790 Realty Corp. v Subway Real Estate Corp.

[*1] 790 Realty Corp. v Subway Real Estate Corp. 2007 NY Slip Op 51040(U) [15 Misc 3d 1139(A)] Decided on May 18, 2007 Civil Court Of The City Of New York, New York County Singh, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 May 18, 2007
Civil Court of the City of New York, New York County

790 Realty Corp., Petitioner,

against

Subway Real Estate Corp., Respondent-Tenant, "XYZ Corp.," "John Doe and/or Jane Doe," Respondents-Undertenants.



096043/06

Anil C. Singh, J.

This is a commercial nonpayment summary proceeding. Respondents-undertenants Surinder Kumar and Sudesh International Inc. move for summary judgment dismissing the complaint pursuant to CPLR 3212 or, in the alternative, for leave to join necessary parties. Petitioner opposes and cross-moves for an order: a) striking the affirmative defenses of Sudesh International Inc. and Surinder Kumar; b) striking the affirmative defenses of respondent-tenant Subway Real Estate Corp. ("Subway"); c) striking respondent Subway's first counterclaim; and, d) in the event the verification is deemed insufficient for any reason, amending the verification nunc pro tunc. Respondent Subway opposes petitioner's cross-motion.

On January 29, 1998, petitioner and respondent Subway entered into a written lease agreement for commercial space located at 790 Ninth Avenue in Manhattan [Motion for Summary Judgment, Exhibit C]. Subway leased the premises for a term of ten years to operate a Subway restaurant. Paragraph 74 of the lease states that Subway may sublet the premises to any Subway franchisee without the prior consent of the landlord, and paragraph 77 states that the landlord agrees to accept the rent from Subway's sublessee/franchisee.

Respondent Subway subleased the premises to Mohamed Sayed and Ibrahim Sayed. On [*2]April 16, 1998, Mohamed Sayed and Ibrahim Sayed assigned the sublease to Rajeev Kumar.

Subsequently, Surinder Kumar entered into a franchise agreement to operate the restaurant, and on November 30, 2005, respondent Surinder Kumar purchased the franchise from Rajeev Kumar. At the closing, the sublease for the premises was assigned from Rajeev Kumar to Surinder Kumar. At that time, Rajeev Kumar provided a sworn affidavit that he was not in arrears on the lease [Motion for Summary Judgment, Exhibit D]. In the same affidavit, Rajeev Kumar agreed to indemnify and hold harmless Surinder Kumar and Sudesh International Inc. against all actions which might be instituted against Sudesh International Inc. or Surinder Kumar by reason of the ownership and operation of the franchise.

In March of 2006, petitioner's managing agent, Noam Corporation, sent a letter to respondent Subway that states in pertinent part as follows:

Upon review of your Lease Agreement we found uncollected charges on your account.

As per article 62 in your Lease agreement, the Landlord may increase the Base Rent based on the Consumer Price Index. If on December of any year after year 2002 the CPI is greater than the base year (that being December of 1998) the base rent for the ensuing calendar year is increased by the percentage difference of the CPI.

For your convenience and clarification I've enclosed 3 tables which clearly explain how the charges are calculated.

As you can see (on the enclosed tables) the total amount owed thru March 2006 is $21,327.23.

Your monthly rent for the months of April thru December 2006 is $4875.19; this is the amount you will be billed for from now going forward. Please send this amount when mailing your April rent.

Please be advised that you still have an outstanding balance of $4,169.12 on your account. Your open balance consists of $3929.12 for Real Estate taxes, $190 for rent payment and $50 which you were charged for having two checks returned to us for insufficient funds. As per our conversation I re-deposited those two checks today.

Considering the above information you need to pay $25,496.35 to clear up all the balances on your account.

(Motion for Summary Judgment, Exhibit G).

The letter reflects that a courtesy copy was sent to Surinder Kumar.

In May 2006, petitioner served a rent demand upon respondents in the amount of $27,204.61 for CPI and other miscellaneous charges. In July 2006, petitioner served a second rent demand upon respondents in the amount of $26,542.42 for CPI and other miscellaneous charges [Affirmation of Robert L. Kahn, Esquire, Exhibit A].

Petitioner served a third rent demand on respondent Subway dated October 6, 2006. Unlike the previous rent demands, the October 6, 2006 rent demand makes no reference to CPI [*3]charges. Instead, it demands rent in the amount of $32,145.83 for alleged nonpayment of rent for the months of May through October of 2006; 2006/2007 real estate taxes; and an unpaid balance of $1,826.85 [Motion for Summary Judgment, Exhibit A].

Petitioner filed the instant nonpayment petition on October 18, 2006. Respondents Surinder Kumar and Sudesh International, Inc. filed a verified answer raising twelve affirmative defenses, and respondent Subway Real Estate Corp. answered the petition, raising ten affirmative defenses. In addition, respondent Subway filed a counterclaim against petitioner for attorney's fees, and two cross-claims against respondent Surinder Kumar for contribution and/or indemnification in the event petitioner prevails.

In their motion for summary judgment, respondents Sudesh International Inc. and Surinder Kumar contend that the petition should be dismissed for three reasons: 1) petitioner's claim for real estate taxes is moot since they were paid; 2) petitioner failed to satisfy a condition precedent before the CPI charges are due; and, 3) petitioner's claim for CPI charges should be barred because of laches.

Respondent Surinder Kumar states in a sworn affidavit that the first time he learned of any CPI charges claimed by petitioner was in March 2006, when he received the letter from Noam Corporation quoted at length above. He states that petitioner billed for CPI charges for the periods of 2002 and 2005 for the first time in March 2006, and he asserts that the ledger and monthly bills show that petitioner never billed for the CPI for 2003 through 2006 until March 2006 [Motion for Summary Judgment, Exhibits E and F]. Moreover, Mr. Kumar states that at the time he contracted to purchase the Subway store and entered into the sub-assignment of the lease, he had a reasonable expectation that if the petitioner was seeking CPI charges for any given year, the petitioner would have billed for the CPI increases sometime during the calendar year in question. He contends that the landlord failed to issue the CPI statements as required by the lease and should be barred from recovering CPI charges.

Mr. Kumar states that he was not the party in possession or the sublessee for the time period of 2002 through 2005, for which CPI charges are sought. Furthermore, he states that, had he known CPI charges were delinquent or due, he may not have entered into a contract to purchase the Subway store or changed his offer. Finally, Mr. Kumar states that his circumstances and position have changed as a result of the actions or failure of petitioner, and petitioner should therefore be barred from seeking the retroactive CPI charges.

The language regarding notice of the CPI increase is set forth at Paragraph 62 of the rider to the lease agreement and states in pertinent part:

As used in this article: (1) "Index" shall mean the "Consumer Price Index for Urban Wage earners and Clerical Workers (1967-100)" specified for "All Items," relating to New York metropolitan area, and issued by the Bureau of Labor Statistics of the United States Department of Labor.... (2) "Base Index" shall mean the Index in effect in December, 1998. (3) "Anniversary Month" shall mean December of the calendar year ending December, 2002 succeeding the "Base Index" year and each successive December thereafter during the Lease term and any extended or renewed lease term or any successive December after the "Base Index" year falling during the term of this lease. (4) "Percentage Increase" shall mean the percentage equal to the fraction, the numerator of which shall be the Index in the Anniversary Month less the Base Index, and the denominator of which shall be the Base Index. [*4]

If the index in any Anniversary Month shall exceed the Base Index, then the Basic Rent payable for the ensuing calendar year, and thereafter until a new index comparative statement is sent to Tenant shall be increased by a sum equal to the Base Rent times the Percentage Increase. At any time after January first of the said ensuing calendar year. [sic.] Owner shall send Tenant an index comparative statement setting forth (a) the index in the Anniversary Month preceding the date of the statement, (b) the Base Index, (c) the Percentage Increase, and (d) the increase in the Basic Rent. On the first day of the calendar month ("current month") following the month in which the index comparative statement was sent (i) Tenant shall pay to Owner a sum equal to 1/12 of said increase in the Basic Rent multiplied by the number of calendar months of the lease term then elapsed since January 1st of the current year and (ii) thereafter commencing with the current month and continuing monthly thereafter until a different index of rent shall be increased by an amount equal to 1/12th of said increase.

(Cross-Motion, Exhibit E).

Respondents contend that the claim for the balance of the monies sought by petitioner, less check payments deposited by petitioner after the proceeding was commenced, is essentially for retroactive CPI charges. Respondents cite several cases for the proposition that a timely billing of escalation charges is a condition precedent to a tenant's obligation to pay. Here, respondents contend that petitioner failed to provide a statement showing the computation of increases in a timely manner. According to respondents, paragraph 62 of the lease sets forth the definition, method and the time period for demand of CPI charges and, pursuant to case law, these conditions must be met before any additional rents are due.

Respondents contend that the language in the lease requires petitioner to send the comparative statement bill in January to the tenant the year following the year the index was greater than the preceding year from the Base Index. Respondents argue that, without sending such a statement which is clearly a condition precedent, no additional rent is due. Petitioner sent a billing statement for CPI charges for the first time in March 2006. Though petitioner seeks CPI charges for 2002 through 2005, the petitioner did not send the billing statement as required by the lease. Hence, respondents contend that petitioner is now barred from recovering any CPI for the period prior to March 2006, and respondents are not liable for the CPI charges.

In response, petitioner contends that it never waived, or intended to waive, the CPI charges. Petitioner contends further that the failure to bill for the CPI charges for a short period of time was inadvertent. Furthermore, it is petitioner's contention that it did, in fact, bill for the CPI charges, and such billing was in accordance with the relevant lease provisions. In any event, petitioner contends that there are no CPI charges in the petition, and the cases cited by respondents are inapposite to the matter at issue.

After careful consideration, the Court finds that two cases clearly support respondents' contention that petitioner is not entitled to collect CPI charges under the specific circumstances in the present case.

In B.W.H.N.V. Assoc. v. Sun Lee Deli & Grocery, 194 Misc 2d 725 (App. Term, 1st Dep't 2003), landlord initiated a commercial nonpayment proceeding in Civil Court. Landlord's petition sought additional rent for the preceding five-year period based upon the consumer price index escalation clause in the lease. Civil Court granted the tenant's pre-answer dismissal motion [*5]on the ground not raised in the moving papers that landlord had failed to provide semiannual statements for the additional rent due, as required under lease paragraph 40(B), thereby failing to comply with a condition precedent to payment.

The Appellate Term reversed on the grounds that Civil Court had impermissibly treated the pre-answer dismissal motion as one for summary judgment, stating that the "[l]andlord should be afforded an opportunity to contest this issue and submit any available evidence that prior demand for the charges was made" (Id., 194 Misc 2d at 726).

The Appellate Term in B.W.H.N.V. Associates cited Walton v. Eastern Analytical Labs, 246 AD2d 532 (2d Dep't 1998), in which plaintiff landlord and defendant tenant entered into a lease in 1984 whereby the tenant agreed to pay additional rent based on increases in plaintiff's operating expenses over and above the operating expenses in the base year of 1984. The lease provided as follows:

After the end of each calendar year, the Landlord will submit a statement showing the computation of proportionate increase in operating expenses, as herein above provided.

(Walton, 246 AD2d at 533)

Until February 1995, the landlord never submitted to the tenant a statement showing the computation of the proportionate increase in operating expenses, after the end of each calendar year, as required by the lease.

The Supreme Court of Nassau County granted tenant's motion for summary judgment dismissing landlord's cause of action seeking payment of additional rent for the period 1990 through 1993. The Second Department affirmed, holding that the landlord failed to perform a condition precedent pursuant to the terms of the lease when it never submitted to tenant a statement after the end of each calendar year as required by the lease (Id., 246 AD2d at 533).

In the present matter, similar to the lease provision in Walton, paragraph 62 of the lease agreement unambiguously states that "[a]t any time after January first of the said ensuing calendar year," the landlord shall send the tenant a new comparative statement. Petitioner argues that all that is required is that the CPI increase calculation be sent "at any time" subject to a six-year statute of limitation. The same argument was made by the dissent in Walton, which concluded that the time to submit additional rent statements to the tenant was limited only by the statute of limitations. However, the majority rejected as this court does the conclusion reached in the dissenting opinion.

Paragraph 62 required petitioner to provide a CPI statement to respondent on an annual basis near the beginning of each calendar year. Because paragraph 62 is analogous to the lease provisions that required the landlords to provide annual or semiannual statements to the tenants in B.W.H.N.V. Associates and Walton, the petitioner in the instant matter likewise failed to perform a condition precedent pursuant to the terms of the lease. It was not until March 21, 2006, that petitioner sent respondents copies of tables showing the CPI charges for the years 2002 through 2006. Under the legal reasoning set forth in the cases above, respondents in the instant matter are thus not liable for additional rent for CPI charges for the period 2002 through 2006.

In addition, we reject petitioner's contention that there are no CPI charges currently outstanding since rental payments have been applied pursuant to the terms of the lease to the [*6]earliest arrears, and those arrears have now been paid. As we noted above, petitioner's managing agent sent a letter dated March 21, 2006, to respondents demanding payment for "uncollected charges," including the sum of $21,327.23 for CPI charges. Then, petitioner sent two rent demands one dated May 11, 2006, and the other dated July 24, 2006 plainly stating that respondents owed the sum of $21,327.23 for CPI arrears. Surinder Kumar states in a sworn affidavit that he sent rent checks to petitioner each month for the period January 2006 through October 2006, yet the petition alleges that respondent failed to pay rent for the months of May, June, July, August, September and October of 2006 (Kumar Aff., para. 8, p. 3).

Solomon Gottlieb, petitioner's managing agent, states in a sworn affidavit that "[t]here are no CPI charges currently outstanding since rental payments have been applied pursuant to the terms of the lease to the earliest arrears and those arrears have now been paid"[FN1] (Gottlieb Aff., para. 6, p. 2). However, it was clearly improper for petitioner to apply respondent's rental payments to the CPI arrears in light of the Court's finding that petitioner failed to satisfy the condition precedent necessary to collect such CPI charges. In short, petitioner's contention that it filed the petition not to collect CPI arrears, but to collect unpaid rent, is a disingenuous attempt to do an end run around respondents' defense that petitioner failed to satisfy the condition precedent set forth in paragraph 62 of the lease agreement.

Finally, petitioner's cross-motion to strike respondents' affirmative defenses and to strike the first counterclaim of respondent Subway for attorney's fees is granted to the extent of striking the counterclaim for attorney's fees because there is no provision in the lease agreement which would allow the tenant to recover such fees. Respondent does not cite any statutory or contractual basis for an award of legal fees.

For the above reasons, respondent's motion for summary judgment is granted, and the petition is dismissed with prejudice. Petitioner's cross-motion is granted only to the extent that respondent's counterclaim for attorney's fees is stricken. In all other respects, petitioner's cross-motion is denied.

The foregoing constitutes the decision and order of the court.

Date: May 18, 2007______________________________

New York, New YorkAnil C. Singh Footnotes

Footnote 1:We note in passing that Mr. Gottlieb states in his affidavit that "[t]here is now a water charge due" (Gottlieb Aff., para. 6, p. 2). However, petitioner fails to delineate the amount and the dates of the alleged water charge, and none of petitioner's rent demands state that there is any arrearage in water charges.