Trump on the Ocean, LLC v Ash

[*1] Trump on the Ocean, LLC v Ash 2009 NY Slip Op 51837(U) [24 Misc 3d 1241(A)] Decided on August 25, 2009 Supreme Court, Nassau County Warshawsky, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on August 25, 2009
Supreme Court, Nassau County

Trump on the Ocean, LLC, Plaintiff,

against

Carol Ash, in her official capacity as Commissioner of the New York State Department of Parks, Harold H. Hagemann, Jr., in his official capacity as Director of the Concessions Management Bureau, and the New York State Office of Parks, Recreation and Historic Preservation, Defendants.



005274/2009



Plaintiff:

Jaspan Schlesinger Hoffman, LLP

Attn.: Steven R. Schlesinger, Esq.

300 Garden City Plaza

Garden City, New York 11530-3324

Defendants:

State of New York

Office of the Attorney General

Attn.: Toni E. Logue, Asst. Atty. General

200 Old Country Road, Suite 460

Mineola, New York 11501

Ira B. Warshawsky, J.

PRELIMINARY STATEMENT

Plaintiff seeks relief from its obligation to pay annual rental under the terms of its [*2]

Lease No. X000682 with New York State Office of Parks, Recreation and Historic Preservation ("State Parks") and the right to discontinue payments to Westchester Fire Insurance as Surety on the Capital Performance Bond pending the issuance of a building permit. Plaintiff also seeks to enjoin the Defendants from demanding or collecting rents under the lease, taking action to terminate or enforce the lease, requiring the Plaintiff to file, or continue, a Capital Enforcement Bond, and for a tolling of the time within which construction is to be completed for a term equal to the delay occasioned by the actions of the Defendants. Motion Sequence No. 2 seeks to enjoin the Defendants from declaring the existing Capital Performance Bond in default. The Court heard oral argument on the motions on August 17, 2009.

BACKGROUND

These motions relate to difficulties encountered in the construction of a new restaurant and catering facility at Jones Beach, to replace the original 1936 structure, and its 1964 replacement. Plaintiff and State Parks executed a commercial lease on September 25, 2006. They amended the lease by Amendment No. 1 on November 22, 2006. As required by the Finance Law, the lease was approved by New York State Attorney General and the Comptroller on December 1, 2006. On May 31, 2007 the parties executed a Letter of Understanding. The purpose of the latter was to increase the level of compliance with the Leadership in Energy and Environmental Design (LEED) Green Building Rating Program, from LEED compliant to LEED certified. Plaintiff acceded to this request.

Among the more significant clauses of the contract which are relevant to the pending motions are that the term was for 40 years from the first day of the month following the month in which the Comptroller approved the lease, through the last day of the 480th month following the month of Comptroller approval. Base rent of $200,000 per year, adjusted each January to reflect changes in the Consumer Price Index-U - U.S.City Average. Additional rent, in the form of a percentage of gross receipts, commences in the fourth year of the lease, and escalates to 5% for the 25th — 40th years. Construction was to be completed not later than 36 months after the inception of the lease. By letter dated July 10, 2007, Department of Parks declared that the completion date pursuant to § 11 (a) of lease was June 14, 2010.

Plaintiff demolished the remnants of the existing building, but when it applied for a building permit, it was advised that the basement, which had been part of the original approved plans, required certification that it complied with ASCE 24. This is a Federal Emergency Management Agency (FEMA) standard, adopted by the American Society of Civil Engineers, generally aimed at residential construction. ASCE 24 prohibits the existence of basements for human occupancy, thus requiring an application for a variance to place the kitchen at that level.

While State Parks apparently had authority to issue a variance on its own, it deferred to New York State Department of State, ostensibly because of the latter's greater experience with such applications. As owner of the property, State Parks sought a variance on behalf of itself and the Plaintiff from a restriction which it had itself imposed, that is, compliance with New York State Building Code for the construction of an occupied basement in a VE Zone as designated by FEMA. The first application was denied for failure to submit additional information requested by a Board member before the hearing date. The second hearing was originally scheduled for the next available date for the same Hudson Valley Board, but was transferred to Long Island, specifically at the Long Island Cradle of Aviation, as opposed to the State Office Building in [*3]Hauppauge. Three of the original hearing officers recused themselves shortly before the hearing, and were replaced.

By all accounts, the second hearing was a raucous affair, with significant television and press coverage, and numerous opponents permitted to speak. Many of their complaints had little to do with the issue before the panel; rather, they exhibited a generalized opposition to the project. The Board rendered a decision within 90 minutes of the conclusion of testimony, denying the variance application. Following the decision, Defendant Ash demanded the removal of the basement from the plans.

Plaintiff commenced an Article 78 proceeding to challenge the legitimacy of the determination of the Board. By Order dated October 21, 2008, this Court concluded that the March 4, 2008 determination of the Regional Board of Review was without a rational basis and "contrary to the uncontradicted evidence in the record." Defendants, together with State Parks, the applicant, filed a Notice of Appeal, but have yet to perfect it by filing the Record on Appeal and appellate briefs.

In a separate Order dated December 29, 2008, this Court dismissed the Fifth Cause of Action on the ground that it was a request conditioned upon the failure of Plaintiff to obtain a reversal of the board determination. Since they did obtain a reversal, the claim was no longer viable. The Sixth Cause of Action, requesting a "Yellowstone Injunction", was also dismissed on the ground that the requisite factors for such relief were not present. While the proceeding involved a commercial lease, the Court concluded that the landlord had not declared the lease in default or set a term within which the tenant is to cure the default. Since that time and beforehand as well, the construction project has been stalled, with the Plaintiff in possession of neither a variance nor a building permit.

On March 4, 2009, State Park sent a letter to Plaintiff which demanded payment of base rent of $207,307 by March 24, 2009. Plaintiff responded with a letter invoking section 37 of the lease, the force majeure provision, which would excuse the Plaintiff's performance under the lease (specifically payment of rent and maintaining performance bond). State Parks did not respond to that letter. Plaintiff brought the instance action and sought a TRO enjoining State Parks from declaring a breach of the lease. The Court (Bucaria, J.) granted said request on May 4, 2009. Plaintiff now seek a determination that they are no longer required to pay the base rental, that they are no longer required to maintain the existing Capital Improvement Bond, and that the delays occasioned by the conduct of the Defendants should not be charged against it in calculating the thirty-six months within which construction is to conclude.

Plaintiff commenced a separate action against State of New York in the Court of Claims, seeking monetary damages for the failure of State Parks to cooperate in the progress of the lease agreement, including manipulation of the variance application process so as to assure denial, and their lack of effort in the application before the Department of State. This action was dismissed by Decision and Order dated July 14, 2009. The Court there concluded that the contract failed to obligate State Parks to obtain a variance or otherwise assist the claimant in doing so. While recognizing the existence of an implied warranty of good faith and fair dealing in all contracts, such warranty would obligate State Parks to perform a task not otherwise required by the express terms of the contracts. Even if the Court concluded that such a covenant of good faith and fair dealing should be implied, neither the denial of the variance by another State agency, nor the [*4]failure to assign a person of sufficient stature to assist in the application process, state a cause of action for breach of such covenant.

DISCUSSION

It is impossible for this Court to avoid the conclusion that the Defendants have had a change of heart with respect to the Jones Beach project, and are taking every opportunity to run out the clock until June 14, 2010, when they will declare the Plaintiff in default, and cancel the contract. Plaintiff seeks authorization to terminate payments of the base rental and continued funding of the Capital Performance Bond until the building permits are issued and construction commences. In addition, they request a tolling of the thirty-six month term for conclusion of construction for a term equal to the time of the Defendants' delay.

Rental Payments

Dealing first with the issue of rental payments, the lease is clear that base rental payments commence on the first day of the month after the approval of the lease by the Comptroller. Plaintiff claims an exemption from this obligation under the Force Majeure clause contained in

¶ 37 of the lease, which provides as follows:

If either State Parks or Lessee shall be delayed or prevented from the performance of any act required by this Lease by reason of acts of God, weather, earth movement, lockout or labor trouble, unforseen restrictive governmental laws, regulation, acts or omissions, (emp. supplied) or acts of war or terrorism which directly affects the Licensed Premises and/or facilities and services of Jones Beach State Park, riot or other similar causes, without fault and beyond the reasonable control of the party obligated, performance of such act, including payment of all License Fees and R & R deposits due, shall be permanently excused for the period of the delay and the period for the performance of such act shall be extended for a period equivalent to the period of such delay, at which time all payments due shall be resumed.

Force majeure, literally "a superior force" in French, is most frequently applied to Acts of God or events in nature, which are neither anticipated nor controllable, but it may well apply to "governmental prohibitions." "Interpretation of force majeure clauses is to be narrowly construed and only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused.'" (Reade v. Stoneybrook Realty, LLC, 63 AD3d 433, 434 [1st Dept. 2009]), quoting (Kel Kim Corp. V. Central Mkts., 70 NY2d 900, 902—903 [1987]). In Reade the Court concluded that a TRO issued by Supreme Court, which prohibited the continuation of construction by landlord, was governmental action beyond the control of the landlord and thereby included in the "governmental prohibitions" phrase in the rent abatement clause in the lease.

The present case is somewhat unusual in that it is the owner of the property, State Parks, which refused to issue a building permit to commence driving pilings for the project, basing its refusal upon the newly stated position that because the project was in a "flood management zone", construction of the basement must comply with the American Society of Civil Engineers (ASCE) 24. A review of the standards and the building codes in this publication makes it clear that the regulations are aimed at residential frame construction in flood hazard areas. The restrictions include construction of the first floor at a designated height above ground level, depending upon the flood hazard classification, breakaway areas in construction below the first [*5]floor to permit free passage of flood waters, and, as a practical matter, a prohibition against the use of enclosed spaces below the base flood elevation human occupancy.

By insisting on this ostensibly irrelevant standard, State Parks made it impossible to construct the building under the already approved plans. State Parks is a construction-permitting agency which could have granted a variance on its own. 19 NYCRR 1204.3(e). It also was authorized to accept alternate materials, design and methods of construction. State Building Code § 103.3. Nevertheless, it deferred to Department of State, ostensibly placing the matter out of its own control.

The issue before the Court with respect to the payment of rent is whether or not the imposition of construction requirement which mandated a request for a variance, State Parks removing itself as the construction-permitting agency authorized to grant a variance, the denial of the variance application of one State agency by another, and the variance applicant now appealing, but not perfecting for eight months, the grant of relief in its favor from the denial by Department of State, is adequate to trigger the language of the force majeure clause upon which Plaintiff relies.

The Court determines that the language of the force majeure clause of the lease agreement, specifically "unforseen restrictive governmental laws, regulations, acts or omissions" includes the foregoing events. The imposition of impossible to comply with standards with respect to the approved basement, the refusal of State Parks to act in its capacity as a code enforcement entity, its transference of its authority to Department of State, its tepid efforts in support of its own variance application, and, most incredibly, its filing a Notice of Appeal from a ruling of this Court in its favor, could hardly have been anticipated.

In accordance with that clause, the events being "without fault and beyond the reasonable control of the party obligated, payments of all License Fees and R & R deposits shall be permanently excused from the period of delay and extended for a period equivalent to the period of such delay, at which time all payments shall be resumed." The delay began on September 12, 2007, when State Parks demanded that the project must comply with the New York State Building Code, which precluded the existence of the already approved basement. That delay has continued to the present time and will continue into the future, until a building permit is issued. The Plaintiff is excused from payment of the base rents from September 12, 2007 until the issuance of a building permit allowing construction to begin.

Maintenance of Performance Bond

Westchester Fire Insurance Company is the surety on Bond No. K0755B089, in the original amount of $18,204,000. The bond is a requirement of ¶ 11 (d) of the Lease (Exh. "B" to Motion Sequence 1). It provides in pertinent part as follows:

Prior to the signature of this Lease by the parties, Lessee has provided a letter of pre-approval from a surety company, or other provider reasonably satisfactory to State Parks, assuring that such company will produce a capital performance bond or letter of credit that will take effect upon the issuance of a building permit by State Parks. As a condition precedent to the issuance of a building permit by State Parks, Lessee shall produce a performance bond or letter of credit in the amount of $11 million from a recognized financial institution, or other evidence of adequate financing of the capital obligation that is satisfactory to State Parks. [*6]

Plaintiff obtained the performance bond in anticipation of imminent issuance of a building permit. The bond is apparently in full force and effect and premiums are being charged, despite the fact that it is not required to take effect until the issuance of a building permit. The language of the lease does not require a bond to be in effect until the issuance of a building permit. Defendants have refused to issue such a document in the absence of a variance from the post-agreement requirement unilaterally imposed by them. To the extent that the following sentence would seem to make the production of a performance bond a condition precedent to the issuance of a building permit, the long-standing doctrine of contra preferendum requires that such ambiguity be resolved in favor of the Plaintiff.

Plaintiff seeks an injunction precluding Defendants from taking action to declare the bond in default if it is terminated. Defendants oppose the application on the ground that the Plaintiff has not established a likelihood of success on the merits, irreparable harm if the injunction is denied, and a balance of the equities in favor of granting the injunction. (Evans-Feeke v. Showcase Contracting Corp., 3 AD3d 549 [2d Dept. 2004]).

Plaintiff has undoubtedly been paying very substantial premiums on the bond since December of 2006, despite the fact that the triggering event, the grant of a building permit, has not yet occurred. The fact that Plaintiff has located construction trailers on the site, built stairways for entry to them, and removed the remnants of the previously demolished restaurant, doe not justify the requirement of the maintenance of a bond to cover the now-estimated $24,000,000 cost of improvements. In keeping with the language of ¶ 10 (a) of the lease, Plaintiff has established its ability to obtain a surety bond in an amount necessary to guarantee the faithful performance of the contemplated capital improvements by having done so. Despite the language of ¶ 10 (c) and (d), Plaintiff is entitled to cancel the capital improvement bond until Defendants issue a building permit for the sinking of pilings and the additional work to complete the project. While the lease remains in effect, the performance bond is not required to be effective until a building permit is issued.

On the issue as to whether Plaintiff is required to maintain the bond in full force and effect during the time that construction is stayed because of the lack of a building permit, the Plaintiff is likely to succeed on the merits. The lease calls for the bond to be in effect from the issuance of a building permit. In the absence of an injunction, Defendants are likely to declare the bond in default, triggering litigation between them and the insurer, the impleader of Defendant, and further delays in the project, all of which will not only result in additional expenditures of funds, but also may have the effect desired by the Defendants, the development of ill-will against Plaintiff, and the fomenting of antipathy by a small minority of detractors, leading to a tarnishing of the Trump reputation as a successful developer of high-end properties in the metropolitan area and elsewhere. Money will not remedy the damage which this will occasion.

Lastly, it would be hard to imagine the equities being balanced more favorably toward Plaintiff. Rather than proceed to honor their obligations under the agreement they have acted to the detriment not only of the citizenry who now have an unsightly crater at the Central Mall at Jones Beach, instead of a quality restaurant and catering facility, but to all the taxpayers in the State of New York. Despite the constant wailing about the State's declining tax revenues and

increasing obligations, Defendants have prevented the creation of a $24,000,000 capital [*7]improvement on State Parks land, at no cost to themselves, and seem intent on denying the coffers of the State the share of the gross proceeds of the facility to which the lease entitles them.

If Plaintiff, in its own economic self-interest, determines to terminate payments upon the Westchester Fire Insurance Company pending the issuance of a building permit, they are justified in doing so. Defendants are enjoined from declaring Plaintiff in default with respect to the maintenance of a Performance Bond, unless and until they issue a building permit and Plaintiff fails to re-activate the bond in accordance with ¶ 11 (d) of the Agreement.

Tolling of the period within which construction is to be completed.

¶ 11 (a) requires the Lessee to "commence construction of the Capital Improvements upon execution and approval of this lease by all necessary parties and to complete construction within thirty-six (36) months thereafter. By letter dated July 10, 2007 State Parks stated that the completion date is June 14, 2010. They have not altered there position despite the fact that more than two years later, construction has not yet begun. Neither have they ceased demanding the payment of base rental, the record before the Court reflecting a March 4, 2009 demand for the 2008 rental. Exh. "E" to Motion Sequence No. 1. Plaintiffs are entitled to a Yellowstone Injunction.

By virtue of the foregoing documents, Defendants have threatened to terminate the lease agreement in violation of the rights of Plaintiff as above-enumerated. Relief from such conduct, in the form of a preliminary injunction, is available pursuant to Civil Practice Law and Rules

§ 6301. This Court has previously denied an application for a Yellowstone Injunction, but concludes that the circumstances have now changed so as to now require a reconsideration of that position.

First Natl. Stores v. Yellow Shopping Ctr., 21 NY2d 630 (1968) created a new era of commercial landlord-tenant law in New York. It involved a dispute as to who, between the landlord and tenant, was obligated to pay for the installation of a fire sprinkler system mandated by the City of New York. When the tenant did not pay, landlord served a notice for them to cure within a certain period. Tenant sought a stay of the cure period before it expired so as to preserve the lease until the merits could be resolved in Court. They are now routinely granted to tenants in a commercial lease, who have received a notice of default, a notice to cure, or a threat of termination of the lease, where the request has been made before the termination of the lease, and they are prepared and capable of curing the default by any means short of vacating the premises. (225 E. 36th St. Garage Corp. V. 221 E 36th Owners Corp., 211 AD2d 420, 421 [1st Dept. 1995]). The purpose of the Yellowstone Injunction is to maintain the status quo with respect to the cure period while the underlying dispute is being litigated. (Graubard Miller Pomeranz & Shapiro v. 600 Third Ave. Assoc., 900 NY2d 508, 514 [1999]).

In this case State Parks has set a date for completion of the construction as June 14, 2010, a deadline that is now impossible to meet, largely, if not exclusively, based on the Defendants actions and failure to act in accordance with the lease terms. They have also demanded payment of the base rent for 2008 within 20 days of the receipt of their March 4, 2009 correspondence, and made an additional demand at the conclusion of the hearing. As previously noted, rent is not due for 2008 because of the force majeure provision of the lease. It is incontrovertible that construction expected to take 36 months cannot be completed in the 10 months after the return date of the motion. [*8]

Plaintiff is therefore entitled to a Yellowstone Injunction, to maintain the status quo, with a tolling of the time within which construction is to be completed. The time between September 12, 2007 and the date when a building permit is issued will not count toward the 36-month period during which construction is to be completed.

This constitutes the Decision and Order of the Court.

Dated: August 25, 2009

J.S.C.