In 2010, the First Department, in dismissing a claim by commercial tenants that electric charges were unconscionable, held that the plaintiffs had failed to establish “a lack of meaningful choice, and noted that the commercial tenants were free to not rent from the defendant and go elsewhere.”[i]
Thus, when I represented a commercial landlord in a non-payment proceeding against a law firm tenant earlier this year, it was unclear where a court within the Second Department – in this case, the First District Court in Nassau County – would fall on the issues of a five percent late charge and electric charges to which the tenant objected.[ii] The landlord’s rent demand sought $2,531.70 including a five percent late charge plus electric charges of $993.52, as well as taxes and attorneys’ fees for an unrelated proceeding.
Turning first to the late charge, the tenant argued that the charge was “illegal” in that it was usurious and “does not in any way even remotely apply to damages actually sustained and is an unconscionable penalty.” In response, we argued on behalf of the landlord that the late fees were not usurious, as the fees existed in connection with a commercial lease, not a loan or forbearance, nor were they unconscionable, as they were negotiated by sophisticated business people specifically for a commercial lease.
Regarding the electric charges, the tenant argued that because it occupied only a small part of the commercial premises, the sum of $993.52, which was a fixed amount set forth in the lease, was “disproportionate” to their actual electricity consumption. The parties disagreed over whether the landlord was obligated to furnish an accounting of the actual electric usage and bills; the landlord pointed out that the tenant had paid the monthly electric charge – which the landlord did not dispute was not based on actual usage – for over a decade.
The tenant commenced an action in Nassau County Supreme Court seeking reimbursement of the “excess” electricity payments and a return of funds withheld from a security deposit as determined by a prior summary proceeding in District Court. The tenant argued that the Supreme Court had jurisdiction over the entire dispute (even that piece pending in District Court) as the tenant was seeking a declaratory judgment and equitable relief, for which the District Court lacks jurisdiction. Upon Landlord’s motion, the Supreme Court dismissed the Complaint. The Supreme Court found that “[t]o the extent plaintiff claims that the electric charge is exorbitant, it is what he agreed to, and nothing more…The fact that a landlord may make a profit on the payments for electricity, is no defense to a tenant.”[iii] The Court reached a similar conclusion regarding the late fee, noting that “[a]side from the fact that it constitutes a negotiated provision of a commercial lease between sophisticated parties, there [is] nothing exorbitant about such a provision calling for a 5% late fee.”[iv]
Ultimately, the District Court disagreed with the jurisdictional issue: “[T]his court can determine all issues in an expeditious manner,” wrote Judge Fairgrieve. “The purpose of summary proceedings is to quickly resolve cases.” The District Court then granted summary judgment to our client.
Citing the First Department’s Accurate Copy, the Court noted that a sophisticated party such as the law firm tenant in this case “had a meaningful choice to walk away and rent elsewhere.” Accurate Copy had rejected an unconscionability claim on the grounds of the plaintiffs’ failure to allege and prove a lack of meaningful choice, as well as claims that electric charges were illegal on the basis that the plaintiffs did not allege failure by the landlord to enforce a lease’s electric charge provisions in conformance with their terms. The Accurate Copy court declined to upset the commercial leases at issue in that case for the “purpose of alleviating a hard or oppressive bargain.” Looking to this First Department case, this District Court within the Second Department agreed.
[i] Accurate Copy Service of America, Inc. v. Fisk Bldg., 72 A.D.3d 456, 899 N.Y.S.2d 157 (1st Dep’t 2010) (quotation from Old Country Road Realty, LP v. Zisholtz & Zisholtz, LLP, 53 Misc.3d 1203(A), 2016 WL 5396005).
[ii] Zisholtz, supra.
[iii] Zisholtz & Zisholtz, LLP, v. Old Country Road Realty, L.P., Nassau County Index No. 602616-16 (Murphy, J.), entered September 13, 2016.