CNR Healthcare Network, Inc. v 86 Lefferts Corp.

[*1] CNR Healthcare Network, Inc. v 86 Lefferts Corp. 2007 NY Slip Op 51780(U) [16 Misc 3d 1141(A)] Decided on July 19, 2007 Supreme Court, Kings County Rivera, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 July 19, 2007
Supreme Court, Kings County

CNR Healthcare Network, Inc., and CNR Housing Development Fund Corp., Plaintiffs,

against

86 Lefferts Corp., Defendants,



30856/02

Francois A. Rivera, J.

On August 15, 2002, plaintiff CNR Healthcare Network, Inc. and CNR Housing Development Fund Corp. (hereinafter "plaintiffs" or "CNR"), commenced the instant action by serving a summons and verified complaint upon 86 Lefferts Corp. (hereinafter "defendant" or "Lefferts"). Defendant joined issue by its verified answer and counterclaim dated October 10, 2002.

Plaintiff CNR Healthcare Network, Inc. is a not-for-profit corporation organized pursuant to the laws of the State of New York. CNR Housing Development Fund Corporation is a subsidiary of CNR Healthcare Network. Defendant is a corporation organized pursuant to the laws of the State of New York and is the owner of a vacant parcel of land located in Kings County, known as 86 Lefferts Place, Brooklyn, New York (hereinafter "Premises").

Plaintiff's complaint alleged three causes of action. The testimony and documentary evidence presented at trial revealed several undisputed facts relevant to the underlying dispute. On September 30, 1995, CNR's affiliate, Center for Nursing & Rehabilitation, Inc. and Lefferts entered into a valid and binding agreement pursuant to which an option was purchased by Center for Nursing & Rehabilitation, Inc. to acquire a long-term leasehold interest in the Premises from Lefferts. Under the agreement, as later amended, CNR would develop a 70-unit supportive housing project for the elderly at a total cost of over $9.3 million, through which financing would be obtained by CNR from the United States Department of Housing and Urban Development ("HUD"). This type of housing is commonly referred to as "Section 202" housing after the federal statute authorizing the HUD financing. Significantly, this improvement of the Premises would remain with Lefferts after expiration of the lease term.

The September 30, 1995 agreement between Lefferts and Center for Nursing & Rehabilitation, Inc. was modified three times. The first modification, on November 22, 1995, substituted CNR as the optionee, replacing Center for Nursing & Rehabilitation, Inc. The second modification, on December 17, 1999, reinstated the agreement, and the third and final modification occurred on April 5, 2001. The April 2001 option modification adopted provisions [*2]of the earlier agreements, deleted certain paragraphs, and added other provisions. Among the additions was a mortgage subordination clause which set forth the following language in Paragraph 3. g. of the April 2001 agreement:

"The following provision shall be incorporated and made part of the lease: The Lease shall be subject and subordinate to any mortgages to banks, insurance companies or similar financial institutions which hereinafter may affect the Demised Premises, and all renewals, modifications, replacements, spreaders, consolidations and extensions of such mortgages; provided however that the holder of the mortgage and tenant shall execute and deliver a non-disturbance agreement in recordable form wherein the holder of the mortgage shall agree that in the event of the foreclosure or rights asserted under the mortgage shall agree that in the event of the foreclosure or rights asserted under th emortgage by the holder of the mortgage... shall not: a (i) name the Tenant as a party defendant ... (ii) disturb Tenant's occupancy of the Demised Premises'..."

The parties also included a clause in the option agreement which controlled the obligations of the parties with respect to what could be included in a lease if the option were exercised. Paragraph 14 stated: "Owner and optionee shall each covenant and agree to sign, execute, and deliver or cause to be signed, executed, and delivered and to do or make or cause to be done or made, upon the written request of the other party, any and all agreements, instruments, papers, deeds, acts or things supplemental confirmatory or otherwise as may be reasonably required by either party hereto for the purpose of or in connection with consummating the transaction herein described. Furthermore, the Owner agrees to make such modifications to the annexed Lease as may be necessary to comply with FHA regulations, requirements or funding requests, provided however, that the Owner shall not be required to agree to any modification which materially increases his obligation or reduces the rents or Owner's other entitlement or benefits, or any other sum payable to the Owner pursuant to the lease."

The deadline for CNR to exercise their option, under the final modification, was June 30, 2002.

The documents comprising the modified agreements included the lease to be executed upon exercise of CNR's option as well as several lease riders, including a rider which contained provisions required by HUD as a predicate to granting a loan to CNR. The agreement included language requiring Lefferts to make modifications to the lease to comply with HUD requirements.

Having secured the option, and having paid the various option fees required under the amendments, plaintiffs began the HUD loan application. In anticipation of the exercise of the option by CNR, under cover of a letter dated November 9, 2001, CNR's counsel forwarded to Lefferts, a set of the lease documents, reflecting the modifications agreed to by the parties over the years. A revised version of the lease rider required by HUD was subsequently transmitted [*3]after the development was changed from a Section 207 project to a Section 202 project. Four paragraphs in the HUD 202 rider differ from the agreed upon lease provisions. Paragraph 12, in particular, stated: "Any mortgage or encumbrance upon the Lessor's interest in the property shall be subordinate to the Lease."

On June 24, 2002, six days before the expiration of the option, CNR alleges it exercised its option by transmitting notice of same and forwarded the revised lease agreement executed by CNR, a certified check in the amount of $90,000.00 (representing the first three month's rent and the last year's rent under the lease), and other documents provided for under the agreement.

On or about July 3, 2002, CNR received a firm commitment from HUD for a $9,328,400.00 mortgage to finance the project, valid for 60 days (unless renewed or extended by HUD).

By letter dated July 10, 2002, Lefferts rejected CNR's attempt to exercise the option claiming that the plaintiff did not comply with the terms of the agreement. The instant action was then pursued. In their answer, defendant generally denied the complaint and assertes eleven affirmative defenses and four counterclaims.

By a decision, dated March 23, 2003, Justice Dowd dismissed three of defendant's counterclaims. The fourth, and only surviving, counterclaim alleges that pursuant to a provision in the November 1995 modification to the option agreement, plaintiffs agreed to pay legal fees arising out of changes or additions to the option agreement and that plaintiffs have failed to reimburse defendant for the legal expenses incurred. Defendant also claims entitlement to recover legal fees under §349 of the General Business Law and the common law.The issues in this action were tried before Part 52 of this Court without a jury on December 14, December 18, December 20, 2006, January 2, January 3, January 8, and January 9, 2007. David Ruffo, Benjamin Weinstock, Michael Fassler, and Brian Sullivan testified for the plaintiff. Bariy Weber and Saul Feder testified for the defendant. Pursuant to CPLR §4213, the parties were afforded an opportunity to submit requests for findings of fact and post-trial memoranda of law.

Although some facts presented at trial are in dispute, the fundamental and pertinent facts are not. The court's analysis will focus on the above-mentioned undisputed facts. The issue presented at trial was whether the plaintiff properly executed the option, complying with the terms of the modified agreement. The plaintiff claims they did and they seek specific performance of the option. The defendant, in essence, claims that the HUD 202 rider, submitted by the plaintiff to the defendant to exercise the option, conflicted with provisions explicitly agreed upon in the option agreement. Also, because defendant believed that the modifications proposed by HUD were material changes and affected their rights and obligations of the Premises, defendant rejected the plaintiff's exercise of the option.

DISCUSSION

It is well settled that when interpreting a contract, the court should arrive at a construction which will give fair meaning to all of the language employed by the parties, to reach a practical interpretation of the expressions of the parties so that their reasonable expectations will be realized (Yonkers Contracting Co, Inc. v Romano Enterprises of New York, 40 AD3d 629 [2nd Dept. 2007]). A contract should not be interpreted in such a way as would leave one of its provisions substantially without force or effect (Yonkers Contracting Co, Inc. v Romano [*4]Enterprises of New York, supra.; McCabe v Witteven, 34 AD3d 652).

There is no dispute that the parties included a provision in the option agreement that required the inclusion of the subordination clause outlined in paragraph 3(g) of the April 2001 modification. The HUD modifications explicitly conflicted with that most recent option agreement between the parties. To enforce plaintiff's attempt to exercise the option against the defendant's desire would render the subordination provision of the agreement, as well as other provisions in the option agreement, without any force or effect.

Also, the language of the future assurance clause found in paragraph 14 of the option rider allowed the acceptance of HUD modifications but only if the changes did not materially affect the owner's entitlements and benefits to the Premises. Because the modifications of the HUD 202 rider conflicted with the subordination clause of the option agreement, as well as other provisions of the option agreement, it materially affected the defendant's entitlements and benefits to the Premises because they were benefits agreed to by the parties. Although there is no evidence that the conflict between HUD's modification and the option agreement actually affected the defendant's ability to acquire financing, it certainly could have. HUD's modifications, in this respect, was a material change. Plaintiff could not compel the defendant to execute a lease which unambiguously conflicted with the underlying option agreement. Specific performance is denied.

The defendant, in its counterclaim, alleged it is entitled to attorney's fees for the defense of this action. Defendant relies on paragraph 4 of the November 22, 1995 agreement which stated,

"Optionee agrees that all reasonable legal fees incurred by Owner subsequent to the datehereof in connection with changes in or additions to any of the documents annexed heretoand forming part hereof, or to follow up with respect to the same, which are requested byOptionee in order to satisfy the United States Department of Housing and UrbanDevelopment or any other entity which the Optionee deals with regarding this transaction,or if otherwise requested by Optionee, shall be paid by the Optionee within thirty (30)days following demand."

Interpretation of contractual language requires an interpretation of the intent of the parties at the time the agreement is made. The language of the option agreement pertaining to attorney's fees is clearly in anticipation of a successful exercise of the option agreement. The unambiguous intent of the parties is for the optionee to pay incidental legal fees incurred by the owner leading up to the closing on the underlying transaction. The language, on its face, does not unequivocally demonstrate an intention of the optionee to be responsible for legal fees connected to litigation on a breach of the option agreement. The trial testimony in evidence presents nothing to support a contrary view.

It is well settled that attorney's fees may not be awarded in the absence of a statute expressly authorizing their recovery, or an agreement or stipulation to that effect by the parties (see Feeney v Licari, 131 AD2d 539 [2nd Dept. 1987]). Here, the stipulation or agreement between the parties was intended to cover attorneys' fees in contemplation of successfully exercising the option. The court will not expand the scope of recovery to matters which it does not believe were contemplated by the parties' agreement (see 56th Street Swim and Health Club, [*5]145 AD2d 311 [1st Dept. 1988]).

The court, however, will award reasonable attorney's fees for defendant's review the plaintiff's offer to exercise the option, the review of the documents including the proposed HUD 202 rider, and the actions taken to reject the offer to exercise the option by plaintiff.

The court anticipates an ancillary proceeding regarding the legal costs of the defendant. The defendant is directed to submit an affidavit of the owner of 86 Lefferts, Corp. and an affirmation of the defendant's counsel pertaining to the legal costs consistent with the above decision. Such affidavit and affirmation should be submitted to the court and served on the plaintiff within 30 days of entry of this order. Parties are to appear in Part 52 on August 21, 2007 for a hearing on the issue of attorney's fees.

The foregoing constitutes the decision and order of the court.

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JSC