When Your Tenant Sells Newspapers in the Digital Age
December 1, 2019
Landlord Options for Retail and Restaurant Defaults
Not all of these options are mutually exclusive; some can be used in combination. It is beneficial to look at each possible action you could take in isolation, before putting together a plan.
Option 1: Do A Summary Nonpayment Proceeding Pursuant to Statute
A Nonpayment Proceeding
In most instances when a landlord finds it necessary to sue a tenant to recover rent or possession of a premises, the proper vehicle is a summary proceeding for the recovery of real property (“summary proceeding”). A summary proceeding is an expedited lawsuit, for the recovery of rent and possession of a premises. Summary proceedings are expeditious because the parties’ procedural rights and remedies are very limited. Among other things, for example, the tenant’s time to answer the lawsuit is accelerated and, absent leave of court, there is no discovery. CPLR § 408; RPAPL § 701; NYU v. Farkas, 121 Misc.2d 643 (Civ. Ct. N.Y. Cty. 1983). There are two types of summary proceedings: nonpayment proceedings (“nonpayment”) and holdover proceedings (“holdover”). We will discuss holdovers in the next section.
A nonpayment is a lawsuit for the recovery of rent due and, in the absence of full and timely recovery of rent due, possession of the premises. RPAPL § 711(2).
In addition to regular monthly rent, retail and restaurant tenants, frequently owe “Additional Rent”, charges for things priced outside of the rent because they are changeable and unpredictable. For example, electricity, real estate tax escalations, and/or late fees. When I see that I am being instructed by a landlord client to sue for Additional Rent, I have three questions.
(i) Is the additional rent really due?
Is the additional rent really due? For example – I have seen landlords try to bill tenants for things landlord should not be entitled to. For example, trying to bill building-wide architectural fees to a tenant as “repairs.” You need to check the lease for the authority to bill an item as additional rent.
(ii) If the additional rent is due, was it calculated in a defensible way?
If the additional rent is really due, was it calculated in a defensible way? Many of these items require a little math. For real estate tax escalations, for example, the lease usually says to subtract the base year from the current taxes and then the tenant pays a percentage of the marginal increase, usually commensurate with their percentage of the building’s total floor area. I like to make sure landlord did the math right.
(iii) Was the additional rent billed correctly?
Was the additional rent billed correctly? Unlike regular monthly rent, which is usually due without demand as per the lease, additional rent does, indeed, need first to be billed. How else would the tenant even know it was due? Thus, tenant needs to be billed in accordance with whatever the lease says about such things. Many leases require landlord to present tenant with a bill for additional rent, and tenant gets a set number of days to pay. Some leases even dictate how that bill has to be sent and to whom.
Option 2: Terminate the Lease Under the Conditional Limitation Clause of the Lease
Nonpayment of Rent as a Conditional Limitation
Although many leases specifically exclude such, a lease can provide a mechanism whereby the landlord may terminate the lease, after default in the payment of rent, in the commercial context.
In order to utilize the conditional limitation, you must first notify the tenant of the default and set forth a time period in which the tenant must cure the default, as per your specific lease. This notice is commonly referred to as a “notice to cure default”.
“Yellowstone” and Tolling Time to Cure Defaults
Giving a notice to cure may prompt the commercial tenant to initiate a proceeding in Supreme Court commonly referred to as a “Yellowstone,” so called after the case of First National Stores v. Yellowstone Shopping Center. First National Stores v. Yellowstone Shopping Center, 21 N.Y.2d 630 (1968), rearg. denied, 22 N.Y.2d 827 (1968).
The essence of a Yellowstone is a declaratory judgment complaint accompanied by an emergency stay application (which is routinely granted, at least in the form of a temporary restraining order, pending a hearing on a preliminary injunction), which seeks a trial on the issue of whether the tenant is in violation of the lease. If the court finds the tenant in violation, then by virtue of the stay of the notice to cure, the tenant still has the opportunity to cure the violation before the cure period ends. This process can buy the tenant significant time as the resolution of the proceeding can take months or years.
To demonstrate one’s entitlement to a Yellowstone injunction, a tenant must demonstrate that it: (i) holds a valuable commercial lease (ii) has received a notice to cure; (iii) has requested injunctive relief prior to the termination of the lease; and (iv) is prepared to and maintains the ability to cure the alleged default by any means short of vacating the premises. Garland v. Titan West Assocs., 147 A.D.2d 304 (1st Dept. 1989).
The First Department has held that commercial tenants have a right to a virtually automatic issuance of a Yellowstone injunction and has held that in order to obtain a Yellowstone, rather than requiring the tenant to prove on her application that she can cure the alleged default, a tenant must merely state her desire and ability to cure the default by any means short of vacating the premises. See Herzfeld & Stern v. Ironwood Realty Corp., 102 A.D.2d 737 (1st Dept. 1984).
If the tenant is successful in having the Yellowstone injunction implemented, then the landlord must answer the Supreme Court action and counterclaim for termination of the tenancy.
A Yellowstone injunction can provide a modicum of protection to landlords as well as tenants, because such injunctions are often conditioned upon the tenant’s ongoing payment of rent and/or the posting of a bond to protect the landlord from a wrongfully issued injunction.
If there is not a successful Yellowstone application by a commercial tenant, then the case will, generally, go faster for the landlord and cost less for the landlord to prosecute.
Termination Notice and Holdover
If no Yellowstone proceeding is commenced and the default is not cured, then the landlord may notify the tenant that the lease will be terminated in a certain number of days, as per the lease. This notice is commonly referred to as a “notice of termination.”
After the expiration of the notice of termination, the landlord may commence a summary holdover proceeding (summary proceedings discussed above) against the tenant to recover possession of the premises. A holdover is a lawsuit for possession of the premises, regardless of the payment of rent, although past due rent or a fee for using and occupying the subject premises may also be recovered in a holdover. RPAPL § 711 (1).
Option 3: Claw Back Free Rent from the Beginning of the Lease
Many retail and restaurant leases allow tenant to have a period of free rent at the beginning of a lease. Landlords do this to entice tenants to choose their buildings over other options and to soften the difficulty of a tenant having to finance a build-out at the beginning of the lease, during which the tenant will not have any income. Landlords rationalize the initial loss by calculating the benefit of having the full lease term.
In the event of a default, the free-rent period increases a landlord’s loss. Landlords seldom, however, ask me to attempt to claw back the free rent because they have often forgotten the free rent period. Depending on what the lease says, however, clawing back free rent may be a possibility.
Option 4: Draw Down on The Security or the Letter of Credit
The security should not be utilized unless the relationship between landlord and tenant is ending. I hate when my landlord clients allow a retail or restaurant tenant to use the security to ameliorate an interim default. I have often observed that security, once drawn down, whether partially or in full, is never replaced. I have also often observed that the landlord or manager then later cannot easily remember, without reference to its records and usually before it is too late, that the restaurant tenant has used all or part of the security in the past. Thus, in these situations, if the relationship ultimately ends with tenant in arrears, there is no security as a contingency against such default. For these reasons, I do not recommend using this option unless the relationship with tenant is ending.
Option 5: Sue The Good Guy Guarantors
Enhanced Good Guy Guaranty
“Good Guy Guaranties” are “commonly understood to apply to obligations which accrue prior to the surrender of the lease premises.” Russo v. Heller, 80 A.D.3d 531 (1st Dept. 2011).
Often, however, the guaranty will be stronger and more favorable to Landlord. The guaranty of rent and all monetary obligations of tenant under the lease can be guaranteed through what the guaranty defines as the “Vacate Date”. The Vacate Date is often defined as:
“…the date that Tenant, after giving Landlord at least six (6) months’ prior notice of its intention to vacate the Premises, (y) surrenders the Premises to Landlord broom clean, free of all occupants, and (z) delivers to Landlord a key to the Premises. The delivery of such key(s) shall not be deemed to release the Tenant from any of its liability under the Lease.”
In such case, tenant must give landlord six months advance notice of its intention to invoke the Good Guy release of personal liability, which means the guarantors are on the hook for an extra six months of rent.
The Problem with Good Guy Guaranty Litigation
Most guarantors are just as broke as the single-asset retail or restaurant corporation that was the defunct tenant. This has been my frequent observation. I always begin my work on a post-possession guaranty lawsuit by running a credit report on the guarantor. I cannot possibly tell you how often the report produces a long list of judgments that are ahead of my client in time and priority. Maybe via a bank account search run by my licensed private investigator, I discover that the would-be-debtor has $212.13 in a bank account somewhere in New Jersey. I fully understand that “someday” the would-be-debtor might have attachable assets. Many things might happen someday. Personally, I question whether a landlord who has just lost a bunch of money on a defaulting restaurant tenant should incur more legal fees to obtain a worthless judgment.
Moreover, if the guarantors are not broke, the amount owed is not worth pursuing in a New York Court if it is under $100,000. Court is a black hole for resources – time, money, mental energy. You must go back again and again and again. So even using a bad, cheap lawyer will eventually stop making economic sense for the less than 6-figure case.
Finally, a money judgment is just a piece of paper unless you can collect on it and collecting on judgments is very difficult. Let us say you pursue the case with all vigor, and win. Now what do you get? You get a judgment, which is a piece of paper, unless you turn the judgment into money. How do you get the judgment debtor to pay the judgment? The answer is longer than what I have said so far. In essence, collecting a judgment is a whole other legal case – a longer and harder one.
Unless your guarantor is local and you are certain she has attachable assets, and you feel confident that she will remain local and continue to have such assets, then seeking to get a judgment against a guarantor is often waste of time.
How a Guaranty Can Be Used Effectively
Considering the questionable wisdom of a post-possession collection effort against guarantors, what utility can a guaranty have?
I like to begin collection efforts against a guarantor while the tenant is still in possession and relatively early into the default. If the retail or restaurant tenant’s principal is the guarantor, as here, it puts intense pressure on that individual to deal with the situation. Sometimes the tenant has trouble getting its revenue to where it wants and, as a result, lags behind on the rent. If a landlord has tolerated this for a period of time, the restaurant tenant begins to see landlord as her bank. A guarantor lawsuit, however, is a wake-up call.
I have had a lot of success in situations where I simultaneously combine a nonpayment proceeding (option 1) with a guarantor action (while tenant is still in possession).
Conclusion – My General Advice to Landlords of Failing Retail and Restaurant Tenants
On one hand, we all know that the new economy has not been kind to retail or restaurants. I was just speaking to a newsstand tenant I was evicting. He said, “Five years ago I used to sell 900 papers a day, now I’m lucky if I sell 100 papers a day.” People don’t read print newspapers anymore. I said to him, “Can you sell something else that people want while they’re in the subway?” And he said, “Don’t you think I’ve tried? People only want so many packets of tissues and candy bars.”
On one hand, I feel bad for guys like this. On the other hand, I say to myself, the world changes for us all. Adapting is part of business.
I often say to tenants who are not paying the rent, “The landlord is not your partner. Also Mr. Tenant, if something changed and you suddenly made ten times more money, it’s not as if you would pay ten times more rent. So why should the landlord accept less rent if you are doing poorly?”
Also, when I am negotiating with these tenants and they are telling me their woes, sometimes I wonder how much it is because they’re just a bad manager, especially with a new store. Again, should this be the landlord’s problem?
The dilemma is that even if the landlord is not officially the tenant’s partner, in some sense, the landlord is the tenant’s partner. If your tenant’s main item to sell has always been newspapers, and now it’s the age of digital media, then you as the landlord can’t really say, “Tough luck”. Because if you say that you’re going to end up with an empty store. And, these days, nobody wants an empty store.