Is Prepaid Rent Recoverable if a Lease Terminates Early?

What happens when rent is prepaid under a lease but the lease is purportedly terminated prior to the expiration of the term? The Court of Appeals in Eujoy Realty Corp. v. Wagner Communications, LLC addressed this issue.1

Landlord Eujoy owned a building in Queens with a steel frame structure on the roof for the placement of billboard advertisements. Tenant Van Wagner considered the billboard desirable because of its visibility to passing traffic on the Long Island Expressway. Van Wagner leased the billboard for a 15-year term commencing December 1, 2000 and ending September 30, 2015.

The lease specifically provided for the payment of “annual basic rent” for the period January 1, 2007 through December 31, 2007 in the amount of $96,243.00 in advance on January 1, 2007. The lease further provided that “Should this Lease be terminated for any reason prior to the date of its expiration [Van Wagner] shall not be entitled to the return of… any basic rent paid in advance and covering period beyond the date on which the lease is terminated…” The lease, however, provided several exceptions to this clause and allowed the apportionment of rent if the lease terminated due to a fire or casualty, condemnation or the enactment of any law making the billboard illegal. A rider to the lease also afforded Van Wagner the right to terminate the lease if the view of the billboard from the Long Island Expressway was ever “substantially obstruct[ed]” by “the erection of a new building or the increase in height of the building between the location [of the billboard] and the [LIE].”

In early January 2007 Van Wagner sent a check for $96,243.00 to Eujoy for the annual basic rent for the entire year of 2007. The check was dated January 2, 2007; however Van Wagner almost immediately stopped payment on the check claiming that it was “accidentally” and “erroneously” issued. Shortly thereafter, on January 16, 2007, Van Wagner’s Executive Vice President wrote a letter to Eujoy’s co-owner confirming a conversation with another co-owner advising that Van Wagner had terminated the Lease effective January 8, 2007 pursuant to the Rider and enclosed a check for $2,109.43 representing rent for January 1, 2007 to January 8, 2007.

Eujoy thereafter commenced an action against Van Wagner seeking the balance of the annual basic rent for 2007 in the amount of $94,137.57 and for reasonable legal fees and costs related to Van Wagner’s default.

Eujoy quickly moved for summary judgment arguing that “[t]he parties did not stipulate to apportion rent paid in advance and for the period following termination of [the lease] pursuant to [the Lease Rider] and Article 19 of the lease entitled it to its reasonable attorneys’ fees and costs.” Van Wagner cross moved for summary judgment “based on the lease” or, alternatively, for leave to amend its answer to include an affirmative defense of estoppel.

Van Wagner submitted an affidavit of its Executive Vice President claiming that in 2006 it became apparent that construction would eventually block the visibility of the billboard from the Long Island Expressway thus entitling tenant to invoke the termination clause in the rider and that upon his discussion by telephone with Eujoy’s co-owner late in 2006, Van Wagner “agreed [to] keep the advertisements posted, and thus pay rent to [Eujoy] for as long as [Van Wagner] could collect revenues from [its] customer…” The affidavit also stated that because Eujoy “accepted the benefits of [Van Wagner’s] extended use of the [billboard] through January 8, 2007 and agreed that the Lease would terminate as of that date…it should not be entitled to collect rent for any subsequent period.”

The Supreme Court denied Eujoy’s motion and granted Van Wagner’s cross motion holding that Eujoy was not entitled to any portion of prepaid rent because Van Wagner “did not pay any such rent because [it] stopped payment on the rent check before [Eujoy] cashed it.”

On appeal, the Appellate Division, with two dissents, reversed the Supreme Court’s order, granted Eujoy’s motion for summary judgment, denied Van Wagner’s cross motion in its entirety, and remanded the matter for a determination of attorneys’ fees. After final judgment, the Court of Appeals took up the case as of right because of the two Justice dissent and affirmed.

After discussing preservation issues, the Court of Appeals addressed the prepaid rent issue. Initially the Court reminded us of the common law rule that rent “is consideration for the right of use and possession of the leased property that a landlord does not earn until the end of the rental period” unless the parties expressly agree otherwise. The Court stated “when a lease sets a due date for rent, that date is the date on which the tenant’s debt accrues” and that “[r]ent paid ‘in advance’ (i.e. at the beginning of the term) is unrecoverable if the lease is terminated before the completion of the term, unless the language of the lease directs otherwise.” The Court repeated long-standing policy of a “strong preference for freedom of contract in the creation of leases, and although it may seem harsh for tenants, the courts assume that the parties have knowingly bargained for the provisions of their agreement. This is especially true in the case of arms-length commercial contracts negotiated by sophisticated and counseled entities. [Citation omitted.] Courts will give effect to the contract’s language and the parties must live with the consequences of their agreement. If they are dissatisfied …the time to say so [is] at the bargaining table.”

In addressing the lease, the Court noted that the lease described the rent as “annual basic rent,” which it cited as confirmation of the parties’ agreement and intent that rent be paid in advance in annual installments. The Court continued that the lease explicitly states that the tenant is not entitled to “the return” of any basic rent “paid in advance,” even if the lease is terminated prior to the expiration of the rental period unless one of the lease exceptions existed. The Court noted that while tenant never fully pay the rent due January 1, 2007 because it stopped payment of its check, that did not change the lease requirement that the rent became due on January 1, 2007 and under this lease the rent could not be apportioned because the lease did not terminate based on one of the exceptions specifically enumerated in the lease.

The Court determined that Van Wagner “accrued a debt for the annual basic rent under the terms of the lease when it remained in possession of the billboard after January 1, 2007, and there is nothing in the law or the language of the agreement the relieves it of that debt.”

Thus, when a tenant agrees to the payment of rent in advance, if it wants the ability to apportion the rent if the lease terminates early, such must be specifically provided for in the lease.

¹ 22 N.Y.3d 413 (2013)