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TENANT DENIED PURCHASE OPTION DUE TO LEASE DEFAULT

Failing to pay the rent on time could have dire consequences for commercial tenants even when they have never been declared in default.

According to the Appellate Division, Second Department, in Cyber Land, Inc. v. Chon Prop. Corp., a tenant's mere failure to pay rent on time could work to divest it of lease-related rights, such as a "right of first refusal" to purchase a building. In that case, the option was conditioned upon tenant "not being in default" during the lease term and, of course, this particular occupant "frequently" paid its rent late and failed to remit the full amount due to its landlord. 

When the building was later sold to a third party, the tenant filed a lawsuit in the Queens County Supreme Court seeking to enforce its right to purchase the building. The tenant claimed that its mere failure to pay the rent on time did not invalidate the option, since it was never given a formal default notice.  The tenant further asserted that any alleged violations of the agreement's terms were inconsequential.

Neither the Supreme Court nor the Appellate Division concurred with the tenant's arguments. Here's how the Appellate Division addressed the tenant's claims:

"A covenant to pay rent at a specified time ... is an essential part of the bargain as it represents the consideration to be received for permitting the tenant to remain in possession of the property of the landlord" ... Accordingly, the plaintiff's repeated breaches of the covenant to timely pay rent contained in the lease were not de minimus, but were instead breaches "of a material term of the lease" ... Notice of such default was not required ... Furthermore, while the plaintiff is correct that equity may relieve a party against a good faith, de minimus, breach that is promptly cured ... the unrefuted evidence indicates that the plaintiff has not paid the complete rent due in August 2003. Accordingly, the Supreme Court properly granted the motion of the defendants and third-party defendant for summary judgment dismissing the complaint.

How does one reconcile the outcome of this case with the recent holdings of the appellate courts of the First Department and the New York State Court of Appeals?

In decisions relating to lease defaults, these other courts appear to be suggesting a mere "default" will not trigger a tenancy's forfeiture nor support a judgment for rent, legal fees or other charges due under the agreement or accompanying guaranty.  Some formal notice (or series of notices) need first ensue. 

[See, for example, our analysis of Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC., wherein both the Appellate Division, First Department, and the Court of of Appeals refused to hold two guarantors liable for the payment of their dealership's rent notwithstanding the unambiguous language of the governing guaranty.  To review that post, please click on the following link: http://www.nyrealestatelawblog.com/2006/12/when_is_a_default_a_default.html ]

Make sense of it all, if you can.  We dare you!

For a copy of the Appellate Division's decision in Cyber Land, Inc. v. Chon Prop. Corp., please click on the following link: http://www.nycourts.gov/reporter/3dseries/2007/2007_00481.htm

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