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).