Category: Uncategorized

By Patrick McCormick

The long standing “one inch” rule in New York, in connection with actual partial evictions, as explained by Judge Cardozo1 has been that an actual eviction by a landlord, even if partial, and no matter how trivial, will suspend the entire rent owed by the tenant. The reason for such rule, as explained by the Court of Appeals2 is “that the tenant has been deprived of the enjoyment of the demised premises by the wrongful act of the landlord; and thus the consideration of his agreement to pay rent has failed.”

As a result of such rule, practitioners in Landlord/Tenant courts are (or were) well aware that a full 100% rent abatement would result, even if a tenant remained in possession of the premises,3 if a landlord physically expelled or excluded a tenant from any part of the leased premises.

The Court of Appeals in Eastside Exhibition Corp. v. 210 East 86th Street Corp.,4 while claiming it was not overruling this longstanding rule, appears to have done just that.

The facts in Eastside are straightforward: Eastside, as tenant, entered into an 18 year lease with 210 86th Street Corp., as landlord, to operate a multiplex movie theater. The lease allowed landlord to make repairs and improvements without an abatement of rent during the period the work was in progress and also provided that the tenant would not receive an allowance for any diminution in value resulting from the repairs or improvements. Approximately 4 years after commencement of the term, without notice, landlord entered the premises and “installed cross-bracing between two existing steel support columns on both of plaintiff’s leased floors causing a change in the flow of patron traffic on the first floor and a slight diminution of the second floor waiting area.” Plaintiff ceased paying rent alleging an actual partial eviction. At trial, the parties stipulated that the total area of the demised premises was between 15,000 and 19,000 square feet and that the cross-bracing installed by landlord occupied approximately 12 square feet. The Supreme Court dismissed plaintiff’s claim and entered judgment for defendant holding that “the taking of 12 square feet of non-essential space in plaintiff’s lobby constituted a de minimis taking not justifying a full rent abatement.” The Appellate Division, First Department modified, “holding that there is no de minimis exception to the rule that any unauthorized taking of the demised premises by the landlord constitutes an actual eviction” but held that the remedy was not a full rent abatement but compensation to plaintiff for its actual damages. During an inquest, the plaintiff’s witnesses were not able to estimate actual damages testifying that given the variables in the motion picture industry, damages were impossible to determine. The Supreme Court made no damage award to plaintiff and the Appellate Division affirmed.

On these facts, and acknowledging the existence of the long standing rule, the Court of Appeals held “Given the inherent inequity of a full rent abatement under the circumstances presented here and modern realities that a commercial lessee is free to negotiate appropriate lease terms, we see no need to apply a rule, derived from feudal concepts, that any intrusion-no matter how small-on the demised premises must result in a full rent abatement. Rather, we recognize that there can be an intrusion so minimal that it does not prescribe such a harsh remedy.” The Court then enunciated what appears to be a new rule: “For an intrusion to be considered an actual partial eviction it must interfere in some, more than trivial, manner with the tenant’s use and enjoyment of the premises.”

This new pronouncement now opens the door to an analysis, on a case by case basis, as to whether a particular intrusion or taking by a landlord, given the particular facts at issue, is severe enough to warrant any relief at all and, if so, the extent of such relief.

The dissent by Judge Read is well written and worth reading for its analysis as to why the “trivial” taking may not be so trivial on the facts presented and for its historical analysis of the law as it relates to actual partial evictions. The most compelling objection raised by Judge Read is succinctly stated as follows: “The majority has overruled an easy to understand, easy to apply bright-line rule in favor of a new de minimis rule that affords no predictability of outcome. Under Kernochan, it was very risky for a landlord to intrude on leased space in disregard of the tenant’s right to the whole of the property because the tenant might withhold rent. Now it is very risky for a tenant to withhold rent where the landlord wrongfully appropriates any portion of the leased premises because it is left up to the courts to determine whether the ouster is merely trifling in amount and trivial in effect. This determination will inevitably require expensive, protracted litigation with an uncertain resolution (citation omitted).”

It was the predictability of outcome that previously guided both landlords and tenants and helped guide their decision making process. Now, without such predictability, will landlords be more willing to take space from tenants? Will tenants continue to pay rent even if landlords trespass and take back portions of the demised premises instead of availing themselves of the costly and often times lengthy, and now unpredictable, judicial process? Only time will tell what the fallout from this decision may be.

“Be Concise, Accurate When Responding to RFPs”

By Kristen D’Andrea, Long Island Business News

More than ever, private clients and businesses are shopping for bargains in legal services. And as more legal teams respond to requests for proposals, the importance of drafting a concise and accurate response is paramount to a firm’s business.

“From a firm perspective, we’re in favor of them,” said Patrick McCormick, partner at Campolo, Middleton & McCormick in Bohemia. “If we think we can provide value at a competitive price, we’ll get involved.”

It is not uncommon for law firms to bid on RFPs for government or municipal work. “Generally, they’re well drafted by the municipality and we know exactly what they’re looking for,” McCormick said.

Unfortunately, the same can’t be said for some responses.

Amy Stein, professor of legal writing at Hofstra University’s Maurice A. Deane School of Law, likened submitting an RFP to being in the honeymoon stage. If the entity that put out the request struggles to understand a response, they’ll likely be concerned about a firm’s ability to follow direction in litigation. “How you put together your proposal is foreshadowing to a company of how you’ll act as a business partner to them,” Stein said.

In drafting a response, Stein stressed the importance of simple steps, such as following instructions and doing homework. If an RFP has 10 questions, each with three sub-parts, she advises responders to go through each item step-by-step. The order in which the RFP is organized can likely offer a glimpse into the company’s priorities and needs.

Still, she doesn’t recommend relying solely on the contents of an RFP to learn about the company. “Do your research and you might pick up information about their business that’s not in the proposal,” she said. “Maybe a partner at the company went to school where someone from your firm did.” Including any additional information about a company, obtained outside of the RFP, will show that the responder is hungry, she said.

Writing clearly and effectively, and proofreading, are all critical to submitting a winning RFP, Stein said. “Handing in a proposal with a typo is like going on a job interview without brushing your hair,” she said.

McCormick recommends being short and sweet. “You want to respond completely but there’s no need to say more than needs to be said,” he added. In fact, submitting the longest, most verbose response may work against you, Stein said.

Should a firm’s marketing staff help draft a response to an RFP? It’s fine to ask them for help with editing, McCormick said, but it’s important the people who are going to be involved in doing the work respond. The people who will know how long a project will take to complete and the types of consultants needed should run the show.

An RFP is not the place to market yourself, McCormick cautioned. “You should already be past that stage,” he said. Those putting out the requests want to know a firm is qualified to do the necessary work at the price stated.

When it comes to bids, “Don’t say you’ll do an entire case for $250 if your hourly rate is $250,” said Stein. Rather, when drafting a response, attorneys should be careful not to promise anything unethical or they can’t deliver. “Be honest and realistic,” she said. “Don’t guarantee you

will always collect all of their debts, for example.”

Likewise, if the business reading the RFP responses finds a law firm that bid an extremely low price, it should raise a red flag the firm might not understand the work that needs to be done, is not well staffed, or does not have a lot of business, McCormick said.

Ultimately, responses should be customized and tailored to the individual needs of the entity putting out the request. While it’s fine to work off a response from another RFP, Stein recommends ensuring at least 15 percent is personalized.

McCormick agreed. “No one wants to see a form or cookie cutter response,” he said.

Read it on LIBN.

By Patrick McCormick

Public policy in New York seeks to avoid forfeiture of leases.1 What is commonly referred to as a Yellowstone injunction is a procedural mechanism used by tenants in furtherance of that policy.2 As succinctly stated by the Court of Appeals:

A Yellowstone injunction maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture.³
To obtain a Yellowstone injunction, and thus toll the running of a lease cure period, the party requesting the relief needs to demonstrate:

As is evident from this well accepted standard, to obtain Yellowstone relief, the tenant need not meet the more stringent requirements for a preliminary injunction.⁵ However, despite this relaxed standard, obtaining Yellowstone relief is not always a simple matter and there are numerous cases denying relief, most of which focus on the timeliness of the application or the tenant’s ability to cure the alleged default.

Timeliness of Application
As set forth above, the Court of Appeals has confirmed that an application for a Yellowstone injunction must be made prior to the termination of the lease.⁶ What appears to be a simple standard is not, however, so simple.

Where a tenant fails to make a timely request to toll a cure period, “a court is divested of its power to grant a Yellowstone injunction.”⁷ The Appellate Division, Second Department, has interpreted the timeliness element as requiring the tenant to make an application forYellowstone relief “not only before the termination of the subject lease — whether that termination occurs as a result of the expiration of the term of the lease, or is effectuated by virtue of the landlord’s proper and valid service of a notice of termination upon the tenant after the expiration of the cure period — but must also be made prior to the expiration of the cure period set forth in the lease and the landlord’s notice to cure.”⁸

In Goldcrest Realty Company v. 61 Bronx River Owners, Inc.,⁹ the plaintiff sponsor of the subject cooperative and holder of unsold shares allocated to 15 apartments, moved by order to show cause for both a Yellowstone injunction and a preliminary injunction. The motion was made after receipt of 15 separate default/cure notices, after the expiration of the cure period and after receipt of termination notices but before the date set in the termination notices for the termination of the respective leases. The Court held in these circumstances that neither a Yellowstone nor preliminary injunction was available.

In reaffirming prior holdings the Court explained that once the cure period expired, the Court was powerless to revive a lease. The Court once again explained that the request for a Yellowstone injunction must be made both before the termination of the lease and before the expiration of the cure period set forth in the lease and cure notice. In so doing, the Court restated its express rejection of any prior decision “fixing a different or longer period of time in which an application for Yellowstone relief must be made.”¹⁰ The Appellate Division held that the Court below improperly granted the Yellowstone injunction “since the plaintiff did not seek Yellowstone relief within the cure period . . .” In addition, the Appellate Division also held, in agreement with the First and Third Departments, that a motion for a preliminary injunction “must also be made prior to the expiration of the cure period.”

Disagreeing with the Second Department, the Appellate Division, First Department, takes a more forgiving view.¹¹ In a case involving a commercial lease where the lease provided for a specific time period within which to cure any alleged default, but also provided for an unspecified longer cure period for those defaults that could not be cured within the specified time period, where the tenant took significant steps to cure the alleged default, but could not cure the default within the specified time period, the Court reversed an order denying an application for a Yellowstone injunction even though the application was made after the expiration of the initial cure period and after service of a notice of termination. Emphasizing that the specific lease in question simply required the tenant to commence diligent efforts to cure the defaults within the initial cure period, the Court explained that because the lease at issue provided for a scenario where the tenant might not be able to cure an alleged default within the specific cure period, the landlord should be bound to the specific terms of its lease agreement which provided for an additional unspecified cure period.¹²

Delay in making the application can also prove harmful even if made within the applicable cure period. In a recent case¹³ the plaintiff commercial tenant sought a Yellowstoneinjunction one day before the cure period was to expire. A temporary restraining order was issued by the Court ultimately denied the motion holding that the tenant failed to demonstrate it was ready and able to cure the defaults alleged (failure to pay rent and late fees and procure the required amount of liability insurance). As there was one day left in the cure period when the motion was decided, the lease terminated the next day.

After expiration of the lease, tenant moved to renew and reargue, conceding its initial motion failed to address its ability to cure the claimed insurance default. The Court below granted the motion to renew/reargue and granted the Yellowstone injunction. The case eventually went to trial and tenant was found to have breached the insurance provision but the trial judge determined that the Yellowstone injunction had been granted nunc pro tuncas of the date of the original Yellowstone application and that therefore tenant still had one day to cure the default.

The Appellate Division, First Department, held that the trial Court “improperly concluded that Tenant still had the right to cure its breach.”¹⁴ The Court reasoned that after the initial motion for a Yellowstone injunction was denied, because the motion to renew/reargue was brought after the cure period expired, the Court did not have the power to grant Yellowstonerelief. The Appellate Division also held that, while in certain extremely limited circumstances retroactive relief was possible, those circumstances did not exist in this case and that giving retroactive effect to the Yellowstone injunction upon the motion to renew/reargue was improper.

Finally, where a lease provides for a specific time period within which to cure alleged defaults, but the landlord’s default notice grants a longer period to cure the default, an application for Yellowstone relief will be deemed timely if made before the expiration of the longer period provided in the notice.¹⁵

Willingness to Cure
Unlike the dispute regarding timeliness of an application for Yellowstone relief, the First and Second Departments agree that a tenant need not actually prove it as the ability to cure an alleged default in order to obtain relief. A tenant need only “convince the Court of his desire and ability to cure the defects by any means short of vacating the premises.”¹⁶ The Second Department has stated that the willingness to cure requirement will be demonstrated where a tenant in its motion papers indicates that it is willing to repair any defective condition found by the Court and by providing proof of the substantial efforts it already made in addressing the majority of conditions listed in the notice to cure.¹⁷

Residential Leases
While the majority of Courts addressing Yellowstone injunctions involve commercial leases,Yellowstone injunctions are available in certain instances involving residential leases. RPAPL 753(4), which is applicable only in New York City, grants a residential tenant who has been found in default of his lease a ten day period to cure lease violations before being subject to eviction. Because this statutory protection is available only in New York City, courts have permitted Yellowstone Injunctions in matters involving residential leases outside New York City.¹⁸

1 Pfeiffer v. Larrea, 33 Misc.3d 1212(A), 2011 N.Y. Slip Op. 51909(U) (October 21, 2011).

2 Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y. 2d 573, 415 N.Y.S.2d 800 (1979); Olim Realty Corporation v. Big John’s Moving, Inc., 250 A.D.2d 744, 673 N.Y.S. 2d 439 (2d Dep’t 1998).

3 Beaumont Offset Corp. v. Zito; 256 A.D.2d 372, 681 N.Y.S.2d 561 (2d Dep’t 1998); 210 West 29th Street Corp. v. Chohan 13 A.D.3d 613, 786 N.Y.S.2d 322 (2d Dep’t 2004).

4 Ross Realty v. V & A Iron Fabricators, Inc. 5 Misc.3d 72, 787 N.Y.S2d 602 (App. Term 2004).

5 46 N.Y. 2d at 577.;

6 Ross Realty v. V & A Iron Fabricators, Inc. 5 Misc.3d 72, 787 N.Y.S.2d 602 (App. Term 2004).

7 Pfeiffer v. Larrea 33 Misc.3d 1212(A), 2011 N.Y. Slip Op. 51909(U) (October 21, 2011).

8 42 A.D.3d 246, 836 N.Y.S.2d 242 (2d Dep’t 2007).

9 42 A.D.3d at 249.

10 17 Misc.3d 1126 (A), 851 N.Y.S.2d 71 (N.Y.C. Civ. Ct. 2007).

11 Ruppert House Co., Inc. v. Altmann 127 Misc2d 115, 485 N.Y.S.2d 472 (N.Y.C. Civ. Ct. 1985).

January 13, 2012

Perhaps the better question is not whether the relationship at issue is one between a landlord and tenant or between a licensor and license, but whether it matters legally or practically? The short answer is that it does matter both legally and practically. But first, what is the distinction between a lease and a license?

The Court of Appeals, long ago, described a license as “a personal, revocable and non-assignable privilege, conferred either by writing or parol, to do one or more acts upon land without possessing any interest therein.” Licenses are commonly used for kiosks found in shopping malls or for cellular towers on roofs of buildings. Under a lease, the landlord surrenders “absolute possession and control of property to another for an agreed-upon rental.” Thus, the primary factor is whether the occupant has the exclusive right to use the premises. If the use is exclusive, the relationship is most likely a landlord/tenant relationship. If not, a licensor/licensee relationship likely exists.3 As will be discussed below, there may be reasons a landowner may want a licensor/licensee relationship, but it is important to note that courts will analyze the relationship to determine whether it is a licensor/licensee or landlord/tenant relationship and will not simply acquiesce in the characterization of the relationship used by the parties.

In addition to obtaining the exclusive use of premises that is the hallmark of a lease, what are the other factors to consider when deciding whether to enter a license or lease? The most obvious consideration relates to termination of the relationship and resulting eviction. Initially, as set forth above, the license may be revoked at any time. Thus, absent an agreement, the revocation, and thus termination of the license can generally come with no notice whatsoever. Any resulting eviction requires service of a 10 day notice to quit before commencement of a summary proceeding. Notably, the 10 day notice to quit is also required if the license term expires.

Another significant factor involves the ability of a licensor to exempt himself from liability for damages resulting from his own negligence. New York General Obligations Law §5-321 generally provides that a lease clause attempting to exempt a landlord from damages resulting from his own negligence is void as against public policy and is thus not enforceable. There is no analogous statutory provision applicable to a licensor. Thus, it is possible for a licensor to exempt himself from damages caused by his own negligence.

Yet another consideration is whether a licensee is able to obtain a Yellowstone injunction. As discussed in a prior article, to obtain a Yellowstone injunction to toll the running of a cure period, one of the requisite elements to be shown by the party seeking the injunction is the existence of a commercial lease. If no lease exists, it follows that a Yellowstone injunction is not available. Also, because a license is revocable at will, there will not likely be a cure period to be tolled by a Yellowstone injunction.

Thus, a licensee may not enjoy all the rights enjoyed by tenants, but is protected by some procedural safeguards. In evaluating whether to enter into a license or lease, both the owner and potential tenant/licensee need first to evaluate whether the exclusive right to possess the subject premises is important and, if not, whether the protections available to tenants but not licensees is significant given the particular circumstances at hand. Whether a license or lease is ultimately chosen, the most important factor is that both parties understand the nature of the relationship from the beginning, so that there are few surprises if the relationship turns sour.

By Patrick McCormick

Landlords routinely collect a security deposit from tenants at the commencement of a lease term with the deposit generally to be used to ensure the tenant’s compliance with its lease obligations.These obligations typically include the payment of rent or additional rent and payment for any damage to the leased premises caused by the tenant. While Courts will look to the lease to determine the nature of a deposit (i.e. whether the deposit is security, liquidated damages or a penalty) and the right to the deposit, the parties to the lease sometime overlook the General Obligations Law provisions relating to security deposits1. The failure to comply with the General Obligations Law can prove costly. Indeed, as demonstrated by the following case, the failure to comply with GOL §7-103 can have harsh results.

In relevant part, GOL §7-103 (1) provides:

Whenever money shall be deposited or advanced on a contract or license
agreement for the use or rental of real property as security for performance
of the contract or agreement or to be applied to payments upon such contract or
agreement when due, such money . . . shall be held in trust by the person with
whom such deposit or advance shall be made and shall not be mingled
with the personal moneys or become an asset of the person receiving the
same . . . (Emphasis supplied)
GOL §7-103 (2) provides, in relevant part:

Whenever the person receiving money so deposited or advanced shall
deposit such money in a banking organization, such person shall thereupon
notify in writing each of the persons making such security deposit or advance,
giving the name and address of the banking organization in which the deposit
of security money is made, and the amount of such deposit.
Pritzker v. Park South Lofts LLC2 was an action brought by a residential tenant against his landlord for the return of his security deposit. The landlord refused to return tenant’s $84,000.00 security deposit because the tenant allegedly caused $36,404.06 in damage to the demised premises. Landlord also refused to return the entire deposit because it was incurring legal fees in connection with the repairs and with the action commenced by the tenant. The tenant alleged claims against the landlord for conversion, breach of the lease, violation of GOL §7-103 and attorneys fees. Landlord asserted counterclaims alleging damage to the apartment and attorneys fees.

In discussing the General Obligations Law, the Court specifically held that “where a landlord has deposited a security deposit in a bank and fails to comply with the notice provision of GOL §7-103(2), a court may draw the rebuttable inference that the landlord has mingled that security deposit with the landlord’s own money, in violation of GOL §7-103(1). [citations omitted] Such commingling constitutes a conversion, as well as a breach of fiduciary duty [citation omitted] and regardless of any non-compliance by the tenant with the terms of the lease, it entitles the tenant to an immediate return of the deposit. [citations omitted]. In the event of such commingling, the landlord may not use any portion of the deposit even for otherwise legitimate purposes. [citations omitted].”

In this case, it was not disputed that the landlord deposited the tenant’s security deposit in an “agency account” of landlord’s managing agent and neither landlord nor its managing agent notified tenant of that deposit as required by GOL §7-103(2). Landlord produced certain banking records from the agent for a period surrounding the deposit of the tenant’s security deposit which records showed seven deposits into the account in addition to the deposit of tenant’s security. Landlord did not identify the sources of those other deposits and no proof was submitted that anyone other than the landlord may have owned any portion of the money in that particular account.

The Court held that “the mere fact that [tenant’s] security deposit was deposited in an agency account does not show that the deposit was not commingled with any of [landlord’s] own money.” A member of the landlord (an LLC) provided an affidavit that its agency account “is wholly segregated from [landlord’s] monies.” Notwithstanding such affidavit, the Court held “in the absence of any explanation of the sources of the many credits to [the agency] account, other than that of plaintiff’s security deposit, in the absence of a copy of such contract as [landlord] and [its agent] may have entered into, and in the absence of unambiguous evidence that the [agency] account does not include money belonging to [landlord]” the affidavit was not sufficient “to rebut the presumption that the security deposit was mingled with the personal monies [of the landlord] within the meaning of GOL §7-103.” Also troubling to the Court was the fact that, after the tenant vacated the apartment, the landlord determined that a portion of the security deposit would be used to repair damage allegedly caused by tenant. But, rather than return the excess security deposit, the landlord retained the entire security deposit to guarantee attorneys fees to which it believed it would be entitled in connection with the tenant’s action. The Court held that these facts demonstrated that the landlord exerted dominance over the security deposit and did not view it as segregated from its own money and therefore granted tenant summary judgment on its claims for conversion and violation of the General Obligations Law.

While the Court did find the tenant partially liable to landlord on landlord’s counterclaims for damage to property, the Court nevertheless granted tenant a judgment for the full amount of the security deposit [$84,000.00] with interest from the end of the lease term.

While this result may be harsh, it could have been avoided had landlord or its agent provided tenant with notice in compliance with GOL §7-103(2) and produced sufficient proof in accordance with GOL §7-103 that the security deposit was not commingled with landlord’s personal funds.

The Appellate Term also recently considered a matter in which the tenant sued to recover his security deposit and the landlord sought to recover sums for certain unpaid charges. In awarding the tenant the return of his security deposit and reducing the amount awarded to the landlord, the Court focused on the specific terms of the lease. In Schlesinger v. Edwards3 after a non-jury trial, the Court awarded the tenant, who had vacated the premises at the end of the lease term, a judgment in the sum of $4,300.00 representing the return of tenant’s full security deposit and awarded the landlord the sum of $553.54 on his counterclaim to recover sums for unpaid electric bills, water bills, carpet cleaning, cleaning and repair of bath and kitchen tile and for rekeying locks to the premises. On appeal, the landlord argued that a rider to the lease required the tenant to provide 60 days notice to landlord if tenant did not intend to renew the lease and that if tenant failed to do so landlord was entitled to retain the entirety of the security deposit.

While the specific lease language is not reported in the case, the Court found that the landlord’s interpretation of the lease clause did “not appear to reflect the parties’ intention, as the lease was for a defined one-year term.” The Court interpreted the lease clause at issue to require the tenant, upon the expiration of the lease term, to provide 60 days notice to the landlord if tenant intended to remain in the premises after the expiration of the lease term and that if the tenant did not give such notice but nevertheless remained in the premises, his security deposit would be forfeited. Finding the lease clause ambiguous, the Court applied the doctrine of contra proferentem, and construed the clause against the landlord and granted the return of the security deposit because the tenant had timely vacated the premises upon the expiration of the one year term. The Court also reduced the monetary award to the landlord finding that the lease specifically provided that if the premises was not cleaned at the expiration of the term, the sum of $100.00 would be deducted from the security deposit but that landlord could collect more than $100.00 if the cleaning costs exceeded $100.00 and landlord provided itemized receipts for such cleaning. The landlord, despite claiming that the cleaning costs for the carpet and bathroom/kitchen tile exceeded $100.00, did not provide itemized receipts for such and thus reduced the landlord’s award for such cleaning costs to $100.00 reducing the entire award to $373.54.

The very simple lesson learned from these cases is that both landlords and tenants should specifically comply with the terms of their lease, which should be carefully drafted to properly memorialize their agreement, and should scrupulously comply with applicable governing statutes.

By Patrick McCormick

It has long been the rule in New York that “attorneys’ fees are deemed incidental to litigation and may not be recovered unless supported by statute, court rule or written agreement of the parties.” Flemming v. Barnwall Nursing Home & Health Facilities, Inc., 15 NY3d 375, 379 (2010). A lease for residential property can constitute such a written agreement and residential leases often contain provisions permitting landlords to recover attorneys’ fees incurred with enforcing the terms of the lease, including commencing and prosecuting summary proceedings.

Recognizing the disparity of bargaining power that often exists between landlords and tenants, in 1966, Real Property Law §234 was enacted to level the playing field and permit tenants to recover legal fees from a landlord, if the lease contains a provision that the landlord may recover from tenant the legal fees incurred by the landlord in connection with an action or summary proceeding, but does not contain a reciprocal provision in favor of the tenant. RPL§234, in relevant part, provides:

Whenever a lease of residential property shall provide that in any action
or summary proceeding the landlord may recover attorneys’ fees and/or
expenses incurred as the result of the failure of the tenant to perform any
covenant or agreement contained in such lease, or that amounts paid by
the landlord therefore shall be paid by the tenant as additional rent, there
shall be implied in such lease a covenant by the landlord to pay to the
tenant the reasonable attorneys’ fees and/or expenses incurred by the
tenant as the result of the failure of the landlord to perform any covenant
or agreement on its part to be performed under the lease or in the
successful defense of any action or summary proceeding commenced
by the landlord against the tenant arising out of the lease . . .

In <strong>Matter of Casamento v. Juarequi, _____ AD3d___, ____ N.Y.S.2d ____.</strong> 60453/07, NYLJ 1202514734594, at *1 (App. Div. 2nd, Decided September 13, 2011), the Second Department took the opportunity to “examine and reconcile an apparent conflict among the courts” in interpreting “a pre-printed form [lease] which is generally in use throughout New York.” In rendering its decision reversing the lower courts and awarding attorney’s fees to the tenant, the Court “stress[ed] that the outcome of every motion for an award of attorney’s fees pursuant to [RPL] section 234 must be based upon a review of the complete lease provision at issue, within the context of the lease, in order to discern its meaning and import before that lease provision may be properly analyzed under the statutory mandate regarding the implied covenant in favor of the tenant.”

As set forth by the Court in <strong>Matter of Casamento</strong>, in March 2007, the landlord served a Notice to Cure alleging that the tenant violated specified paragraphs of their lease by physically assaulting landlord and making alterations to the bathroom and kitchen without landlord’s prior written consent.

The Notice specified that “pursuant to your lease you are responsible for legal fees incurred by the landlord with regard to the preparation and service of this Notice to Cure and any and all work done prior to and subsequently thereto based upon your default under the lease.” Landlord subsequently served a Termination Notice and commenced a holdover proceeding. The tenant prevailed and subsequently moved for an award of attorney’s fees. The motion was denied by the lower court and by the Appellate Term. The Appellate Division, Second Department reversed the lower court decisions and awarded attorney’s fees to the tenant.

The Appellate Division based its reversal on paragraph 16 of the pre-printed form lease which permits a landlord to recover reasonable legal fees incurred in obtaining possession and re-renting the apartment after termination of the lease. In opposition to the motion for legal fees, the landlord argued that this lease provision applied only to legal fees incurred in re-renting an apartment vacated by an eviction — not the case here — and therefore did not support the tenant’s claim for attorney’s fees. The tenant argued that by demanding attorney’s fees in the Notice to Cure, the Landlord admitted that the lease authorized an award of attorney’s fees.

After analyzing the legislative intent in enacting RPL §234, the Court turned to the lease clause in question. While recognizing that lease paragraph 16 was “not an all inclusive attorney’s fee provision, it does permit the landlord, under the circumstances described, to recover an attorney’s fee in litigation occasioned by the tenant’s failure to perform an obligation set forth in a covenant of the lease.” Thus, the Court reasoned, lease paragraph 16 fit squarely within the statute because it provides for the landlord to recover attorney’s fees resulting from the tenant’s failure to perform a covenant or agreement contained in the lease.

Apparently recognizing that its decision would be viewed as expanding the circumstances when legal fees could be awarded, the Court cited to the “remedial purpose of section 234″ and the “basic tenet of statutory construction that the mischief to be corrected and the spirit and purpose of the statute must be considered in construing the statutory language,” to support its decision.

The Appellate Division, Second Department has clarified for both landlords and tenants the circumstances under which legal fees may be awarded to residential tenants. Whether landlords will be deterred from commencing eviction proceedings as a result of this decision remains to be seen.

By Patrick McCormick

It cannot be debated that making or serving a proper rent demand under RPAPL § 711(2) is a necessary precondition to the commencement of a nonpayment proceeding. It is common practice, indeed I suspect it would not be an exaggeration to say it happens every day in every landlord/tenant court, for a landlord to make or serve a rent demand and then commence a nonpayment proceeding seeking to recover not only the rent and additional rent demanded, but also rent that accrued after the demand.

Judge Arlene P. Bluth in RCPI Landmark v. Chasm Lake Management Services, LLC, (56557/11 NYLJ 1202494916664, at *1 (Civ, NY, Decided May 9, 2011) found fault with this common practice and dismissed a nonpayment proceeding as fatally defective, because the petitioner sought to recover rent that was not demanded.

The facts in RCPI are straightforward: landlord served a rent demand on January 24, 2011, for rent due through January 2011; tenant failed to pay; landlord commenced a non-payment proceeding in February 2011, seeking the amount sought in the demand plus February 2011 rent. Respondent moved to dismiss “asserting that the petition is fatally defective because petitioner sued for February rent, which was never demanded.”

Despite recognizing that a “motion to amend the pleadings to conform to the proof should certainly be granted at the trial,” the Court nevertheless found the petition fatally defective because landlord “unilaterally sued for the February rent that was never demanded.” The Court continued: “A request to amend a petition to add rents that have accrued after service of the petition must be denied with the ability to renew upon service of the proper papers or at trial.” The Court concluded that “by unilaterally including the February rent in the petition, petitioner has attempted to circumvent the requirement of first demanding the rent. This shortcut, although common, is improper. Because the petition seeks rent that was never demanded, respondent’s motion is granted and the petition is dismissed.”

Thus, we have a clear example of elevating form over substance, especially because the initial return date of the petition is supposed to be the trial date (see, RPAPL § 745) — although that rarely occurs, in large part due to the overwhelming number of cases handled by the landlord/tenant courts. Nevertheless, it seems to be a waste of resources to dismiss a proceeding where the Court would have permitted the petition initially to include February rent if an additional demand was served and would have permitted an amendment to the petition at trial to include February 2011 rent and presumably all other subsequently accruing rent. Despite such, the Court determined that including February 2011 rent in the petition without service of an additional demand was fatally defective. There is no compelling reason for this ruling which will likely result in motion practice rendering nonpayment proceedings anything but “summary” and increased costs to the tenant if the lease requires the tenant to pay costs and fees associated with prosecuting the summary proceeding.

While additional courts will need to weigh in on this issue and hopefully there will be guidance from an appellate court, the simple lesson here is that if you represent a landlord, do not seek rent in a nonpayment proceeding if the rent has not been previously demanded.

Another recent proceeding in which a Court dismissed the petition based on a “defective” rent demand is JLNT Realty LLC v. McKenzie, 56518/2011, NYLJ 1202508287984, at *1 (Civ., KI, Decided, July 19, 2011). In JLNT , the Court dismissed the nonpayment petition where the amount sought in the rent demand was almost double the amount alleged due and sought in the petition.

In JLNT Realty, the landlord’s rent demand sought 2 month’s rent that had been previously paid by the tenant upon resolution of a previous non-payment proceeding. The stipulation of discontinuance of the previous proceeding specifically recited that tenant had paid rent through September 2010, but the landlord, in a new rent demand, sought rent for August 2010, and September 2010. The petitioner “corrected this error in the subsequent petition” but the Court nevertheless dismissed the petition because the rent sought in the rent demand was “not reasonably related to the actual amount owed and therefore the demand is defective.” The Court further found the rent demand was “not made in good faith and is defective as a matter of law. The importance to the tenant of receiving an accurate demand of rent due is of paramount importance, especially in view of the consequences of non-payment.”

It is interesting to note that the Court in RCPI did not discuss the requirement that a rent demand must seek an amount reasonably related to the actual amount owed. If the demand does not need to recite the exact amount owed, why is a petition defective if it seeks some rent not demanded? I suppose the Court in RCPI would say “because the statute requires it.” This seems to put us on a slippery slope requiring exact precision and agreement between the amount recited in a rent demand and a subsequent petition. I anticipate additional motions by tenants making these arguments, resulting in additional delays in disposing of proceedings.

On August 5, 2011, the IRS finally published some guidance for executors of estates of people who died in 2010. Notice 2011-66 explains how these executors can opt-out of the estate tax, and Revenue Procedure 2011-41 explains the special tax rules that apply to assets when executors opt-out of the estate tax.

The estate tax and the Generation-Skipping Transfer (GST) tax were repealed on January 1, 2010; but on December 17, 2010, President Obama signed a law that reinstated them retroactive to January 1, 2010.

This law gave people who died in 2010 a special tax break: executors of 2010 decedents can opt-out of the default estate tax rules. Under the new law, the estate tax rate in 2010 was set at 35% and the exemption was $5 million. This is the same as it now is for 2011 and 2012. This second method of estate tax has one main benefit: assets received from a decedent are generally stepped-up to fair market value under Internal Revenue Code §1014whereas if the executor chooses to opt-out, there is generally no step-up in basis.

To remain with the default estate tax rules, executors file the form they always filed for taxable estates: Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. On August 1, 2011, the IRS finally published draft instructions for Form 706. These instructions inform executors that for decedents dying after December 31, 2009 and before December 17, 2010, the due date for Form 706 is September 19, 2011.

Executors of 2010 decedents can opt-out of the default estate tax rules by filing a special form: Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent. Opting-out of the estate tax also means opting-out of the stepped-up basis rule under IRC §1014 and opting-in to the modified carryover basis rule under IRC §1022.

Carryover basis generally means that assets keep the same basis — the basis in the hands of the decedent “carries over” to the recipient. IRC §1022 modifies this carryover basis rule, because it allows executors to step-up the basis of some assets. Executors can allocate a $1.3 million step-up in basis to assets passing to any person. Executors can allocate an additional $3 million step-up in basis to assets passing either in trust or outright to a surviving spouse. In Revenue Procedure 2011-41, the IRS provides a safe harbor for making these basis allocations.

The IRS estimates that 7,000 executors of estates who died in 2010 will make the Section 1022 Election and thus will be required to file Form 8939. The big question for the executors is what was the total assets (greater than $5 million) in the estate versus what was the capital gain on those assets. If the potential estate tax is greater than the potential capital gains tax, the executor should opt-out so there would be no estate tax. Speaking to a knowledgeable accountant or trust and estates attorney should help answer that question.

Do you want to hand your heirs big tax problems? Would you like to hand the IRS a sizable chunk of your inheritance? Probably not. But if you misunderstand the rules when it comes to inherited IRAs, you just might. Here are some mistakes that IRA owners and IRA heirs often make.

1. Many clients think that a will or a trust can facilitate the transfer of IRA assets.
   IRAs don’t pass to heirs through wills or trusts (a few rare exceptions aside). The beneficiary form takes precedence. This is a form the IRA owner filled out and signed when opening the account.Problems arise when:
   • •  The IRA owner dies without designating a beneficiary;
   • •  The designated beneficiary has passed away before the IRA owner; or
   • •  No one can find the beneficiary form (not even the IRA custodian,
     i.e., the financial institution that hosts the IRA).

   In these circumstances, IRA heirs commonly end up playing by the IRA custodian’s rules. The resulting beneficiary often ends up with the IRA owner’s estate and must be paid out within five years of the owner’s death. This is usually a very undesirable tax consequence. It might be a contingent beneficiary and perhaps a very undesirable emotional consequence. The best thing to do is to keep the beneficiary form handy, keep it up to date and to let your heirs know where it is.

2. Too often, non-spousal IRA heirs see the inherited assets as money to spend.
   They withdraw the entire IRA balance as soon as it’s given to them. Unfortunately, what happens is all that money will be subject to federal income tax. Due to this move, they may lose a third of the IRA assets (or more).Instead, non-spousal beneficiaries need to open an inherited IRA to house the inherited assets and simply take Required Minimum Distributions (RMDs) from that inherited IRA under the appropriate schedule. This will allow the beneficiary to stretch the IRA over the course of his or her lifetime.With a traditional IRA the age of the original account holder is a big factor. If the original IRA owner is under age 70-1/2 and hadn’t taken any RMDs, when the beneficiary inherits the IRA, distributions must occur within five years of the original IRA owner’s death. Under this five-year rule, the entire account balance must be distributed to the beneficiary within those five years. If the account holder was over age 70-1/2 and had already taken RMDs, then the inherited IRA assets may be distributed gradually over the projected lifetime of the beneficiary according to IRS tables. If you don’t have to go by the five-year rule, the invested IRA assets may keep compounding across many years with the added benefit of tax deferral.You can also disclaim or renounce some or all of the inherited IRA assets, which could be a wise move for tax purposes if you don’t need the inherited funds.
3. When a spouse dies, the surviving spouse that inherits an IRA doesn’t review all options to choose carefully.
   Here are the options that should be considered:
   1. Roll over the assets into a beneficiary IRA. There are compelling reasons to go with the rollover. The widowed spouse can set up an RMD schedule based on his or her life expectancy. This second point is really important, because the rollover allows the surviving spouse to put off the RMDs that would otherwise soon need to happen. In fact, the surviving spouse can wait until the year in which the original IRA owner would have turned 70-1/2 to start taking required withdrawals from the IRA.
   2. Convert the inherited IRA into your own IRA. If the spouse converts the IRA into his or her own IRA, the surviving spouse can name a beneficiary for the inherited assets, keep contributing to the IRA, and potentially avoid RMDs until he or she turns 70-1/2.
   3. Take a lump sum distribution. If the widowed spouse wants to take distributions from the inherited IRA before age 59-1/2, a rollover is probably not the way to go. If that is the desire, those withdrawals will be slapped with the 10% early withdrawal penalty plus the requisite income taxes once it’s rolled over. Either way, there will still be income tax consequences to be considered.
   4. Disclaim up to 100% of the deceased spouse’s IRA assets. Or, a surviving spouse who doesn’t really need inherited IRA assets can disclaim them, meaning that they will go to the named contingent beneficiary. Sometimes this can be a wise move for tax purposes. The surviving spouse cannot direct where the IRA assets go. Disclaiming an asset acts as if you have predeceased the original owner.
4. Non-spousal heirs fail to re-title an inherited IRA.
   If this isn’t done by the year following the year in which the original IRA owner passed, then there can be no direct rollover of the inherited IRA assets and no stretch for those assets. A non-spouse beneficiary cannot roll inherited IRA assets into their own IRA. It must be re-titled as an inherited IRA. The IRS will treat those inherited IRA assets like a fully taxable cash distribution with 100% of it subject to income tax.

The bottom line is that the beneficiary must think before he or she acts in order to avoid unwanted taxes and penalties.

On September 17th 2010, New York State enacted the New York Prudent Management of Institutional Funds Act (NYPMIFA) which significantly changes the rules governing how notfor-profit organizations manage, invest and spend their endowment funds. The Act applies to all public charitable organizations, private foundations and practically every corporation formed under the New York Not-For-Profit Corporation Law. The new law provides institutions with more flexibility in spending from endowment funds giving them greater access to funds needed to support their programs and services that may be struggling due to the recent economic downturn.

NYPMIFA eliminates the historic dollar value limitation on spending, allowing institutions to dip into the original dollar value of the endowment fund as long as the governing board deems it prudent. Prior to this law, not-for-profit corporations were only allowed to spend income earned by an endowment fund (ie. interest, dividends, royalties, etc). The adoption of NYPMIFA eradicates the historic floor on spending and now allows an organization to spend endowment fund assets after considering the following eight factors; preservation of the endowment fund, purposes of the fund, general economic conditions, possible effects of inflation or deflation, total return, other resources available, the investment policy of the institution and where appropriate, alternatives to expenditure.

The Act includes a notable provision that is intended to ensure against excessive spending, creating a rebuttable presumption of imprudence if more than 7% of the fair market value of an endowment fund is spent in any one year. This 7% rebuttable presumption applies only to funds created on or after the effective NYPMIFA date, September 17, 2010. Though it’s important to note that an appropriation of less than 7% is not presumptively prudent, the institution must still take proper measures to uphold the outlined prudence standard.

The NYPMIFA standard of prudence also applies to the delegation of investment and management funds to outside professionals. The institution must exercise its duty of care and act prudently in selecting, continuing or terminating an external agent such as an investment advisor, investment manager or bank or trust company. Outside agents also owe a duty to exercise with reasonable care, skill and caution to comply with the scope of the delegation. Any contract that delegates a management or investment function must provide that the contract can be terminated at any time without penalty (with up to 60 days notice). Although not required by the Act, we recommend that an organization keep detailed records describing the nature and extent of the consideration that the governing board gave to each of these factors when making investment decisions.

Donors of endowment funds in existence before September 17, 2010, must be given the opportunity to opt out of NYPMIFA’s new spending rules. The Act requires 90 days advance notice be made to the donor, if alive and identifiable, with reasonable efforts before appropriating form the endowment fund for the first time. The notice must ask the donor to indicate whether the organization may spend as much of his or her gift as it determines is prudent or if the endowment fund must maintain the historic dollar value of the gift. The notice also must include an explanation of the potential impact that each choice would have on spending from the fund. Donor notice is not required if the gift instrument already permits spending below historic value, if it already expressly limits spending or if the donor never included a separate statement restricting funds when the donation was made.

Even prior to this law, an organization could always seek release of donor-imposed restrictions placed on management or use of funds by obtaining the written approval of the donor or seek court release with prior notice to the Attorney General. NYPMIFA now expands the situation under which an institution may seek a release or modification of a restriction on an endowment fund by allowing an institution to seek release in the court even if the donor is available. For funds of less than $100,00 or more than 20 years old organizations can release or modify restrictions without court involvement by simply giving prior notice to the donor (if available) and the Attorney General.

There are a number of steps and actions that notfor-profit entities must take to ensure their organization is in compliance with the new law. Here are a few first steps that we recommend. We would be happy to help you prepare any of the documents described below and to work with you in educating your board about these new requirements.

1. Educate your governing boards about the requirements and changes resulting from this Act. Make sure that all board directors and members are aware of the revised standards of conduct for managing and investing funds, delegating management and the new rules pertaining to donor restrictions.
2. Promptly adopt a written investment policy incorporating the standards of NYPMIFA. NYPMIFA requires organizations to adopt a written investment policy. The policy should reflect the detailed guidance on prudent investing as well as the new law’s rules on investment strategy and delegation of investment management. The creation or revisions of an organization’s policy must be sure to include the eight factor prudence standard for managing and investing, a diversification requirement, an overall investment strategy and the guideline’s for delegation of investment management.
3. Set up procedures to send out notifications to existing donors, giving them the opportunity to opt out of the new rules. As set forth in NYPMIFA, the notice must include substantially the following language:Attention, Donor: Please check box #1 or #2 below and return to the address shown above: __ #1. The institution may spend as much of my gift as may be prudent. __ #2. The institution may not spend below the original dollar value of my gift. If you check box #1 above, the institution may spend as much of your endowment gift (including all or part of the original value of your gift) as may be prudent under the criteria set forth in Article 5-A of the Not-forProfit Corporation Law (The New York Prudent Management of Institutional Funds Act). If you check box #2 above, the institution may not spend below the original dollar value of your endowment gift but may spend the income and the appreciation over the original dollar value if it is prudent to do so. The criteria for the expenditure of endowment funds set forth in Article 5-A of the Not-for-Profit Corporation Law (NYPMIFA). During the 90 day notice period, a donor may modify the gift instrument — with or without the consent of the organization — to prohibit application of NYPMIFA’s spending rules. If the donor does not respond within the 90 days, these new spending rules will apply to the gift. Organizations must keep records of the actions taken in compliance with these notice requirements.
4. Revise solicitation materials for endowment funds to include new disclosure requirements. NYPMIFA requires organizations to make the following disclosure in all solicitations for contributions to an endowment: Unless otherwise restricted by the gift instrument pursuant to paragraph (B) of Section 553 of the Not-for-Profit Corporation Law, the institution may expend so much of an endowment fund as it deems prudent after considering the factors set forth in paragraph (A) of Section 553 of the Not-for-Profit Corporation Law.

The solicitation disclosure language is designed to alert donors to the fact that unless otherwise specifically restricted by a gift instrument, the organization will be allowed to expend so much of an endowment fund as it deems prudent after considering the eight NYPMIFA prudence factors governing appropriation decisions. Accordingly, all solicitation materials for endowed funds will need to be revised to reflect this new rule, and the policy should include a statement of the rule.