Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 761 N.Y.S.2d 620 ( 2003 )

OPINION OF THE COURT

Saxe, J.

The central issue on this appeal is the correct construction of the parties’ commercial lease regarding their respective rights and obligations after a substantial casualty rendered the leased premises unusable. Its resolution requires consideration of competing rules of contract construction.

Defendant 538 Madison Realty Company owns the five-story building located at 538 Madison Avenue in midtown Manhattan. The Vermont Teddy Bear Co., Inc. was the tenant of the building’s first-floor retail space under a 10-year lease agreement dated October 24, 1996. On December 7, 1997, a large portion of the southern facade of the adjacent building collapsed onto 538 Madison, causing substantial structural damage to 538 as well as a shutdown of the surrounding area. It is undisputed that the collapse rendered the leased premises unusable by the tenant.

Pursuant to article 9 of the lease, if the premises were rendered wholly unusable, the tenant’s rent obligation would cease from that time forward, and would not resume until five days after written notice from the landlord that the premises were substantially ready for reoccupancy. Moreover, paragraph 3 of the rider to the lease gave the tenant, in these circumstances, the option to furnish the landlord with written notice of the tenant’s election to terminate the lease if the premises were not restored within one year after the landlord’s receipt of the notice.

On December 16, 1997, plaintiff wrote a letter to defendant’s managing agent in which plaintiff, among other things, provided notice that, pursuant to paragraph 3 of the lease rider, it intended to terminate the lease if the premises were not restored within one year.

An initial question is raised by defendant as to whether this letter may even serve as the requisite predicate for termination, since it was not sent in accordance with the lease provisions concerning notice, which require that notice be sent by certified or registered mail to the landlord at a specified address as well as to designated counsel. However, defendant’s failure to object promptly to the form or manner of delivery of plaintiffs notice, and, indeed, its response to the substance of the notice, demonstrates a waiver of the defect (see Rower v West Chamson Corp., 210 AD2d 7 [1994]).

Having determined that plaintiffs notice was sufficient, the question is whether defendant’s subsequent conduct successfully forestalled the contemplated termination in the manner required by the lease.^*

In a January 19, 1998 letter, defendant’s managing agent advised plaintiffs counsel, among other things, that repairs to the premises had begun and that the managing agent would notify plaintiff “as soon as the building is ready for occupancy.”

Defendant relies upon the affidavit of its contractor, maintaining that plaintiffs ground floor space was actually restored as of July 7, 1998, less than seven months after the tenant’s termination letter dated December 16, 1997. It concedes, however, that no formal notice of the restoration was sent. In support of its assertion that plaintiff was aware of the completed restoration in July 1998, defendant relies upon letters in which an officer of Vermont Teddy Bear stated the company’s understanding that its obligation to pay rent would resume when the landlord’s casualty insurance coverage for lost rent ran out. However, none of these letters even mentioned the undisputed contract term that the tenant’s rent obligation would be reinstated only upon five days’ written notice, nor did any of them mention the progress of the restoration work, referring only to the exhaustion of insurance benefits for lost rent.

Since it is undisputed that defendant landlord did not give the tenant written notification that the premises were restored, this appeal turns on whether the tenant’s one-year notice of termination was averted by the actual restoration of the leased premises, regardless of whether the tenant was given notice of the restoration. Or, was it necessary, in order to avert the termination, to provide written notice to the tenant of the completed restoration of the premises?

The relevant language of lease rider paragraph 3 merely states that, once the tenant has given notice of its election to terminate, “[i]n the event the Premises are not restored within such one (1) year period the Lease shall be deemed terminated as of the end of the 12 [month] period and both Landlord and Tenant shall be released from all obligations which may arise after the Termination Date.” The provision contains no explicit requirement of written notice of the completed restoration. The defendant suggests, and the dissent agrees, that this wording requires the conclusion that the act of restoration of the premises is sufficient by itself to successfully avert the termination of the lease, and that the absence of written notice to the tenant of the completed restoration is immaterial. Indeed, the dissent reasons that if the parties had intended to require written notice in order to avert the termination within one year, that requirement would have been set forth in the lease provision, when in fact, it was not. In short, the dissent would apply the rule that a term lacking from a contract may not be supplied by the courts under the guise of construction or interpretation (see 22 NY Jur 2d, Contracts § 218, at 260-261).

Indeed, if our examination were limited to the words contained in paragraph 3 of the lease rider, we would agree with the dissent’s proposed interpretation. However, the parties’ agreement must be read as a whole; one term should not be interpreted in a vacuum (see Zodiac Enters, v American Broadcasting Cos., 81 AD2d 337, 339 [1981], affd 56 NY2d 738 [1982]; 22 NY Jur 2d, Contracts § 251, at 307). When viewed as such, it becomes clear that paragraph 3 of the lease rider arises out of, and relates to, article 9 of the original standard form lease. Both concern the parties’ rights and obligations under the lease after a substantial casualty renders the leased premises unusable. Indeed, the two provisions are interrelated and should be read in conjunction. Consequently, the rule that a term lacking from a contract may not be supplied by the courts is inapplicable because the contract provision under consideration is interrelated with another provision, one which contains the term at issue, that is, the requirement of written notice of restoration by the landlord.

Article 9 is part of the standard form store lease issued by the Real Estate Board of New York, which was used and adapted by the parties; it sets out the parties’ rights and obligations in the event that a casualty causes damage to the leased property. Subsections (c) and (d) of article 9 relate to the event that a casualty renders the premises wholly unusable, and they read in full as follows:

“(c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent and other items of additional rent as hereinafter expressly provided shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent shall be apportioned as provided in subsection (b) above), subject to Owner’s right to elect not to restore the same as hereinafter provided.

“(d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant given within 90 days after such fire or casualty or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Owner’s rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner’s control. After any such casualty, Tenant shall cooperate with Owner’s restoration by removing from the premises as promptly as reasonably as possible, all of Tenant’s salvageable inventory and movable equipment, furniture, and other property. Tenant’s liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant’s occupancy.” (Emphasis added.)

Interestingly, subsection (c) of the provision states that if the premises are rendered unusable, the tenant’s obligation to pay rent ceases “until the date when the premises shall have been repaired and restored by Owner,” which, if read alone, would seem to re-establish the obligation to pay rent on the date of the premises’ restoration. Indeed, it is not until the very last sentence of subsection (d) that the reinstatement of the tenant’s rent obligation is made contingent upon prior written notice. Before that, the subsection discusses several other rights and obligations, including the owner’s right to terminate the lease if it chooses to demolish or rebuild rather than make repairs, the owner’s obligation, if it chooses to repair, to do so expeditiously, and the tenant’s obligation to fully cooperate with the restoration by removing its property. Yet, of course, the final sentence of subsection (d), the statement that “Tenant’s liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant’s occupancy,” is understood to modify the provision of subsection (c), which otherwise appears to reinstate the tenant’s rent obligation on the very date the premises are restored.

The same logically holds true for rider paragraph 3: the final sentence of subsection 9 (d) modifies its provision, which otherwise appears to reinstate the lease on the actual date of restoration, so as to reinstate it after the tenant is provided with notice of the restoration. Indeed, it makes little sense to provide for the landlord to have the ability to reinstate the lease without simultaneously reinstating the tenant’s obligation to pay rent under the lease. The landlord’s contractual right to reinstate the lease is, at the least, intertwined with its right to reinstate the tenant’s obligation to pay rent.

The distinction made by the dissent between these two provisions is a semantic one. Certainly, paragraph 3 is a separate provision of the lease, with a separate purpose; however, subsections 9 (c) and (d) are also distinct provisions with distinct points to cover. Yet, the obligations discussed in these various provisions are interrelated: they all concern how and when the tenant’s obligations under the lease are either eliminated or reinstated after a casualty renders the leased premises unusable. The absence of a written notice provision in rider paragraph 3 itself is not dispositive. The most reasonable way to read the lease is to consider the two provisions together, as providing for the event of a complete casualty, leading to the conclusion that the written notice provision at the very end of lease subsection 9 (d) must logically be as applicable to rider paragraph 3 as it is to lease subsection 9 (c).

But, it is not merely the interrelated nature of subsections 9 (c) and (d) and paragraph 3 that supports the conclusion that a five-day written notice of restoration is required in order to reinstate the tenant’s lease obligations. The purpose of the rules of contract construction, after all, is to help us determine the intent of the parties (see Mallad Constr. Corp. v County Fed. Sav. & Loan Assn., 32 NY2d 285 [19733 ; 22 NY Jur 2d, Contracts § 224, at 270). If the apparent meaning of a single contract term, or the apparent inference to be taken from the absence of a contract term, seems contrary to what the parties would have intended, it is incumbent upon us to reconsider that term, or absence of a term, in the context of the whole writing, to determine whether another, more feasible intent can be gleaned from considering those words in their larger context.

Here, it is difficult to conceive of how or why the parties to this commercial lease, when entering into it, would have intended to provide that the landlord could reinstate the lease without simultaneously reinstating the tenant’s obligation to pay rent under the lease. Reinstating the lease after the premises have been restored is virtually synonymous with putting the tenant back in possession, and it is unthinkable that a landlord would place the tenant back in possession without simultaneously providing for reinstatement of the tenant’s rent obligation. The procedure required by the lease to put the tenant back in possession and reinstate the tenant’s rent obligation must be one and the same with the procedure necessary to reinstate the lease. Reading rider paragraph 3 to permit reinstatement of the lease, separate and apart from reinstatement of the tenant’s rent obligation, is contrary to common sense, and we therefore cannot conclude that it is what the parties intended.

Furthermore, it is apparent that with rider paragraph 3, the parties intended both to give the landlord substantial time to restore damaged property, and to create a clear-cut and absolute outside time limit to the parties’ rights and obligations following a substantial casualty which made the premises unusable. This time limit would necessarily cover both the landlord’s right to reinstate the rent obligation as provided for in article 9, and its ability to avert termination of the lease pursuant to a 12-month notice provided for within paragraph 3. Indeed, it is fair to say that rider paragraph 3 protects the tenant from being kept on the hook past the one-year mark, unable to operate its business in the leased premises but also indefinitely unable to relocate to alternate premises.

In order to protect the tenant in the manner rider paragraph 3 intends, the lease must be interpreted so as to give the tenant the certainty that as of the set deadline, it will have either the right to be back in possession or the right to relocate to alternative premises. Where that right to be restored to possession turns on a circumstance that will not necessarily be within the tenant’s knowledge, there can be no such certainty.

Notably, not all repairs are observable; they may include infrastructure work, such as electrical or plumbing work, the completion of which would only be known to the party who hired and arranged for payment of the contractor. Indeed, such work may even require a permit and a sign-off upon completion (see e.g. Administrative Code of City of NY §§ 27-147, 27-3018), the grant of which would be solely known by the owner, not the tenant. This leaves the tenant without the independent ability to determine whether the restoration is completed. On the date when the 12-month period ends, the tenant cannot know for certain that the restoration is completed, unless it obtains that information from the owner — and the owner has no contractual obligation to make that knowledge available to the tenant within that time frame.

Yet, the interpretation of the lease proposed by defendant would leave open the possibility that the landlord could successfully complete the restoration of the premises within a year, but — whether intentionally or from neglect — not notify the tenant until days, weeks or even months later. This would leave the tenant without the certainty of a definite outside date after which it may safely consider itself released from the lease and provide itself with alternate business premises.

The dissent acknowledges that interpreting rider paragraph 3 as it does would make it necessary for the tenant to “monitor the condition of the property” in order to determine whether or not it has been restored within the one-year period; but, it asserts that “such is not an unreasonable burden for a party seeking to avoid the remaining nine years of a million dollar 10-year lease.” This statement implies that it is appropriate to impose such a monitoring obligation upon the tenant since the tenant is receiving a substantial benefit by being permitted to terminate its lease obligations.

However, imposing on the tenant this additional obligation of continually monitoring the condition of the property is an unreasonable burden, placed on the wrong party, first of all because the lease terms already put the tenant at a tremendous disadvantage in the event of a substantial casualty. Under this lease, once the premises have been rendered unusable, the tenant’s business operations must be completely interrupted, yet the tenant is unable to relocate to alternate premises, since at any time for the following 12-month period it is obligated to retake possession and resume paying rent merely upon five days’ notice of the landlord’s completed restoration. Moreover, the tenant has no right to control the timing, or even the occurrence, of restoration work. Conceivably, the tenant could leave its business in limbo the full 12 months, only to ultimately discover that the landlord had not had the necessary work performed, leaving the tenant to then arrange for an alternate business location.

Secondly, not only is the tenant not receiving a substantial benefit by being given a right to be relieved of its lease obligations, but in fact, this lease gives the tenant less protection than would a lease containing no provisions at all relating to a complete casualty; in such a case, the tenant would have the right, under Real Property Law § 227, to simply surrender the premises in the event a casualty rendered the premises unusable.

As to defendant’s suggestion that the tenant is as capable as the landlord of determining whether and when the premises are once again usable, we must disagree. Mere visual monitoring of the condition of the property will not necessarily give the tenant accurate knowledge as to whether the restoration is completed, particularly given the possibility of infrastructure work or the need for certification from a municipal agency. Nor does the tenant have the same right or ability as the landlord to communicate directly with contractors or municipal agencies. The only truly accurate means available to the tenant for finding out whether the restoration is completed is a direct inquiry of the landlord. Therefore, in effect, the dissent’s interpretation of the lease requires the tenant who is out of possession due to a severe casualty to affirmatively seek from the landlord, on a regular basis, notice of the completion of the restorative work. A realistic reading of the lease, requiring a five-day written notice of restoration from the landlord, would obviate this awkward requirement, and place the burden on the only appropriate shoulders: those of the landlord, the only party certain to possess that information.

For these reasons we conclude that only proper way to read the lease is to recognize that the requirement of five-day written notice of completion of restoration must have been intended to be as applicable to the landlord’s right to avert a termination as it is to the landlord’s right to reactivate the tenant’s rent obligation.

Finally, there is no merit to defendant’s protest that reading the contract this way will jeopardize thousands of commercial leases and the landlords and tenants who rely on the standard form lease of the Real Estate Board of New York. This dramatic assertion ignores the fact that it was the parties who altered the terms of the standard form lease by their addition of a rider to the standard form lease. Nor is there any merit to defendant’s contention that reading the lease to require written notice of the completed restoration in order to avert termination constitutes an improper “forfeiture.” Defendant will still own the property, and may still rent the premises in question.

We therefore agree with the conclusion reached by the motion court: the 12-month period having passed without the landlord providing the tenant with the requisite notice that restoration was complete, the December 16, 1997 termination notice became effective and the lease was terminated prior to the landlord’s subsequent attempt to provide such notice. Plaintiff was entitled to summary judgment.

Accordingly, the judgment of the Supreme Court, New York County (Herman Cahn, J.), entered August 10, 2001, which, upon a grant of plaintiff’s motion for summary judgment on its claim that its lease with defendant was properly terminated, awarded plaintiff the amount of $170,161.29, representing its security deposit and rent overpayments plus prejudgment interest, should be affirmed, without costs. Appeal from the order, same court and Justice, entered on or about August 2, 2001, should be dismissed, without costs, as subsumed in the appeal from the ensuing judgment.

* Since we are interpreting the terms of the lease as a matter of law, the particular circumstance of the tenant’s desire to arrange for an assignment of the leasehold to a successor tenant is irrelevant on this point.