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Subtenant’s Liability for Holding Over After Termination of Its Sublease

Posted: March 9th, 2014

By Patrick McCormick

Who is responsible for the damages that result when a commercial sub-tenant holds over past the expiration of its term causing the tenant to incur damages under its lease? In what appears to be a case of first impression in the Second Department,

in PHH Mtge. Corp. v. Ferro, Kuba, Mangano, Sklyar, Gacovino Lake, P.C.1 the Appellate Division has confirmed that, with appropriate lease clauses, the sub-tenant is liable for the damages incurred by the tenant resulting from the sub-tenant’s failure timely to vacate the premises it occupied.

The facts in PHH are simple enough: Owner/Landlord leased certain premises to Tenant. Tenant sublet the entire premises to PHH. PHH then sub-sublet a portion of the premises to Sub-subtenant Ferro Kuba. The rent Ferro Kuba was obligated to pay to PHH was about one-half the amount of rent paid by PHH to the Tenant and about one-quarter the amount of rent paid by the Tenant to the Landlord. The Master Lease between the Landlord and the Tenant provided for holdover damages to be paid to the Landlord in the amount of one and one-half the amount of base rent for each month of the holdover. The Sublease between the Tenant and PHH and the Sub-sublease between PHH and Ferro Kuba each incorporated by reference all the terms of the Master Lease, which included the holdover damages clause.

The Master Lease, the Sublease and the Sub-sublease terms ended; Ferro Kuba failed to vacate the premises it occupied and held over for 25 days thus precluding PHH and, in turn, the Tenant, from tendering vacant possession of the entire demised premises to the Landlord. The Landlord sought holdover damages from Tenant who in turn sought those damages from PHH. PHH paid $60,489.17 in holdover damages and sought to recover those damages from Ferro Kuba. When Ferro Kuba refused to reimburse PHH for the damages it caused, PHH commenced an action in Supreme Court, Suffolk County, which ultimately denied PHH’s motion for summary judgment.

The Appellate Division, Second Department reversed and granted PHH judgment on liability and remitted the matter to Supreme Court “for a determination of the amount of the plaintiff’s liquidated damages, interest, and counsel fees pursuant to the terms of the master lease and sub-sublease.” The Appellate Division based its determination on the terms of the master lease and sub-sublease finding specifically that “As a sub-subtenant, the defendant had expressly agreed to be bound by all of the provisions and restriction in the master lease for the premises, which included the payment of liquidated damages in the event of a holdover occupancy of part or all of the premises. Therefore, based upon the provisions of the master lease and the sub-sublease, the defendant is liable for holdover damages for the entire leasehold premises during the period at issue.”

In response to Ferro Kuba’s claim that Landlord could have rented the vacant portion of the premises and that landlord may have accepted a surrender of a portion of the premises, the Appellate Division held, “In this regard, a lessor is under no duty to rearrange its leasing of space in a commercial building to mitigate the damages caused by a subtenant who holds over.”

This case points out that, from the tenant’s perspective, it is critical that any sublease incorporate relevant terms, especially those under which tenant may be found liable for damages, to ensure the tenant has a viable remedy against the subtenant for damages caused by its holding over. When representing the subtenant, counsel needs to make sure that, in the face of such “incorporation by reference” clauses, the subtenant is made aware of the potential exposure.

¹ 113 A.D.3d 831, 979 N.Y.S.2d 536 (2d Dep’t 2014).

March 2014: Crossfit Liability: Protecting your Business

Posted: March 9th, 2014

By Scott Middleton, Esq.

In addition to being an attorney here on Long Island, I’m an avid CrossFit Athlete and have been participating in CrossFit for over 18 months now. The benefits from this type of fitness regime have had a tremendous impact on me: overall better fitness and nutrition, coupled with a sense of camaraderie among fellow CrossFitters and especially in one’s own gym. It has helped me both personally and professionally.

With the rising popularity of CrossFit here on Long Island and across the country it’s important to understand the risks to gyms and fitness centers that host these high intensity exercises. As a business owner or operator it is imperative to know how to protect yourself. Therefore, the question becomes how a CrossFit business can protect itself and its employees from potential lawsuits.

In New York, General Obligations Law §5 – 326 was enacted to prevent amusement parks and recreational facilities from enforcing exculpatory clauses printed on admission tickets or membership applications.

The cases that followed the enactment of §5 – 326 have focused on several factors to determine whether a facility is instructional or recreational, including: the organization’s name, its certificate of incorporation, its statement of purpose and whether the money charged is tuition or a fee for use of the facility. If training sessions are instructional in nature but are ancillary to the recreational activities offered by the facility, GOL §5 – 326 will apply in the waiver/release will be unenforceable as it will be considered to be against public policy.

Anyone who participates in a CrossFit, at a reputable facility knows that most offer rather strenuous but free introductory class. These are generally small and under the instruction of the coach/trainer. This is followed by the “on-ramp” where would be cross-fitters are introduced to many of the basic exercises, under the supervision and close instructional scrutiny of a trainer. Once you “graduate” from the “on-ramp” you’re ready (or maybe not) for regular CrossFit classes. During the short but grueling workouts, coaches are present to instruct on both basic and complex exercises. They continuously critique and teach.

The common thread here is that instruction is present throughout all aspects of CrossFit. The level of involvement of the coaches/trainers in continually correcting movements during the workout creates an atmosphere that is instructional and cannot be considered to be recreational or an ancillary service of a recreational facility. Thus, New York’s General Obligations Law §5 – 326 would not apply to CrossFit facilities and the waiver is completely enforceable. This affords CrossFit gyms a level of protection not present in “big box” gyms.

As a courtesy, I’d happily review your waivers to avoid making unnecessary mistakes in their enforceability.

NYC Earned Sick Time Act Goes into Effect April 1, 2014

Posted: March 9th, 2014

Effective April 1, 2014, private sector New York City employers with five or more employees must provide paid sick time to all employees who work at least 80 hours in a calendar year.1

Accrual and Use
Mayor Bill de Blasio signed the City Council’s expanded sick leave bill earlier this year. The New York City Earned Sick Time Act (the “Act”) provides that these private sector employees will now earn up to 40 hours of paid sick time per year, accruing at a rate of one hour for every 30 hours worked. The Act covers both full-time and parttime workers.

Employees may use sick time for three purposes:

The employee’s mental or physical illness, injury or health condition or need for medical diagnosis, care or treatment of a mental or physical illness, injury or health condition or need for preventive medical care; and/or
Care of a family member2 who needs medical diagnosis, care or treatment of a mental or physical illness, injury or health condition or who needs preventive medical care; and/or
Closure of the employee’s place of business by order of a public official due to a public health emergency or such employee’s need to care for a child whose school or childcare provider has been closed by order of a public official due to a public health emergency.

Employees will begin accruing sick time at the start of employment or on April 1, 2014, whichever is later, but cannot begin using the sick time until July 30, 2014 or 120 days after the start of employment, whichever is later.

Unused sick time carries over to the following year, but the Act does not require employers to offer more than 40 hours of paid sick time to an employee per year. The Act does not require any payment to employees for accrued but unused sick time.

Notice and Documentation by Employees
An employer may require reasonable notice from the employee of the need to use sick time. When the need to use sick time is foreseeable, an employee may be required to provide notice of up to seven days; when the need is unforeseeable, an employee may be required to provide notice to the employer as soon as is practicable. An employer may require documentation signed by a licensed health care provider, but only for absences of three or more consecutive work days. The Act restricts employers from seeking information about the nature of the illness or absence.

Employer Obligations
Employers who provide sick leave must provide a Notice to new employees when they begin employment and to existing employees by May 1, 2014. (A copy of the Notice prepared by the New York City Department of Consumer Affairs can be accessed at http://www.nyc.gov/html/dca/downloads/pdf/Mand atoryNotice.pdf.) The Notice describes the accrual and use of sick time, defines the employer’s “calendar year,” and advises employees of their right to be free from retaliation for using sick time and the right to file a complaint with the Department of Consumer Affairs in connection with violations of the Act. in English and any other primary language spoken by the employee, if the Department has posted a form in that language on its website (the Department plans to provide the Notice in Spanish, Chinese, French-Creole, Italian, Korean, and Russian).

Employers must maintain sick-time compliance records for at least three years.

Next Steps
Employers with New York City locations who already offer paid leave that can be used as sick time should evaluate their existing policies and update them to comply with the Act’s requirements. Those employers whose existing policies do not comply with the Act must draft new policies that meet the minimum requirements of the Act.

Please contact us with questions and for guidance in ensuring your company’s policies comply with the new legislation.

1 The Act does not cover independent contractors, work-study students, government employees, and certain hourly physical, speech, and occupational therapists. In addition, union agreements in certain industries may opt their workers out of the Act. Domestic workers are also subject to different regulations.

2 A “family member” is defined as an employee’s child, spouse, domestic partner, parent, sibling, grandchild or grandparent, or the child or parent of an employee’s spouse or domestic partner.

February 2014 Legal Brief – Firm Newsletter

Posted: February 28th, 2014

“Dumb Starbucks” – Is this Coffee Shop an Art Gallery?

Posted: February 27th, 2014

Tags: intellectual property

A new coffee shop mocking Starbucks opened in Los Angeles in early February and quickly gained nationwide attention. The store looks identical to the typical Starbucks, but with the exception of the word “dumb” prefixed to the title and menu items.

Dumb Starbucks is not affiliated with Starbucks Corporation, and the company claims that their use of Starbucks’ trademark and logos is “fair use” because it is “making fun” of Starbucks.

The store’s FAQ sheet states the following:

Is this a Starbucks?
No. Dumb Starbucks is not affiliated in any way with Starbucks Corporation. We are simply using their name and logo for marketing purposes.

How is that legal?
Short answer – parody law.

Can you elaborate?
Of course. By adding the word “dumb,” we are technically “making fun” of Starbucks, which allows us to use their trademarks under a law known as “fair use.” Fair use is a doctrine that permits the use of copyrighted material in a parodical work without permission from the rights holder. It’s the same law that allows Weird Al Yankovic to use the music from Michael Jackson’s “Beat It” in his parody song “Eat It.”

So this is a real business?
Yes it is. Although we are a fully functioning coffee shop, for legal reasons Dumb Starbucks needs to be categorized as a work of parody art. So, in the eyes of the law, our “coffee shop” is actually an art gallery and the “coffee” you’re buying is considered the art. But that’s for our lawyers to worry about. All you need to do is enjoy our delicious coffee.

Are you saying Starbucks is dumb?
Not at all. In fact, we love Starbucks and look up to them as role models. Unfortunately, the only way to use their intellectual property under fair use is if we are making fun of them. So, the “dumb” comes out of necessity, not enmity.https://twitter.com/benpankonin/status/432554620515131392/photo/1

A spokesperson for Starbucks stated that “while we appreciate the humor, they cannot use our name, which is a protected trademark.”

Dumb Starbucks’ defense is debatable. A trademark is a symbol that is used “to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.” 15 U.S.C. § 1127. Trademark fair use allows a non-owner of a mark to “nominatively” name and display the mark for the purpose of talking about it, in comparative advertising and for parody.

Here, Dumb Starbucks uses the exact Starbucks name and logo, but with the addition of “Dumb” in the prefix. However, the protected name and logo are used on numerous items throughout the store. Further, Starbucks’ designs, such as the store’s overall look, can also be protected as a trade dress under the Lanham Act. Dumb Starbucks resembles an actual Starbucks and its overall feel. Even the same cups and aprons are used. Therefore, it is debatable whether a consumer will confuse Dumb Starbucks’ marks for Starbucks’ protected marks.

Dumb Starbucks’ defense, however, may never be fully litigated. Despite Dumb Starbucks’ claim that it is an art gallery and not subject to permits, health inspectors disagreed and recently shut down the store. This store may have been just a social media experiment brought about by Nathan Fielder, the person behind Dumb Starbucks and host of the Comedy Central show “Nathan For You.” Fielder is known for his social media experiments and this may have been one of them. As demonstrated by the media attention it generated, Fielder may have achieved his purpose. While it is uncertain whether Dumb Starbucks will be revived, this case remains puzzling and a debate within the intellectual property community.

Protecting Your Retirement Accounts

Posted: February 27th, 2014

By: Martin Glass, Esq. email

Tags: elder law, estate planning

When discussing estate plans with my clients, I always make sure we discuss their retirement accounts (such as IRAs, 401ks, etc.). These are normally owned by only one person and have a beneficiary. Therefore they are not typically in a trust nor do they pass under a Will. What I have been finding is that often times their retirement accounts have the greatest value of any property they own, including their house. Because these accounts defer payment of income tax, their balances can grow very quickly, and can easily become worth millions over the course of generations.

With this in mind, I tell every client that they need to be absolutely sure they named a beneficiary for each retirement account. The beneficiary is the person or persons they want to receive the retirement account when they die. Many of my clients think they did. Many of them find out that they didn’t. You should contact your plan administrator to make sure you did. Retirement plans sometimes provide for a default beneficiary in the event you did not name one. Many times, however, your account will be left to your estate when you die.

This can be financially disastrous. Unless you leave your retirement account to a qualified beneficiary, it will be necessary to cash in the account and pay it out to your beneficiary. If your beneficiary is your estate, which is not a qualified beneficiary, your estate will have to pay income taxes on the payout. In other words, your $600,000 IRA is now worth only $400,000 to your family after taxes!

So, do not rely on hope that your plan has a default beneficiary designation. Check with your plan administrator that you have your own beneficiary designation on file. Get and keep a copy of that designation for your records so you (and your beneficiary) can prove that you made it.

One of the great things about leaving your retirement accounts to your children is that the accounts can “stretch out” over the life of each designated qualified beneficiary. For example, your son can “stretch” taking money out of the account over his life expectancy calculated from when you died. That is good since retirement accounts grow so rapidly by deferring the payment of income taxes. Your nest egg just became your son’s nest egg! But what happens if your son is the kind of guy that spends every penny he gets as soon as he can get it?

If you name your son as your direct beneficiary, he may decide he wants to spend that money now. As far as he’s concerned, inherited money is “found money.” Because your beneficiary didn’t work for it, he thinks of it as a freebie. Even though your son has the right to stretch out the retirement account over his lifetime, he may choose to ask for a lump-sum distribution instead.

This is definitely not a good idea. First, about one-third of the balance in your IRA is lost to payment of federal income tax. Second, that $600,000 IRA, whose balance could have grown rapidly and tax-deferred into millions of dollars over the next few decades, is gone in an instant.

A way to try to avoid this is by creating a specially designed revocable trust for your son, and designating that trust as your IRA beneficiary. Under IRS rules, a properly drafted trust can be used as a qualified beneficiary. Your son will no longer have the option of taking it all out at once. That will now be up to the trustee.

Trusts are prudent not only for family members that are spendthrifts. They might also be advisable if your child has special needs, is in a bumpy marriage, has creditor problems or is in a high-risk profession. Upon your death, the trust takes the retirement account and stretches it in a way that preserves it for that child and for future generations.

3 Counter-Intuitive Negotiation Tricks

Posted: February 9th, 2014

By: Joe Campolo, Esq. email

Tags: negotiation

When negotiating, we often follow our instincts and intuition. However, negotiation as a discipline is often counter-intuitive. Best practice suggests that we often go against our instincts and follow behaviors which at first pass do not seem to be appropriate to the desired outcome. A recent article posted on the Forbes Leadership Forum on forbes.com entitled Three Tricks That Make Negotiations Work by Richard Shore discusses three not-so-obvious strategies that seem counter-intuitive, yet make perfect sense.

1. Don’t look at the person who is talking; look at the people who are listening.
In group settings, people naturally tend to focus on the speaker. In a negotiation, that person commonly is a lawyer rather than a principal. He or she is trained to deliver a pitch or make an argument effectively. This includes not only speech, but also tone of voice, facial expressions, and body language. The negotiator is trying to control the message—and usually succeeds. Often, that is not a true reflection of their actual state of mind or your opposing party’s true settlement position. So, focus your attention on key representatives of the opposing party other than the speaker. They are more likely to convey their true frame of mind through facial expressions and body language. Because they are not in the spotlight, their facial expressions and body language can be quite informative, like a “tell” in poker. Negotiation tells can be particularly valuable when someone other than the speaker is the true decision maker—for example, when the in-house client representative is calling the shots on settlement, even though the party’s lawyer does most of the talking.

To read the full article, click here

January 2014 Legal Brief – Firm Newsletter

Posted: January 31st, 2014

Non-Disclosure Agreements – A Lesson to Be Learned

Posted: January 18th, 2014

Tags: corporate, intellectual property

A non-disclosure agreement (NDA) is typically used between companies to protect confidential information during a potential transaction. Every NDA, however, is different. The specific terms and provisions in the NDA determine whether your trade secrets would be protected upon disclosure. Accordingly, each NDA should be tailored and specific to the transaction. A recent case decided by the Federal Circuit Court of Appeal demonstrates that special attention needs to be given to an NDA.

The Convolve v. Compaq and Seagate litigation involved a misappropriation of trade secret dispute between Convolve, the owner of certain intellectual property, and Compaq and Seagate. Although the dispute involved many different issues, of particular importance was the Federal Circuit’s holding that Convolve lost its trade secret status by failing to provide written follow-up memoranda as mandated by the NDA.

The particular NDA at issue stated that to trigger either party’s obligations, the disclosed information must be marked confidential at the time of disclosure or designated as confidential by written memorandum identifying the confidential information.

After entering into an NDA, Convolve gave presentations and sent slides from one presentation to both Compaq and Seagate. In the end, however, the parties did not enter into a license agreement as anticipated. A few years later, Convolve sued Compaq and Seagate alleging misappropriation of trade secrets, among other things. The District Court held, and the Federal Circuit affirmed, that the claimed trade secrets were not preserved according to the procedures listed in the NDA. Specifically, there were no written confidential follow-up memorandums mandated by the NDA. Therefore, the disclosures given at Convolve’s presentations were not subject to confidentiality obligations.

This case illustrates that parties should pay particular attention in drafting and understanding the NDA prior to disclosing confidential information. If the NDA has a marking requirement, the disclosure should ensure that markings are provided, and if a follow-up memorandum is required, then a memorandum should be provided immediately after disclosure. Furthermore, parties should also ensure that the NDA has procedures in place to remedy any inadvertent or accidental disclosure of confidential information. As demonstrated, special attention must be paid to an NDA because it could determine whether your trade secret will be protected.