October 12, 2025

In 2025, I was still dealing with clients, both landlords and tenants, grappling with commercial rent arrearages left over from the Pandemic. This is a story of one such matter.

I was representing a commercial tenant, a prominent professional practice in Manhattan. For some crazy reason, even though this company suffered mightily through the Pandemic as so many did, the company neither asked for nor received any rent relief from their commercial landlord. Perhaps it was pride or integrity on the part of the company’s principals. Perhaps it was the naivete in mundane business matters that is so often the trait of people who are outstanding in their professions. Whatever it was, by the time they found me in 2025, the situation had caught up with them. Their options were to pay the rent or cover salary, but they could not continue to do both without depleting the principals’ retirement plans.

The dilemma for me as their commercial landlord-tenant litigation advisor, was how do you ask a commercial landlord, who itself has been through a tough bunch of years, for Pandemic relief…in 2025!?

I drafted the principals of tenant a Commercial Lease Remedies Analysis, wherein I explored their options. Tenant did not have many options. We settled on what I refer to as a “controlled default”. I define “controlled default” as a situation where the tenant informs the landlord that it is about to default, before it defaults, and explains the reasons for the default, thus opening the door to negotiation.

The landlord did not respond well to my controlled default overture and the tenant’s withholding of half of the next month’s rent. The landlord hired an aggressive law firm. The law firm served a predicate notice (a condition precedent to litigation) upon my tenant client. They escalated. I needed to defend.

I responded with a certificate of occupancy defense. Hey…do not roll your eyes just yet. Typically, certificate of occupancy defenses offer little to commercial tenants. Most commercial leases in New York have robust “as is condition” clauses and have additional clauses that go something like this:

The Tenant represents to the Landlord that the Tenant has made, or caused to be made, a careful inspection of the premises and that the Tenant has made an examination of the building and that that the area and present condition of the premises are in all respects satisfactory to the Tenant, except (if at all) as may herein otherwise be expressed in the Work Letter annexed hereto. The Tenant acknowledges that no representations or promises have been made by the Landlord or the Landlord’s agents with respect to the premises or the building or the Certificate of Occupancy thereof (including as to any floor loads set forth therein), except as in this lease set forth, and no rights, easements, or licenses are acquired by Tenant except as expressly set forth herein. The statements contained in this lease regarding the use of the premises by the Tenant shall not be deemed a representation or warranty by the Landlord that such use is lawful or permitted by the Certificate of Occupancy of the building.”

Such clauses usually rule the day. See also Jordache Enterprises, Inc. v. Gettinger Associates, 182 AD2d 488 [1st Dept 1992], where a commercial tenant commenced an action against its landlord for recission of its lease, based upon the allegation that the landlord had fraudulently misrepresented the fact that the store had a valid certificate of occupancy allowing it to be used for storage. The landlord in Jordache Enterprises counterclaimed against tenant for unpaid rent. The appellate court in Jordache Enterprises held that the absence of a certificate of occupancy did not entitle the plaintiff to terminate the lease, where the absence of the certificate was readily curable by the subsequent acquisition by the landlord of a temporary amended certificate of occupancy for the space. The court in Jordache Enterprises further held that tenant had no right to terminate the lease under the circumstances, which established that the absence of a certificate of occupancy had not interfered with the tenant’s possession and lawful use of the subject premises for storage, and that the tenant, therefore, had not suffered any damages. Moreover, the Jordache Enterprises court held that the absence of a certificate of occupancy alone does not amount to a constructive eviction (and thus a defense to the nonpayment of rent).

Nevertheless, here I had an interesting fact pattern. The certificate of occupancy for the subject building was for straight-up factory use. My tenant-client was, obviously, a professional practice, not a factory. The non-conformity of the use was stark. Moreover, as luck would have it, there was an extant 2013 New York City Department of Buildings violation posted against the premises that stated, “Occupancy contrary to that allowed by C of O…illegal occupancy noted…factory converted to offices…” The landlord appeared to have pulled a few permits to correct the issue, but had not completed the work.

I (think) I read every case on the topic, and I found this little gem – Jack Kelly Partners LLC v. Zegelstein, 140 AD3d 79 [1st Dept 2016]. In Zegelstein the appellate court refused to grant summary judgment to landlord and dismiss tenant’s case to rescind its lease where there was a genuine issue of material fact regarding whether the certificate of occupancy for the premises could have been corrected to allow for commercial uses as an executive recruiting firm and whether landlord was willing to have the certificate of occupancy corrected. The court in Zegelstein held:

While there is case law holding that “[t]he mere failure of a landlord to obtain a certificate of occupancy before a commercial tenant’s date of occupancy does not, without more, give the tenant the right to terminate the lease” [citations omitted], those cases are clearly distinguishable from the facts of this case. Notably, [Progressive and Jordache] … deal with situations in which the absence of a valid CO could be readily cured by obtaining a corrected CO, whereas it is unknown from this record whether the CO could be corrected…or whether [landlord was] willing to have it corrected…

 

In any event, in Progressive, this Court, in denying the tenant’s motion for summary judgment, also found, that there were issues of fact “as to whether defendant made a specific representation concerning permitted uses under the certificate of occupancy, and, if so, whether plaintiff’s alleged reliance thereon was reasonable” … According to the present complaint, defendants advertised and conveyed to the general public that the premises was suitable for commercial use, and the executed lease indicated that only such use was permitted. Plaintiff thus claimed it relied on defendants’ statements and representations concerning the use of the premises.

 

…Moreover, as a matter of equity, [landlord] should not be able to hide behind the “no representations” clauses included in the lease while at the same time having represented to [tenant] that the premises are suitable for commercial use, and in fact stating in the lease that [tenant’]s use of the space as an office is “deemed to be a material inducement to the Landlord to enter into this Lease” and that tenant shall use the space for “no other purpose.” The same paragraph provided that the parties “agree … that any use or occupancy by Tenant of the Demised Premises for a purpose not specifically set forth above shall be deemed a material default by Tenant.” Under this scenario, [tenant] was in “default” immediately upon the execution of the lease since the stated commercial use was in violation of the CO, an incongruous result.”

Nice case! Would I bet the farm on it? No. Especially not in light of the lease clause I was working with. But, again, the non-conformity of the use here was stark and the landlord had not done much to ameliorate the Department of Buildings violation. You never know! I sewed the seeds of doubt, while respectfully explaining that my client could not pay what it did not have, and asking for mercy in light of the fact that this tenant had NOT defaulted during the thick of the Pandemic, allowing the landlord to carry all the other tenants who likely did!

The parties entered into a détente agreement. The landlord would lower the rent for the remainder of the term (about a year) if the tenant would divulge their financials, justifying the default. The parties cooperated. The end of the lease came. There were some tense moments, but the landlord eventually let my client go free, without drawing down on their letter of credit. I assume that the principals of landlord evaluated the situation as follows – this tenant defaulted less and later than the other tenants in the building during the Pandemic, and it was not worth fighting about a certificate of occupancy issue, which, if it gained traction, could be used by other tenants in the subject building.

All is well that ends well for both sides.

Respectfully submitted,

Michelle Itkowitz