A recent article discussed the decision by the Appellate Division First Dept. in 135 East 57th Street LLC v. Daffy’s Inc.1 in which the Appellate Division excused a tenant’s failure to timely give notice of its election to exercise its option to renew its commercial lease because the tenant had “garnered substantial good will in its approximately 15 years at the location, which good will was a valuable asset that would be damaged by its ouster from the premises.” The Court in Daffy’s Inc. referenced the Court of Appeals decision in J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc.2 , which held that “the loss of an option does not ordinarily result in the forfeiture of any vested rights . .”

By decision dated May 3, 2012, the Court of Appeals in Baygold Associates, Inc. v. Congregation Yetev Lev of Monsey, Inc.3 , citing J.N.A. Realty Corp., held that the tenant was not entitled to equitable relief to excuse its failure to timely exercise its option to renew under the circumstances presented, despite the fact that the premises had been continually operated as a nursing home for more than 30 years and more than one million dollars in improvements had been made to the premises.

In Baygold Associates, Inc., Baygold operated a nursing home in Monsey, New York from 1972 through 1975. In 1976, Baygold, as tenant, entered into a lease with Monsey Park Hotel, the owner of the premises, for a ten year term. The lease granted Baygold the option to extend the term of the lease for four ten year periods by giving notice by certified mail, return receipt requested, no later than 270 days before the expiration of each term or extended term. With the owner’s consent, Baygold sublet the premises to its affiliate Monsey Park Home for Adults which operated a nursing home from 1976 through 1985 and made approximately one million dollars in improvements to the premises. In 1985, Monsey Park Home for Adults sub-sublet the premises to Israel Orzel who continued to operate a nursing home at the premises. In August 1985, Baygold renewed the lease for two additional ten year periods. During Orzel’s tenancy, Orzel also made improvements to the premises.

In July, 2005, Baygold directed its attorney to renew the lease for two additional ten year terms. It was disputed whether Baygold’s attorney actually prepared and sent the renewal notice as required by the lease.

In July 2007, the Rubenfeld family, as successor to the owner, entered into a contract to sell the property to defendant Congregation Yetez Lev of Monsey Inc. Rubenfeld’s attorney notified Baygold that its tenancy would expire September 30, 2007 and that Baygold would be a month-to-month tenant. Baygold claimed it had exercised the renewal option and Baygold’s attorney produced a copy of a November 1, 2005, renewal letter but did not produce either a certified mail receipt or a return receipt green card.

Baygold sued seeking a declaration of the rights of the parties in connection with the renewal term. After a bench trial, Supreme Court held that the lease was not properly renewed because Baygold did not comply with the specific lease renewal provisions and denied equitable relief. The Appellate Division affirmed holding that Baygold “failed to demonstrate ‘that it made improvements of a substantial character’ in anticipation of renewing the lease.”

The Court of Appeals granted leave to appeal and on appeal framed the issue as “whether non-renewal would result in a forfeiture by Baygold.” The Court, in citing J.N.A. Realty, noted that “a forfeiture results where the tenant has in good faith made improvements of a substantial character, intending to renew the lease and the tenant would sustain a substantial loss in case the lease were not renewed.” Also, in citing Sy Jack Realty Co. v. Pergament Syosset Corp.4 the Court of Appeals noted that “we have concluded that the ‘long standing location for a retail business is an important part of the good will of that enterprise’ and that a tenant may be entitled to equitable relief through the loss of such ‘a substantial and valuable asset.’” However, the Court of Appeals held that “the forfeiture rule was crafted to protect tenants in possession who make improvements of a ‘substantial character’ with an eye toward renewing lease, not to protect the revenue stream of an out-of-possession tenant like Baygold.”

The Court noted that Baygold had not made any improvements to the premises since 1985, and that neither Baygold nor any of its affiliates was a tenant in possession of the premises at the time of the failure to comply with the lease renewal provision. The Court dismissed any claim that Baygold’s improvements made more than twenty years earlier, when it was a tenant in possession were made “with a view toward renewal of the lease such that Baygold’s equitable interest in a renewal must be protected. Those improvements are too attenuated from Baygold’s failure to exercise the option over 20 years later.”

The Court seemed to place significant emphasis on the fact that Baygold was an out of possession tenant and therefore did not possess any good will in connection with the premises. This, coupled with the fact that Baygold itself did not make improvements to the premises for more than 20 years, in the Court’s view, precluded equity from from intervening to excuse Baygold’s failure to comply with the lease renewal provisions.