On March 11, 2014, a divided panel of the First Department issued a decision in Building Service Local 32B-J Pension Fund v. 101 Limited Partnership, 2014 NY Slip Op, 01544, addressing issues arising from a commercial tenant’s breach of duty to repair its premises.
Building Service Local 32B-J Pension Fund arose out of a commercial lease that required the tenant to keep the premises in repair and to surrender it to the landlord in good condition. The landlord sent the tenant a notice stating that the tenant had violated its duty to repair and that it intended to enter the premises and conduct the repairs itself. In response, the tenant commenced the action and obtained a Yellowstone-type preliminary injunction—supported by a bond in excess of $4m—prohibiting the landlord from entering the premises to make repairs. After the lease expired, the landlord counterclaimed for damages arising from tenant’s failure to repair, seeking, inter alia, damages for lost rent because the tenant’s actions had delayed the landlord in repairing and re-leasing the premises. The tenant moved to dismiss that claim and to dissolve the bond, both of which were granted by the motion court.
The majority affirmed dismissal of the claim for delay damages, holding that:
It is well settled that lost rent is not recoverable as damages for breach of a lease covenant requiring a tenant to keep the premises in good repair . . . . If the action is brought before the lease expires, a landlord can recover the injury done to the reversion, i.e. the difference between the value of the premises with the improvement and absent the improvement . . . . if the action is brought after the expiration of the lease term, the measure of the damages is the cost of putting the premises into repair.
(Internal citations and quotations omitted.)
The majority also relied upon the fact that the lease nowhere provided that “additional rent beyond the term of the lease” would be available as a remedy for failure to repair.
However, the majority did hold that lost rent may be available “as damages against the undertaking” under CPLR 6312(b), which provides for “all damages and costs which may be sustained by reason of the injunction,” and reversed the motion court’s release of the bond for failure to consider whether the preliminary injunction was warranted.
The dissent agreed that delay damages would be available against the bond, but also would have held that delay damages were available under the lease:
The lease contains no limitation on landlord’s right to recover damages for a default under the Upkeep Clause or from tenants’ blocking landlord’s contractual right to perform the system repair work itself if tenants fail to do so. Thus, landlord is entitled to recover its economic losses, including delay damages, if proven, that were caused by tenants’ breach and that the parties had reason to foresee as a likely result of the breach.
This case illustrates both the need for leases to specify that lost rent will be an available measure of damages, and also the need for a sufficient bond. Setting aside questions of proof, if not for the substantial bond obtained, the landlord might have been left without a remedy for any lost rent.