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Elements of Pandemic-Era Commercial Landlord and Tenant Settlement Agreements

May 30, 2021

I have settled so many commercial landlord and tenant matters during this Pandemic year. I intended to write here about those that presented interesting stories. But the year has been so hectic and, frankly, I have worked on so many settlement agreements that they have started to mush together in my mind. Suffice it to say that I have been privileged to work with co-counsel, opposing counsel, and clients who have come up with very interesting ways to structure resolutions and to get settlements done during these trying times.

In this post, I am reviewing some optional components of Pandemic-era settlement agreements in commercial landlord and tenant matters.

  • “Abatement of Arrears”. A portion of the rent is forever forgiven. Black’s Law Dictionary defines “abatement” as “nullification”. Often in a Pandemic-era settlement agreement the landlord will abate all the late fees and interest.

  • “Deferment of Arrears” (a/k/a “Rent Holiday”). The arrears will not be paid now, but the arrears will be paid on some agreed upon date in the future. Black’s Law Dictionary defines “deferment” as “delay or postponement”. Usually when the landlord agrees to defer the rent due, time gets tacked on to the term of the lease.

  • “Arrears Held in Abeyance Pending Tenant Compliance with Deal” (a/k/a “Conditional Abatement”). Here, landlord is cutting tenant a break on the arrears. But the unpaid portion of the arrears is held in abeyance, unless and until tenant defaults on the terms of the settlement deal in the future. Black’s Law Dictionary defines “abeyance” as “temporary inactivity”.
    • In an interesting and oft used hybrid of this method, the arrears-held-in-abeyance typically decrease as tenant complies with the deal over time. The longer the tenant complies, the more the arrears decrease.
    • I really like this method of settling a Pandemic-era rent default. Most landlords understand that they need to share the burden of the Pandemic with their tenants, or the tenant’s business will not survive, and the landlord will have empty space to fill. But no landlord wishes to give a large abatement (i.e., to permanently forgive a large amount of rent) if the tenant is just going to turn around five minutes after the abatement gift and default all over again. The landlord prefers to hold the arrears over the tenant’s head in a conditional manner, to ensure tenant compliance. From the tenant’s point of view, however, the tenant usually already has a great deal of incentive to survive. Most tenants have struggled mightily during the Pandemic to do so, often investing their own money into their businesses. Therefore, to a tenant it is no settlement at all to keep moving forward if landlord is not going to, eventually, fully abate a portion of the arrears. The “abeyance” method satisfies both parties’ needs. The landlord gets to use the arrears as leverage. But that leverage decreases over time, as the tenant continues to comply with the settlement agreement, and hopefully, as the world normalizes.

  • Temporary Prospective Rent Reduction. In addition to dealing with arrears, many commercial landlords are willing to give a period, typically through 2021 or the Spring of 2022, of reduced base rent. What I have seen very little of is rent reductions radiating far into the future. No one is sure about what the market will do. Rent reductions generally do not apply to additional rent, such as real estate tax escalations. I have, however, seen a handful of landlords willing to renegotiate the base tax year with tenants, which often provided much needed relief.

  • Guarantors. When the terms of a lease change, the personal guarantors need to ratify the new deal and agree that the guaranty extends to the new terms, signing personally in front of a notary. In this Pandemic-era I have seen guarantors swapped out for new guarantors and guarantors added. Obviously, this is another way to increase the comfort of the landlord with the deal. Sometimes the guaranties are for the rest of the term and sometimes just for the payment of deferred arrears. Only tenants who are confident of their ability to meet the terms of the settlement should offer up a personal guaranty of their principals.


    Respectfully submitted,

    Michelle Itkowitz

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    Saving a Rent Stabilized Tenant’s Apartment in Manhattan in a Non-Primary Residence Case

    March 28, 2021

    In this post, I describe how I saved a Rent Stabilized tenant’s apartment in Manhattan and I talk about my philosophy towards “victory” and settlement.

    In our story today, my client was a residential tenant in Manhattan. Her[1] three-bedroom apartment was subject to Rent Stabilization. In July 2017, her landlord commenced a non-primary residence case against her. No, I did not get that date wrong…this case took 31 months to resolve.

    My client lived in the building all her life. Literally, she was brought home from the hospital some 75 years ago to an apartment in that building. She grew up in the building and left briefly for college and then to serve her country. When she returned to New York City in the 1970’s, her and her husband moved into the subject apartment. The landlord’s suspicion that tenant had stopped using the apartment as her primary residence was aroused because my client was often away. Now a widow, my client was was temporarily in residence at a prestigious university, outside of New York State, finishing her PHD. While her absence was, indeed, temporary, it was also lengthy.

    Discovery was conducted, i.e., the exchange of paper and depositions. The Pandemic did not make the case go faster. Eventually we got to our pre-trial conference. The trial judge really liked my case. He said, “If tenant can prove she is a fully matriculated student, you lose the case landlord.” Well, of course, I could prove that. I already had a certified copy of my client’s transcript. Wow, who would not like to hear that from their trial judge?! OMG how I love the scent of winning! What a great blog post that would make!

    Let us, however, take a step back and think this through. First, after the Housing Stability and Tenant Protection Act of 2019, vacancies in Rent Stabilized apartments are virtually valueless, because there is no more vacancy deregulation. So why was the landlord still pursuing the recovery of this apartment so vigorously? The answer likely lied in the fact that the market value for this unit was north of $8k per month. There may be rules, but this landlord probably was not intending to follow them. Why should that matter to my tenant-client? Here is why. If I won the case, the landlord would be forced to give my client another Rent Stabilized lease renewal. That would cover my client for another two years. But after that, the landlord would likely just bring the next case regarding my client’s residence during those two years. Not to mention that the landlord might even appeal a loss at trial. Winning is delightful. But so often in today’s world, victory is not tantamount to finality. 

    As I discussed the matter with my client, it became apparent that it was not the apartment that she was attached to, it was the building. The address is a great one. The building was filled with a lifetime’s worth of her friends. Frankly, a three-bedroom apartment was a lot more room than my client really wanted.

    So, I asked the Landlord, “Hey what do you have vacant in the building?” Normally that address would have almost no vacancy. By this point, however, we were in the middle of the Pandemic. Thus, there were vacancies.

    It took some negotiation, but the landlord moved my client to a newly renovated one-bedroom apartment in the building. The landlord paid for the move and did a good job. My client loves the new apartment. Everything is nice and new, and it fits her lifestyle better than all the empty rooms and ghosts of the subject apartment. The price was right and, of course, my client remains a Rent Stabilized tenant. And its over.

    I love winning. I love mutually beneficial solutions more. I love delivering value to my clients the most.

    Respectfully submitted,

    Michelle Itkowitz



    [1] Certain unimportant details changed to protect the innocent.

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    The Case for an Evidence Based Law Practice and Some Good Guy Guaranty Case Resolutions

    February 28, 2021 

    One of the challenges of administrating your own boutique law practice is managing an ever-growing caseload. During the Pandemic, I have been busier than perhaps at any other time in my law practice. Also, Pandemic-defaults present landlord and tenant practitioners with a whole new set of issues and challenges. Nevertheless, when a surge hits like this, one must be mindful not to prioritize new matters over existing matters. Everything needs to keep moving. 

    This post is about the settlement of two pre-Pandemic lease guarantor cases, where I represented the landlord. Both matters settled in 2020. Both concerned restaurants.

    Case “A” (as we will call it) began in February 2019 and the guarantors were sued for $530k. The case took 21 months to settle. After paying my legal fees (I never take these matters on contingency, my clients pay straight hourly), the landlord collected 16 cents on the dollar.

    Case “B” began in November 2019 and the guarantors were sued for $296k. The case took eight months to settle. After paying my legal fees, the landlord collected 44 cents on the dollar.

    These two cases brought my firm’s guaranty collections average, which I have been tracking since 2018, to 36 cents on the dollar (net to client) and an average resolution time of nine months.

    What is the lesson?

    I am so forthright about this data because I believe that law can and should be an evidence-based practice. An evidence-based practice shifts the basis for client and lawyer decision making from traditional, intuitive, and unsystematic experience to firmly grounded data. In other words, I can look at my commercial-landlord-clients in the midst of a lease default and tell them this – based on my last four years of experience, if you hire me to seek $250k from a guarantor, you will pay me about $25k to do so, your net recovery will be around 36 cents on the dollar, and it will take about 9 months. Those are not guaranties; they are averages. Clearly, if you reexamine Case A above, that case netted the landlord only 16 cents on the dollar and took 21 months, which was below my averages. Case B, however, exceeded my averages.

    Nevertheless, the commercial landlord in Case A was happy with me. It got $84k (net) that it would not otherwise have had. The landlord was also happy with me because I did not tell it to expect 100 cents on the dollar in 10 seconds. The decision-makers expectations were managed. It is also important to note that each of these cases was undertaken against guarantors who the landlord had reason to believe had assets somewhere. I would not expect my stats to be a good predictor of an outcome for a guarantor whom early investigation shows is and will remain broke.

    If there is a lesson here for would-be commercial-tenant-guarantors, it is this. Sign guaranties with great caution. The only guaranty an individual should ever sign should be a “good guy guaranty” (search this phrase in the search functionbox on this website and you will find a great deal of material thereon) and the good guy guaranty should not require the guarantor to be current through the date of vacatur.

    Respectfully submitted,

    Michelle Itkowitz

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    Regaining Possession of a Rent Stabilized Apartment from a Tenant Who Moved to Oregon Four Years Ago – With Just a Notice (and Mountains of Camera Data!)

     January 31, 2021

    Whenever a potential landlord client comes to me and tells me that they have a “slam dunk” non-primary residence case I always roll my eyes. I always ask the same question, “Do you have cameras? No, not the security camera in the front of the building that takes bad pictures of everyone as they come and go and that overwrites in 30 days.” If they have no cameras, I send them to a reputable NYS licenses private investigator who knows how to do cameras legally, ethically, and in such a way that the data is admissible in court. If they say they are not willing to do the camera work, I decline the case.

    The first part of this post will be my standard stuff on cameras in Housing Court cases. The second part of the post will be the story of me, on behalf of a residential landlord client, regaining possession of a rent stabilized apartment from a tenant who moved to Oregon four years ago – with just a notice (and mountains of camera data!)

    Cameras


    Why cameras?

    There are certain cases that I refuse to bring on behalf of a landlord-client if the client has not properly installed cameras outside of the subject apartment. These include: 

    ·         non-primary residence cases

    ·         illegal sublet cases

    ·         illegal short-term sublet cases (like Airbnb)

    ·         succession rights cases, and

    ·         many types of nuisance cases.

    Such cases are almost un-winnable without a camera.

    Let us consider a non-primary residence case, for example. In the Rent Stabilized context, a tenant must reside in their apartment as their primary residence. Therefore, the first thing that a landlord needs to prove in a non-primary residence case is that the tenant is NOT there. How could a landlord prove that the tenant is not there? The following is a sample colloquy between a lawyer and a landlord-client on this topic. 

    Landlord:  The tenant in B5 no longer lives in the apartment as his primary residence.

    Lawyer:  How do you know that tenant does not live in the subject apartment anymore?

    Landlord:  Because he isn’t there.

    Lawyer:  I heard you say that already. But how do you know? What is the source of your knowledge?

    Landlord:  The super.

    Lawyer:  The super lives on the same floor as the tenant and is home all day long?

    Landlord:  No the super doesn’t live on tenant’s floor and he is obviously out and about all day.

    Lawyer:  The super lives in the building at least?

    Landlord:  No, the super lives in another building.

    Lawyer:  OK, so the super attends to only the tenant’s building?

    Landlord:  No, the super cares for ten buildings, tenant’s building is one of the ten.

    Lawyer:  So, if the super works 40 hours per week, and tenant’s building is one of ten, at best he or she spends about 4 hours per week in tenant’s building?

    Landlord:  I don’t know; maybe more.

    Lawyer:  So, what is the super (who is already a biased witness because he is testifying on behalf of his employer) going to testify to, that in the four hours per week that he is in the building he never sees tenant around?

    Landlord:  Something like that, I guess.

    Lawyer:  Then you lose. Because tenant will come in and testify that she lives in the apartment, and you have not done anything significant to discredit her.

    Landlord:  Well a private investigator got me a printout that shows that someone with the same name as tenant owns a house in the Catskill Mountains.

    Lawyer:  What name is that?

    Landlord:  “Jane Smith”.

    Lawyer:  That is a very common name. Does anything else in the report connect tenant to that address?

    Landlord:  No.

    Lawyer:  Even if Tenant John Smith of Apt. B5 does own that house in the Catskill Mountains, what are you going to do when Smith says this is just a summer home she only goes to occasionally and she rents it out to others for investment purposes?

    Landlord:  Well, I just know tenant doesn’t live there. I just know it.

    Lawyer:  Does the super ever see anyone else coming and going from the subject apartment?

    Landlord:  No.

    Lawyer:  Has the tenant had any repairs done in the apartment recently?

    Landlord: 18 months ago, she complained of a leak and we went in and fixed it.

    Lawyer:  Well that suggests to me that tenant lives there.

    Landlord:  I just know tenant doesn’t live there. I just know it.

    Lawyer:  Your psychic knowledge or strong hunch is NOT admissible evidence. You need ADMISSIBLE PROOF in a court. Or you lose.

    A picture (or a video) is worth a thousand words, or a thousand guesses and speculations.

    Cameras are cheaper than legal fees. If a landlord is not willing to pay for cameras, he is not going to be willing to pay legal fees for a protracted trial that landlord is likely to lose.

    Below are two recent examples from Housing Court. Each of these cases may well have had a different outcome if the landlord attorneys had insisted, as I do, that their landlord clients first obtain camera data.

    (1)  Grandson Found Entitled to Grandmother's Rent-Controlled Tenancy; Holdover Suit Dismissed; The court found Occupant credibly testified he lived in the apartment since birth as tenant of record raised him. Occupant’s testimony could not be challenged. NYLJ 1549173362NY6044717/

    (2)  Tenant submitted documents to support his alleged primary residency at the premises, including mobile bills and a driver’s license reflecting the premises' address. Landlord did not meet its burden to establish Tenant did not maintain his primary residence at the premises and did not prove Tenant did not reside at the premises during the relevant time frame. E-Z pass records were not found probative as Tenant had a girlfriend in NJ he visited, while documentary evidence supported his testimony he resided at the premises but shopped in NJ. Landlord's witnesses were unable to credibly testify that Tenant did not reside at the premises as his primary residence. NYLJ 1576493344NY8222015/

    How to do cameras correctly.

    Cameras should be set up by a professional licensed private investigations and/or security firm. The more experience the company has with this type of work, the better.

    First, the camera must be set up so that it does NOT look into the tenant’s apartment when the door is opened, thus invading tenant’s privacy. See more about that below.

    The camera must be set up so that it gets a clear view of the subject apartment, but not so that multiple apartments are under surveillance, because then there will be a lot of unnecessary footage to review.

    The camera should be motion activated; otherwise, it will be difficult to review all the footage.

    Landlord’s counsel needs to work closely with the surveillance camera technologists to streamline both the technical and legal process involved with utilizing cameras, or the evidence obtained from the cameras might not be admissible. A videotape must be “authenticated” before it can be used as evidence in a court proceeding. Testimony from someone who has knowledge of the circumstances and who actually reviewed the footage is usually sufficient. See Zegarelli v. Hughes, 3 NY3d 64, 69 [2004] (A surveillance videotape of plaintiff, sought to be introduced by defendant, was properly authenticated where defendant's investigator testified that he had observed plaintiff; that the exhibit shown to him was a copy of a videotape he had made of the observation; that the tape fairly and accurately showed what he had observed; and that the tape had not been edited at all. Testimony from the videographer that he took the video, that it correctly reflects what he saw, and that it has not been altered or edited is normally sufficient to authenticate a videotape.)

    I strongly prefer that the same person:

    ·         install the camera;

    ·         maintain the camera (i.e. change its batteries);

    ·         retrieve the data card from the camera and take it to where it will be stored;

    ·         superintend the storage system;

    ·         review the footage; and

    ·         produce a detailed log of what each incident reveals.

    This person is your witness in court!

    Landlord’s counsel can see why attending to the details of this type of thing BEFORE a case gets started is vital to bringing a healthy case. Tenant’s counsel can also see how useful it is when landlord’s counsel leaves this important evidentiary work unattended to until trial.

    Cameras Legality

    Courts in New York have ruled that tenants have an expectation of privacy inside their apartment behind the closed entry door. Otero v. Houston Street Owners Corp., 2012 WL 692037 [Sup. Ct. NY. Co.]; see also People v. Mercado, 68 NY2d 874 [1986] (“Once the door is closed, an individual is entitled to assume that while inside he or she will not be viewed by others”).

    On the other hand, New York courts have found that residents in multi-family buildings lack a reasonable expectation of privacy in the building’s common areas, such as lobbies, stairwells, and hallways because it is accessible to other persons. People v. Funches, 89 NY2d 1005, 1007 [1997].

    Back to Our Story


    In our story a potential residential landlord client came to me three years ago with the “slam dunk” case. The tenant had allegedly moved to Oregon[fn1] two years ago (at that time). I insisted on cameras as a prerequisite for me taking the case and referred him to a NYS licensed private investigator who does this stuff correctly. The landlord, like so many before him and many whom I assume will come after him, never called me again. That is not for another 30 months! The landlord popped back up again over two years later. I was not even sure who it was when the email came in, “Michelle we are ready for the case now…” My response -“What case? I get 600,000 emails a day, who are you?” Well, unbeknownst to me, this guy actually took my advice, called the PI, and ran the camera for over two years, in anticipation of the tenancy’s next Golub period (non-renewal window). Part of the delay was occasioned because landlord needed to properly renew the lease. In any event, in the meantime, landlord obtained 30 months of top notch computer data! Which was fascinating.

    Here is part of what the notice of non-renewal I drafted stated:

    a.    Tenant was only seen at the Premises for one (1) day (March 25, 2019) during the entire 915 Surveillance Period, a period of 30 months (two and a half years).

    b.    A man designated as “Subject 1” was seen in the Premises on approximately 97 days of the Surveillance Period (11% of the time). Upon information and belief, Subject 1 is not Tenant. These are pictures of Subject 1 pulled from the surveillance video: [photo omitted]

    c.    On two occasions (May 20, 2018 and June 1, 2018), a person came to the door of the Premises and Subject 1 handed him what appeared to be stacks of mail. On March 25, 2020, a woman, believed to be another tenant of the subject building, let herself into the Premises and came right back out again with what appeared to be a pile of mail.

    d.    No one other than Subject 1 has resided in the Premises since at least May 30, 2018. The Premises has been completely empty for 818 days of the Surveillance Period (approximately 90% of the time).

    I sent the Notice of Non-Renewal. Three days later, the tenant called me from Oregon. Delightful gentleman. I advised him repeatedly (both orally and in writing) to get an attorney. He declined. He was done with New York City, he had a great job in Oregon, and as the camera showed, he was having trouble subletting the subject NYC apartment. He did not wish to fight. Landlord refunded tenant’s security deposit and gave him a general release. Tenant mailed us the keys and a surrender affidavit.

    I know what you are going to ask. Would we have gotten the same result without 30 months of camera data? Maybe. Maybe not. Based on my decades of experience doing this – I say probably not. Certainly, we did not need thirty months! But it was great to have it. A year is usually fine.

    If all of that is not enough, I leave you with one more reason that a landlord should never bring a non-primary residence case without a camera. I heard a story from a colleague where the camera quickly revealed that the tenant suspected of nonprimary residence actually lived full time in the apartment. He lived alone and worked nights. That is why the building super never saw the guy coming or going during the day.

    Respectfully submitted,

    Michelle Itkowitz

    [fn 1 = Some details changed to protect the innocent.]

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    Is Santa (with the help of Itkowitz PLLC) Bringing Rent Relief Due to Covid for NYC Restaurants this Holiday? IMPORTANT COVID DECISION ALERT

    UPDATE: On April 12, 2021 the below decision was upheld upon re-argument.

    December 23, 2020

    Itkowitz PLLC just secured an important victory for a Manhattan restaurant-tenant impacted by the pandemic and the executive orders prohibiting indoor dining. This decision has implications for restaurants (and other businesses shut down by executive orders during the pandemic) all over the City.

    In the context of a Yellowstone injunction application, a Manhattan Supreme Court judge held that:

    • A restaurant-tenant is likely to prevail on its claim that it did NOT owe rent when executive orders shut its business down during the Covid period.
    • A landlord who wrongly drew down on a restaurant-tenant's security for an alleged rent default during the Covid period will likely have to put the money back.
    • Attempting to terminate a restaurant tenant on specious legal grounds during the Covid period likely amounts to statutorily prohibited commercial tenant harassment, for which tenant has a private cause of action for damages against landlord. 

    Here are some quotes from the case, a full copy of which is at the end of this post:

     “The [restaurant tenant and guarantor] have established a likelihood of success on the merits of their claim that the tenant is not obligated to the defendant for rent for the months of March through August 2020, and it is not obligated to replenish the security deposit equal to the rent otherwise owed for those months, even if the lease, by its terms, authorized the defendant to draw down the deposit to cover rent.”


    “The [restaurant tenant and guarantor] have established that they are likely to succeed on their claim that the COVID-19 epidemic, and the consequent state-mandated suspension of indoor dining at restaurants, constituted a sudden, unexpected, unfortunate set of circumstances and, hence, a “casualty” within the meaning of the lease that rendered the premises unusable for a period of time, and thus relieved the tenant of its obligation to pay rent.” 

    “In the subject lease, there is no provision compelling the tenant to replenish a security deposit that the landlord drew down to cover allegedly unpaid rent. The [restaurant-tenant and guarantor] correctly assert that such an obligation cannot be implied into the terms of the lease."


    “[The restaurant-tenant and guarantor] have also established a likelihood of success on the merits of their claim that the [landlord] violated Admin. Code of City of N.Y. (Ad Code) § 22-902(a) by engaging in commercial harassment of a commercial tenant that has been adversely affected by the COVID-19 pandemic.”

    ·

    The order was issued on December 21, 2020 by New York Supreme Court Justice John J. Kelley. Here is a pdf of the decision. The full text of the decision is below. A copy of the decision is also publicly available on the NYS Court System’s website.


    Happy and Safe New Year,

     

    Michelle Itkowitz

     

    FULL TEXT OF THE DECISION

     

    NYS Supreme Court, New York County, 188 Ave. A Take Out Food Corp. v. Lucky Jab Realty Corp., Index No. 653967/2020

     

    This is an action for a judgment declaring that the defendant landlord may neither compel the plaintiff 188 Ave. A Take Out Food Corp. (hereinafter the tenant) to replenish a security deposit that the defendant drew down to cover allegedly unpaid rent, nor evict that plaintiff from a commercial leasehold for failing to replenish the security deposit. The plaintiffs move for a Yellowstone injunction (First National Stores, Inc. v Yellowstone Shopping Center, Inc., 21 NY2d 630 [1968]) prohibiting the defendant from terminating the subject lease, and from commencing or continuing any attempts to terminate the lease or evict the tenant from the leased premises pending disposition of the action. In the order to show cause initiating the motion, dated August 24, 2020, this court temporarily restrained the defendant from commencing or continuing any such attempts, pending hearing of the motion. The motion is granted, and the defendant is enjoined, pending the disposition of this action, from seeking to terminate the subject commercial lease or evicting or taking any steps to evict the tenant from the leasehold. In addition, the period for replenishing the tenant’s security deposit, as otherwise set forth in the lease, is tolled pending disposition of the action.

     

    The tenant entered into a commercial lease with the defendant on May 1, 2017 for the purpose of operating an indoor dining restaurant in the defendant’s premises. On March 16, 2020, Governor Andrew Cuomo issued Executive Order 202.3 that, in relevant part, suspended indoor dining within the State of New York until further notice to prevent the spread of the COVID-19 pandemic. In accordance with the Executive Order, the tenant suspended its indoor restaurant operations, and has not employed the premises for such purposes at least until November 2020.

     

    On March 17, 2020, the courts were closed due to the COVID-19 pandemic. On March 22, 2020, the courts suspended all electronic and non-electronic filings in all pending actions and proceedings. The court lifted the suspension on electronic filings on May 5, 2020, and reopened for non-electronic filings on June 10, 2020. The tenant partially reopened for take-out service in mid-May, but could not sustain its business, so it closed down again until mid-July, when it reopened solely for outdoor dining services.

     

    During April 2020, the defendant, without express permission from the plaintiffs, drew down the sum of $14,935.00 from the tenant’s security deposit, and applied it to allegedly outstanding rent. In May 2020, and again in June 2020, July 2020, and August 2020, the defendant similarly drew down the sum of $15,383.05 from the tenant’s security deposit and applied it to allegedly outstanding rent. On August 7, 2020, the defendant served a 15-day notice upon the plaintiffs, demanding that the tenant replenish the security deposit, and notifying the plaintiffs that “if Tenant fails to replenish the Security Deposit on or before August 24, 2020, Landlord will terminate this Lease pursuant to Article 17(1) of the Lease.”

     

    The plaintiffs commenced this action on August 20, 2020, seeking a judgment declaring that they did not owe rent to the defendant from March 2020 forward by virtue of the fact that the premises were rendered partially unusable due to a “casualty,” a term that was left undefined in the lease, but construed by the plaintiffs to include the state of emergency in New York engendered by the COVID-19 pandemic and consequent suspension of all indoor dining for several months. The complaint also seeks a judgment directing the defendant to replenish the tenant’s security deposit and pay a rent credit to the tenant.  Simultaneously with the commencement of the action, the plaintiffs made the instant motion for a Yellowstone injunction prohibiting the defendant, pending the disposition of the action, from taking any steps to terminate the lease or evict the tenant from the leasehold based on any failure by the plaintiffs to replenish the security deposit. In the order to show cause initiating the motion, the court temporarily restrained the defendant, pending the hearing of this motion, from “terminating the lease . . . instituting any action or proceeding in connection with terminating the lease . . . and enforcing any remedy upon the alleged defaults contained in the Replenishment Demand.” This court further tolled the alleged period for curing the claimed defaults in the tenant’s replenishment of the security deposit pending hearing of this preliminary injunction motion.

     

    “The purpose of a Yellowstone injunction is to allow a tenant confronted by a threat of termination of the lease to obtain a stay tolling the running of the cure period so that after a determination on the merits, the tenant may cure the defect and avoid a forfeiture of the leasehold” (Hopp v Raimondi, 51 AD3d 726, 727 [2d Dept 2008]).  An applicant for a Yellowstone injunction must establish that,

     

    “(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating

    the premises”

     

    (Graubard Mollen Horowitz Pomeranz & Shapiro v 600 Third Ave. Assoc., 93 NY2d 508, 514 [1999], quoting 225 E. 36th Street Garage Corp. v 221 E. 36th Owners Corp., 211 AD2d 420, 421 [1st Dept 1995]; see 3636 Greystone Owners, Inc. v Greystone Bldg., 4 AD3d 122 [1st Dept 2004]).

     

    “Since courts cannot reinstate a lease after the lapse of time specified to cure a default, an application for Yellowstone relief must be made not only before the termination of the subject lease--whether that termination occurs as a result of the expiration of the term of the lease, or is effectuated by virtue of the landlord's proper and valid service of a notice of termination upon the tenant after the expiration of the cure period--but must also be made prior to the expiration of the cure period set forth in the lease and the landlord's notice to cure”

     

    (Korova Milk Bar of White Plains, Inc. v PRE Props., LLC, 70 AD3d 646, 647 [2d Dept 2010] [citation and internal quotations marks omitted]). The plaintiffs commenced this action and sought Yellowstone relief both within the cure period and the term of the lease.

     

    It is well settled that a plaintiff need not admit responsibility for the alleged default set forth in a notice to cure in order to establish entitlement to relief under Yellowstone, provided that the plaintiff remains willing and able to cure, should a default be found (see Artcorp Inc. v Citirich Realty Corp., 124 AD3d 545 [1st Dept 2015]; Boi To Go, Inc. v Second 800 No. 2 LLC, 58 AD3d 482 [1st Dept 2009]). If the default is not susceptible to cure, the Yellowstone application will be denied (see Zona, Inc. v Soho Centrale, 270 AD2d 12, 14 [1st Dept 2000]). Nonetheless, a tenant is not required to prove its ability to cure prior to obtaining a Yellowstone injunction (see WPA/Partners v Port Imperial Ferry Corp., 307 AD2d 234, 237 [1st Dept 2003]), only that it will be able to cure in the future.

     

    On May 7, 2020, Governor Andrew Cuomo issued an executive order that provided, in relevant part, that

     

    “[t]here shall be no initiation of a proceeding or enforcement of either an eviction of any residential or commercial tenant, for nonpayment of rent or a foreclosure of any residential or commercial mortgage, for nonpayment of such mortgage, owned or rented by someone that is eligible for unemployment insurance or benefits under state or federal law or otherwise facing financial hardship due to the COVID-19 pandemic for a period of sixty days beginning on June 20, 2020”

     

    (Executive Order 202.28, May 7, 2020). The governor extended the term of that moratorium pursuant to Executive Order 202.48, which provided that

     

    “[t]he directive contained in Executive Order 202.28, as extended, that prohibited initiation of a proceeding or enforcement of either an eviction of any residential or commercial tenant, for nonpayment of rent or a foreclosure of any residential or commercial mortgage, for nonpayment of such mortgage, is continued only insofar as it applies to a commercial tenant or commercial mortgagor, as it has been superseded by legislation for a residential tenant, and residential mortgagor, in Chapters 112, 126, and 127 of the Laws of 2020”

     

    (Executive Order 202.48, Jul. 6, 2020).  Pursuant to Executive Order 202.64, dated September 18, 2020, the governor extended the moratorium as to commercial tenants until October 20, 2020. On October 20, 2020, the governor issued an executive order extending the moratorium on the “eviction of any commercial tenant for nonpayment of rent . . . through January 1, 2021” (Executive Order 202.60, Oct. 20, 2020).

     

    Consequently, even if the court were not inclined to grant Yellowstone relief, it would nonetheless be obligated to grant a preliminary injunction prohibiting the defendant from seeking to evict the tenant at least until January 1, 2021. The court concludes, however, that Yellowstone relief is also warranted here.

     

    To obtain a preliminary injunction, a movant must demonstrate, by clear and convincing evidence, (1) a likelihood of success on the merits, (2) irreparable injury if a preliminary injunction is not granted, and (3) a balance of equities in its favor (see CPLR 6301; Nobu Next Door, LLC v Fine Arts Hous., Inc., 4 NY3d 839, 840 [2005]; Doe v Axelrod, 73 NY2d 748, 750 [1988]).  The decision whether to grant a preliminary injunction rests in the sound discretion of the Supreme Court (see Doe v Axelrod, 73 NY2d at 750).

     

    The plaintiffs have established a likelihood of success on the merits of their claim that the tenant is not obligated to the defendant for rent for the months of March through August 2020, and it is not obligated to replenish the security deposit equal to the rent otherwise owed for those months, even if the lease, by its terms, authorized the defendant to draw down the deposit to cover rent.

     

    Paragraph 9(b) of the subject lease recites that

     

    “[i]f the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be . . .at the expense of Owner, and the rent and other items of additional rent. . . . shall be apportioned from the day following the casualty according to the portion of the demised premises which is usable.”

     

    Paragraph 9(c) provides that

     

    “[i]f the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent . . . shall be proportionately paid up to the time of the casualty and then shall cease until the date that the demised premises shall be . . . restored by Owner.”

     

    The term “casualty,” as employed in a lease, is generally defined as an “accident” or an “unfortunate occurrence,” that is, something other than a “common occurrence” constituting a “sudden or unexpected” event or series of events (Blue Water Realty, LLC v Salon Mgt. of Great Neck, Corp. ___ AD3d, ____ 2020 NY Slip Op 07450, *1 [1st Dept, Dec. 10, 2020]; see 45 Broadway Owner LLC v NYSA-ILA Pension Trust Fund, 107 AD3d 629, 631 [1st Dept 2013]; IQ Originals v Boston Old Colony Ins. Co., 85 AD2d 21, 22 [1st Dept 1982], affd 58 NY2d 651 [1982]). The plaintiffs have established that they are likely to succeed on their claim that the COVID-19 epidemic, and the consequent state-mandated suspension of indoor dining at restaurants, constituted a sudden, unexpected, unfortunate set of circumstances and, hence, a “casualty” within the meaning of the lease that rendered the premises unusable for a period of time, and thus relieved the tenant of its obligation to pay rent. Consequently, the plaintiffs have shown a likelihood that they will prevail on their argument that, even if the lease otherwise permitted the defendant to draw down the security deposit to cover unpaid rent and rent arrears, under the unique circumstances of this case, the defendant was not authorized to do so here. The plaintiffs would clearly suffer irreparable harm in the potential loss of a leasehold in the absence of the injunction. Moreover, the balance of equities favors the plaintiffs here, as any loss sustained by the defendant would be compensable by money damages. Hence, the issuance of a Yellowstone injunction is warranted.

     

    The plaintiffs have also established a likelihood of success on the merits of their claim that they are not obligated to replenish the security deposit but, instead, the defendant is obligated to do so. They have established the likelihood that they will prevail on this claim even if the defendant lawfully drew down the security deposit to cover rent.

     

    The plaintiffs note that the lease, at Paragraph 31, provides that the “Tenant has deposited with Owner the sum of $72,500.00 for faithful performance and observance of the Tenant of the terms provisions and conditions of this Lease,” and that although that paragraph permits the defendant to draw down from the security deposit in certain limited circumstances, it does not obligate the plaintiffs to replenish the security even where the deposit is legally drawn down.

     

    A security deposit “provides a fund from which the landlord can draw for unpaid rent or damages and which puts the landlord into the status of a secured creditor” (Markowitz v Landau, 171 AD2d 564, 565 [1st Dept 1991]). Generally, a landlord is entitled to retain a deposit in escrow until the expiration of the lease absent the lease stating otherwise, and “an action for the return of security is premature where the term has not yet expired” (Wingett v Bartoloni, 2005 NY Slip Op 51176[U], 8 Misc 3d 134[A] [App Term 2d Dept, 9th & 10th Jud Dists 2005]; see also Fifth Ave. Ctr., LLC v Dryland Properties, LLC, 149 AD3d 445, 445 [1st Dept 2017]). While usually nothing will prevent a landlord from applying the security deposit to the arrears, “interest on the arrears should not [be] calculated prior to the application of a credit for the security deposit” (Wooster 76 LLC v Ghatanfard, 68 AD3d 480, 481 [1st Dept 2009]; see 88 Third Realty, LLC v Bekiyants, 2018 NY Slip Op 33340[U], 2018 NY Misc. LEXIS 6509, *24-25 [Sup Ct, N.Y. County, Dec. 21, 2018]).

     

    Generally, commercial leases do not permit tenants voluntarily to offset their obligations to pay rent or additional rent with their security deposits, at least until a landlord has secured a judgment against the tenant in a nonpayment proceeding (see Ring v Anabil USA, Inc., 29 AD3d 408 [1st Dept 2006]). Conversely, some leases, such as the one in dispute, expressly permit a landlord to apply a security deposit to cure a tenant’s default arising from nonpayment (see Fifth Ave. Ctr., LLC v Dryland Props., LLC, 2020 NY Slip Op 30015[U], 2020 NY Misc LEXIS 30, *5 [Sup Ct, N.Y. County, Jan. 2, 2020]; 413 W. 14 Assoc. v Santorelli, 2011 NY Slip Op 32105[U], 2011 NY Misc LEXIS 3792, *5 [Sup Ct, N.Y. County, Jul. 29, 2011] [Gische, J.]).

     

    Leases can also be drafted to obligate a tenant to replenish a security deposit when the landlord properly draws it down (see 413 W. 14 Assoc. v Santorelli, 2011 NY Slip Op 32105[U], 2011 NY Misc LEXIS 3792, *5 [tenant that permanently vacated premises need not replenish security deposit that had been applied to rent obligations despite a lease term requiring replenishment, since security deposit constitutes liquidated damages held in escrow, and tenant had no further obligations to secure]; cf. 75 Broad, LLC v Ramgopal, 2018 NY Slip Op 32820[U]; 2018 NY Misc LEXIS 5128, *14 [Sup Ct, N.Y. County, Nov. 7, 2018] [replenishment is required where express terms of lease and guarantee provide that the replenishment amount accrues prior to the tenant’s vacatur of the leasehold]).

     

    In the subject lease, there is no provision compelling the tenant to replenish a security deposit that the landlord drew down to cover allegedly unpaid rent. The plaintiffs correctly assert that such an obligation cannot be implied into the terms of the lease. “It is well settled that no additional liability or requirement will be imposed upon a tenant by interpretation unless it is clearly within the provisions of the instrument under which it is claimed” (67 Wall St. Co. v Franklin Natl. Bank, 37 NY2d 245, 249 [1975]). To the extent that there are any ambiguities in the terms of the lease in this regard, the terms must be construed against the drafter of the instrument (see Alphonse Hotel Corp. v 76 Corp., 273 AD2d 124, 124 [1st Dept 2000]; Rapid- American Corp. v Olympic Tower Assoc., 157 AD2d 589, 590 [1st Dept 1990]), here, the landlord. In any event, inasmuch as the plaintiffs have established, by virtue of the lease’s casualty clause, that they are likely to succeed on their claim that they did not owe rent during the duration of the state-mandated suspension of its business activities, they are also likely to succeed on their claim that the defendant was not entitled to draw down the security deposit in the first instance.

     

    In addition, the plaintiffs have also established a likelihood of success on the merits of their claim that the defendant violated Admin. Code of City of N.Y. (Ad Code) § 22-902(a) by engaging in commercial harassment of a commercial tenant that has been adversely affected by the COVID-19 pandemic. As relevant here, Ad Code § 22-902(a)(11)(ii) provides that

     

    “[a] landlord shall not engage in commercial tenant harassment.  Except as provided in subdivision b of this section, commercial tenant harassment is any act or omission by or on behalf of a landlord that (i) would reasonably cause a commercial tenant to vacate covered property, or to surrender or waive any rights under a lease or other rental agreement or under applicable law in relation to such covered property, and (ii) includes one or more of the following:

     

    *****

     

    “threatening a commercial tenant based on . . . the commercial tenant's status as a person or business impacted by COVID-19.”

     

    Pursuant to Ad Code § 22-902(a)(11)(c)(i), “a business is ‘impacted by COVID-19’ if . . . it was subject to seating, occupancy or on-premises service limitations pursuant to an executive order issue by the governor or mayor during the COVID-19 period,” where the term “COVID-19 period” is defined as

     

    “March 7, 2020 through the later of the end of the first month that commences after the expiration of the moratorium on enforcement of evictions of any tenant, residential or commercial, set forth in executive order number 202.8, as issued by the governor on March 20, 2020 and extended thereafter”

     

    (Ad Code § 22-902[a][11][a][i]). Ad Code § 22-903(a) creates a private right of action permitting a tenant to commence an action in the Supreme Court for a judgment “restraining the landlord from engaging in commercial tenant harassment and directing the landlord to ensure that no further violation occurs” (Ad Code § 22-903[a][1]) or awarding “such other relief as the court deems appropriate, including but not limited to injunctive relief, equitable relief, compensatory damages, punitive damages and reasonable attorneys’ fees and court costs” (Ad Code § 22-903[a][3]). The plaintiffs established the likelihood that they will prevail on this claim by showing that (a) the tenant is a commercial tenant “impacted by COVID-19,” as that term is defined in the Ad Code, as the tenant was subject to the Governor’s executive orders limiting seating, occupancy, and on-premises services between March 7, 2020 and January 1, 2021, (b) the defendant, in serving a notice to cure in August 2020, based on the tenant’s failure to replenish an existing security deposit, and thus during a period when the defendant knew that the tenant was unable to generate any revenue precisely because of the executive orders, committed an act that would reasonably cause the tenant either to vacate its commercial leasehold or surrender its rights under the lease, and (c) the tenant seeks injunctive and equitable relief to remedy the defendant’s service of the notice to cure, as authorized by the Ad Code.

     

    Accordingly, it is

      

    ORDERED that the plaintiffs’ motion for the issuance of a Yellowstone injunction is granted, and pending final adjudication of this matter, the defendant and its agents are hereby enjoined and restrained from terminating or cancelling the lease between the defendant and the plaintiff 188 Ave. A Take Out Food Corp. and also from taking any action to evict that plaintiff from the leased premises based upon the grounds alleged in the subject Notice to Cure Default, dated August 7, 2020, and that plaintiff’s time to cure any alleged defaults under the lease is hereby tolled; and it is further,

     

    ORDERED that the plaintiffs shall comply with all obligations under the lease other than the obligation to pay rent and any additional rent in a timely manner in connection with those months when the operation of their indoor dining restaurant business has been mandatorily suspended by law or by Executive Order of the Governor of the State of New York or the Mayor of the City of New York; and it is further,

     

    ORDERED that the parties shall appear remotely, via the Microsoft Teams application, for a preliminary conference on February 26, 2021, at 11:45 a.m.; the court shall schedule the conference and email invitations to counsel containing links to permit counsel to access the preliminary conference.

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