Rosenberg & Estis, P.C. Client Newsletter - October 2023

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As I invite you to read our latest Client Newsletter, it is an absolute honor to announce that Rosenberg & Estis, P.C. was named among Crain’s 2023 ‘Best Places to Work in NYC.’ This achievement is a testament to our talented and dedicated lawyers and staff. For nearly 50 years, Rosenberg & Estis has set a standard of excellence within the New York real estate industry, and we continue to do so as we guide the real estate community through today’s plethora of economic, legal and regulatory challenges. I hope you find our October newsletter informative. Please do not hesitate to contact your R&E attorney to discuss how Rosenberg & Estis can continue as your trusted thought partners.”

Michael E. Lefkowitz Managing Member

Contents Rosenberg & Estis Feature Story 4 As New York City’s cannabis dispensaries have begun to operate after the State first legalized recreational marijuana use in 2021, City and State leaders are cracking down on unlicensed dispensaries across the City. While cannabis dispensaries have helped to revitalize NYC’s retail landscape since the fallout of the pandemic, lawmakers intend to hold property owners accountable for tenants selling cannabis products without proper licensing. This article by Adam Lindenbaum and Harris Davidson informs developers, landlords, owners, brokers and managing agents about the current state of the intersection between NYC’s real estate and marijuana markets.

Rosenberg & Estis Named Among Crain’s 2023 “Best Places to Work in NYC” 6 This honor is a testament to the dedication and collaboration of Rosenberg & Estis, P.C.’s premier legal team, as well as the diversity and commitment of our staff. We are proud to provide a working environment where talent thrives, and we look forward to continuing to set a standard of excellence within the legal real estate industry.

Podcast: Inside R&E Inside R&E is a podcast hosted by New York City’s leading real estate attorneys who discuss current issues facing developers, owners and operators in the industry.

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Recent Publications 12 Published works by our attorneys as seen in the New York Law Journal and the New York Real Estate Law Reporter.

Press Releases 26 Rosenberg & Estis recently secured the first successful temporary restraining order against Airbnb and one of its New York apartment hosts, prohibiting the use of and the advertisement of the subject premises on Airbnb, since implementation of New York City Local Law 18 banning millions of apartments from offering short-term rentals.

Welcome Back R&E Juris Doctors Rosenberg & Estis welcomes back its 2023 Juris Doctors.

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Recent Events 29 As the industry’s top legal resource, R&E attorneys were invited as expert speakers on in-person panels as well as several webinars.

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FEATURE STORY

Up in Smoke: Retail Leases With Unlicensed Cannabis Dispensaries Laced With New Legal Risks New York’s Recently Enacted Series of Smoke Shop Laws Now Authorize State and City Agencies to Penalize Owners for Knowingly Renting to Unlicensed Marijuana Sellers

Adam Lindenbaum Member

Harris Davidson Associate

R&E EXCLUSIVE FEATURE STORY by Adam Lindenbaum and Harris Davidson September 26, 2023 Introduction As New York City’s recently-licensed cannabis dispensaries have begun to operate after the State first legalized recreational marijuana use in 2021, City and State leaders are cracking down on unlicensed, “quasi-legal” dispensaries that have popped up throughout the City. Cannabis dispensaries have helped fill a substantial void in the retail landscape in the fallout of the COVID-19 pandemic. However, with new State and City legislation enacted during the past few months that targets commercial landlords who rent retail space to unlicensed cannabis dispensaries, New York has signaled that it intends to hold property owners accountable for the sins of their tenants. Where does this leave landlords with tenants selling cannabis and drawing the attention of law enforcement? And with the chaotic state of the legal and licensed cannabis retail market still in flux, where do commercial property owners go from here?

This article by Rosenberg & Estis, P.C., New York’s preeminent real estate law firm since 1975, seeks to answer these questions and to inform New York’s developers, landlords, owners, brokers and managing agents about the current state of the intersection between New York City’s real estate and marijuana markets.

New York Legalizes Marijuana, and Unlicensed Smoke Shops Proliferate Marijuana is the most commonly used federally illegal drug in the United States. On March 31, 2021, New York State joined 20 other states, plus the District of Columbia, in legalizing marijuana for adult recreational use. The “Marihuana Regulation and Taxation Act,” more commonly known as the Cannabis Law, created the Office of Cannabis Management (OCM) and tasked the newly-formed agency with developing regulations and issuing licenses so businesses could participate in this newly-legalized industry in New York.

In the first year and a half following the State’s passage of the Cannabis Law, the OCM was slow to issue Conditional Adult-Use Retail Dispensary (CAURD) licenses to retail entrepreneurs while it developed its regulatory criteria. The OCM’s original guidelines, which called for 50% of licenses to go to “social and economic equity applicants,” were recently called into question by a Hudson Valley judge who sided with a group of disabled veterans in temporarily halting the OCM’s licensing process. Prior to the injunction being granted, the OCM had issued seven full CAURD licenses and over one hundred provisional CAURD licenses to retailers in New York City.

While New York was struggling with the bumpy rollout of the Cannabis Law, commercial landlords were struggling with the slow return of shoppers and retail tenants in the post-pandemic era. Building owners had empty storefronts, and many began receiving inquiries from brokers on behalf of prospective tenants interested in signing leases for a new breed of smoke shop. New York City has long been known for the “slightly illicit” version of the corner bodega—i.e., one that sells smoking paraphernalia next to the potato chips—but these new stores were different. These “budding” retailers ditched the snacks, clearly intending to capitalize on the void created by the Cannabis Law’s decriminalization of marijuana and the OCM’s delayed issuance of CAURD licenses. Tenants correctly reasoned that, because the Cannabis Law had legalized recreational marijuana, no one would be prosecuted for buying or selling weed, and law enforcement would be slow to issue fines. Unlicensed smoke shop operators were keen to pay above-market rents as a result, which helped seal the deal for many property owners who were still trying to recover from the pandemic.

The State and City Swing Back the Pendulum By the beginning of 2023, New York City was reportedly home to anywhere between 1,400 and 8,000 unlicensed smoke shops, and State and City officials had seen enough.

FEATURE STORY

Law enforcement began to crack down in response to complaints from local residents seeking to close the new smoke shops. The City and State’s enforcement efforts would no longer be targeted solely at the stores themselves; rather, the strategic decision was made to start going after retail landlords.

In February 2023, Manhattan District Attorney Alvin Bragg sent letters to more than 400 property owners, warning of evictions and fines pursuant to Real Property Actions and Proceedings Law (RPAPL) Section 715(1), which requires owners and landlords to commence eviction proceedings if a commercial tenant is engaged in “illegal” trade or business.

Legal observers questioned whether the new smoke shops were truly illegal, in light of the Cannabis Law, or rather, were merely unlicensed businesses, and thus more akin to an unlicensed cigarette seller. Rather than litigate the issue, State and City officials set about passing new laws aimed squarely at penalizing commercial landlords who rented to unlicensed smoke shops in order to try to stamp out the unlicensed weed market, as explained below.

A. RPAPL § 715-A On May 3, 2023, New York State enacted RPAPL § 715-A, which requires landlords “to make an application for the removal of a commercial tenant” if the landlord receives written notice from a state enforcement agency—which includes the Attorney General and the OCM—that the tenant is in violation of either Penal Law § 222 (which criminalizes the possession of distribution-quantities of cannabis without a license) or Cannabis Law Article 6 (which regulates the permitting and licensing of dispensaries). RPAPL § 715-A requires landlords to initiate the equivalent of an illegal-use eviction proceeding against tenants engaged in the unlicensed sale of cannabis, regardless of whether or not the tenant has violated any of the terms of its lease. If a landlord receives a violation notice from an enforcement agency that its tenant has violated RPAPL § 715-A, such notice triggers the landlord’s obligation

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to initiate proceedings against the tenant within five days after receipt.

If the landlord fails to timely commence such a proceeding, or if the enforcement agency believes the landlord is not prosecuting the proceeding “diligently” and “in good faith,” then the statute authorizes the enforcement agency to prosecute the eviction proceeding against the tenant, “as though the [City] were the owner or landlord of the premises.” RPAPL § 715-A provides that if the enforcement agency takes over the prosecution, then the owner and tenant shall each be treated as co-respondents in the proceeding.

Incredibly, RPAPL § 715-A requires the landlord to go forward with the eviction proceeding even if there has not already been an independent finding by a criminal court that the tenant violated Penal Law Section 222 or Cannabis Law Article 6. Indeed, RPAPL § 715-A appears to hold landlords responsible for de facto prosecutions of Penal Law Section 222 or Cannabis Law Article 6, in the context of a landlord-tenant eviction proceeding filed in the Civil Court.

If the Civil Court sustains the violation, RPAPL § 715-A authorizes the immediate removal of the tenant and the imposition of a civil penalty in an amount up to three times the rent charged during the violation. If the owner was a named co-respondent with its tenant in the proceeding, then the owner may be liable to pay the penalty. There is, therefore, significant financial incentive for an owner to act quickly and diligently in response to a notice received from an enforcement agency that the tenant is violating Penal Law § 222 or the Cannabis Law. B. Cannabis Law § 16-A Cannabis Law § 16-A was also enacted by the New York State Legislature on May 3, 2023 and amends the Cannabis Law of 2021 to give State enforcement agencies the additional power to shut down unlicensed smoke shops by

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FEATURE STORY

suing landlords in Supreme Court for preliminary injunctions, temporary closure orders, temporary restraining orders and permanent injunctions. Cannabis Law § 16-A further authorizes enforcement agencies to name the real property itself as a defendant and to file a notice of pendency or lis pendens against the property, which gives law enforcement the power to close a store even if the landlord and tenant fail to appear to contest the court proceeding. A notice of pendency is a significant concern for most owners, especially those with conventional mortgages placed at risk of triggering a default thereunder.

Similar to RPAPL § 715-A, Cannabis Law § 16-A provides that a landlord that merely permits an unlicensed smoke shop to lease retail space may be held liable, even where it was not actively involved in cannabis sales. Cannabis Law § 16-A not only gives courts the power to close unlicensed cannabis distributors, but also gives the courts the power to impose monetary penalties on landlords. Specifically, if a court finds that the landlord “intentionally” permitted the unlicensed smoke shop to operate, it may fine the landlord up to $10,000 a day for each day of the violation.

C. Local Law 107 New York City Local Law 107 of 2023, which was enacted by the New York City Council on July 23, 2023,1 dovetails with RPAPL § 715-A and Cannabis Law § 16-A. Local Law 107 prohibits commercial landlords from knowingly leasing retail space to smoke shops that sell unlicensed marijuana, cigarette or tobacco products. Similar to RPAPL § 715-A and Cannabis Law § 16-A, Local Law 107 requires landlords to ensure that commercial spaces are leased only to licensed businesses.

Pursuant to Local Law 107, City and State agencies that conduct inspections for unlicensed marijuana or tobacco sales, such as the New York City Police Department, must provide a written warning to the property owner requiring that the owner “ensure that the unlicensed sales…are ceased.” Owners have 15 days to appeal the written notice. Unless the appeal is granted, the warning constitutes presumptive evidence that the owner has knowingly leased the commercial premises in violation of the law. Subsequent violations will result in the issuance of a civil summons to the owner, which carries a $5,000 fine for the first violation after a written warning and a $10,000 fine for each subsequent violation.

Conclusion and Practice Tips Although New York’s retail marijuana market may not show signs of slowing down—with one think tank predicting a $6 billion market by 2030—it is clear that only fully legal and licensed dispensaries will survive in New York in the long term. Commercial landlords considering entering into new

1. Codified as Section 10-186 of the New York City Administrative Code.

leases with OCM-licensed CAURDs should conduct careful due diligence on the prospective tenant.

With the recent enactment of RPAPL § 715-A, Cannabis Law § 16-A, and Local Law 107, many retail landlords who entered into multi-year leases with unlicensed cannabis shops between 2021 and early 2023 may already be exploring means of limiting their exposure. With the possibility of increased agency enforcement, landlords and their agents should be on the lookout for warning letters from City and State enforcement agencies and should act immediately if such a letter is received.

The best way for landlords with unlicensed smoke shop tenants to avoid liability is to immediately direct their tenants to become licensed, or to at least begin the process with OCM. Although OCM has been temporarily enjoined from issuing new CAURD licenses, its oversight board meets once a month and is expected to continue issuing new licenses as soon as the litigation over licensee criteria is resolved.

Alternatively, landlords can protect themselves against an RPAPL § 715-A and/or Local Law 107 violation by issuing a default notice and/or commencing a proceeding to evict the tenant. Most commercial leases have a clause that requires the tenant to comply with all federal, state, and local laws, rules, regulations, and ordinances, even those enacted after the lease was executed.

Landlords should consult with their attorneys to carefully prepare their cannabis shop leases and to ensure that such leases will not violate the terms of their mortgages. Landlords should also have their attorneys review commercial leases to determine the best strategy for protecting their property and defending against violations for unlicensed cannabis sales.

Rosenberg & Estis, P.C. will continue to track the implementation and enforcement of these new City and State laws as we gain greater clarity regarding how the new laws play out in the Courts.

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BEST PLACES TO WORK

Rosenberg & Estis Named Among Crain’s 2023 “Best Places to Work in NYC”

Featuring Rosenberg & Estis, P.C. September 28, 2023 Rosenberg & Estis, P.C., New York City’s largest real estate-only law firm, has been named one of the Crain’s 2023 Best Places to Work in New York City. Founded in 1975 by Gary M. Rosenberg and the late Warren A. Estis, the firm has 189 employees and was ranked among large companies with 100 or more staff.

“At Rosenberg & Estis, we work hard to maintain a boutique, family-like atmosphere that celebrates the different skills, talents and culture of our team,” said Michael E. Lefkowitz, Managing Member and a leader of the firm’s Transactional Department. “It is a tremendous honor that so many of our employees acknowledged the firm’s culture to help us earn this recognition from Crain’s New York Business.”

As this award indicates, R&E is known for its engaging, teamstyle atmosphere which contributes to the firm’s unparalleled ability to collaborate across complex areas of real estate in the representation of owners, developers, operators and managers. When weather permits, R&E’s legal team and staff enjoy a bi-monthly social on the 12th-floor terrace – a time for drinks, appetizers and games which has been dubbed “Thursdays on Third” as a tribute to the terrace’s stunning view down Third Avenue. R&E also uses this outdoor space for weekly morning yoga classes along with other regular events, like staff and subgroup lunches, firmwide breakfasts, ice cream parties, health fairs and more.

Crain’s partners annually with Best Companies Group to conduct anonymous surveys of thousands of employees at New York City-based companies to select the best places to work.

The awards program is designed to identify, recognize and honor the 100 best companies to work for in the metropolitan area. Highlighting strengths, weaknesses and opportunities to improve, the two-part survey looks to employees for evaluation of their employer’s workplace policies, practices and demographics, as well as its culture and work-life balance.

With an average employment length of 11.5 years, R&E boasts one of the highest retention rates in the real estate law industry. Surveyed employees also noted the firm’s competitive compensation, health benefits, profit-sharing and wellness programs, as well as a hybrid remote work policy that supports work-life balance.

(Thursdays on Third)

BEST PLACES TO WORK

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(R&E’s 2023 Transactions Night Out)

Additionally, the R&E community loves any opportunity for competitive fun. This year, the firm started its first intramural softball team. R&E employees also participate in regular group outings involving trivia, bowling, fantasy football and more. R&E is a firm where connections are made across every level of leadership and every area of practice, cultivating a tight-knit sense of camaraderie that helps to advance the firm’s excellent legal services.

continue cultivating a positive working environment as we strategically and systematically advance our growth.”

The Crain’s 2023 Best Places to Work in New York City recognition follows Rosenberg & Estis’ consistent ranking among The Real Deal’s Top New York Law Firms. In 2020 and 2018, R&E also received the highest honor from The New York Law Journal: Litigation Department of the Year (Real Estate).

The firm continues to expand both in size and scope of work it handles. In the past five years, it has grown to 96 attorneys working with 93 support staff across the real estate landscape, helping clients move forward with complex projects and challenging legal issues.

(R&E Softball)

“This recognition is a testament to the value we place on our staff and the firm’s commitment to provide superior legal solutions for our clients over the last five decades,” said Gary M. Rosenberg. “We are proud of this firm, and our goal is to (R&E’s 2023 Ice Cream Social)

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PODCAST

Inside R&E is a podcast hosted by New York City’s leading real estate attorneys who discuss current issues facing developers, owners and operators in the industry.

Inside R&E is the perfect way to kickstart your week in the New York real estate world. Inside R&E is available to stream on all major platforms including Apple Pod-

casts, Spotify, Amazon Music and Google Podcasts. Click here to listen and subscribe wherever you get your podcast.

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PUBLICATIONS

Are Inclusionary Air Rights Unique? Specific Performance Revisited

In this discussion of contractual rights, the authors discuss ‘301 East 60th Street LLC v. Competitive Solutions,’ a “guidepost to parties engaged in any contractual dispute where specific performance might be sought as a remedy.”

On May 30, 2023, the Appellate Division, First Department, decided 301 East 60th Street LLC v. Competitive Solutions LLC, 217 AD3d 79 (1st Dept. 2023) (Competitive Solutions)— the first decision to grant a purchaser of inclusionary air rights (IARs) the remedy of specific performance against a seller who reneged on the parties’ agreement.

This article discusses two issues decided by the Appellate Division: (1) whether IARs are considered “unique,” which is required to invoke the equitable remedy of specific performance, and (2) whether the parties’ agreement entitled the purchaser to specific performance as a contractual remedy.

(Disclosure: The prevailing purchaser in Competitive Solutions, 301 East 60th Street LLC (“purchaser”), was represented by Rosenberg & Estis.

Background At the crux of Competitive Solutions was the nature of IARs. New York City grants IARs as an incentive for developers to build or rehabilitate affordable housing by awarding those developers additional air rights, which can be used to increase the size of a development. However, unlike “ordinary” air rights that are appurtenant to specific real property and can only be used on that property or an adjacent property, IARs do not attach to the real property generating them.

It is therefore possible to purchase or own IARs without owning the property that generated them, although they must be used within the same Community District or within a halfmile radius of the property which generated them (see Zoning Resolution §23-96[a]).

IARs can be freely sold and transferred through private sale by obtaining a certificate of eligibility for zoning bonus (a “certificate”) from the New York City Department of Housing Preservation and Development (HPD). There is limited market data concerning the transfer of IARs, since there are a limited number of transactions, and information about the sale prices of those transactions is not public or otherwise made easily available.

In Competitive Solutions, purchaser sought to acquire IARs for its development of five adjacent lots that it owned on the Upper East Side of Manhattan, located within Community Board 8. Accordingly, purchaser entered into a letter agreement (the “agreement”) with seller to acquire 21,000 square feet of IARs for its intended development. Paragraph 8(b) of the agreement provided that, if purchaser was ready, willing, and able to purchase the IARs, and seller refused to transfer them “for any reason whatsoever,” then:

As seen in the New York Law Journal

By Gary M. Rosenberg, Michael A. Pensabene and Ethan R. Cohen October 4, 2023

Purchaser shall have the right, in its sole discretion as its sole and exclusive remedy, to either (a) seek specific performance of Seller’s obligations under this Agreement or (b) terminate this Agreement by notice to Seller and cause Escrow Agent to return

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the Deposit to Purchaser, together with any interest earned thereon. (emphasis added).

Paragraph 8(b) further provided that: In the event Purchaser shall not be successful in any action for specific performance, Purchaser shall still have the right to pursue the remedies… set forth in (b) above. Notwithstanding the foregoing, in the event that Seller’s default hereunder is the result of HPD refusing the issue the Certificate due to circumstances that are beyond the reasonable control of Seller, then in such case, Purchaser’s remedies hereunder shall be limited to the remedies set forth in (b) above.

After seller refused to close on the sale, purchaser commenced an action against seller seeking specific performance of the agreement, both as an equitable and contractual remedy. In response, seller asserted that purchaser had no right to specific performance under either theory.

The parties respectively moved for summary judgment, but Supreme Court denied both motions. Denying purchaser’s motion, Supreme Court found that there were questions of fact as to whether IARs are “unique,” which is required to invoke the equitable remedy of specific performance; and also found that a fair reading of the contract does not “guarantee” purchaser the right of specific performance.

Denying seller’s motion, the court found that seller failed to demonstrate that the agreement does not entitle purchaser to specific performance. Both sides appealed to the Appellate Division.

Specific Performance as an Equitable Remedy In New York, to obtain the equitable remedy of specific performance—a remedy external to the contract which compels the breaching party to perform the contract—the aggrieved party must show that (a) it performed its contractual obligations, (b) the defaulting party is able to perform its part, and (c) there is no adequate remedy at law (see FMF Gen. Contr. Corp. v.

Bisbee, 6 AD3d 45 [1st Dept. 2004]).

The third prong of this test, that there is no “adequate remedy at law,” exists where “the subject matter of the particular contract is unique” (Sokoloff v. Harriman Ests. Dev. Corp., 96 NY2d 409 [2001]).

Seller sought to dismiss the complaint on the grounds that specific performance was not available to purchaser as an equitable remedy. Seller argued that (1) IARs are not “unique” because IARs are not real property and are no different from other IARs that purchaser could obtain from another seller within Community Board 8; (2) because other “suitable

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substitutes” existed, similar to other goods that are capable of being duplicated, such as bricks, the particular IARs that seller owned could not be considered “unique”; and (3) since IARs were fungible assets that could be replaced, there is no irreparable harm, so money damages was the appropriate remedy.

Relying on the Court of Appeals landmark decision in Van Wagner Adv. Corp. v. S & M Enters., 67 NY2d 186 (1986) (Van Wagner) and on Stellar Sutton LLC v. Dushey, 82 AD3d 485 (1st Dept. 2011), purchaser argued that the subject IARs were, in fact, “unique” because they were incapable of being valued with reasonable certainty, rendering money damages unavailable as an appropriate remedy.

In Van Wagner, the court determined that a “distinction must be drawn between physical difference and economic interchangeability” (67 NY2d at 192), while noting that “uniqueness in the sense of physical difference does not itself dictate the propriety of equitable relief” (id.). With respect to whether a commodity can be valued with certainty and economic interchangeability, Van Wagner explained: What matters, in measuring money damages, is the volume, refinement, and reliability of the available information about substitutes for the subject matter of the breached contract. When the relevant information is thin and unreliable, there is a substantial risk that an award of money damages will either exceed or fall short of the promisee’s actual loss. Of course this risk can always be reduced— but only at great cost when reliable information is difficult to obtain. Conversely, when there is a great deal of consumer behavior generating abundant and highly dependable information about substitutes, the risk of error in measuring the promisee’s loss may be reduced at much smaller cost. In asserting that the subject matter of a particular contract is unique and has no established market value, a court is really saying that it cannot obtain, at reasonable cost, enough information about substitutes to permit it to calculate an award of money damages without imposing an unacceptably high risk of undercompensation on the injured promisee.

Conceived in this way, the uniqueness test seems economically sound (id. at 193 [internal citations omitted]).

Purchaser argued that, because IARs are so thinly and opaquely traded, the market value of the IARs could not be reasonably obtained, noting that seller’s principal himself, who was an expert in IARs, admitted that he could not ascertain the market value of the IARs that seller had initially agreed to sell to purchaser. Under Van Wagner, the IARs were, therefore, “unique.”

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Specific Performance as a Contractual Remedy In the alternative, purchaser argued that it was entitled to specific performance as a contractual remedy, noting that the contractual prerequisites for specific performance under the agreement had been satisfied. Accordingly, relying on 101123 LLC v. Solis Realty LLC, 23 AD3d 107 (1st Dept 2005) (“Solis”), purchaser argued that specific performance should be awarded as a contracted-for enforcement mechanism under the agreement, if not as an equitable remedy extraneous to it.

In Solis, the court held that parties are free to establish in a contract the prerequisites for obtaining the remedy of specific performance in the event of a breach. The default provision in Solis provided that the “Purchaser shall have the right to bring an action for specific performance against seller and exercise any other remedies at law or in equity” if the seller willfully defaulted (id. at 108-109).

Affirming the trial court’s granting of specific performance in Solis, the First Department ruled that: Where the parties to a real property sale contract have made specific provision for the buyer’s options in the event the seller is unable to satisfy a condition in the contract, and have even agreed upon the circumstances under which the buyer may claim a right to specific performance of the contract, the [principles of contract law] require the court to enforce the contract as written, including the applicable remedies, and the court may not look beyond the agreed-upon remedies to award the buyer specific performance in circumstances other than those in which the parties agreed that it would be available. (id. at 112-113).

“receive” it, and that the agreement contemplated circumstances when specific performance would not be awarded, in recognition of the fact that purchaser might not be successful in “seeking” specific performance.

Seller further noted that the agreement did not contain recitals that might supplant the common law test and support a contractual right to specific performance, such as stating that a default would cause purchaser to suffer irreparable harm, that purchaser’s damages cannot be calculated with reasonable certainty, or that the IARs are irreplaceable or unique.

Accordingly, seller argued, specific performance was not a contractually “guaranteed” remedy.

Purchaser argued that seller’s interpretation of the agreement could not be correct under settled law concerning contract interpretation. If, as seller asserted, specific performance was not available as a contractual remedy, because it can never be a remedy at law, and it was not available as an equitable remedy, because IARs are not unique, then purchaser’s right to “seek” specific performance could never succeed.

In seller’s view, the default provision was void ab initio, without force or effect, and mere surplusage, which violates cardinal principles of contract interpretation requiring that no provision in a contract can be interpreted as being without meaning.

The Appellate Division’s Ruling The Appellate Division agreed with purchaser, finding that seller’s interpretation of the agreement was “unpersuasive,” particularly because under seller’s interpretation of the agreement, there was no situation where purchaser could succeed in an action for specific performance.

Purchaser argued that a contract freely entered into between two sophisticated parties that provided for the remedy of specific performance should be enforced as written, in the absence of countervailing public policy. Because purchaser satisfied the conditions stated in the agreement to seek specific performance, it should be awarded as a contractual right.

The court found that merely including the term “seek” in an agreement does not create a barrier to contractual relief.

Instead, the court must enforce a contract that provides for specific performance according to its terms and should accord deference to the parties’ “manifest intent,” unless it would result in an inequitable result. Here, since the criteria in the agreement for specific performance were met, specific performance was an available remedy.

Seller argued that New York does not recognize a contractual right of specific performance. Rather, the agreement makes clear that purchaser’s sole and exclusive remedy was to either “seek” specific performance or pursue the return of deposit.

However, the Appellate Division made clear that there is no automatic contractual right to specific performance; it is an equitable remedy for a breach of contract. It is a matter of judicial discretion that is controlled by doctrines and principles of equity.

Seller asserted that the word “seek” was used intentionally to incorporate the common law, equitable test for specific performance, which does not provide purchaser with the contractual right to receive specific performance.

Therefore, the Appellate Division explained, courts must balance “the expectation interest of the injured party” against whether specific performance would impose a disproportionate or inequitable burden on the breaching party.

It was seller’s position that the agreement merely provided purchaser with the right to “seek” specific performance, not

Here, seller did not argue that specific performance of the contract would impose a disproportionate or inequitable

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burden, and instead argued that purchaser was not entitled to specific performance because seller claimed that returning purchaser’s deposit was an adequate remedy for breach of the agreement to convey the IARs. The Appellate Division disagreed with seller and stressed that a parties’ wish to simply return a deposit, and unwillingness to perform its contractual obligations, does not furnish a defense to specific performance, nor grounds to cancel a contract.

The Appellate Division explained that, in New York, courts consistently consider air rights to be “an interest in real property,” which weighs in favor of granting specific performance. However, the court also emphasized that specific performance is not limited to real property, and applies in other instances, such as the sale of shares of stock in a close corporation or an agreement to sell shares in a cooperative, neither of which are real property rights.

The court further explained that specific performance may also be available in actions “where the market is opaque and the price of the goods is subject to intense fluctuation.” Here, seller admitted that it was difficult to ascertain the value of IARs due to the lack of documentation.

Therefore, the Appellate Division found that, in Competitive Solutions, specific performance of the agreement to sell the IARs was warranted because of the parties’ express incorporation of a specific performance remedy in their agreement, seller’s willful breach of the agreement, the absence of an inequitable or disproportionate burden against seller, and the admitted uncertainty of valuing the IARs. The Competitive Solutions court established that IARs are to be considered “unique” for purposes of awarding specific performance, in equity, against a defaulting seller, which will provide greater certainty for purchasers engaging in similar transactions. However, it should remind practitioners that New York does not automatically recognize a contractual right to specific performance.

Any party seeking or defending against claims for specific performance, or involved in drafting or entering to a contract for the sale of goods, real property, or related items of value should consider this well-reasoned decision illuminating the elements and considerations that courts will weigh and consider to determine whether to grant a claim for specific performance. Competitive Solutions is a guidepost to parties engaged in any contractual dispute where specific performance might be sought as a remedy.

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PUBLICATIONS

Guaranty Law Invalidated

In March 2020, as New York City became the epicenter of the COVID-19 pandemic, Governor Andrew Cuomo issued a number of executive orders,1 some of which required non-essential businesses to close their doors. As a consequence, many commercial businesses began defaulting on rent payments or attempting to terminate their leases altogether, to potentially catastrophic effect for landlords, who rely on rent payments to cover expenses (e.g. taxes and debt service).2 In May 2020, the New York City Council enacted several local laws to combat the economic impact of the pandemic on struggling small businesses. Among the laws passed in this legislative relief package were amendments to the Commercial Harassment Law (Local Law No. 53 of 2020) and to the Residential Harassment Law (Local Law No. 56 of 2020), and the “Guaranty Law” (Local Law No. 55 of 2020).3 While facially implemented to protect struggling commercial tenants and small businesses, the practical effect of these laws was to shift the economic burden of the pandemic almost exclusively to landlords, who were now precluded from enforcing certain negotiated personal guaranties contained in their lease agreements. Compounding that restriction, the amendments to the Harassment Laws stoked apprehension with respect to the consequences of demanding rent payments directly from tenants.

By far, the most egregious action was the enactment of the Guaranty Law, which limited the ability of commercial landlords to enforce their bargained-for personal guaranties for the period from March 7, 2020, through June 30, 2021 to the extent the guarantor was an individual.4 In November 2020, three commercial landlords challenged these local laws in Melendez v. City of New York, 503 F. Supp. 3d 13 (S.D.N.Y. 2020), aff’d in part, vacated in part, rev’d in part, 16 F.4th 992 (2d Cir. 2021). The plaintiffs alleged that the Guaranty Law unconstitutionally restricted their contractual rights under personal guaranties5 and urged the court to find a violation of the Contract Clause6 which provides that “no State shall ... pass any ... Law impairing the Obligations of Contracts.”7 A Contract Clause challenge in the Second Circuit requires the Court to find that (1) the contractual impairment is substantial and, if so, (2) whether the law serves a legitimate public purpose such as remedying a general social or economic problem and, if such purpose is demonstrated, (3) whether the means chosen to accomplish this purpose are reasonable and necessary.8

As seen in the New York Real Estate Law Reporter

By Deborah E. Riegel August 2023

1. Will Feuer & Noah Higgins-Dunn, Cuomo orders most New Yorkers to stay inside — ‘we’re all under quarantine now’, CNBC (2020), https://www.cnbc. com/2020/03/20/new-york-gov-cuomo-orders-100percent-of-non-essentialbusinesses-to-work-from-home.html.

2. Matthew Haag, New Threat To New York City: Commercial Rent Payments Plummet, The New York Times (2020), https://www.nytimes. com/2020/05/21/nyregion/commercial-rent-NYC-coronavirus.html.

3. Sydney Pereira, City Council Passes Bills To Aid Small Businesses, “The Heart And Soul” Of NYC, Gothamist (2020), https://gothamist.com/news/ help-heart-and-soul-nyc-council-passes-bills-aid-small-businesses.

4. New York City, N.Y., Code § 22-1005, New York City, N.Y., Code § 22-1005.

PUBLICATIONS

The District Court found that while the Guaranty Law imposed a substantial impairment on the Plaintiff’s contract, it held the law to be constitutional because it advanced a significant and legitimate public purpose through reasonable and appropriate means.9 In short, the District Court found that the goal of the Guaranty Law -- ostensibly to prevent the City’s small business owners from being pushed to the brink of either business and/or personal bankruptcy, with the broader goal of allowing such businesses to recover after the pandemic -- advanced a legitimate public purpose.

While the presence of a pandemic and economic crisis gave way to a finding of necessity, the District Court acknowledged the need to find that the impairment of contracts was appropriate and reasonable.10 Ultimately, the Court determined that the law withstood constitutional scrutiny because (1) it was limited to personal guaranties made by natural persons who are not the tenant, (2) it was temporally limited to a particular timeframe (i.e., debts that arose between March 7, 2020-June 31, 2021), and (3) that commercial landlords still had other means through which they could recoup lost rental income (albeit more difficult).11 In October 2021, on appeal to the Second Circuit Court of Appeals, the Second Circuit reversed the lower court, outlining five major concerns with the Guaranty Law.12 Consistent with the lower court, the Second Circuit found that the Guaranty Law substantially impairs the contract rights of landlords and interferes with their reasonable expectations. The Court pointed to the fact that the law renders any personal guaranties of rent obligations arising from March 7, 2022 through June 30, 2021 permanently unenforceable.

Therefore, although on its face, the Guaranty Law was temporally limited to a 16-month period, its effect was permanent -- “the landlord can never seek to recover those amounts from the guarantor. Not during the pandemic period. Not after the emergency declaration is withdrawn. Not ever. This substantially undermines the landlord’s contractual bargain, interferes with his reasonable expectations, and prevents him from safeguarding or ever reinstating rights to which he was entitled during a sixteen-month period.”

purpose and protects a basic societal interest rather than a “favored group” could not be determined as a matter of law. It further concluded that dismissal was not warranted where reasonableness or appropriateness of the means used could not be determined in favor of the City of New York as a matter of law. The Second Circuit reviewed five factors, which in their totality precluded dismissal. First, the Guaranty Law was neither temporary nor limited, in that it extinguished rather than deferred debts. Second, the Court examined the purported purpose of the law -- to protect guarantors of small businesses which closed during the pandemic and to allow them to reopen -- and compared it to the actual law, which failed to condition the relief on the reopening of those businesses. Third, the Court took issue with allocation of the burden of the Guaranty law on private landlords, rather than the City (or the public that benefits from functioning businesses in their neighborhoods). Fourth, the Court pointed to the failure to condition the relief afforded by the Guaranty Law on need, particularly where some guarantors have the benefit of “good guy” guaranties, and contrasted the failure to examine need in this context with the many government assistance programs implemented during the pandemic, such as the CARES ACT or the American Rescue Plan’s Restaurant Revitalization Fund. Finally, the Second Circuit found that the reasonableness of the law was called into question by any compensation of the landlords or their principals for damages.

On remand to the District Court in March 2023 for a decision consistent with the Second Circuit’s opinion, Judge Abrams this time found that the Guaranty Law lacked the requisite reasonability to overcome a Contract Clause challenge,13 and concluded that the Guaranty Law violated the Contracts Clause. She therefore granted the Plaintiffs’ summary judgment motion, relieving landlords from the burden of shouldering consequences of the pandemic and the related government restrictions.14

Similarly, the Court found that based on the record before it, the question of whether the law served a legitimate public

5.

6.

7.

8.

Id. at 18.

Id. at 31.

U.S. Const. art. I, § 10, cl. 1.

See Sullivan v. Nassau Cty. Interim Fin. Auth., 959 F.3d 54, 64 (2d Cir. 2020).

9. Id. at 36.

10. Id. at 34.

11. Id. at 35-36.

12. Melendez v. City of New York, 16 F.4th 992 (2d Cir. 2021).

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13. Melendez v. City of New York, No. 20-CV-5301 (RA), 2023 WL 2746183 (S.D.N.Y. Mar. 31, 2023).

14. Id. at 16.

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PUBLICATIONS

The ‘Fraud Exception’ Requires Fraud

The Legislature, in reaction to recent court decisions, has made a belated effort to retroactively redefine “fraud” in the context of pre-HSTPA claims, passing a bill that would effectively deem any past violation of any law or duty by a landlord to constitute fraud.

Just when New York courts were beginning to consistently apply the law concerning the elements that a tenant must prove to establish the “fraud exception” to the “pre-HSTPA” four-year statute of limitations and lookback rule for rent overcharge claims, the Legislature, in reaction to recent court decisions, has made a belated effort to retroactively redefine “fraud” in the context of pre-HSTPA claims, passing a bill that would effectively deem any past violation of any law or duty by a landlord to constitute fraud.

On June 20, 2023, the final day of the legislative session, the New York State Assembly passed a controversial bill, already passed by the Senate on June 9, 2023, which, among other things, purports to “clearly define the scope of the fraud exception to the pre-HSTPA four-year rule for calculating rents,” “in light of court decisions arising under the Housing Stability and Tenant Protection Act of 2019 (HSTPA), including Regina Metro v. DHCR.” The bill will, eventually, be presented to the Governor to either sign or veto. If signed, it will likely face the same legal challenges that curbed the retroactivity of parts of the HSTPA, and will add more confusion to the landscape, which was finally enjoying some clarity and consistency.

The recent court decisions to which the bill refers began with Matter of Regina Metro. Co., LLC v. DHCR, 35 NY3d 332 (2020) (“Regina”), and culminated with Casey v Whitehouse Estates, Inc., 39 NY3d 1104 (2023), at the Court of Appeals, and Burrows v 75-25 153rd Street, LLC, 215 AD3d 105 (1st Dept. 2023), at the Appellate Division, First Department (all three cases were handled by Rosenberg & Estis, including co-author Ethan R. Cohen).

These cases suggest that the Legislature’s belated attempt to retroactively redefine “fraud” is misguided and would retroactively eliminate the repose provided to landlords under the prior law by the statute of limitations and lookback rule—exactly the result condemned by the Court of Appeals in Regina.

In June 2019, the New York State Legislature enacted the HSTPA, which effected a monumental change to the laws concerning rent overcharge claims, eliminating the pre-HSTPA four-year statute of limitations and “lookback rule” for rent overcharge claims.

As seen in the New York Law Journal

By Gary M. Rosenberg and Ethan R. Cohen August 2, 2023

However, in April 2020, in Regina, a landmark decision, the Court of Appeals held that retroactive application of the HSTPA to a landlord’s past conduct occurring prior to the HSTPA was unconstitutional.

Instead, the court held that claims concerning a landlord’s conduct prior to the HSTPA (before June 2019) must be determined under the laws existing at the time of the conduct, as fairness would dictate.

PUBLICATIONS

In Regina, the court reviewed the pre-HSTPA law. Prior to the HSTPA, the law unequivocally provided that, if a landlord registers the legal rent with DHCR each year, then a tenant must challenge that registered legal rent within four years, after which it is beyond legal challenge (former RSL § 26-516[a][i]).

Therefore, the pre-HSTPA statute of limitations provided that a tenant must bring a rent overcharge claim within four years of the first overcharge alleged (former CPLR 213-a; former RSL §26-516[a]).

For a timely claim, pre-HSTPA law provided a four-year lookback rule, providing that, to determine the correct legal rent, the court or DHCR must only look back at the registered or actual rent four years before the claim—known as “the base date”—and add all legal increases available after the base date to get the “legal rent.” The Court was not permitted to look beyond the base date rent (i.e., the lookback rule), except to determine if the landlord committed fraud.

In Regina, the Court of Appeals repeatedly emphasized that “the prior statutory scheme conferred on owners clear repose” from claims regarding “conduct that occurred…many years or even decades before the HSTPA,” and condemned “upend[ing] owners’ expectations of repose relating to conduct that may have occurred many years prior to the recovery period.”

The court explained, “[b]efore the HSTPA, the combined effect of the statute of limitations and lookback rule provided owners substantial repose relating to rent increases collected more than four years prior to the filing of the complaint” and “the limitations provisions–in order to promote repose–precluded consideration of overcharges prior to the recovery period.”

The court discussed the “strong public policy favoring finality, predictability, fairness and repose served by statutes of limitations,” and stressed that the repose embodied in the statute of limitations is no different for rent overcharge claims, explaining that: “Civil liability is always bounded by the public policy of repose embodied in statutes of limitations…Overcharge liability…is no different.”

The only exception to these principles is fraud. Namely, recognizing that a landlord who committed fraud should not be entitled to hide behind the statute of limitations and lookback rule, the Court of Appeals created a “fraud exception,” which the Legislature codified, providing that if a landlord engaged in a fraudulent scheme to destabilize an apartment that tainted the reliability of the rent on the four-year base date, then the court and DHCR should not rely on the actual base date rent, and instead must use DHCR’s punitive “Default Formula” to determine the legal rent. In Conason v Megan Holding, LLC, 25 NY3d 1 (2015), the Court of Appeals explained that the “fraud exception” also provides an exception to the fouryear statute of limitations.

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Thus, “fraud” is an exception to the entire statutory scheme under pre-HSTPA law. In turn, if every violation of law is deemed to be fraud, it would swallow all of the rules, and there would be no statute of limitations or lookback rule.

Thus, the Court of Appeals expressly held in Regina that pointing to the “illegality” of past rents alone does not establish a colorable claim of fraud, nor provides a right to relief outside of the limitations period, explaining that: “In every overcharge case, the rent charged was, by definition, illegally inflated—otherwise there would be no overcharge.”

The court further explained that just because a prior registration or conduct is revealed “to be illegal does not mean that tenants must be able to recover a certain measure of monetary damages for associated rent increases despite their failure to seek recovery within the limitations and lookback periods.”

Instead, the Court of Appeals made clear that “fraud” for purposes of establishing the “fraud exception” is no different in this context than any other context, holding: “Fraud consists of “evidence [of] a representation of material fact, falsity, scienter, reliance and injury.” In other words, the “fraud exception” requires fraud.

In 2023, in Casey v Whitehouse Estates, Inc., 39 NY3d 1104 (2023)–the first Court of Appeals decision on these issues since Regina–the lower court and Appellate Division found that the owner committed fraud in the manner in which it recalculated rents following the Court of Appeals’ decision in Roberts v Tishman Speyer Properties, L.P., 13 NY3d 270 (2009).

In Casey, the Court of Appeals reversed on appeal, found that the owner did not commit fraud, and confirmed that fraud will only allow the four-year lookback period and statute of limitations to be breached, and the punitive “Default Formula” to be used, where the alleged fraud taints the reliability of the rent on the all-important base date.

The court could have, but did not, disturb its holding in Regina that fraud requires “evidence [of] a representation of material fact, falsity, scienter, reliance and injury.” In fact, two of the dissenting Judges in Regina joined the majority opinion in Casey.

After Regina and Casey, with clear guidance from the Court of Appeals, the Appellate Courts finally began to consistently apply the standard for what a tenant must prove to establish fraud as an exception to the pre-HSTPA four-year statute of limitations and lookback rule, consistently applying the common-law fraud standard in Burrows v 75-25 153rd Street, LLC, 215 AD3d 105 (1st Dept 2023) (“Burrows”), Hess v EDR Assets LLC, 217 AD3d 542 (1st Dept 2023), Woodson v Convent 1 LLC, 216 AD3d 585, 588 (1st Dept 2023), Najera-Ordonez v 260 Partners, L.P., 217 AD3d 580 (1st Dept 2023), Quinatoa v Hewlett Assoc., LP, 205 AD3d 654, 655 (1st Dept

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2022), and Gridley v Turnbury Vil., LLC, 196 AD3d 95 (2d Dept 2021), among other cases.

In Burrows, tenants at 75-25 153rd Street in Queens, NY, brought a putative class action against their landlord, asserting that the landlord’s predecessor had illegally registered their initial legal rents in 2007, by registering both legal rents and actual/preferential rents for the initial tenants, allegedly in contravention of RSC §2521.1(g), which required the initial legal rents for the “421-a building” to be the actual rents charged and paid by the initial tenants.

In 2020, more than 13 years after the initial DHCR registrations, tenants commenced a class action against the current landlord, who purchased the building in 2015, long after any challenge to the registered 2007 initial legal rents had expired under the pre-HSTPA four-year statute limitations.

The tenants sought to recover millions of dollars of damages from the current landlord, based solely on the 2007 registrations of the prior landlord, which were well beyond challenge when the current landlord purchased the building. The tenants, however, claimed that the 2007 registrations were “illegal” and “fraudulent,” following a pattern of class actions claiming “fraud” in an attempt to avoid the pre-HSTPA statute of limitations.

The landlord (represented by the authors’ firm) moved to dismiss, arguing that the tenants’ belated claims were blatantly barred by the statute of limitations, and that tenants could never establish the “fraud exception” because fraud requires reasonable reliance, and here, the prior landlord had openly registered both legal and preferential rents with DHCR in 2007 and every year thereafter, such that any error was obvious on the face of the registrations. There was no fraud, and therefore no excuse for the tenants’ failure to bring a claim for more than 13 years.

The lower court denied the motion. On appeal, however, the Appellate Division, First Department, reversed, holding that: “As the Court of Appeals recognized in Regina, reasonable reliance is as much an element of fraud in this context as in others,” because “[f]raud consists of evidence of a representation of material fact, falsity, scienter, reliance and injury.”

Here, the alleged “inflation of the legal regulated rents set forth on the publicly filed registration statements was evident from the registration statements themselves, negating the element of reliance as a matter of law.”

Accordingly, the court held: “since plaintiffs’ claims are based upon inflated figures for legal regulated rents that were registered far more than four years before the commencement of this action in 2020, their claims are time-barred.”

The First Department continued: “Plaintiffs’ reliance on the fraud exception is unavailing because the record, and plain-

tiffs’ own admissions in their complaint, establish that there was no such fraudulent scheme in this case.” “[A]s a matter of law, neither plaintiffs nor any of their predecessors could have reasonably relied on the inflated “legal regulated rent” figures that appeared on face of the registration statements.”

Accordingly, the class action was dismissed.

Burrows, the first appellate decision to dismiss an untimely putative class action based on the tenants’ inability to establish fraud as a matter of law, provides an excellent example of how pre-HSTPA law balanced tenants’ rights with the repose provided by the statute of limitations to landlords who did not commit fraud, including for decade-old conduct of a landlord’s predecessor.

However, in direct response, the Legislature has now made an effort to retroactively redefine “fraud” under the pre-HSTPA law. The new bill provides that: With respect to the calculation of legal rents for the period either prior to or subsequent to June 14, 2019, an owner shall be deemed to have committed fraud if the owner shall have committed a material breach of any duty, arising under statutory, administrative or common law, to disclose truthfully to any tenant, government agency or judicial or administrative tribunal, the rent, regulatory status, or lease information, for purposes of claiming an unlawful rent or claiming to have deregulated an apartment, whether or not the owner’s conduct would be considered fraud under the common law, and whether or not a complaining tenant specifically relied on untruthful or misleading statements in registrations, leases, or other documents…

The problem with attempting to retroactively redefine “fraud” in 2023, for claims concerning pre-2019 conduct, is evident on its face. Just like retroactively applying the HSTPA to past claims, the bills would “upend owners’ expectations of repose relating to conduct that may have occurred…many years or even decades before the HSTPA.” If every violation of any duty or any law is automatically deemed to be fraud, no matter how long ago, and no matter if the conduct actually constitutes fraud (i.e., representation of material fact, falsity, scienter, reliance or injury), then the “fraud exception” would swallow all of the pre-HSTPA laws and rules. Moreover, if passed, the much-needed consistency that was finally emerging in cases where tenants alleged pre-HSTPA “fraud” would again fall to confusion and uncertainty, which benefits nobody.

By retroactively deeming any violation of any duty to automatically be fraud, and thereby providing an exception to the pre-HSTPA statute of limitations and lookback rule in every case, the Legislature would, in effect, be retroactively eliminating the entire pre-HSTPA scheme, which is exactly the result that the Court of Appeals held to be unconstitutional in Regina.

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If passed, the bill will likely face the same legal challenges that parts of the HSTPA failed to overcome. However, because the Legislature is purporting only to interpret and clarify prior law concerning fraud, rather than change it, the outcome of such legal challenges is yet to be seen.

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PUBLICATIONS

CPLR 3213 Motions for Summary Judgment in Lieu of Complaint: An Update

For New York State litigators, moving for summary judgment in lieu of complaint pursuant to CPLR 3213 offers a quick, cost-effective approach to enforcing a lease guaranty. The accelerated procedure, if successful, allows the plaintiff to obtain a judgment relatively quickly and without engaging in costly and time-consuming discovery.

While an attractive option, eager litigators should be mindful that CPLR 3213 is available only “[w]hen an action is based upon an instrument for the payment of money only” (or for payments on judgments). Therein lies the rub; not all guaranties are created equal.

Moreover, not all departments of the Appellate Division treat CPLR 3213 motions in the same manner; as described below, a notable divide exists between the First and Second Departments regarding whether a guaranty qualifies as “an instrument for the payment of money only” if it promises not just payment, but also performance.

CPLR 3213 Motions Generally CPLR 3213 permits a plaintiff to move for summary judgment in lieu of a complaint to collect on an instrument for payment of money only. This summary procedure “affords a speedy and efficient remedy to secure judgment in certain cases where service of formal pleadings would be unnecessary for the expeditious resolution of the dispute between the parties” (Maglich v. Saxe, Bacon & Bolan, P.C., 97 AD2d 19 [1st Dept.

1983]).

It provides for “quick relief on documentary claims so presumptively meritorious that a formal complaint is superfluous, and even the delay incident upon waiting for an answer and then moving for summary judgment is needless” (SpringPrince, LLC v. Elie Tahari, Ltd., 173 AD3d 544, 545 [1st Dept.

2019]). Owners’ attorneys often invoke CPLR 3213 to enforce lease guaranties when commercial tenants fail to pay rent.

To make out its prima facie case, a plaintiff must establish “the existence of the guaranty, the underlying debt and the guarantor’s failure to perform under the guaranty” (Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 25 NY3d 485, 492 [2015]), citing Davimos v. Halle, 35 AD3d 270, 272 [1st Dept 2006]; see also SCP (Bermuda) Inc. v.

Bermudatel Ltd., 224 AD2d 214, 216 [1st Dept 1996]).

As seen in the New York Law Journal

By Gary M. Rosenberg and Brendan J. Derr June 6, 2023

Second Department’s Interpretation The Appellate Division, Second Department has consistently interpreted CPLR 3213 broadly when determining whether a lease guaranty qualifies as an instrument for the payment of money only. Provided that the guaranty is absolute and there are no conditions precedent to the guarantor’s obligation to pay the tenant’s rental arrears, the Second Department has held that an owner may enforce the guaranty via CPLR 3213 even where the instrument guarantees both payment and performance.

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Plaintiffs moving for summary judgment in lieu of complaint often cite Afco Credit Corp. v. Boropark Twelfth Ave. Realty Corp. (187 AD2d 634 [2d Dept. 1992]). There, a finance agreement contained an insured’s unconditional promise to repay to the lender certain sums advanced on its behalf.

In iPayment, Inc. v. Silverman, the court held that a guaranty containing unconditional obligations to pay rent and, separately, perform all other covenants under the sublease qualified as an instrument for the payment of money only under CPLR 3213:

Although the agreement also contained other provisions and terms apart from the obligation to repay the lender, the court found that those terms and provisions did not require “additional performance by the lender as a condition precedent to repayment, [nor] otherwise alter[ed] the insured’s promise of repayment” (id. at 634)

Plaintiff established its entitlement to summary judgment by submitting defendants’ guaranty and evidence of their failure to pay. While a guarantee of both payment and performance does not qualify as an instrument for the payment of money only under CPLR 3213 (see Punch Fashion, LLC v.

Merchant Factors Corp., 180 A.D.3d 520, 521, 120 N.Y.S.3d 284 [1st Dept. 2020], lv dismissed 35 N.Y.3d 1124, 134 N.Y.S.3d 7, 158 N.E.3d 898 [2020]), paragraph 1 of the guaranty signed by defendants includes an unconditional obligation to pay all rent and additional rent owed under the sublease, and therefore does so qualify (id.); “it required no additional performance by plaintiff[ ] as a condition precedent to payment or otherwise made defendant[s’] promise to pay something other than unconditional” (Park Union Condominium v. 910 Union St., LLC, 140 A.D.3d 673, 674, 33 N.Y.S.3d 733 [1st Dept. 2016]).

Therefore, the court held that the finance agreement was an instrument for the payment of money only under CPLR 3213.

In Premium Assignment Corp. v. Utopia Home Care, Inc., the court similarly held that because the instrument at issue did not require additional performance on the plaintiff’s part as a condition precedent to repayment and also did not require the plaintiff to pursue its claim against the defendant’s insurer, the instrument qualified as an instrument for the payment of money only (58 AD3d 709 [2d Dept 2009]).

First Department’s Interpretation By contrast, the Appellate Division, First Department has applied a stricter standard where a guaranty requires the guarantor to perform obligations in addition to the payment of money.

Generally, the First Department has held that an agreement guaranteeing both payment and performance does not qualify for CPLR 3213 treatment (see Punch Fashion, LLC v. Merch.

Factors Corp., 180 AD3d 520 [1st Dept. 2020]).

For example, in Bank of Am., N.A. v. Filho, the guaranties at issue stated that they were “guarant[ies] of payment and performance” of an aircraft lease and that if there was a default, the guarantor “shall (i) punctually pay any such obligations requiring the payment of money … and (ii) punctually perform any and all Obligations not requiring the payment of money” (203 AD3d 594, 594 [1st Dept. 2022]).

In addition, the court found that the guaranties’ defined term “Obligations” grouped both payment and performance obligations together, and therefore promise both payment and performance. Accordingly, citing to Punch Fashion, the court held that summary judgment in lieu of complaint was inappropriate because the guaranties did not qualify as instruments for the payment of money only.

However, perhaps in response to the Second Department’s broader interpretation, the First Department recently has expanded its interpretation of CPLR 3213, creating exceptions to the general rule where the guaranty of payment is separate from the guaranty of performance of obligations.

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(192 AD3d 586, 587 [1st Dept. 2021]). Key to this ruling was that the unconditional obligation to pay all rent and additional rent was contained in a different paragraph than the defendant’s other obligations.

Last month, the First Department broadened the exception again. In BBM3, LLC v. Vosotas, the court held: CPLR 3213 relief was appropriate despite the completion guaranty’s provision requiring some additional performance obligations by the borrower, as the guaranty “include[d] an unconditional obligation to pay” that “required no additional performance by plaintiff as a condition precedent to payment” (iPayment, Inc. v. Silverman, 192 A.D.3d 586, 587, 146 N.Y.S.3d 51 [1st Dept. 2021], lv dismissed 37 N.Y.3d 1020, 154 N.Y.S.3d 27, 175 N.E.3d 909 [2021][citations omitted]). Furthermore, nothing in the guaranty rendered defendant’s promise to pay anything but unconditional.

2023 NY Slip Op 02279 (1st Dept. May 2, 2023).

In BBM3, the guaranties’ definition of “Guarantied Obligations” contained both monetary and non-monetary obligations. Nevertheless, because the monetary obligations were unconditional and distinct from the non-monetary obligations, the court held that the guaranties qualified as instruments for the payment of money only.

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Takeaway Litigators and transactional attorneys alike should be aware of the foregoing case law when litigating and drafting lease guaranties. Litigators who overzealously move for summary judgment in lieu of complaint to enforce guaranties of both the payment of money and the performance of other obligations may have their motions denied by the court—wasting the client’s time and money and undermining the purpose of moving under CPLR 3213.

However, such a mistake is not necessarily fatal to the underlying claims. Indeed, the First Department has held that when a “plaintiff has mistaken his remedy and CPLR 3213 is in fact not available, the action typically should not be dismissed but simply converted to ordinary form as the statute provides [i.e. the CPLR 3213 summary judgment motion should be deemed a complaint], unless the court orders otherwise.

If the claims can be decided on the merits, the court can grant summary judgment accordingly” (JFURTI, LLC v. First Capital Real Estate Advisors, L.P., 165 AD3d 419, 421 [1st Dept. 2018] [internal citations omitted]).

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PRESS RELEASES

Rosenberg & Estis Secures First Temporary Restraining Order Against Airbnb Since Recent Local Law Passed Featuring Michael A. Pensabene, Peter B. Kane and Daniel E. Kirshblum October 4, 2023 Rosenberg & Estis, P.C. secured the first successful temporary restraining order against Airbnb and one of its New York apartment hosts, prohibiting the use and the advertisement of the host’s apartment on Airbnb, since implementation of New York City Local Law 18 banning millions of apartments from offering short-term rentals.

In a precedent-setting victory in the Supreme Court of the State of New York, Judge Suzanne Adams issued a Temporary Restraining Order (“TRO”) against Airbnb and the tenant of an Upper West Side apartment managed by Canvas Property Group for violating Local Law 18, which prohibits the short-term rental of an unregistered apartment.

In this case, Canvas Property Group, which manages the apartment building on behalf of ownership, had been diligent in its application of the new law and registered the property as prohibited. Once Canvas had knowledge that the tenant was renting her apartment as a vacation home on the Airbnb platform, Canvas’ diligence permitted Rosenberg & Estis to promptly secure a victory against the offending tenant and Airbnb.

According to Rosenberg & Estis Member Peter B. Kane and Associate Daniel E. Kirshblum, it soon became apparent that the tenant had never lived in the three-bedroom apartment and had rented it solely to operate it as an Airbnb.

The decision, which comes on the heels of the State Supreme Court’s dismissal of Airbnb’s challenge to the legality of Local Law 18, paves the way for Canvas and the owners of the apartment to evict the tenant for illegal subletting, but also to pursue damages from both the tenant and Airbnb, providing a playbook for other landlords looking to prevent and suspend illegal rentals in their properties.

“Unfortunately, this is all-too prevalent in New York,” said Kane. “Short-term rentals have become a cloak and dagger operation with so-called hosts giving their guests secret instructions to dupe building owners. Despite its ability to check the city register for prohibited apartments, Airbnb turned a blind eye and conspired with the tenant to rent the unit to tourists and visitors.”

“This is a clear signal to Airbnb and its hosts in New York City that they cannot ignore the law,” said Michael A. Pensabene, a Member of Rosenberg & Estis’ Litigation Department who represented the building owner. “The court’s granting of an immediate temporary restraining order demonstrates that Airbnb and the tenant must comply with Local Law 18.”

With thousands of short-term rentals still being advertised in the city, Rosenberg & Estis anticipates more actions against scofflaws and the online platform.

First enacted in January 2023, LL18 recategorized whole classes of accommodations as unauthorized, including rent controlled and stabilized apartments, Mitchell Lama properties and any property receiving a federally subsidized mortgage. It also allowed any property owner – of any property type – to request a permanent overriding veto against registration so that, in the event a tenant or unit owner applied to register their property, it would be immediately flagged as prohibited by request of the building owner or management.

“For the first time, the city is holding Airbnb accountable for violating a law designed to police an increasingly opaque industry and restore the city’s stock of affordable housing to permanent residents,” said Pensabene. “Rosenberg & Estis will continue to rigorously represent and work with clients, such as Canvas, against those who believe they can choose to ignore the law to the landlords’ detriment.”

The TRO remains in full force and effect against both the tenant and Airbnb until further argument can be heard by the Court in late October on the underlying motion for a full injunction.

PRESS RELEASES

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WELCOME LAW CLERKS

Rosenberg & Estis Proudly Welcomes Back Our 2023 Juris Doctors

Huey Chan R&E Litigation

Collin Chipetine R&E Litigation

Ainsley J. Gilman R&E Transactions

Shayne J. Messing R&E Litigation

Isabella D. Pisani R&E Transactions

Cherry Srivastava R&E Litigation

EVENTS

BISNOW’S NY MULTIFAMILY & RESIDENTS OF THE FUTURE EVENT Adam R. Sanders, 10.4.23

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ROSENBERG & ESTIS, P.C. MEMBER RETREAT - MIAMI Rosenberg & Estis, P.C., 9.29.23

R&E Member Adam R. Sanders moderated the opening panel at Bisnow’s Multifamily event. The panel addressed topics at the forefront of the multifamily sector, from ways development, marketing and leasing teams can collaborate to get leasing activity started, to the types of development and design strategies that today’s development teams are requesting to improve a building’s operational efficiency.

Thanks to all R&E Members who participated in this year’s retreat. We hope that in addition to the work we all did that you also had a good time connecting with each other. As we continue to advance the growth of this firm - both in the scope of services we provide our clients as well as the workplace culture and environment of our office - we appreciate all of the constructive feedback received throughout the weekend as well as your dedication to continuing to improve the firm.

R&E INTRAMURAL SOFTBALL GAME THE BAR IS LOW!

CRAIN’S 2023 BEST PLACES TO WORK IN NYC - AWARD CEREMONY

Rosenberg & Estis, P.C., 10.3.23

Rosenberg & Estis, P.C., 9.28.23

Rosenberg & Estis’ intramural softball team, The Bar is Low, is loving the start of its second season. After our recent game, the team dominated trivia at The Waylon on 10th Avenue.

Rosenberg & Estis is thrilled to announce its distinction among Crain’s 2023 Best Places to Work in NYC. Erica Linnemann, R&E Marketing Specialist, and Kelly M. Mueller, R&E Operations Manager, attended the Crain’s reception to accept the award on behalf of the firm. We are so grateful to every member of the R&E team who participated in the Crain’s survey to achieve this well-deserved honor.

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BROOKLYN LAW SCHOOL “MEET THE DEAN” EVENT Rosenberg & Estis, P.C., 9.27.23

EVENTS

THURSDAYS ON THIRD WELCOME BACK JURIS DOCTORS! Rosenberg & Estis, P.C., 9.7.23

Rosenberg & Estis hosted Brooklyn Law School for its “Meet the Dean” event, introducing David D. Meyer. We love any opportunity to partner with BLS and especially to reconnect with the alumni, many of whom are current R&E attorneys across all levels of firm leadership.

Rosenberg & Estis hosted another Thursdays on Third as a welcome-back gathering for our returning team of Juris Doctors. We are so glad to have Huey Chan, Collin Chipetine, Ainsley J. Gilman, Shayne J. Messing, Isabella D. Pisani and Cherry Srivastava back in our offices working within our Transactions and Litigation groups.

ROSENBERG & ESTIS LUNCH-ANDLEARN WITH ARBOR REALTY TRUST

THURSDAYS ON THIRD - FAREWELL TO RICHARD B. CORDE

Rosenberg & Estis, P.C., 9.21.23

Rosenberg & Estis, P.C., 8.24.23

Rosenberg & Estis recently hosted Arbor Realty Trust, Inc. for a lunch-and-learn, with high-level presentations from Zachary J. Rothken, Head of the firm’s Administrative Law Department, and Daniel M. Bernstein, Head of the firm’s Tax Incentives & Affordable Housing Department.

Our latest Thursdays on Third was a blast, but bittersweet as we said farewell to Richard B. Corde, Litigation Of Counsel who has been with the firm since his days as a Law Clerk and Summer Associate. Thanks to everyone who could join in this farewell gathering, and we wish Richard the best of luck!

EVENTS

BISNOW’S NEW YORK AFFORDABLE HOUSING CONFERENCE Daniel M. Bernstein, 8.23.23

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THURSDAYS ON THIRD & FAREWELL TO SUMMER LAW CLERKS Rosenberg & Estis, P.C., 8.9.23

Daniel M. Bernstein moderated the “Investment Outlook: Strategies To Offset Smaller Margins On Affordable Housing” panel at Bisnow’s Affordable Housing event. Daniel led the conversation to address topics at the forefront of the New York City real estate industry today, including financing solutions for debt, equity and low-income housing tax credits, and sourcing development opportunities in the face of uncertain market conditions.

Recently we hosted Thursdays on Third (on Wednesday) to say farewell (for now) to our 2023 Summer Law Clerks! It was perfect weather and a great night overall. We were so grateful to have these law students on our legal team for the summer, and we wish them the best of luck as they embark on a new semester!

ROSENBERG & ESTIS LITIGATION NIGHT OUT

TRANSACTION GROUP ANNUAL SHAKE SHACK LUNCH

Rosenberg & Estis, P.C., 8.10.23

Rosenberg & Estis, P.C., 8.9.23

R&E’s Litigation Group loves a little healthy competition! We hosted this year’s Litigation Night Out just a few blocks up Third Avenue at Clinton Hall, which included a great game of trivia. Already looking forward to next year!

One of our favorite traditions – R&E’s Annual Transaction Group Shake Shack Lunch! It’s always a treat to reconnect with the team on our stunning 12th-floor terrace. Thanks to all who could join in on the fun!

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EVENTS

COCKTAIL RECEPTION HONORING JUDGE JUDY H. KIM

R&E ANNUAL MLB OUTING: METS VS. YANKEES

Rosenberg & Estis, P.C., 7.31.23

Rosenberg & Estis, P.C., 7.27.23

Rosenberg & Estis, P.C. hosted a fundraising reception for Judge Judy H. Kim, Candidate for the Supreme Court, New York County. We are so grateful to everyone who joined us for this event on our terrace, and we wish Judge Kim the best of luck in the rest of her campaign!

Rosenberg & Estis had a blast at the recent Mets vs. Yankees game. This is something we do every year with our summer law clerks. Thanks to all who could attend, and we look forward to next year.

R&E ANNUAL LITIGATION GROUP LUNCH

ROSENBERG & ESTIS TRANSACTION GROUP NIGHT OUT

Rosenberg & Estis, P.C., 7.27.2023

Rosenberg & Estis, P.C., 7.13.23

Rosenberg & Estis hosted its annual group lunch for the Litigation Department. This year we had delicious Mexican food on our terrace which boasts a gorgeous view of Midtown. Thanks to everyone who helped to prep this wonderful afternoon!

R&E’s Transactional Department had a blast at its annual Group Night Out. This year the team had a delicious Peruvian dinner and Pisco Sours at The Inkan, followed by bowling at The Gutter in Long Island City. Congratulations to R&E Member Arielle Frost, who once again proved to be the firm’s highest scoring bowler!

EVENTS

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ROSENBERG & ESTIS, P.C. FIRMWIDE THURSDAYS ON THIRD​

R&E’S ANNUAL SUMMER GOLF INVITATIONAL AND DINNER

Rosenberg & Estis, P.C., 7.12.23

Rosenberg & Estis, P.C., 7.11.23

Rosenberg & Estis hosted another Thursdays on Third for our entire team, including attorneys and staff. We love any opportunity to connect with colleagues on our terrace – especially those from other departments or floors, who we wouldn’t get to see on a regular work day.

Rosenberg & Estis was thrilled to participate in another Annual Summer Golf Invitational with our friends at The Durst Organization. It is always a treat to play on the gorgeous course at The Saint Andrews Golf Club. Congratulations to this year’s champions: Michael E. Lefkowitz, R&E Managing Member, Richard Y. Im, R&E Member, and Michael Rhee, Durst’s Senior Vice President and General Counsel.

ROSENBERG & ESTIS, P.C.’S ANNUAL ICE CREAM SOCIAL

COOKING BY THE BOOK SUMMER LAW CLERK EVENT

Rosenberg & Estis, P.C., 7.12.23

Rosenberg & Estis, P.C., 6.28.23

R&E’s Annual Ice Cream Social is one of our favorite traditions. There’s no better way to cool off in July than with some Ben & Jerry’s on our wonderful terrace!

Rosenberg & Estis’ novice chefs heated up the kitchen at the Cooking by the Book event, held at De Gustibus Cooking School. This hands-on experience made for a night of laughter and fun while R&E law clerks - as well as a few others from our legal team and staff - prepared a three-course meal and along the way learned useful knife skills and cooking and baking techniques.

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EVENTS

ROSENBERG & ESTIS 2023 STAFF NIGHT OUT

JEWISH NATIONAL FUND ANNUAL TREE OF LIFE GALA 2023

Rosenberg & Estis, P.C., 6.22.23

Rosenberg & Estis, P.C., 6.12.23

Everyone had so much fun at this year’s Staff Night Out! Many thanks to all who attended and especially to those who helped coordinate such an amazing experience at Clinton Hall. It was such a treat to end the work day a little earlier than usual and reconnect with our team.

Rosenberg & Estis was pleased to attend Jewish National Fund’s Annual Tree of Life Gala. Congratulations to our friends and honorees Laurent Morali (CEO, Kushner) and Michael Mintz (CEO and Founder, MD Squared Property Group, LLC). R&E Member Deborah E. Riegel has been JNF’s New York Board President since 2018, and we are proud to continue supporting this wonderful organization.

JEWISH LAWYERS GUILD 44TH ANNUAL GALA

2023 CHASHAMA GALA HONORING GARY M. ROSENBERG

Rosenberg & Estis, P.C., 6.22.23

Rosenberg & Estis, P.C., 6.8.23

Rosenberg & Estis proudly supported the Jewish Lawyers Guild at its Annual Gala. Congratulations to this year’s honorees: Hon. Deborah Kaplan, Hon. Adam Silvera and Hon. Doris M. Gonzalez! R&E Member Alex M. Estis is pictured here with Justice Arthur F. Engoron, taken that night.

Rosenberg & Estis was thrilled to attend this year’s Chashama Gala which honored Gary M. Rosenberg, R&E Co-Founder and Chairman of the Board of Directors. We have proudly supported Chashama since its founding in 1995, and we are so grateful for everyone who joined us in contributing this year.

EVENTS

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REAL ESTATE AND CONSTRUCTION COUNCIL GALA

J.P. MORGAN CORPORATE CHALLENGE 2023

Norman Flitt and Alex M. Estis, 6.7.23

Rosenberg & Estis, P.C., 6.1.23

Members Norman Flitt and Alex M. Estis attended this year’s Real Estate and Construction Council Gala honoring Michael J. Franco from Vornado Realty Trust. This event offered several spectacular performances for guests to enjoy – Norman and Alex saw the Cabaret in the Penthouse at Lincoln Center!

Rosenberg & Estis was proud to participate in this year’s J.P. Morgan Corporate Challenge. Congratulations to all of our runners and walkers - they are pictured here, outside of our building at 733 Third Avenue.

2023 COPE FOUNDATION ANNUAL GOLF OUTING

ROSENBERG & ESTIS SUMMER LAW CLERK WELCOME LUNCH

Rosenberg & Estis, P.C., 6.5.23

Rosenberg & Estis, P.C., 6.1.23

Adam R. Sanders, William R. Byers, Eric S. Orenstein and Casey E. Delaney participated in the 2023 COPE Foundation Annual Golf Outing. Rosenberg & Estis is proud to continue supporting this amazing foundation whose Co-President is our very own Larry R. Mergentime. Until next year!

Rosenberg & Estis hosted a welcome lunch for its 2023 Summer Law Clerks. We are so excited to have Miriam Avrutin, Myles Brawer, Michael Fortugno, Justin Glaser, Halle Jaffe, Olivia Morri, Imrajdeep Sahota and Sarah Silbowitz on our team this summer.

Rosenberg & Estis, P.C. 733 Third Avenue New York, NY 10017 T. 212 867 6000 www.rosenbergestis.com

This is published by the law firm Rosenberg & Estis, P.C. It is not intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations that Rosenberg & Estis, P.C. has accepted an engagement as counsel to address. ©2023 Rosenberg & Estis, P.C. | ATTORNEY ADVERTISING