Ruling gives slow-coach tenants pause for thought.
Law firm, Kronish Lieb Weiner & Hellman, LLP sued fashion house, Tahari, Ltd., for causing delays to its occupancy of a space Tahari leased in the Trizec-owned Grace Building.
Now, Judge Walter B. Tolub has determined that a tenant who stays on after their lease has expired is not only liable contractually to their landlord, but also for any damages incurred to the incoming tenant because they are unable to get into the space.
These damages could include the cost of swing space, as well as construction costs made to the space when the incoming tenant is finally able to take occupancy.
The decision handed down by the Supreme Court judge should now give tenants who drag their heels when it comes to vacating their space once the lease has expired pause for thought.
"This case is ground breaking," said Todd Soloway, partner for the law firm, Pryor Cashman Sherman & Flynn LLP, who, along with partner, Eric D. Sherman, represented Kronish Lieb.
"An incoming tenant suing an outgoing tenant for liability for hold over is a very new concept. It's making a splash in the owner-broker community."
Marc Fried, a partner in the real estate and construction litigation team at Nixon Peabody LLP, added, "This now introduces a third party into the typical landlord-tenant relationship.
"In the past, you had the landlord and tenant arguing over the occupancy issue. The tenant now has an additional risk which isn't controllable by negotiations with the landlord. You're no longer dealing with the person you entered into contract with; you have a third person involved, putting more pressure on you."
According to Soloway, Tahari now owes his client around $1 million in damages on top of the standard charges imposed on the designer by Trizec in the form of a rent hike which, in this case, amounted to $110,000 per month during the disputed period. Trizec has also sued the designer for damages in a case that is still pending. Tahari Ltd., the fashion design company run by Elie Tahari, had been subleasing space on the 48th floor of 1114 Avenue of the Americas, commonly called the Grace building, which is owned by Chicago-based Trizec.
Kronish Lieb had signed a lease for the 46th and 47th floors of the building in 1993, with an option for the 48th floor that it chose to exercise in November 2001. Tahari's lease expired in May 2003 and Kronish planned to move into the space on June 1, 2003.
However, approximately a month prior to the expiration of their lease, Tahari informed Trizec that he wasn't going to leave the space.
"When Tahari signed his lease, he knew that at the end of the lease term, Kronish Lieb had an option to expand into this space and my understanding was that he was told ... Kronish Lieb probably would take it, don't expect to stay," said Ted Jadwin, general counsel for Trizec.
"Best as we can tell, Tahari didn't do anything about it. He did everything he could to fight us."
When Tahari's lease expired, Trizec immediately commenced litigation to evict the designer from the premises. During this time, Trizec received a holdover rent of $110,000 a month from the designer.
Over the next 18 months, litigation went from State Court to Appellate Court, where a judge ruled to evict Tahari, who ultimately vacated the building in January 2005, 18 months after the expiration of his original lease.
In a summary judgment, Judge Tolub determined that Tahari was liable to the incoming tenant, which he determined was a tort liability, as Kronish Lieb had been injured financially by the company holding over.
A status conference will be held on March 17, when Tolub may set a date for an upcoming trial which will determine how much in damages Tahari owes Kronish Lieb.
Tahari--who did not return repeated calls for comment on this report--has filed a notice to appeal the court's ruling and has made several counter claims against Kronish Lieb, including an allegation that the firm interfered with its efforts to sublease space from HBO on the second floor of the Grace Building.
In a signed affidavit, HBO stated that no such negotiations took place but the Judge left the claims open, a decision that Kronish plans to appeal.
While holding over is a common practice in New York, cases are not usually as extreme as Tahari's. Typically tenants hold over for a few weeks, no more than a couple of months, usually for understandable reasons, such as delays in construction of their new space, or simply being unable to move on time.
However, with the potential to create a financially crippling ripple effect, this latest decision is expected to light a fire under lackadaisical tenants.
"In New York, it's such a tight market, that if a tenant holds over in its space it has a domino effect on a lot of other parties," Jadwin said. "The next tenant gets held up and the person supposed to go into his space gets held up, etc. It has a lot of ripples. And in a tight market like New York, a lot of people get hurt."
"I think what makes this case important is that it's an extreme situation. I don't think many tenants would willingly say they are going to stay put, 'Let them sue me.' Even if a tenant were inclined to do that, after this ruling they'd think twice. I think what should happen, ideally, is that tenants will do everything in their power to move on time so not facing potential damage claims."
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|Title Annotation:||Tahari Ltd. accused for not vacating Trizec Corporation Ltd.'s building|
|Publication:||Real Estate Weekly|
|Date:||Mar 1, 2006|
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