1250 Broadway, 27th Floor New York, NY 10001


Typically, a "default" arises upon a party's breach or noncompliance with a contractual term or condition.  And, in order to provide a corrective remedy and avoid a possible forfeiture, many agreements will usually afford the party deemed in breach with an opportunity "to cure" or correct the underlying violation.

Leases are no different.  At least so we thought until the Court of Appeals issued its decision in Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC.  In that case, Arthur and Brian Miller each agreed to be personally responsible for the payment of their auto dealership's lease-related obligations for certain Madison Avenue space.  That document provided, in part, as follows:

[I]n the event Tenant shall not have been in monetary default under the Lease at any time during the first three (3) years of the Lease, this Guaranty and Guarantor's [sic] obligations thereunder shall cease and terminate upon the third (3rd) anniversary of the Commencement Date.

On September 29, 2003, some three years and three months into its lease, the dealership stopped paying the rent and vacated the space.  The landlord later filed suit seeking damages for all rent that due for the balance of the lease term [October 2003 to June 2010], discounted for present value.

Since the parties' agreement provided that rent was due "in advance on the first day of each calendar month," and the dealership consistently paid rent late, the landlord argued that the Millers were personally liable for the sums sought.  The New York County Supreme Court responded to that argument with a dismissal of the case against the guarantors finding that the landlord had "waived" its objection to the tenant's default by repeatedly accepting the late-rent tenders "without protest and without taking any action," like issuing a default notice or otherwise declaring the tenant in default of the governing lease.  On appeal, the Appellate Division, First Department, affirmed the dismissal, noting as follows:

To determine whether the guaranty ever became effective and whether it remained in effect at the time Bentley vacated the premises, we must look to the lease to determine whether there was a "monetary default" by the tenant. If there was no "monetary default" under the lease, the condition precedent was not fulfilled and the guaranty, together with its "no waiver" provisions concerning landlord's enforcement of its rights and remedies, never had any force and effect. As previously stated, because landlord, by a course of conduct extending over a period of years, waived the tenant's late payment of rent, there was no "monetary default" by the tenant under the lease during the applicable three-year period, the guaranty neither took effect nor was extended, and the guarantors were never subject to its terms and obligations. Once waived, the default in timely payment of rent is extinguished and cannot later be revived, like a phoenix, into a material default for the purpose of extending the period of the collateral guaranty. Thus, the loss sought to be recouped in this action, resulting from a default (vacatur of the premises) that occurred three years and three months after the commencement of the lease, is not recoverable from the individual defendants.

The thrust of the AD's argument was that there should have been some formal notice that the acceptance of the late rent payments was without prejudice to the landlord's rights under the guaranty.  As the AD observed:

Having failed, over the course of three years, to give Bentley any notice that timely payment of rent would be required, landlord may not now insist that its tenant's failure to strictly comply with the timely payment condition of the lease constitutes a default.

On December 19, 2006, the state's highest court affirmed the AD's disposition of the case but applied a different -- and more troubling -- analysis.  After examining the language of the governing lease's default provision, the Court of Appeals came to the following conclusion:

In the event of a default in the payment of rent, paragraph 17 requires the landlord to notify the tenant of the default and, after receipt of the notice, the tenant will have seven days to cure the deficiency. Even if the default is not cured within seven days of the notice, the lease provides that the landlord must send another notice giving the tenant three additional days to cure, meaning that the tenant has 10 days after it receives the first notice from the landlord to remedy any deficiency relating to the payment of rent. This provision clearly distinguishes between a default in the payment of rent and other types of defaults, with the former referred to at the end of the provision as a "monetary default" under certain circumstances.

Nothing in the language of the lease suggests that rent that was paid in full each month, albeit in an untimely manner, would nonetheless fall within the category of "monetary default." To the contrary, it appears that a default in the payment of rent does not ripen into a "monetary default" until the landlord has first served a notice of default and the default has "remain[ed] uncured" for at least seven days because it is only in that context that a default in the payment of rent is characterized as a "monetary default."

A creative analysis but, in our opinion, just plain wrong.   In fact, we believe the case's outcome derives from a strained reading of the underlying lease agreement.

This language found in a lease's "default" provision is typically operative when a landlord wishes to exercise the "conditional limitation" -- that is, bring the lease to a premature end and evict a tenant from the space as a result of a breach.  That language usually does not define when a "default" has occurred.  Rather, it governs the steps that need to be taken when a landlord wishes to terminate the tenancy based on that "default."

In this particular instance, the state's highest court seems to be suggesting that -- according to its reading of the operative conditional limitation language -- the tenant was not in "default" of its obligation to pay rent unless and until one or more predicate notices issued.  That strikes us as nonsensical. 

We submit that the "default" arose upon the tenant's failure to remit rent as of the first of the month, as contractually required.  And, that occurrence should have been sufficient to trigger personal liability under the guaranty (as a result of the clear and unequivocal wording of that document).  As we have observed in our prior blog post on this topic -- the Millers knowingly and willingly agreed to an "absolute and unconditional Guaranty of payment and performance," which was enforceable "without the necessity for any suit or proceedings on Landlord's part of any kind or nature whatsoever against Tenant, without the necessity of any notice of non-payment, non-performance or non-observance (except as expressly required under the terms of this Guaranty), or ... of any other notice or demand to which the Guarantor might otherwise be entitled, all of which the Guarantor expressly waives ...."

Additionally, the guaranty specified that it would not be "terminated, affected, diminished or impaired by reason of the assertion, or the failure to assert, by Landlord against Tenant of any of the rights or remedies reserved to Landlord pursuant to any provisions of the Lease."

Finally, the agreement provided that the guaranty would "in no way be affected, modified or diminished by reason of ... any modification or waiver of or change in any way of the terms, covenants, conditions or provisions of the Lease by Landlord and Tenant, or by reason of any extension of time that may be granted by Landlord to Tenant, or by reason of any dealings or transaction or matter or thing occurring between Landlord and Tenant ...."

All that stuff reads pretty unambiguously to us.  No "notices" of any kind were required to issue or otherwise be given to the guarantors (under the guaranty).  Yet, the state's highest court elected to rely on the conditional-limitation language of the lease as a basis for relieving the Millers of their personal obligations.  (So much for enforcing agreements, as written.)

If the court's analysis were taken to its logical extreme, a tenant would not be in breach of a lease until such time as a predicate notice issued declaring the tenant in default.  And if that's the case, would the tenant then be entitled to yet another notice affording it an opportunity to cure or correct the default?

And, pray tell, if a tenant is never formally declared in default, when does the time start to run for statute of limitations purposes?  And, how could a "default" be "waived" by a landlord if the violation's existence has never "ripened," or otherwise been formally acknowledged?

Has our state's highest court added yet another needless layer of complication and confusion to  landlord-tenant relationships by its holding in this case?

Only time will tell.

For a copy of the Court of Appeal's decision in Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC, please click on the following link: http://www.nycourts.gov/reporter/3dseries/2006/2006_09502.htm

For our prior blog post on this case, please click on the following link: http://www.nyrealestatelawblog.com/2006/05/whens_a_guaranty_not_a_guarant.html