Rachel Bridge Corp. v Dishi
Annotate this CaseDecided on June 30, 2004
Civil Court of the City of New York, New York County
RACHEL BRIDGE CORP., Petitioner,
against
AVI DISHI, Respondent. LA UNICA MODA and XYZ CORPORATION, Respondent-Undertenants.
55787/04
Anil C. Singh, J.
At issue in this proceeding is whether the tenant should be relieved of the consequences of his failure to exercise an option to renew a valuable commercial lease in accordance with the terms of the lease.
On August 20, 1991 the parties entered into a standard form preprinted lease for premises located at 1365 St. Nicholas Avenue. Page one of the lease contains a handwritten and initialed notation which provides that the term is for twenty years terminating on November 30, 2011. In contrast, paragraph 40 of the rider to the lease states that "...tenant shall pay Landlord $12.40 per annum per sq. ft. with 5% per annum increments for a period of twelve years... Additionally tenant shall have the right to renew the lease for an additional eight years by giving written notice to landlord at least six months prior to expiration of the lease."
Not surprisingly the parties interpreted the lease and rider differently. The landlord claimed that the lease term was for twelve years with an eight year renewal. The renewal was not exercised therefore the lease had terminated on November 30, 2003. The tenant contended that he had a twenty year lease with an eight year option.
By order dated May 3, 2004, the Hon. Jeffrey Oing found that the landlord's interpretation was correct and granted it partial summary judgment. The court found the language in the rider to be unambiguous. The court noted that the rider specifically provided that the rider would control in the event of a conflict between the lease and rider. Further, the court held that the tenant's alleged attempt to exercise the option by hand delivery did not comply with the notice provision of the lease which required any notice to be served by registered or certified mail. Finally, the court set this matter down for a hearing on whether the tenant should be relieved of its default (Mass Properties v. 1820 New York Avenue Corp. 152 AD2d 727 (2nd Dept. 1989).
The hearing was held before me on June 9, 2004. The tenant Avi Dishi testified that he approached the landlord Rachel Bridge Corp. ("Rachel Bridge") in 1990 or 1991 with a business [*2]proposal to convert the ground space of 1365 St. Nicholas Avenue in Manhattan being occupied by Rachel Bridge as an office to retail use. At that time the zoning permitted only office use. Therefore, the plan would require a change in zoning as well as relocating Rachel Bridge to different premises.
Rachel Bridge accepted the proposal. The parties entered into the lease. According to Dishi the lease was prepared by the landlord. He and the landlord's representative negotiated the terms of the lease without the aid of attorneys. Since his English was not very good, the landlord's representative orally went over the terms and crossed out various items at his request. It was agreed that the rent would be paid yearly at $12.40 per square foot which, according to Dishi, was 15% to 20% below the market rate in the area. Dishi stated that when he negotiated the lease he attempted to get a long term 50 year lease. He was making a major investment in a risky project and wanted to recoup his investment over time.
Dishi testified that the construction was a major endeavor and took one year to complete. An architect was hired to convert the space, various filings with the municipality were made to change the zoning and to obtain a new certificate of occupancy reflecting retail use. The building facade was changed. A granite store front was installed at a cost of $150,000. In total the cost of construction was $480,000.00. An additional $60,000.00 was spent building Rachel Bridge's new offices on the second floor of 1365 St. Nicholas Avenue.
Dishi testified that he began paying rent in June, 1992 after Rachel Bridge gave him possession of the ground floor. A letter from Yossi Schwimmer, the
Rachel Bridge representative with whom Dishi had all his business dealing was introduced in evidence indicating that possession was given to the tenant on June 15, 1992.
The retail operation did not commence until May, 1993. Dishi testified that although he was the named tenant the store was subleased to various entities over the years without objection from Rachel Bridge. He was a partner in the retail establishments that ran the businesses. The current rent being paid by the tenant with escalations over the years is $51,000.00. Dishi stated that he charged the retail stores rent which resulted in a profit to him of approximately $2,000.00 per month.
Dishi testified that early 2003 he had a telephone conversation with Schwimmer regarding the length of the lease. He believed that the lease was for twenty years with an eight year option. Schwimmer allegedly advised him that it was for twelve years with and eight year option. Dishi stated that he was concerned about the issue. He had been involved with the landlord in prior litigation. Dishi testified that in order to protect his investment in the lease he asked his secretary to prepare a letter in March, 2003 exercising the option and deliver it to Rachel Bridge. The letter dated March 12, 2003 was introduced into evidence.
Dishi stated that he never got a response to the option notice from the landlord. Rent for 2004 (payable annually under the lease) was tendered to the Rachel Bridge prior to December 20, 2003. He did not have any conversations with Schwimmer until after he received the notice of petition and petition in February, 2004. Dishi denied sending Schwimmer a second copy of the March 12, 2003 letter exercising the option.
Elvira Ramirez was the second and final witness called by the respondent. She testified that she was employed as a secretary by Elsa Investment Company which is owned by Avi Dishi. Ramirez recognized the option letter and recalled typing it in March, 2003. She testified that she [*3]delivered it to the office of Rachel Bridge the same day she prepared the letter. She remembered giving the letter to the employee behind a window in the Rachel Bridge office. She delivered a monthly rent check with the letter. She also recalled redelivering a second copy of the March 12, 2003 notice to the landlord after she was informed that the landlord was claiming that the notice had not been received. Ramirez also testified that she had sent a fax copy of the letter to an attorney in 2004.
The petitioner called one witness, Jacob Schwimmer (known to Dishi as "Yossi"). Schwimmer testified that he was the vice president of Rachel Bridge and the managing agent for 1365 St. Nicholas Avenue. He was familiar with Avi Dishi. Schwimmer stated that in the mid 1990s he instructed his employees to bring any communication relating to Dishi to his attention. All rent checks were received by hand but he could not recall receiving any correspondence by hand.
Schwimmer denied having any conversations with Dishi in 2003. He stated that the rent check for 2004 was delivered by the tenant on January 20, 2004. He was surprised at receiving the check because the lease had expired the prior year on November 30, 2003. Schwimmer testified that he consulted with his attorney and returned the check by letter dated February 6, 2004 advising Dishi that the lease had expired on November 30, 2003. The letter also informed the tenant that legal proceedings had been commenced to recover possession.
According to Schwimmer he spoke to Dishi two days earlier on February 4, 2004 when the tenant called inquiring why the check had not been cashed. Schwimmer stated that he informed him that the lease was up in November, 2003. At this point Dishi hung up the phone. Schwimmer testified that the following day Dishi called again. For the first time Dishi stated that he had a letter in his files exercising the option. Schwimmer said that he had not received the letter. Thereafter, Dishi's secretary redelivered the letter. He was surprised that he had not seen the letter before. Schwimmer insisted that had the letter been delivered timely he would have received it based on his prior instructions to his employees.
Petitioner also introduced a lease into evidence leasing the subject premises to a nonparty, Good Buys Enterprises, Inc. for ten years at $156,000.00 per annum with yearly increases of 5%. Schwimmer testified that in 2003 he was contacted by a Mr. Kahan who was interested in renting space from Rachel Bridge. Schwimmer told him that space may become available. Once the lease expired in November, 2003 he commenced negotiations with Kahan culminating in the lease dated December, 2003. The lease is to commence on March 1, 2004 and according to Schwimmer the new tenant is anxious to take possession of the store.
Discussion
New York courts have recognized that the right to renew a lease is a vested equitable right [J.N.A. Realty Corp. V. Cross Bay Chelsea, Inc., 42 NY 2d 392 (1977)]. Thus where failure to exercise an option will result in a loss of valuable improvements to property, equity may intervene to protect against the forfeiture. Applying this rule, the Second Department in Mass Properties v. 1820 New York Avenue Corp., supra at p. 728 - 729, enunciated a three-prong test. In order to be relieved of the default the tenant must show: (1) the default must be excusable; (2) the default will result in a substantial forfeiture by the tenant and; (3) the landlord will not be prejudiced by allowing the tenant to exercise the option.
I. Excusable Default [*4]
I found Elvira Ramirez to be the most credible witness. While she worked for Dishi she had the least motivation to lie. In contrast both Dishi and Schwimmer have a strong interest in the outcome of this proceeding. Dishi stands to lose a valuable below market commercial lease. Schwimmer, who is the vice resident of Rachel Bridge and managing agent of the building, has a new lease with a tenant who is willing to pay a substantial amount of money for the space. Also, it is clear that the landlord-tenant relationship is strained. Thus Rachel Bridge would be able to rid itself of a tenant that it in all likelihood no longer desires.
I find that Elvira Ramirez prepared and delivered the renewal notice in March, 2003 to one of Rachel Bridge's employees sitting at a window booth in the office. I accept Schwimmer's testimony that he never received the notice in March, 2003. However this fact does not negate delivery by hand to an employee. It should be noted in this regard that Rachel Bridge did not call to the witness stand any of its employees who received rent and other correspondence in 2003 to dispute receipt of the notice.
Furthermore, Dishi's default was inadvertent and excusable. The failure to renew timely can be traced to the lease which is hardly a model of clarity. Page one of the lease clearly states that there is a 20 year term. The option to renew is buried in paragraph 40 of the rider. The provision does not explicitly state that the lease term is only for twelve years. This conclusion can be extrapolated from the language in the paragraph giving the tenant the right to renew for an additional eight years upon on six months prior to the expiration of lease. The rider does not state when the lease expired. The only expiration date of the term appears in the lease and is November 30, 2011. Nor does the rider give the manner in which the option is to be renewed. In order to determine how the notice is to be served one must look at the lease itself which provides for notice by registered or certified mail. Clearly Dishi's negligence in failing to timely renew in accordance with the terms of the lease is excusable and was caused in part by a contradictory document prepared by the landlord [see Jones v. Gianferante, 305 NY 135 (1953) (tenant excused for failure to timely exercise renewal based on ambiguity in the renewal option)].
II. Substantial Forfeiture by the Tenant
The tenant has established that the default will result in a substantial forfeiture. The tenant made significant improvements to the property. Development of the premises from passive office space to income producing retail use was conceived and implemented by Dishi. The new use necessitated a change in zoning, substantial construction and investment [see Nanuet National Bank v. Saramo Holding Co., 153 AD2d 927 (2nd Dept. 1989) (expenditure of $180,000 in construction of a two story building and additional sums spent over a 20-year term constituted substantial improvements)]. The risk of failure of the enterprise was upon the tenant. The amount of good will earned at the location over the twelve years is reflected by the willingness of the new tenant to pay a ten fold increase for the space [see Sy Jack Realty Co. V. Pergament Syosset Corp. , 27 NY2d 449 (1971) (loss of good will of retail enterprise is a substantial and valuable asset)].
III. Prejudice to the Landlord
Most troubling here is whether the landlord will suffer prejudice by permitting the tenant to exercise the option. Rachel Bridge entered into a new ten year lease with Good Buys Enterprises on December 30, 2003. Allowing Dishi to exercise the option will result in the loss of the increased rents from the new lease. It is not out of the realm of possibility that the [*5]landlord may be subject to litigation by Good Buys Enterprises.
However on balance, the loss of market rent and potential litigation is not sufficient prejudice. Rachel Bridge made a business decision to make a deal with Good Buys Enterprises knowing that there was a clear conflict between the lease and rider as to whether the term was for twelve or twenty years. Schwimmer had to have known that the issue would result in litigation with Dishi. Therefore, if Dishi testified there was any prejudice it was because of Rachel Bridge's own actions. First, by preparing a lease that was ambagious and uncertain. Second, by entering a new lease without obtaining a judicial determination as to the length of the term or making the new lease subject to the outcome of this holdover proceeding.
For these reasons, this court holds that the tenant should be relieved of its default and the option is deemed exercised for an additional eight years. Therefore, the holdover proceeding is dismissed with prejudice.
The foregoing constitutes the decision and order of the court.
Date: June 30, 2004 _________________________
New York, New YorkAnil C. Singh
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