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Lease ruling favors owners.

The city's commercial property owners received an early visit from Santa last week when a case involving young Kenneth Cole was decided by the state's highest court in favor of Holy Properties, the owner.

The New York State Court of Appeals ruled last Thursday, December 7th, that a commercial building owner does not have to mitigate damages should a tenant move out.

The seven judge panel's unanimous ruling also acknowledged the use of the Real Estate Board of New York's lease provision - clause 18 - that specifically states the property owner is not required to lessen damages.

The case will prove a warning to tenants who believe they can walk away from commercial leases without incident, but will also reassure lenders who rely on the tenant's bargain when lending to the owners.

"Tenants who vacate the premises before the expiration of their leases will have to pay rent for the balance of the term," said attorney Sydney A. Luria, a partner with Carb Luria Glassner Cook & Kufeld, that filed an amicus curiae brief on behalf of REBNY. "They [vacate] at their own risk."

In residential practice, however, owners are required to mitigate damages by attempting to re-lease the space. "That's been the case law in New York," noted Luria. "In commercial properties, it's been to the contrary: There is no duty to mitigate when the tenant walks out, and the landlord can keep the premises vacant."

Kenneth Cole's attorney, Bruce H. Wiener, a partner with Fischbein Badillo Wagner Harding, said because of this ruling, mitigation is something the tenants "will now have to negotiate for. If they have some bargaining position, because of who they are... they will be able to get that."

The attorney for the owner, Jeffrey R. Metz, a partner with Finkelstein Borah Schwartz Altschuler & Goldstein, who handled the appeal, said the case underscores the point that "real estate contracts are the best example of arm's length bargaining, so the time to cut the deal is at the bargaining table." David R. Brody, another Finkelstein Borah partner, handled the trial work.

The case, Holy Properties Limited vs. Kenneth Cole Productions, arose when the shoe maven's company signed a lease for offices in 29 West 57th Street, on one of the city's most notable blocks, across from Carnegie Hall.

The company began its lease term on January 1, 1985, but after a change of ownership and what they alleged as a deterioration of building services, moved out in December of 1991.

The owner, Holy Properties, a German company that owns other properties in New York City, began a summary eviction proceeding for the non-payment of rent and obtained a judgement and warrant of eviction in May, 1992. It soon also sought rent arrears and damages.

As a defense, Cole claimed the owner had failed to mitigate damages by deliberately failing to show or offer the premises to prospective replacement tenants. "The tenant imposed a defense requesting the court to reverse the law on commercial property and make it identical with residential case law, so that the landlord should be obligated to relet and mitigate the damages," said Luria.

While it was not a factor nor mentioned within the Court of Appeals decision, Metz said there was actually a detailed negotiated rider that allowed Cole to sublease and mitigate its own damages, but it did not do so.

The Supreme Court ruled in favor of the owner, stating that Cole had breached the lease without cause and the owner had no duty to mitigate damages. The Appellate Division affirmed that ruling, but granted leave to appeal, and Luria speculated the judges felt it was time for the Court of Appeals to once again review the matter.

According to the decision rendered by that higher court last week, while the law imposes the duty of making reasonable exertions to minimize injury, leases are not subject to this general rule.

"Once the lease is executed, the lessee's obligation to pay rent is fixed to its terms and a landlord is under no obligation or duty to the tenant to relet, or attempt to relet abandoned premises in order to minimize damages," Justice Richard Simons wrote for the court, citing a 1988 case.

While the building owner has options, once the tenant abandons the premises prior to the expiration of the lease the owner is also within its rights under New York law to do nothing and collect the full rent due under the lease, the opinion continues.

The judges also declined to go along with a certain contract rationale recognized by other industrialized states, including California, Illinois and New Jersey, as brought up by Cole's defense that would have required the owner to mitigate the damages.

Metz explained that up until now, people had been looking at these leases as a contract rather than the transfer of an estate. "They take it squarely out of the general contract rule, where there is an obligation to mitigate damages," Metz said.

Wiener said they conducted a 50-state survey and felt the issue deserved a more historical analysis. "I'm obviously disappointed in the decision and that New York has decided to be in the minority to not mitigate. All the major industrial states do," he said, "and New York is usually on the cutting edge."

But the judges stated: "In business transactions, particularly, the certainty of settled rules is often more important than whether the established rule is better than another or even whether it is the 'correct' rule." The opinion continues: "This is perhaps true in real property more than any other area of the law, where established precedents are not lightly to be set aside."

Becar v. Flues, one of the cases the judges cited several times, is from 1876, Wiener noted. "This is the first time in 120 years that its been cited in this way," he observed. "They never cited it before. So in that sense, it's a reaffirmation of old principals." Agreed Metz, "They certainly reaffirmed the validity of that case."

REBNY has a form lease available to its members that includes paragraph 18, which as a matter of contract eliminates the need of the owner to mitigate damages, noted Luria, and is in conformity with current case law. That clause was used in the Cole lease.

Wiener does not believe the lease clause is so cut and dry, but the judges did not agree.

Pointing to the REBNY lease clause, Justice Simon wrote, "In this case, the lease expressly provided that plaintiff was under no duty to mitigate damages and that upon defendant's abandonment of the premises or evictions, it would remain liable for all monetary obligations arising under the lease."

Metz concluded the judges wanted to declare "that New York is a good place to do business and tenants will be held to the terms of the lease. They won't be able to walk away if there is a downturn. There can be stability in contracts and stability in money lending based on the representation of who your tenants will be."
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Title Annotation:Holy Properties Ltd. vs. Kenneth Cole Productions
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Dec 13, 1995
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