Madison Avenue Leasehold, LLC v. Madison Bentley Associates LLC

OPINION OF THE COURT Tom, J.P. Defendant Madison Bentley Associates (Bentley) is the assignee of a 10-year lease between plaintiff landlord and nonparty MMC Madison LLC, commencing June 15, 2000, for commercial space to be used to sell luxury automobiles.1 The lessee’s payment of rent was guaranteed by the individual defendants under a contemporaneously executed instrument. The guaranty recites that, “in the event Tenant shall not have been in monetary — 3 — default under the Lease at any time during the first three (3) years of the Lease, this Guaranty and Guarantor’s [sic] obligations hereunder shall cease and terminate upon the third (3rd) anniversary of the Commencement Date.” It is uncontroverted that Bentley quit the premises and ceased payment of rent on September 29, 2003, some three years and three months after the commencement date of the lease. At issue on this appeal is whether Bentley was in default of its lease with plaintiff so as to continue in effect the guaranty of the corporate tenant’s performance made by its principals, defendants Arthur Miller and Brian Miller. By its terms, continuation of the guaranty is predicated on the tenant’s “monetary default” during the first three years of the lease term. It is plaintiffs contention that a series of defaults of the lease’s timely payment covenant occurred because Bentley habitually paid rent within the 20-day grace period prescribed in the lease,2 rather than “in advance on the first day of each calendar month,” as specified in the lease rider, purportedly fulfilling the guaranty’s termination condition. However, even accepting, for the sake of argument, that a “default” under the lease is synonymous with a “monetary default” under the lease rider and guaranty,3 landlord’s acceptance of the tendered rent with knowledge of the lease violation extinguishes the default as a matter of law. Moreover, landlord’s practice of accepting the proffered rent payments, without protest, over a period of three years, constitutes a course of conduct effecting a waiver of the timely payment covenant. Thus, we conclude that any asserted default was extinguished, that the conditions necessary to subject the guarantors to liability were never met, that the condition for extending the guaranty was never fulfilled and that the guaranty ceased to have any force and effect upon the third anniversary of the lease. — 4 — In granting the individual defendants’ motion to dismiss the complaint as against them, Supreme Court held that the timely payment covenant of the lease had been waived and that any default was de minimis. The court reasoned that the purpose of the parties’ collateral agreement was to guarantee payment during the first three years of the lease term, the same time period during which Bentley received a rent subsidy from Rolls-Royce. Having failed to seek redress under the lease, the court concluded that landlord “waived any alleged defaults which occurred through Madison Bentley’s adherence to its unchallenged payment practices during the first three years of its lease.” On appeal, plaintiff takes the same position advanced before the motion court, that Bentley’s repeated failure to tender rent on or before the first of each month constitutes a series of defaults under the lease covenant that requires payment to be made on the first day of each month.4 Landlord argues that its tenant was therefore “in monetary default under the Lease” during the first three years of the lease term, that the condition for extension of the guaranty was fulfilled and that the individual defendants are liable under their guaranty for the rent payable for the balance of the lease term. The disputed default provision of the lease is hardly a model of clarity. However, the parties agree that the term “monetary default,” as used both in the guaranty and in the rider to the lease, embraces a default in the payment of rent (although they dispute precisely when a “default” represented by late payment ripens into “monetary default” so as to subject the guarantors to liability). They also agree that the only basis for enforcement of the guaranty beyond June 15, 2003 is the tenant’s “monetary default” during the first three years of the lease (however that term might be construed). Finally, because the extinguishment date of the guaranty precedes by several months the tenant’s breach of the lease upon quitting the premises, there is no dispute that the liability of the individual defendants for the balance of the rent due is solely dependent on the tenant’s “monetary default” under the lease during the first three years. To identify what conduct constitutes a default in the payment of rent, landlord relies exclusively on the terms of the lease, concluding that “default” encompasses any period during which the rent remained unpaid after the due date on the first of each — 5 — month. Even though any such default was ultimately cured by payment of rent within the grace period, landlord maintains that the tenant’s technical violation of the lease’s timely payment covenant is sufficient to fulfill the guaranty’s extension provision. The individual defendants argue that landlord’s conduct in repeatedly accepting late rent payments constitutes a waiver of the timely payment covenant of the lease, as Supreme Court found. They contend that the interpretation propounded by landlord would effectively negate the three-year limitation provision of their guaranty. Landlord responds that waiver is inapplicable to the facts of this case because there is no need to invoke the courts’ equitable powers. It notes that, because its tenant voluntarily removed from the premises, no forfeiture of the leasehold is at stake. Therefore, it contends, it is unnecessary to apply the waiver doctrine to avoid the loss of a valuable leasehold interest. “A waiver is the voluntary abandonment or relinquishment of a known right. It is essentially a matter of intent which must be proved” (Jefpaul Garage Corp. v Presbyterian Hosp. in City of N.Y., 61 NY2d 442, 446 [1984]). Waiver is certainly employed by the courts as a tool of equity to prevent forfeiture (e.g. Baker v Norman, 226 AD2d 301 [1996], lv dismissed 88 NY2d 1040 [1996]; Dellicarri v Hirschfeld, 210 AD2d 584 [1994]). However, contrary to plaintiffs contention, its application is not restricted to the exercise of the courts’ equitable powers but extends to the interpretation of contracts generally (e.g. Computer Strategies v Commodore Bus. Machs., 105 AD2d 167, 174 [1984] [dealership agreement]). This Court applied the waiver doctrine to a dispute over the terms of a guaranty in Bank Leumi Trust Co. of N.Y. v Block 3102 Corp. (180 AD2d 588, 590 [1992], lv denied 80 NY2d 754 [1992]), stating: “a contracting party may orally waive enforcement of a contract term notwithstanding a provision to the contrary in the agreement (Alside Aluminum Supply Co. v Berliner, 32 AD2d 731). Such waiver may be evinced by words or conduct, including partial performance (see, Rose v Spa Realty Assocs., 42 NY2d 338, 343-344). . . . Waiver is unilateral and, ‘not being a binding agreement, can, to the — 6 — extent that it is executory, be withdrawn, provided the party whose performance has been waived is given notice of withdrawal and a reasonable time after notice within which to perform’ (Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175, 184).” The same criteria are pertinent to deciding the instant controversy. It is well established that “[w]hen rent is accepted with knowledge of particular conduct which is claimed to be a default, the acceptance of such rent constitutes a waiver by landlord of the default” (Atkin’s Waste Materials v May, 34 NY2d 422, 427 [1974], citing Woollard v Schaffer Stores Co., 272 NY 304, 312 [1936] and Murray v Harway, 56 NY 337 [1874]), unless landlord has promptly demanded correction of the disputed conduct, in which case waiver is a question of fact (see Jefpaul Garage, 61 NY2d at 448-449). Any provision of a contract is subject to waiver, particularly a provision requiring timely payment (Snide v Larrow, 93 AD2d 959, 959 [1983] [“knowledgeable acceptance of late payments over an extended period of time . . . establishes the necessary elements to constitute a waiver of the right to insist upon timely payments” (citing Ford v Waxman, 50 AD2d 585 [1975])], affd 62 NY2d 633 [1984]; see Calamari and Perillo, Contracts § 11.31, at 444 [4th ed]). The principle is equally applicable to a lease (see East 4th St. Garage v L.B. Mgt. Co., 172 AD2d 292, 292 [1991], citing 61 E. 72nd St. Corp. v Zimberg, 161 AD2d 542 [1990]). The inclusion of a merger clause in an instrument is no bar to waiver because “a contractual provision against oral modification may itself be waived” (Rose v Spa Realty Assoc., 42 NY2d 338, 343 [1977], supra). As here, a no-waiver clause is waived by the acceptance of rent (TSS-Seedman’s, Inc. v Elota Realty Co., 72 NY2d 1024, 1027 [1988]; see also Lee v Wright, 108 AD2d 678, 680 [1985] [“parties may waive a ‘no-waiver’ clause”]). Because this dispute concerns the performance of obligations under a lease, the legal rights of the parties must be construed in light of well-settled landlord-tenant law, which clearly establishes waiver under the facts of this case. It is undisputed that, during its tenancy, Bentley engaged in a practice of making late rent payments, generally within 10 days (23 payments) and otherwise, with a single exception, within 20 days of the due date. Landlord accepted all late payments without protest and without taking any action. No proceedings were instituted — 7 — to recover past-due rent, and no notice demanding timely payment was ever sent to Bentley. In fact, landlord did not raise the timeliness of Bentley’s rent payments until after the third anniversary of the lease, when in early 2004, it commenced this action to recover the rent due for the remainder of the lease term. The course of conduct of the parties to the lease clearly establishes waiver of its timely payment provision as a matter of law. Out of simple fairness, a party that has repeatedly waived a condition of performance, particularly the timeliness of payment, is required to give notice that its waiver has been withdrawn before demanding strict compliance with the condition (see Bank Leumi Trust Co., 180 AD2d at 590; Calamari and Perillo, Contracts § 11.32, at 447-448 [4th ed]). This requirement simply recognizes the reasonable expectations that arise from a course of conduct. This Court applied the rule to the relationship of landlord and tenant nearly a century ago in Montant v Moore (135 App Div 334, 341 [1909]), stating: “where under a lease in which payment of the rent is required upon a day certain the parties by a course of conduct extending for years have acquiesced in a method by which the rent is to be paid, the provision for payment in the original contract is so far waived as to prevent a claim that a failure to pay upon the day named is a breach of the condition until the lessee has notice of the fact that such a custom will not in the future be continued and payment is required upon the day named in the contract.” Having failed, over the course of three years, to give Bentley any notice that timely payment of rent would be required, landlord may not now insist that its tenant’s failure to strictly comply with the timely payment condition of the lease constitutes a default. Plaintiff would have this Court disregard these well-settled legal principles in favor of the strained interpretation it places upon the governing lease. In landlord’s narrow view, a “default” is defined by the peculiar language of its lease, divorced from the concepts of default and waiver well entrenched in the law of contracts and leaseholds. There are several fatal deficiencies in this position. “Parties who engage in transactions based on prevailing law must be able to rely on the stability of such precedents” (Holy — 8 — Props. v Cole Prods., 87 NY2d 130, 134 [1995]). While words are generally assigned their ordinary meaning, where a word has attained the status of a term of art and is used in a technical context (here, a lease), the technical meaning is preferred over the common or ordinary meaning (Calamari and Perillo, Contracts § 3.13, at 155 [4th ed]).5 The law is so well settled with respect to both the meaning and the legal ramifications of a “default” under a lease that plaintiff bears an insurmountable burden to demonstrate that the parties to the guaranty intended to ascribe a different meaning to the term. It must be emphasized that the document subject to interpretation is a standard form lease. To construe conduct that the law does not consider a default to somehow constitute a default under the terms of this lease would cast doubt on the meaning of the term in all leases, removing them from the application of well-established landlord-tenant law. Even were we so inclined, this Court would not confound well-settled principles governing leaseholds for the sake of enforcing a mere collateral agreement. Yet another consideration in interpreting the guaranty is the reasonable expectations of the parties and the business purpose to be served by their contract (Uribe v Merchants Bank of N.Y., 91 NY2d 336, 341 [1998]). Besides the common meaning of the language employed, the expectations and purposes of the parties in view of the factual context in which the agreement was made must be considered in interpreting a contract term, with due regard to the parties’ sophistication (id.; see also Ace Wire & Cable Co. v Aetna Cas. & Sur. Co., 60 NY2d 390, 398 [1983] [insurance policy]). With respect to reasonable expectations, it is axiomatic that the parties to an agreement will interpret the instrument governing their relationship in accordance with existing law (see 1009 Second Ave. Assoc. v New York City Off-Track Betting Corp., 248 AD2d 106, 109 [1998], lv dismissed 92 NY2d 947 [1998]). It is disingenuous to argue that the individual defendants expected their obligations under the guaranty to be extended by a mere technical violation rather than by a material default. Significantly, the condition of the guaranty that obligates them to reimburse landlord for any rent the tenant failed to pay was never activated; all rent due during the relevant three-year pe — 9 — riod was fully paid within the grace period. Furthermore, in view of the coextensiveness of the guaranty and the rent subsidy received by Bentley from Rolls-Royce, it is reasonable to conclude that the parties intended the term of the guaranty to be limited to three years unless the guarantors’ obligations thereunder were actuated by landlord’s tangible loss, whether due to the failure to receive payment of outstanding rent or some other out-of-pocket expense. Finally, though not essential to the disposition of this appeal, the incorporation of a grace period during which no action would be taken as the result of the tenant’s failure to make a rent payment indicates that the parties did not intend immediate legal consequences to ensue as the result of a rent payment made after the due date. Another lease provision affording Bentley free use of the premises for the first two months is similarly conditioned on the absence of default under the lease. It states, “provided this Lease shall be in full force and effect and Tenant shall not be in default hereunder beyond any applicable notice and grace periods, the fixed rent shall abate at the rate of $36,066.67 per month for a period of two (2) months from and after the Commencement Date.” It is clear from this language that any default is not material to the abatement until the expiration of “any applicable . . . grace period[ ].” Landlord advances no reason why a default in the payment of rent should entail immediate adverse consequences for the tenant, even though it was ultimately cured (by acceptance of late payment without protest) and waived (by repeated acceptance of late rent over a period of years). “It is the rare writing that requires no interpretation” (Bensons Plaza v Great Atl. & Pac. Tea Co., 44 NY2d 791, 792-793 [1978]). In construing an agreement, “not merely literal language, but whatever may be reasonably implied therefrom must be taken into account” (Sutton v East Riv. Sav. Bank, 55 NY2d 550, 555 [1982]). A reasonable construction of the termination provision is that the guaranty will continue only if, during the first three years of the lease, landlord has been required to seek payment from the tenant for a breach of the lease (not necessarily one involving the payment of rent). It is undisputed that, during this time period, landlord was subject to no impending financial loss that required resort to its remedies, either against its tenant or the guarantors. Similarly unavailing to landlord’s attempt to avoid the consequences of waiver is its resort to the terms of the guaranty — 10 — itself. Plaintiff again employs a strained interpretation of the language of the instrument to argue that its waiver of timely payment of rent under the lease does not affect its right to hold the individual defendants liable under their guaranty. Plaintiff relies on certain “no waiver” provisions of the guaranty, which recite that the individual defendants’ obligations “shall in no wise be terminated, affected, diminished or impaired by reason of . . . the failure to assert . . . any of the rights or remedies reserved to Landlord pursuant to any provisions of the Lease,” and that the guarantors’ “liability . . . shall in no way be affected ... by reason of any extension of time that may be granted by Landlord to Tenant.” Plaintiff reasons that because waiver constitutes the “failure to assert . . . rights or remedies reserved to Landlord [under] the Lease,” and because waiver resulted from an “extension of time” to pay the monthly rent, such waiver cannot be the basis for the termination of the individual defendants’ obligations under the guaranty. This reasoning, adopted by the dissenter, is flawed by its attempt to read the guaranty separate and apart from the condition under the lease that gives the guaranty force and effect. Simply put, landlord attempts to read the guaranty without any regard to the condition that must first be satisfied to render it effective, that is, a “monetary default” under the lease. While conceding that “contractual provisions can be waived,” the dissent perceives the decisive issue to be not whether landlord waived the right to timely payment under the lease but “whether [landlord] waived any of its rights under the guaranty against the Millers,” concluding that the guaranty’s “no waiver” provisions insulate landlord from the effect of any waiver of performance under the lease. A contract of guaranty is subject to the fulfillment of any condition precedent to the liability imposed on the guarantor (compare American Tobacco Co. v Halle-Perris Trading Corp., 212 App Div 627, 629 [1925] [condition precedent], with American Exch. Irving Trust Co. v Siegel, 229 App Div 453 [1930] [condition subsequent]). In particular, “[t]he guarantor’s liability accrues only after default on the part of the principal obligor” (Brewster Tr. Mix Corp. v McLean, 169 AD2d 1036, 1037 [1991], citing General Phoenix Corp. v Cabot, 300 NY 87, 95 [1949]). Thus, to establish that the guaranty ever took effect, plaintiff must demonstrate that there was a default on the part of the principal obligor, Bentley. As the Court of Appeals stated in Hicks v Bush (10 NY2d 488, 493 n 1 [1962], quoting Golden v — 11 — Meier, 129 Wis 14, 18, 107 NW 27, 29 [1906]), “ ‘If the condition precedent be not performed, then the contract will never have vitality or become a binding agreement.’ ” The condition precedent that must be fulfilled in order to subject the guarantors to liability under the provisions of the guaranty is a “monetary default” under the lease. Furthermore, the guaranty provides that it shall cease on the third anniversary “in the event Tenant shall not have been in monetary default under the Lease at any time during the first three (3) years of the term of the Lease.” To determine whether the guaranty ever became effective and whether it remained in effect at the time Bentley vacated the premises, we must look to the lease to determine whether there was a “monetary default” by the tenant. If there was no “monetary default” under the lease, the condition precedent was not fulfilled and the guaranty, together with its “no waiver” provisions concerning landlord’s enforcement of its rights and remedies, never had any force and effect. As previously stated, because landlord, by a course of conduct extending over a period of years, waived the tenant’s late payment of rent, there was no “monetary default” by the tenant under the lease during the applicable three-year period, the guaranty neither took effect nor was extended, and the guarantors were never subject to its terms and obligations. Once waived, the default in timely payment of rent is extinguished and cannot later be revived, like a phoenix, into a material default for the purpose of extending the period of the collateral guaranty. Thus, the loss sought to be recouped in this action, resulting from a default (vacatur of the premises) that occurred three years and three months after the commencement of the lease, is not recoverable from the individual defendants. To recapitulate, continuation of the guaranty is predicated solely upon a “monetary default,” conceded by all to mean a default in the payment of rent under the lease. The only such default identified by landlord is the failure to make rent payments on the first of each month, not its failure to receive any individual rent payment. Moreover, landlord’s consistent acceptance of late rent payments, without protest, constitutes a waiver of the lease provision requiring prompt payment as a matter of law. Thus, there has been no default by the tenant in the payment of rent, and the guaranty expired according to its terms due to the lack of the antecedent “monetary default” under the lease required by the guaranty’s extension provision. Accordingly, the order of the Supreme Court, New York County (Sherry Klein Heitler, J.), entered January 10, 2005, — 12 — which granted the cross motion of defendants Arthur Miller and Brian Miller for summary judgment dismissing the complaint to the extent that it alleged their individual liability for breach of a lease between plaintiff and defendant Madison Bentley Associates, and denied, as moot, plaintiff’s motion to amend the complaint to add allegations of these individual defendants’ personal liability, should be affirmed, without costs. Footnotes [1] The lease is signed by defendant Brian Miller as managing member of MMC Madison LLC. [2] While the provisions of the lease rider could be read to the contrary, paragraph 17 of the printed lease agreement provides “if tenant defaults in . . . the covenant for the payment of rent . . . and if tenant shall not have diligently commenced curing such default within such twenty (20) day period . . . then owner may serve a written three (3) day notice of cancellation of this lease upon tenant.” Regardless of landlord’s present position, as urged by the dissent, that there is no 20-day grace period, we find that the parties have acknowledged such a grace period pursuant to paragraph 17 of the lease, by landlord’s repeated acceptance of rent within the 20-day period over the course of three years without a single protest. [3] The guaranty provides that any terms “defined in the Lease shall have the same meanings when used in this Guaranty.” The term “monetary default,” while used in the lease rider, is not expressly defined in that document. [4] The provision is contained in a standard form of store lease published by the Real Estate Board of New York, Inc. [5] The exception, inapplicable under these circumstances, is where “another intention is established, as where there is a non-technical meaning and one party is a layperson” (id.).