by Andrew Fine, JD (NYS Bar admission pending; firm alumnus)
Through a recent appellate court decision, New Yorkers were gravely reminded that the age-old commercial concept of “caveat emptor” – which is Latin for “buyer beware” – applies with equal force to those seeking commercial leases. Due diligence and factual investigation, it appears, are burdens naturally imposed on buyers and lessees alike.
On September 14, 2016, the Second Department of the New York Supreme Court, Appellate Division, decided 1357 Tarrytown Road Auto, LLC v. Granite Properties, LLC.[1] In this case, the plaintiff was a company that operated an automobile dealership (hereinafter, “Tarrytown”) which sought to expand its business by leasing additional property from the defendant (hereinafter, the “Landlord”) in the Town of Greenburgh, New York. After negotiation, the two parties entered into an agreement whereby the Landlord assigned an existing lease to Tarrytown. The agreement was finalized in July of 2013.
For the next two months, it was business as usual. In September, 2013, however, Tarrytown discovered that local law prohibited vehicles without license plates from parking on the leased premises (hereinafter, the “local ordinance”). Because Tarrytown intended to operate an automobile dealership on the premises, this local ordinance presented an unwelcome surprise as well as a serious obstacle. Tarrytown argued that the practice of parking cars without license plates on a dealership lot was “essential to the business of selling automobiles.”[2] Indeed, common sense would tend to support that argument.
Despite knowledge that Tarrytown intended to operate a car dealership on the premises, the Landlord had not disclosed the existence of this local law to Tarrytown during their lease negotiation, and the lease itself contained no mention of the local ordinance. The terms of the lease explained instead that provisions in the lease related to the parking of automobiles were subject to “any restrictions of local law, zoning, or ordinance.”[3] The relevant local ordinances were neither mentioned nor described in the lease outside of this generalized provision. Surprised and frustrated by its discovery, in September, 2013, Tarrytown asked the Landlord for a release from the Lease given the commercially frustrating nature of this local ordinance. The Landlord refused.
Tarrytown subsequently brought suit in New York supreme court against the Landlord seeking release from the lease. Specifically, it alleged that the Landlord fraudulently induced Tarrytown into signing the lease by refusing to disclose the local ordinance, and that the Landlord had breached an implied covenant of good faith and fair dealing by failing to disclose the ordinance. The Landlord brought a motion to dismiss Tarrytown’s complaint. The New York supreme court granted this motion to dismiss, but only in part, with respect to the cause of action alleging fraudulent inducement. The Landlord, believing that the supreme court erred by declining to dismiss the complaint in its entirety, and appealed the supreme court’s order.
On appeal, the Second Department ruled in favor of the Landlord, and found that the lower supreme court should indeed have dismissed Tarrytown’s complaint in its entirety. But why?
The Second Department explained that the implied covenant of good faith and fair dealing is breached “when a party acts in a manner that would deprive the other party of the right to receive the benefits of their agreement.”[4] Simply put, this covenant constructively includes any promises “which a reasonable [person]…would be justified in understanding were included” with the rest of the written contract.[5] It was Tarrytown’s contention that the lease carried with it an implied promise from the Landlord that the premises were legally suitable for their intended purposes. The Second Department, however, felt otherwise. It explained that the lease explicitly provided that “no representation concerning the suitability of the premises for [Tarrytown’s]…intended business” was made in the lease. Accordingly, the court declined to “impos[e] a duty on the Landlord to disclose zoning or local law restrictions” on the basis that doing so would impose a duty on the Landlord that was expressly disclaimed by the lease.[6] The Second Department even went one step further by explaining that, generally speaking, contracts such as this may “conclusively establish a defense to causes of action alleging breach of the implied covenant of good faith and fair dealing.”[7] In essence, this means that contracts which state that no representations are being made therein with respect to a certain matter cannot be later invalidated on the basis that the contract should have made such a representation. This judicial analysis appears not to hinge on fairness, but rather on the express defensive language within the contract.
This case may understandably leave New York entrepreneurs and commercial lessees feeling uneasy. After all, this precedent places the burden on lessees to conduct their own due diligence before signing a lease by researching and identifying local zoning laws, local ordinances, and other rules and regulations that could disturb business on the premises. Commercial lessees would be prudent to carefully negotiate with landlords for the inclusion of express warranties and assurances in the lease itself. By the same token, lessees should be wary of those clauses which disclaim representations in the agreement.[8] Otherwise, lessees may fall prey to obscure and unknown regulations that serve to plague the premises that they paid so much to lease. To all business people who are shopping now or in the future for commercial leases: good luck, and caveat emptor.
[1] See generally 1357 Tarrytown Rd. Auto, LLC v. Granite Properties, LLC, 37 N.Y.S.3d 341 (N.Y. App. Div. 2d Dept. 2016).
[2] Id. at 342.
[3] See id. at 343.
[4] Id., citing Frankini v. Landmark Constr. of Yonkers, Inc., 937 N.Y.S.2d 80 (N.Y. App. Div. 2d Dept. 2012)
[5] Id., citing Dalton v. Educ. Testing Serv., 663 N.E.2d 289 (N.Y. 1995)
[6] Id.
[7] Id., citing Minovici v. Belkin BV, 971 N.Y.S.2d 103 (N.Y. App. Div. 2d Dept. 2013)
[8] See “New York Court Reminds Tenants to Do Their Due Diligence,” Westlaw Practical Law Real Estate, Oct. 28, 2016.
Augustus
An essential function of a court adjudicating a contractual dispute is striking a balance between maintaining, what I may term, the integrity and a higher sense of justice, while allowing parties to an arms length bargain the spoils of their bargain. This is especially so when both parties are commercial ones.
Jurisprudence of New York Courts show, generally, a contract may justify rescission where mistakes exist at the time the contract is entered into, and the mistake is substantial.1 Some well-drafted commercial leases expressly provide for 3-6 month periods in which the tenant maybe able to cancel the agreement should they not be in a position to secure the necessary permits in order to use the premises as intended.2
Having said that it is also essential that parties, whether commercial or otherwise, have complete faith in the legal system. The courts are the last line of defense against actual or perceived injustice. In this case, the landlord and tenant, presumably engaged in protracted negotiations before reaching the agreement. During these negotiations the landlord had express notice the tenant was going to use the premises for a purpose forbidden by the local ordinances. The courts should not attempt to shy away from reaching a justifiable decision between commercial parties, merely because it wants to preserve and give effect to ‘a bargain at arms length’. Parties should come to court with the confidence it will ‘do the right thing’. With that regards this decision, based on the facts, is not one where, even though the four corners of a written agreement may have been upheld, justice ‘was done, nor seen to be done.’
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1. Dandey Realty Corp. v. Nick’s Hideaway, Inc., 24 Misc. 3d 105, 106–07, 886 N.Y.S.2d 549, 550 (App. Term 2009)
2. Id.
Adrien
Haste makes waste! This case serves as a great reminder that proper due diligence can never be overestimated. In this case, a proper investigation would have revealed the local ordinance prohibiting vehicles without license plates from parking. More importantly, this case is also a stark reminder that the first step of any due diligence is a careful review of the contract. In our fast paced society, we tend more and more to conclude contracts hastily. That is why it is crucial, especially for small business owners, to hire qualified counsel to carefully review and negotiate their contracts. In this case, the lease provided that: “no representation concerning the suitability of the premises for […] the intended business” was made to the tenant. A proper review of the contract would have indubitably questioned this provision.
A quick remark on caveat emptor. The doctrine is not per se a problem. One can only agree with the Court in considering that business people should be held to a high standard of prudence. However, such a doctrine may raise problems when apply disparagingly across the board, for instance in the realm of consumer law.
Notwithstanding the above, this case does raise some serious issues because it was established that the Landlord purposefully concealed crucial information during the negotiations. Indeed, he knew of the ordinance and thus that the future tenant would not be able to run its dealership as reasonably intended by the tenant. Ultimately, it is for this reason that the Tenant should not be bound by a contract into which he was deceitfully led.
Kara
The writer of the article concluded that the judicial analysis in Tarrytown did not “hinge on fairness, but rather on the express defensive language within the contract.” While it may be reasonable to hold landlords to this standard of only having to do the bare minimum in just including defense provisions, while withholding information that could affect a buyer’s decision to purchase, it almost begs the question: is it fair to do so? Why is the court okay with landlords deliberately leaving out information that could potentially change a tenant’s decision to lease a property?
The doctrine of caveat emptor represents judicial perception that a buyer must look out for oneself. It was created for potential buyers as a reminder to protect themselves from disputes like the one that had arisen in Tarrytown. Caveat emptor serves to minimize allegations of deceit but will not be a defense in a case of fraud, where intent to deceive is a factor in play. So why don’t buyers initially beware if the caveat intends to advise the buyer to protect oneself?
Perhaps because of the existence of caveat emptor, courts give deference to landlords who leave certain facts out when leasing or selling property to a buyer. The burden is on the buyer to be thorough and cautious in their property search. After all, tenants have nothing but a few minutes of time to lose by doing a quick search prior to leasing a commercial property. Buyers need to be knowledgeable of the fact that the doctrine of caveat emptor is a reminder that they should do exactly that. A potential buyer should beware, or be aware, of anything that could alter his or her decision to lease or purchase property prior to the execution of a lease because failure to do so will only result in unnecessary litigation and/or an unfavorable outcome. Commercial lessees should particularly take extra caution in seeking counsel prior to signing a lease that would hold them accountable for property for a number of years. A landlord takes the initial step in drawing up the contract and, oftentimes, expressly includes provisions that can exempt them from facing certain liabilities. In return, when faced with the lease, a lessee, or his attorney, must conduct diligence in thoroughly reading the contract and decide whether to negotiate or exclude terms. Lessees should also take heed and insert warranties that would protect them in the event of a Tarrytown issue. Even though a landlord would be adverse to such warranties, lessees should not be afraid to negotiate the terms of an agreement.
In Tarrytown, the landlord failed to mention an ordinance that prohibited vehicles without license plates from parking on leased premises to a lessee who intended to operate a car dealership on a leased premises in that town. The lease only provided that provisions within it were subject to any restrictions of law, zoning, or ordinance, so tenants did not know about the restrictive law until they were already contracted with the landlord. The Second Department held that the landlord did not breach their implied covenant of good faith and fair dealing like the lessees alleged. Because the landlord did not act in a manner that would deprive the other party of the right to receive the benefits of their agreement, the implied covenant was not breached. But, by societal standards, is that decision “fair”? The court didn’t seem to care in this case. It stated that the landlord did not make any representations concerning the suitability of the premises for the tenant’s intended business in the lease agreements and, thus, a duty on the landlord to disclose zoning or local law restrictions would render those provisions ineffective.
The author of the article suggested that the landlord likely knew about the ordinance and failed to disclose it to the tenant. Agreeably, it is likely that the landlord knew about the local law and purposely included this “defense provision” in the lease as a release from a potential breach of the implied covenant of good faith and fair dealing so that he would not be obligated to discharge the tenant from the lease.
It seems wrong that the Second Department could not find a way to resolve the mess that this tenant found himself in. If the implied covenant of good faith and fair dealing is deemed to be breached when one party acts in a way that would deprive the other of the right to receive the benefits of the agreement, one could argue that the landlord breached this duty because he deprived his tenant from being able to reap the benefits from the property by failing to disclose the ordinance. The landlord knew that the tenant was using the land for a purpose that was prohibited by local law. The direct benefit derived by the tenant was supposed to be use of the commercial property as a dealership so that he could run his business and profit from the sale of vehicles. And because the tenant did not know about the local law, the Tarrytown tenant did not receive said benefits within the agreement.
The court seems to take the position that omission of fact is a lesser evil than a lie. A landlord is certainly not allowed to misrepresent facts pertaining to the property he’s leasing, but he can exempt himself from being liable from anything not stated in the lease. Tarrytown teaches a lesson that lessees must learn: the doctrine of caveat emptor is an important admonition that people must keep in the back of their head before signing a lease. As the author rightly stated, lessees must identify local zoning laws, ordinances, and other rules or regulations that could disturb business on the premises. The court takes the stance that it is a buyer’s duty to know what they are contracting to, and thus caveat emptor comes into play. So, to answer the question posed at the beginning, a judicial decision cannot be deemed unfair if a warning is given and the buyer fails to take it. Lesson learned.