Conditional limitation clause: a powerful remedy for landlord.

(The following article is the fifth of a fourteen part series prepared by our law firm examining the standard Real Estate Board on New York form commercial lease. This series highlights particular clauses in the REBNY lease and how the courts have interpreted them.)

A landlord's most drastic, and often most effective remedy where a tenant is in default is to - following the procedures of the so-called "conditional limitation" clause - declare the lease to be terminated. Among other things, the resultant landlord-tenant proceeding for eviction of the former tenant as a "holdover," offers the landlord various advantages over the familiar non-payment proceeding. Also, a lease once terminated cannot be revived, even in Bankruptcy Court.

This remedy is set forth in the REBNY Standard form office lease, [paragraph] 17. As drafted, however, the clause restricts landlords' rights in some respects that a landlord might not have anticipated. Ironically, the REBNY form office "Loft" lease, in its [paragraph] 17, gives the landlord significantly greater rights then does the form of "office" lease.

This article will review the precedents construing these standard form lease clauses, showing how the courts have, with few exceptions, enforced the clause as written in favor of landlords.

The Basic Concept: Terminating the Lease For a Tenant Default

The basic concept of the conditional limitation clause is to permit landlord to (i) give notice to tenant of some default; and (ii) if tenant does not cure, declare the lease to be terminated.

The mechanism as drafted in the REBNY form has been consistently upheld as effectuating a lease termination. Without getting into ancient learning, certain slight variants in the wording of the clause will result in it being declared a condition subsequent - and hence of no significant use to a landlord - rather than a conditional limitation.

Given the serious consequences to the tenant of landlord's invocation of this remedy, tenants will often seek to avoid its effect by seeking a "Yellowstone" temporary stay. In keeping with the theme of this series, to limit the discussion to the construction of the "form" lease provision, we will not discuss "Yellowstone" injunctions, except to note that (i) if the landlord asserts that tenant has defaulted, the tenant may seek a stay from the Supreme Court, pending a determination as to whether or not tenant has indeed defaulted; but (ii) as a condition to such a stay, the Court should require tenant to keep paying the rent, and to post a bond showing that it has the financial ability to cure. Accordingly, landlords should not necessarily be afraid of "Yellowstone" injunctions: the payment and bonding conditions are often far better than what happens in the typical non-payment case, where the tenant occupies the premises for months, if not years, without paying rent, and without any "use and occupancy" order.

Can a Rent Default Trigger Landlord's Right to Invoke the Conditional Limitation?

Under the regular "office" form REBNY Lease [paragraph] 17, only the following tenant defaults can trigger the conditional limitation:

* A default under any lease covenant except for the covenants for payment of rent or additional rent;

* If the premises become "vacant or deserted":

* In case of attachment of tenant's property, or bankruptcy; and

* If tenant fails to take possession.

The REBNY (office) "loft" form adds the following: (i) if tenant defaults in any respect under any other lease between this same tenant and this landlord - i.e., a cross default clause, and (ii) if tenant fails to replenish the security deposit after landlord has applied any part of it to any rent or additional rent default. This clause is in effect a "back-door" way to convert rent defaults into a basis for invoking the conditional limitation.

Why does the "office" form exclude defaults in payment of rent? And is the back-door mechanism in the "Loft" form - i.e., drawing down the security deposit and then demanding replenishment (and exercising the conditional limitation if there is no replenishment) enforceable?

A recent decision by Justice Schlesinger suggests that the conditional limitation cannot be used in the event of a rent default, for doing so short-circuits the tenant's statutory right, in the context of a non-payment proceeding, to pay the rent arrears/judgment at any time up until 10 days after the judgment, and thereby cause any warrant to be vacated (Moore v. Chase Manhattan Bank, N.A.).

Moore was a surprising decision, in view of the Appellate Terms decision in Grand Liberte Co-op. Inc. v. Bilhaud, which ruled conditional limitations clearly cannot be invoked for rent defaults in residential cases; but arguably commercial cases are different. In Grand Liberte, the conditional limitation clause in the commercial lease there, expressly made applicable to rent defaults, also added a sentence beyond the usual form language, stating that "it [is] the intention of the parties hereto to create hereby a conditional limitation...

The Court in Grande Liberte emphasized this clause in finding that the parties had expressly agreed to a conditional limitation even in the event of a rent default. That Court accordingly held that the clause "shall be enforced in the absence of a showing of fraud, exploitative overreaching or other unconscionable conduct on the part of landlord."

Grand Liberte clearly held that it was not against public policy to have a conditional limitation clause in a commercial lease that covered rent defaults.

The Court in Moore distinguished Grand Liberte on the basis that (i) the form clause in Moore did not have the additional sentence expressly stating that it was a conditional limitation that would cut off the statutory right (applicable in non-payment proceedings) to cure even after a judgment; and (ii) in Moore, the tenant had alleged various acts of overreaching by landlord.

In summary, it may not be necessary for landlords, in commercial cases, to continue to exclude rent defaults from the scope of the conditional limitation clause. But, we suggest, if a landlord wishes to include rent defaults, the landlord should do more than just strike the exclusionary language from the form. Landlord should either add backdoor language as in the "loft" form lease, or add additional language tracking Grand Liberte and expressly providing that tenant is relinquishing any statutory rights to pay even after judgment.

Other "Triggers" of a Conditional Limitation

The conditional limitation may be invoked if a premises becomes vacant and deserted. Occasionally, landlords have sought to invoke this trigger where a tenant has moved out its business operations from the premises, but has continued to pay rent and to keep the premises secure. In Foureal Co. v. National. Molding Corp., the Court squarely held that in these circumstances a premises is not vacant or deserted.

This clause comes into play also in the following context: Suppose there is an overlandlord, a prime tenant/sublandlord and subtenant. Sublandlord fails to pay rent, and overlandlord issues a 3-day notice. Subtenant hears of this, and vacates the premises. Overlandlord then, in effect, buys out the prime tenant, and asserts an action in its new role as sublandlord, against subtenant, for wrongfully abandoning the premises. In In re Sanshoe (EBG Midtown v. McLaren/Hart Environment), the Court rejected subtenant's argument that it was entitled to vacate in this situation:

"When the paramount landlord threatens to cancel the paramount lease, and even goes to the extent of instituting summary proceedings to that end; the subtenant may not anticipate the actual cancellation and vacate from the premises," the ruling states. "Such a course of conduct is fraught with danger; for, if the sublessor and the paramount landlord should settle their differences, the vacating subtenant will find himself in the unenviable position of being held liable for breach of his sublease, which in such case continues unaffected by all the preceding legal skirmishes."

Finally, we note that, like many other lease provisions, the "cross-default" trigger contained in the "loft" form lease may be unenforceable in bankruptcy, see In re Sambo's Restaurant, Inc.; In re Braniff, Inc.; and lit re Brentano's, Inc., where the Court permitted the bifurcation of a single lease that covered two floors, and approved the assignment of the lease pro tanto for only one of those floors.

Conclusion

The conditional limitation is a powerful tool for landlords. Moreover, it may be that the triggering conditions can be made broader than under the current form "office" lease by utilizing language in the "loft" office form. This clause is worth extra attention.