respondents would undertake to complete the process necessary to legalize the space and obtain all approvals from the appropriate municipal agencies, including filings with the Board of Standards and Appeals (BSA).

Petitioners allege that the respondents' payment of $12,000.00 a month in July 2008 and August 2008 did not comply with the terms of the settlement agreement in that the payment due should have been$17,000.00 with $12,000.00 for the then current abated rent and an additional $5,000.00 to be applied to the monthly arrearage payment. Petitioner applied $5,000.00 of the $12,000.00 received towards the monthly arrearage and the balance of $7,000.00 against the current rent leaving a shortfall in payments under the terms of the settlement agreement.

The settlement agreement was personally guaranteed by Anthony Reonegro in the event the respondents vacated the premises prior to the term of the Lease or failed to perform the financial obligations under the lease and settlement agreement. The agreement provided that "if the vacatur is caused by the failure to obtain BSA approval, this Agreement Guaranty is null and void."

Thereafter the petitioners agreed to accept surrender of the premises and terminate the respondents' lease obligation. The parties agreed to have the court decide the issue of whether the respondents had diligently pursued obtaining BSA approvals so as to relieve the guarantor of responsibility for the personal monetary obligations. Petitioners claim they are entitled to the money because the respondents never completed the BSA application process. Respondents allege that they did all that could be reasonably done and that the application process was abandoned because it became obvious that the approvals could not reasonably be obtained.

CHRONOLOGY:

Site Plan Prepared by Tamborra Design and Consultants—May 30, 2003 [*3]

Written Lease Between Steve Kaplan (Landlord) and Synergy, Inc. (Tenant)—July 16, 2003

Synergy Fitness Forest Avenue Inc. incorporated in New York State—July 23, 2003

Kapwest Corp. incorporated in New York State—July 29, 2003

Building Plans Filed by Tamborra Design and Consultants for Medical Group—November 15, 2003

Settlement Agreement between Steve Kaplan as President of Kapwest and Synergy Fitness Forest Avenue, Inc., Brett Holzer as President of Synergy Fitness NYC, Ltd.—September 5, 2007

Personal Guaranty of Anthony Reonegro—September 5, 2007

A search of the New York State Division of Corporations records shows Synergy Fitness NYC, Ltd. having been incorporated on May 9, 2002. The records also show no entity as "Synergy, Inc." being incorporated with a search of that name referring the inquiry to SEVB, Inc. a corporation filed February 1, 1995, but now listed as an "inactive" corporation. There is no evidence of an assignment of the lease to Kapwest or to Synergy NYC or Synergy Forest.

DISCUSSION:

The parties have agreed that the only issue remaining outstanding between them is whether the petitioners may enforce the "personal guaranty" signed by Anthony Reonegro on September 5, 2007 guaranteeing the payment of $40,000.00 to petitioners "if the Tenant: (1) vacates the Premises located at 1268 Forest Avenue, Staten Island, New York prior to the term of the Lease, or (2) fails to perform its financial duties and obligations under the Settlement Agreement and Lease. If vacatur is caused by the failure to obtain BSA approval, this Agreement Guaranty is null and void."

A. Is There a Valid Lease?

On July 16, 2003 there was a written lease that listed Steve Kaplan as the landlord and Synergy, Inc., as tenant, but was signed by Kaplan on behalf of Kapwest, Corp. as the owner and Brett Holzer on behalf of Synergy, Inc. as tenant. The purpose of the lease was for the premises 1268 Forest Avenue, Staten Island, New York, "to be used and occupied by the Tenant as a gym and exercise facility. Not more than twenty percent (20%) of space may be allocated for use as a juice bar and grill-provided tenant obtains necessary permit and Certificate of Occupancy for said usage." After the date of the lease, the petitioners had filed for a certificate of occupancy for a medical facility, while the lease was for use as gym so in the words of Shakespeare's Hamlet "Ay, there's the rub."[FN1] [*4]

The agreement at paragraph 36 of the Rider to Lease provided for a commencement of the lease term "upon the issuance of a certificate of occupancy for premises known as 1268 Forest Avenue, Staten Island, New York (the Commencement Date)....Tenant's obligation to pay base annual rent and additional rent shall commence on the Commencement Date." The lease also required the petitioner to deliver "approximately ten thousand square (10,000) feet consisting of basement and three (3) floors and access to parking lot."

One of the named petitioners at some point acquired this property. The date of the purchase is not part of the record, nor has a copy of the deed been submitted as an exhibit. On September 10, 2002, Kaplan filed plans with the Buildings Department to do an alteration of the then currently existing structure. Parenthetically, that application for alteration was not officially withdrawn until July 26, 2006 a date sometime after the now existing structure was constructed and began to be used by the respondents as a gym. Thereafter petitioners abandoned these renovation plans and filed for a demolition permit on August 5, 2003. The existing building was demolished. Petitioners then filed plans with the Buildings Department to construct a new building to house medical offices and consisting of a cellar storage area, the first floor designated as medical offices with a second floor designated as for offices only. None of these plans included a third floor or a mezzanine. The total square footage of the building filed with the Buildings Department was less than 6,000 square feet. In addition, the premises was to have eleven parking spaces to be served by "paid parking attendants." Attendant parking was needed so as to maximize the entire parking area, without such a filing, there would be insufficient parking spaces for the size of the building constructed.

The Buildings Department issued its first temporary certificates of occupancy for the period August 1, 2006 through August 10, 2006. There were subsequent temporary certificates of occupancy issued August 9, 2006 through November 7, 2006; November 6, 2006 to February 4, 2007; May 18, 2007 to August 16, 2007 and February 27, 2008 to April 27, 2008. There is no explanation as to why there are gaps in the time periods covered by the temporary certificates of occupancy which leads to the conclusion that the building was being used for periods of time without the existence of even current temporary certificates of occupancy. Each of these temporary certificates authorized the medical use. There was never any indication in the Buildings Department filings that a gym or "physical culture establishment" was being operated at the premises or that the parties even contemplated such a use. These plans were filed on behalf of Kaplan and Kapwest. At no time did the Buildings Department ever issue a final or permanent certificate of occupancy for any use. Taking all of these factors into account, it must be concluded there was never a valid lease between the parties.

First, who are the parties to the lease? The opening paragraph designates Steve Kaplan as the landlord and Synergy, Inc., as the tenant, yet the signature block is signed on the preprinted lease is signed only by Holzer on behalf of Synergy, Inc. There is no signature on behalf of the landlord. There is what is purported to be a twelve page "Rider to Lease" which is dated July 17, 2003, the day after the preprinted lease is dated. The Rider to Lease is also between Kaplan and Synergy, Inc., but this document is signed by Kapwest Corp. as the owner and Synergy, Inc., as [*5]the tenant. As stated above, Synergy, Inc., is not recognized as an active registered corporation in New York and there is no evidence of an assignment of the lease to either Synergy Fitness NYC or Synergy Fitness Forest Avenue.

Second, the lease terms required the landlord to deliver a premises of ten thousand square feet of space on a basement and three floors, yet the only approved plans for the premises and the ones which led to the issuance of the temporary certificates of occupancy are for a premises of less than six thousand square feet on two floors and a cellar. It should be pointed out there under the Multiple Dwelling Law there is a difference between a basement-a story partly below the curb level but having at least one-half of its height above curb level (MDL §4(38)) and cellar-an enclosed area having more than one-half of its height below curb level (MDL §4(37). A similar definition exists in the NYC Administrative Code §27-232 where the description of cellar and basement is not limited solely to residential buildings. Based on the initial plans which were filed after the lease was signed, the petitioners were certifying to the Buildings Department an intent to construct a premises inconsistent with what they had contracted to deliver to the respondents for legal occupancy.

This entire transaction is suspect. The lease, July 16, 2003, predates the initial building department filing of November 15, 2003 by four months. The petitioners already had contracted to deliver a premises capable of being used for "gym and exercise facility" in July 2003 yet petitioners commenced obtaining approvals for a structure designated as a "medical facility." All that can be concluded is that the petitioners deliberately embarked on a plan to circumvent the building code. Based on the testimony at trial and the subpoenaed records, it seems that the intent of the petitioners and by implication, the respondents, was to go into occupancy at the premises and use it as a gym and exercise facility, a "physical culture establishment" under the building code, in complete violation of the approved plans and any applicable building code regulations. The parties sought to operate an illegal health club at the site, which respondents have been doing for a period of time, and then seek either an approval of the changed use from the Buildings Department, or a variance from the Board of Standards and Appeals. This procedure apparently is not that uncommon on Staten Island and may explain why certain buildings seem to exist in unusual locations out of context with the surrounding neighborhood.

Third, the lease required the petitioner to deliver a certificate of occupancy for the gym and exercise use while the tenant was to provide the certificate of occupancy for a juice bar and grill at the premises. In addition, the tenant's obligation to pay rent does not accrue until a certificate of occupancy is issued (Rider paragraph 36). No certificate of occupancy was ever issued for any purpose, let alone the leased use. What was issued were five temporary certificates of occupancy for a medical building, neither the petitioners nor the respondents were ever able to deliver a final certificate of occupancy for a medical facility- the building which was filed, or a temporary certificate of occupancy for the gym and exercise facility. As such, no rent was ever due and owing under the terms of the lease.

The Administrative Code defines both a "certificate of occupancy" and a "temporary of certificate" so that use of the term "certificate of occupancy" in the lease refers to what is [*6]commonly called a "final" or "permanent" certificate of occupancy and not a "temporary certificate of occupancy." If the parties wanted the rent obligation to be triggered upon the occupancy by the respondents, the lease should have said so.

Giving the parties the benefit of the doubt that they were acting in good faith, then there never was a valid lease due to "mutual mistake of fact," that is, the belief the gym could legally be operated at the site. Analyzing the situation from a more cynical and perhaps more realistic viewpoint, the parties were engaged in an illegal bargain to construct a building that could neither legally be built on the site at all, nor legalized by amending the plans which were filed. They knowingly signed a lease for a physical culture establishment (PCE) and then embarked on a program of filings with the Buildings Department for a structure which could not accommodate the purpose of the lease. Their actions, if not illegal, are at best in defiance of public policy and should not be tolerated by this or any other court. By operating a gym in a building not constructed for that purpose they placed the safety of the general public at risk.

The parties entered into a written agreement to lease the premises as a gym and fitness center, a use inconsistent with the current zoning. The premises is in a C2-1/R3-2 zoning district. Under this zoning classification, a physical culture establishment cannot be legally occupied or operated as of right. An application must be made to the BSA to for a variance. With this zoning and the lease in place, the petitioner commenced construction of medical offices which could be built as of right. They received approvals for such a building and then several temporary certificates of occupancy. Petitioners did this rather than seeking approval from the BSA prior to construction, apparently hoping to construct the medical offices and then apply for and obtain a variance.

The New York City Administrative Code (NYCAC) treats building safety as a priority and has criminalized many activities. NYCAC §26-125 in regard to the Building Code provides: "every person who shall violate any of the provisions of any laws, rules or regulations enforceable by the department or who shall knowingly take part or assist in any such violation shall be guilty of an offense...."

In addition, NYCAC§26-126 states: "The owner, lessee, or occupant of any building in which a violation of the zoning resolution has been committed or shall exist, or the agent, architect, builder, contractor, or any other person who commits, takes part or assists in any such violation or who maintains any building in which any such violation shall exist, shall be guilty of a misdemeanor,...

While NYCAC§27-147 provides: "No building construction or alteration work...shall be commenced,...until a permit therefor shall have been issued by the commissioner."

The requirement of a certificate of occupancy is set forth in NYCAC§26-222. This statute states: It shall by unlawful to occupy or use any building erected or altered...unless and until a [*7]certificate of occupancy shall have been issued by the commissioner, certifying that such building conforms substantially to the approved plans and the provisions of the building code and other applicable laws and regulations. Nothing herein contained, however, shall be deemed to prohibit the commissioner from permitting the temporary occupancy and use of a building on accordance with and subject to the provisions of the building code....

It is abundantly clear that the parties to this lease agreement are in violation of the NYCAC and are subject to punishment by the appropriate authorities. The occupancy during the entire period of this agreement has been contrary to law.

The Rider to the Lease at paragraph 37 sets forth as "Owner's Work...." 4. In the basement, the men's room shall include, three (3) showers, three (3) stalls, and three (3) urinals, three (3) under mount sinks (including fixtures) 5. In the women's lockers, three (3) showers, five (5) toilets (up to code) and three (3) under mount sinks (including fixtures)...7. In both locker rooms the Landlord is allotting...9. Locker room bathroom shall be handicapped accessible

These are not alterations typical for a medical facility. All of this work is specialized renovations so that the premises may be used as a PCE. Petitioners contracted in the lease to make renovations which were wholly inconsistent with the plans subsequently filed with the Buildings Department. Petitioners' unclean hands extend not only beyond their wrists but are past their elbows approaching their shoulders.

The Rider to the Lease at paragraph 56 (J) provides: Tenant covenants that Tenant will not use...the Premises for any unlawful purpose....Tenant further covenants to comply with all applicable laws, resolutions, codes, rules and regulations of any department, bureau, agency or any governmental authority having jurisdiction over the operation occupancy, maintenance and use of the Premises for (emphasis in original) the purposes set forth herein.

How did the parties contemplate that the Tenant was going to be able to comply with the law when the occupancy from its inception was in violation of the law?

Added to the court's skepticism as to the "good faith" of the parties is the fact that the copies of the lease submitted to the court contains a major discrepancy. Paragraph 53 of the Rider to Lease is labeled "53. Changes in Building Facilities:"but contains no such language. It is followed by a paragraph dealing with the rights of the parties to arbitrate "any matter in dispute wherein arbitration is expressly provided in this Lease...."This is followed by paragraph "55. No Broker." There is no paragraph 54 and there certainly is no language in regard to "Changes in Building Facilities:" anywhere in the copies of the lease submitted to the court.

Based on the foregoing it must be concluded that there never was a legally enforceable lease. [*8]

B. Is There a Valid Settlement Agreement? The settlement agreement dated September 5, 2007 contains the following language: Whereas, Synergy Forest Avenue understands that, pursuant to the terms of the Lease, the Tenant is responsible and obligated to obtain the necessary documentation with the appropriate governmental agencies of the City of New York to obtain proper authority to operate a gym facility at the Premises and, because of the failure to do so, a notice of default dated January 11, 2007 was served;..."

As pointed out above, the written lease agreement does not make it clear that this was the responsibility of the tenant, especially considering that the language of the Rider indicated rent was not due and owing until a certificate of occupancy was issued. If the tenant is responsible for obtaining the certificate of occupancy, then the tenant could operate the facility without a final certificate of occupancy and have no obligation to pay rent. Something that does not make any sense.

Synergy Forest is not a party to the lease, yet it is undertaking to perform the tasks of the tenant under that agreement. There is no assignment of the lease obligations to the Synergy Forest in evidence. In spite of this, Synergy Forest at some point went into possession of the premises, began operating its "gym" business and began paying rent. All of this was clearly in violation of the law because there was never any final certificate of occupancy issued for any purpose nor was there a temporary certificate of occupancy which permitted the PCE use. The only permitted use was as a medical facility, yet the parties knowingly went into an unlawful operation and entered into a lease for a PCE prior to embarking on the Buildings Department application process.

The issue remains can the "settlement agreement" cure this. The answer is no. Merely substituting one tenant for another does not correct the fundamental problem with the lease. The lease purpose was in violation of the building code. The parties knew it and continued to flaunt the law until it became apparent that obtaining the necessary approvals was going to be more costly than envisioned.

The "settlement agreement" provides: Synergy Forest Avenue and Tenant and their agents and representatives shall diligently and in good faith pursue completion of the BSA application process, including all commercially reasonable efforts to obtain approval from the BSA for a cultural establishment at the Premises. Any violations for use and occupancy of the Premises without appropriate BSA and any other requirements of government authority applicable shall be borne by Synergy Forest Avenue and Tenant.

There are a few problems with this clause. First is the reference to "Synergy Forest Avenue and Tenant." The "tenant" on the lease is Synergy, Inc., a non-existent corporation. So who is to perform along with Synergy Forest? Second, the clause requires Synergy Forest to obtain "approval" as a "cultural establishment." This is obviously an error because the [*9]application should be for a "physical culture establishment" and not a museum, art gallery or concert hall. The zoning regulations permit the BSA to approve this PCE use only in certain circumstances. Third, Synergy Forest is in "good faith" is to "pursue completion of the BSA application process" which is to include "all commercially reasonable efforts to obtain approval from the BSA." Synergy Forest contends that they have met this criterion and petitioner alleges that they did not do so. The requirement of a "good faith" clause in any agreement between these parties is ludicrous in light of the fact they were perfectly willing for several years to flaunt the building code and operate without a viable certificate of occupancy.

This court has previously extended the prohibitions in regard to illegal residential occupancies (MDL 302) to commercial settings and held that no rent or use and occupancy can be collected while the premises lacks a valid certificate of occupancy (995 Manor Road LLC v Island Realty Holdings, LLC 15 misc32d 1147(A) (2007)). Because the logic for this monetary penalty is to insure that the building is safe for occupancy for its intended use, why would a court permit the public to frequent an illegal commercial establishment where the potential is for injury to a greater number of persons than in a residential situation? The Building Code establishes safety standards and it must be complied with in all situations. There was no valid certificate of occupancy for this location. The use is illegal and no rent or use and occupancy may be obtained.

The above being the case, Synergy Forest could still contract to obtain the BSA approvals. It is just that no rent may be collected during the period if the gym is being operated without a valid certificate of occupancy. Synergy Forest and the tenant could agree to pay rent and not use the premises, but that would not make any business sense.

C. Is There a Valid Guarantee?

On September 5, 2007, Anthony Reonegro signed a document entitled "Agreement of Guaranty"...between Steven Kaplan and Kapwest Corp. ("Landlord") and Synergy Forest Avenue Inc. and Synergy Fitness NYC Limited." It should be pointed out that neither Synergy Forest nor Synergy NYC is designated as "Tenant" in this agreement. There is no record of any assignment of the lease to either of these entities. The only "tenant" is Synergy, Inc., an inactive corporation, so whose performance is being guaranteed? The personal guarantee is only effective "if the Tenant: (1) vacates the Premises located at 1268 Forest Avenue, Staten Island, New York prior to the term of the Lease, or (2) fails to perform its financial duties and obligations under the Settlement Agreement and Lease. If vacatur is caused by the failure to obtain BSA approval, this Agreement Guaranty is null and void."

Having the guaranty triggered by the tenant vacating the premises prior to the term of the lease, by which it must be concluded is meant, prior to the termination date of the lease, under these facts at a minimum violates public policy. As pointed out above, the occupancy is illegal and in violation of the certificate of occupancy. Had the court been asked to decide only this issue, it would have determined that the lease was illegal and unenforceable and ordered that the tenant vacate the premises because of that fact. Therefore it must be concluded that if whatever entity is occupying the premises for use other than that permitted in the temporary certificate of [*10]occupancy vacates the premises, there can be no breach of the agreement. The "tenant" had no legal right to occupy the premises and must vacate. Vacating under these circumstances cannot trigger liability for rent. It should be pointed out that the petitioners have agreed to accept surrender of the premises and only litigate the issue of the personal guarantee.

As to the other ground for enforcing the guaranty, the failure to perform financial duties and obligations under the Settlement Agreement, the court likewise finds there is no legal basis for this. There is no valid lease, the premises cannot be legally occupied, the landlord cannot collect rent or use and occupancy so long as the premises is being occupied in violation of the certificate of occupancy. The illegal purpose of the lease makes it null and void. Likewise the tenant or any other occupant who has paid money to the landlord cannot recover such payments. The court will not resolve the disputes arising from the illegal agreement.

The guaranty is unenforceable. Neither party may use the court to seek redress of any claims in regard to the terms of the lease.

CONCLUSION:

The lease agreement is null and void. The occupancy is illegal. Neither party may use the court to enforce any claims under the terms of that agreement. The settlement agreement is null and void as is the guarantee. In addition, as a matter of public policy, neither party may enforce any claims under these agreements.

All claims and counterclaims between the parties are dismissed. Neither party may recover any monies from the other. A warrant of eviction is issued forthwith. There is no stay of execution.

Dated:April 28, 2009

Staten Island, NYPhilip S. StraniereJudge, Civil Court Footnotes

Footnote 1:

Hamlet, Act III, Scene 1.