New York Commercial Tenant’s Failure to Give Required Notice of Renewal is Insufficient as Grounds to Excuse Conduct Required by Lease

Whether you are a commercial landlord or tenant, read your lease, read your lease, read your lease! Lease review is not just for when you are negotiating and executing it, only to be put away and forgotten once the ink has dried; but it is an exercise to be carried out through the entire course of the commercial lease tenancy. If you don’t, you run the risk of making a serious mistake that may leave you scrambling for new space. Take the case of Baygold Assocs., Inc. v. Congregation Yetev Lev of Monsey, Inc., 19 N.Y.3d 223 (May 3, 2012). In Baygold Landlord and Tenant entered into a lease on August 2, 1976 for premises used by Landlord as a nursing home. The term was 10 years with four additional 10-year renewal options available to Tenant. In order to exercise an option period, Tenant was required to provide the Landlord with no less than 270 days’ notice before the expiration of each term. The lease further required that the renewal notice be sent “by certified mail with return receipt requested”.

Thereafter, Tenant subleased the space to Monsey Park. Monsey Park ran the nursing home between 1976 and 1985, during which time it made a number of improvements to the leased space. In January 1985, Monsey Park subleased the space to Orzel, who continued to run the premises as a nursing home. During Orzel’s tenancy, only Orzel made improvements to the premises. Renewals were made extending the lease until 2005. The 2005 renewal became the issue. Baygold’s attorney testified that he sent a timely renewal letter to cover the remaining two option terms, but could produce no mail receipt or return card, as required by the lease. In 2007, the Landlord arranged to sell the property to Congregation Yetev Lev of Monsey. Baygold thereafter sued to declare the rights of the parties with respect to the lease renewal.

The Court of Appeals rejected Baygold’s claim to declare the lease properly renewed. In its 1977 decision in J.N.A. Realty Corp. v. Cross Bay Chelsea, 42 N.Y.2d 392 (1977), the Court of Appeals held that equity would relieve a commercial tenant of its untimely failure to exercise an option to renew a lease where (1) such failure was the result of “inadvertence,” “negligence” or “honest mistake”; (2) the non-renewal would result in a “forfeiture” by the tenant; and (3) the landlord would not be prejudiced by the tenant’s failure to send, or its delay in sending, the renewal notice. J.N.A. Realty Corp. v. Cross Bay Chelsea, 42 N.Y.2d 398-400. Here, the Court found Baygold was not entitled to such equitable relief because it could not prove the second element of forfeiture, defined by the Court as where the tenant “‘has in good faith made improvements of a substantial character, intending to renew the lease’ and the tenant ‘would sustain a substantial loss in case the lease were not renewed.’” Id. at 397-398. Baygold did make substantial improvements, but did so some 20 years earlier; and the more recent improvements to the property were made by Baygold’s subtenants, not by Baygold. Thus, Baygold could not take advantage of what the Court of Appeals deemed to be a “narrow” equitable doctrine.

N.B. Judge Smith filed a dissenting opinion, joined by Judge Grafeo, which sees the majority’s opinion as basically a distinction without a difference from the original J.N.A. decision. In Judge Smith’s opinion, the majority opinion made no effort to explain why a subtenant must forfeit all of its improvements because of the mistake of the tenant in failing to provide timely notice. For the entire opinion of Baygold Assocs., Inc. v. Congregation Yetev Lev of Monsey, Inc., click: http://www.nycourts.gov/ctapps/Decisions/2012/May12/66opn12.pdf

 At the BeinhakerMiller Law Firm, LLC, we specialize in commercial leasing for both landlords and tenants. Call us today at 908-272-2232 for appointment to see how we can help.