172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc. , 24 N.Y.3d 528 ( 2014 )

=================================================================
This opinion is uncorrected and subject to revision before
publication in the New York Reports.
-----------------------------------------------------------------
No. 228
172 Van Duzer Realty Corp.,
Respondent,
v.
Globe Alumni Student Assistance
Association, Inc., et al.,
Appellants.
Linda M. Brown, for appellants.
Noah B. Potter, for respondent.
RIVERA, J.:
This appeal involves a dispute over future rental
payments sought under an acceleration clause from an out-of-
possession tenant after termination of the leasehold agreement.
The Appellate Division affirmed an order of Supreme Court which
- 1 -
- 2 - No. 228
granted the landowner plaintiff summary judgment on the issue of
liability, and affirmed a judgment for damages in accordance with
the parties' stipulation. We conclude that the acceleration
clause is not per se invalid merely because the landowner
terminated the lease and the tenant is no longer in possession.
However, defendants should have been permitted to present
evidence in support of their contention that the undiscounted
acceleration of all future rents constitutes an unlawful penalty.
Therefore, we remit for a hearing, limited to that issue.
Real property owner, plaintiff 172 Van Duzer ("Van
Duzer"), and tenant, defendant Globe Alumni Student Assistance
Association ("Association"), entered into a one-year commercial
rental lease agreement. The lease provided that defendant Globe
Institute of Technology ("Globe") would use the property as a
dormitory for Globe's for-profit educational institution. Prior
to the end of the one-year term, Van Duzer and the Association
extended the lease for a nine-year period, and Globe signed a
guarantee that it would be jointly and severally liable for the
Association's obligations under the lease. Van Duzer and the
Association also executed a Student Dormitory Restrictive
Declaration ("Declaration") with the New York City Department of
Buildings indicating, among other things, that the premises would
be used solely as a student dormitory.
Several months after executing the lease extension, Van
Duzer sent the Association a notice to cure for failure to
- 2 -
- 3 - No. 228
maintain the premises in good order, citing several violations
issued by the New York City Environmental Control Board, and
demanding action be taken within a month's time. The Association
failed to cure, and instead vacated the premises and ceased
paying rent as of February 2008. Van Duzer terminated the lease,
effective March 28, 2008, with notice to the Association, and
commenced an action to recover possession and past due rent. In
August 2008, Civil Court awarded Van Duzer possession of the
premises with a zero dollar money judgment.
In September 2009, Van Duzer commenced the present
action against defendants for rent arrears and an amount equal to
the future remaining rent owed on the lease. Van Duzer
thereafter moved for summary judgment based on an acceleration
clause in the leasehold agreement which provides that upon the
tenant's default the landowner may terminate the lease, repossess
the premises, and "shall be entitled to recover, as liquidated
damages a sum of money equal to the total of ... the balance of
the rent for the remainder of the term ...." The provision also
states that "[i]n the event of Lease termination Tenant shall
continue to be obligated to pay rent and additional rent for the
entire Term as though th[e] Lease had not been terminated."1
1
The parties concede that this provision permits the
landowner to demand immediate payment of all future rent
outstanding under the lease, rather than a right to payment as
the rent becomes due. We, therefore, treat the clause as
requiring rent to be paid in one lump payment, rather than in
monthly installments, as would otherwise be required by the
- 3 -
- 4 - No. 228
Defendants objected to summary judgment, contending Van
Duzer could not collect under the acceleration clause once it
terminated the lease and retook possession of the property.
Defendants also asserted that res judicata barred Van Duzer's
damages claims because it could have obtained damages in the
prior Civil Court action. Alternatively, defendants requested
discovery in order to establish the lack of proportionality
between Van Duzer's claimed damages and probable loss. Van Duzer
counter argued that it had difficulty finding new tenants because
the premises was subject to the Declaration's student dormitory-
use limitation. With regards to the res judicata claim, Van
Duzer alleged that Civil Court lacked jurisdiction to award
damages based on the acceleration clause.
Supreme Court granted Van Duzer summary judgment on
liability, finding the parties had clearly agreed that upon
termination of the lease the Association would be liable for
rent, and referred the matter to a Special Referee to determine
damages. The court denied defendants' request for discovery,
concluding that under New York law the landowner was entitled to
collect full rent due under the lease with no obligation or duty
to relet, or attempt to relet, the abandoned premises in order to
minimize damages. Thereafter, upon the parties' stipulation, the
court entered judgment for Van Duzer in the amount of
$1,488,604.66, consisting of the rent remaining due under the
lease.
- 4 -
- 5 - No. 228
lease, reduced by the amount of rent Van Duzer was able to
collect by reletting the premises between August 2008 until
February 2011, plus interest.
The First Department affirmed, concluding Van Duzer
made a prima facie showing of entitlement to accelerated rent
under the terms of the lease, and defendants failed to raise a
triable issue of fact as to whether the liquidated damages
constituted an unenforceable penalty. The court also rejected
defendants' res judicata claim finding such damages were
unavailable in the Civil Court summary proceeding.
On appeal to us, defendants reassert their res judicata
argument and their challenges to the validity of the acceleration
clause, claiming what amounts to a per se rule barring
accelerated rent as damages when the landowner holds rightful
possession of the property. We conclude that defendants
arguments are unpersuasive except for their contention that they
were entitled to a hearing on their claim that the acceleration
clause constitutes a penalty.
As an initial matter, we reject defendants' res
judicata argument because the Civil Court was without authority
to address a claim for the balance of rent due under the
acceleration clause in Van Duzer's holdover proceeding (New York
City Civ. Ct. Act § 204; see also Ross Realty v V&A Fabricators,
Inc., 42 AD3d 246 [2d Dept 2013]; Marketplace v Smith, 181 Misc2d
440, 442-443 [Justice Ct, Monroe Cty, 1999]). Thus, Van Duzer
- 5 -
- 6 - No. 228
was not barred from pursuing damages for defendants' breach.
Turning to defendants other arguments, defendants claim
that Van Duzer is barred from collecting unpaid future rents
pursuant to the acceleration clause because under this Court's
decision in Fifty States Management Corp v Pioneer Auto Parks,
Inc. (46 NY2d 573 [1979]), a landowner cannot claim accelerated
rental payments when the landlord terminates the lease and
retakes possession. Defendants' reliance on Fifty States is
misplaced because the acceleration clause in that case was
"intended to secure the tenant's obligation to" pay rent in the
context of an ongoing leasehold, and the clause set the damages
for a breach of that obligation (Fifty States Management Corp.,
46 NY2d at 578). The Court concluded that a lease term providing
for accelerated rent upon a tenant's default in rent payment, as
a condition of the tenant's continued possession of the property,
is enforceable absent a claim of "fraud, exploitative
overreaching or unconscionable conduct" (id. at 577). Here,
defendants do not argue that they want to be put back in
possession. Moreover, Van Duzer sought damages in accordance
with the acceleration clause after terminating the lease, once
defendants defaulted and breached their leasehold obligations to
maintain the property and pay rent. Thus, unlike the landowner
in Fifty States, Van Duzer is not seeking to deploy the
acceleration clause in the course of a continuing leasehold for
purposes of ensuring the tenant's compliance with a material
- 6 -
- 7 - No. 228
provision of the lease.
Nor can defendants challenge the validity of the
acceleration clause based on this Court's recognition in Fifty
States that, "where a lease provides for acceleration as a result
of a breach of any of its terms, however trivial or
inconsequential, such a provision is likely to be considered an
unconscionable penalty and will not be enforced by a court of
equity" (Id. at 577; see also Seidlitz v Auerbach, 230 NY 167,
173 [1920] [holding a lease provision providing for forfeiture of
tenant's $7,500 deposit for breach of any one of several
covenants of varying importance an unenforceable penalty]; 884
West End Ave. Corp. v Pearlman, 201 AD 12 [1st Dept. 1922]
[holding a lease provision which entitled the landlord to
accelerated rent for any one of a number of trivial breaches an
unenforceable penalty], affd. 234 NY 589). That rule addresses,
in part, the inequities of damages disproportionate to the losses
incurred as a result of a tenant's collateral or minor breach
(Fifty States Management Corp., 46 NY2d at 577-578). That rule
continues in force, but is inapplicable to defendants, who
committed material breaches of the lease by ceasing all rental
payments as of February 2008 and simultaneously abandoning the
premises.
To the extent defendants suggest that a landowner
should be subject to a duty to mitigate, we previously rejected
this argument in Holy Properties Ltd., L.P. v Kenneth Cole (87
- 7 -
- 8 - No. 228
NY2d 130 [1995]). In that case the Court stated that once a
tenant abandons the property prior to expiration of the lease, a
"landlord was within its rights under New York law to do nothing
and collect the full rent due under the lease" (Id. at 134,
citing Becar v Flues, 64 NY 518 [1876], and Underhill v Collins,
132 NY 269 [1892], and Matter of Hevenor, 144 NY 271 [1926]). The
Court adhered to this established approach, and stated that
parties in business transactions depend on the certainty of
settled rules, "in real property more than any other area of the
law, where established precedents are not lightly to be set
aside" (Holy Properties Ltd., 87 NY2d at 134). We see no reason
to reverse course in defendants' case. In particular where, as
in Holy Properties, the parties here freely agreed to bind
defendants to pay rent after termination of the landlord-tenant
relationship (Id. at 134, citing International Publs. v
Matchabelli, 260 NY 451, 454 [1933], and Mann v Munch Brewery,
225 NY 189, 194 [1919], and Hall v Gould, 13 NY 127, 133-134
[1855]).
Defendants argue, in the alternative, that the
liquidated damages as future rent provided for under the
acceleration clause are grossly disproportionate to Van Duzer's
actual losses, and therefore constitute an unenforceable penalty.
Defendants are correct that an acceleration clause is subject to
judicial scrutiny based on a challenge that it is nothing more
than a means by which to exact a penalty otherwise proscribed by
- 8 -
- 9 - No. 228
the law.
As a general matter parties are free to agree to a
liquidated damages clause "provided that the clause is neither
unconscionable nor contrary to public policy" (Truck Rent-A-
Center, 41 NY2d 420, 424 [1977], citing Mosler Safe Co. v Maiden
Lane Safe Deposit Co, 199 NY 479, 485 [1910]). Liquidated
damages that constitute a penalty, however, violate public
policy, and are unenforceable (Truck Rent-A-Center, 41 NY2d at
424, citing City of Rye v Public Serv. Mut. Ins. Co, 34 NY2d 470,
472 [1974]). A provision which requires damages "grossly
disproportionate to the amount of actual damages provides for a
penalty and is unenforceable" (Truck Rent-A-Center, 41 NY2d at
424).
Whether a provision in an agreement is "an enforceable
liquidation of damages or an unenforceable penalty is a question
of law, giving due consideration to the nature of the contract
and the circumstances" (JMD Holding Corp. v Cong. Fin. Corp., 4
NY3d 373, 379 [2005], citing Mosler Safe Co., 199 NY at 485;
Leasing Serv. Corp. v Justice, 673 F2d 70, 74 [2d Cir 1982]).
"The burden is on the party seeking to avoid liquidated damages[]
to show that the stated liquidated damages are, in fact a
penalty" (JMD Holding Corp., 4 NY3d at 380, citing P.J. Carlin
Constr. Co. v City of New York, 59 AD2d 847 [1st Dept 1977];
Wechsler v Hunt Health Sys., 330 F Supp 2d 383, 413 [SD NY
2004]). Where a party establishes a penalty, the proper recovery
- 9 -
- 10 - No. 228
is the amount of actual damages established by the party (JMD
Holding Corp., 4 NY at 380 ["'If the [liquidated damages] clause
is rejected as being a penalty, the recovery is limited to actual
damages proven'"], quoting Brecher v Laikin, 430 F Supp 103, 106
[SD NY 1977]).
Defendants claim that because the acceleration clause
permits Van Duzer to hold possession and immediately collect all
rent due, the damages are grossly disproportionate to the
landowner's actual damages. They contend this is a windfall that
allows Van Duzer to double dip--get the full rent now and hold
the property. On its face this argument is compelling because
arguably the ability to obtain all future rent due in one lump
sum, undiscounted to present-day value, and also enjoy
uninterrupted possession of the property provides the landowner
with more than the compensation attendant to the losses flowing
from the breach--even though such compensation is the recognized
purpose of a liquidated damages provision (Truck Rent-A-Center,
41 NY2d at 423; see JMD Holding Corp., 4 N.Y.3d at 382; Benderson
v Poss, 142 AD2d 937, 938 [4th Dept. 1988]; Gotlieb v Taco Bell
Corp., 871 F Supp 147, 155 [ED NY 1994]). Although the
acceleration clause in Fifty States was held enforceable, that
case is distinguishable from the instant case because there the
landlord did not get to keep the property.
On the record before us it appears that the court below
limited the damages hearing before the Special Referee to whether
- 10 -
- 11 - No. 228
the landowner relet the premises. This was error. Defendants
should have had the opportunity to present evidence that the
undiscounted accelerated rent amount is disproportionate to Van
Duzer's actual losses, notwithstanding that the landowner had
possession, and no obligation to mitigate.
Accordingly, the order of the Appellate Division should
be modified, without costs, by remitting to Supreme Court for
further proceedings in accordance with this opinion and, as so
modified, affirmed.
* * * * * * * * * * * * * * * * *
Order modified, without costs, and case remitted to Supreme
Court, New York County, for further proceedings in accordance
with the opinion herein and, as so modified, affirmed. Opinion
by Judge Rivera. Chief Judge Lippman and Judges Read, Smith and
Pigott concur. Judge Abdus-Salaam dissents and votes to affirm
for reasons stated in the memorandum at the Appellate Division
(102 AD3d 543 [2013]).
Decided December 18, 2014
- 11 -