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October 25, 2021

Fourth Department Explains When a Defaulting Commercial Tenant Is No Longer Responsible for Future Rent

On October 1, 2021, the NYS Supreme Court Appellate Division, Fourth Department, reversed a lower court’s grant of summary judgment to a landlord for money damages through the expiration of a lease term after a commercial tenant, a furniture store, discontinued rent payments and abandoned the premises as a result of the pandemic and related government shutdown orders. In University Sq. San Antonio, Tx. LLC v. Mega Furniture Dezavala, LLC, 2021 N.Y. App. Div. LEXIS 5333 (4th Dep’t 2021), a unanimous Fourth Department noted that “the Landlord reentered, re-keyed, and retained possession” of the space that the tenant had abandoned.

The Fourth Department explained under what circumstances a tenant who abandons the premises is no longer liable to the landlord under the lease:

Generally, a tenant is relieved of its obligation to pay full rent due under a lease where it surrenders the premises before expiration of the term and the landlord accepts its surrender. A surrender by operation of law may be inferred from the conduct of the parties where “the parties to a lease both do some act so inconsistent with the landlord-tenant relationship that it indicates their intent to deem their lease terminated,” i.e., where the tenant vacates the premises and returns the keys, and the landlord procures a new tenant. “Such a surrender and acceptance severs the relationship between the parties upon the creation of an estate inconsistent with the prior tenant’s rights under the lease.” Further, “conduct by the landlord which [falls] short of an actual reletting but which indicate[s] the landlord’s intent to terminate the lease and use the premises for his [or her] own benefit” may evince an intent to accept a tenant’s surrender of the premises. [Citations are in the decision at the link below.]

The court further explained that “[w]hether a surrender by operation of law has occurred is a determination to be made on the facts.” (A citation is in the decision.) A link to the Fourth Department’s full decision can be found here

Prior to this ruling by the Fourth Department, the case law in New York has been difficult to understand and has been applied inconsistently. As a result of this decision, commercial landlords who re-take possession of the premises following a tenant’s abandonment and take affirmative steps to re-let face the very real prospect of not being able to recover from the tenant the unpaid rent through the expiration of the lease term. Accordingly, commercial landlords should either attempt to obtain a judgment against the tenant before re-taking control of the premises (other than to maintain the integrity of premises), or choose to re-take only when obtaining a new tenant is likely.

If you have questions regarding the content of this alert, please contact Sarah O’Brien, associate, at sobrien@barclaydamon.com; Mike Ferdman, partner, at mferdman@barclaydamon.com; or another member of the firm’s Commercial Litigation Practice Area.
 

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