Commercial Lease Parties Beware: Lessons from Tarrytown

by Andrew Fine, JD (NYS Bar admission pending; firm alumnus)

Through a recent appellate court decision, New Yorkers were gravely reminded that the age-old commercial concept of “caveat emptor” – which is Latin for “buyer beware” –  applies with equal force to those seeking commercial leases. Due diligence and factual investigation, it appears, are burdens naturally imposed on buyers and lessees alike.

On September 14, 2016, the Second Department of the New York Supreme Court, Appellate Division, decided 1357 Tarrytown Road Auto, LLC v. Granite Properties, LLC.[1] In this case, the plaintiff was a company that operated an automobile dealership (hereinafter, “Tarrytown”) which sought to expand its business by leasing additional property from the defendant (hereinafter, the “Landlord”) in the Town of Greenburgh, New York. After negotiation, the two parties entered into an agreement whereby the Landlord assigned an existing lease to Tarrytown. The agreement was finalized in July of 2013.

For the next two months, it was business as usual. In September, 2013, however, Tarrytown discovered that local law prohibited vehicles without license plates from parking on the leased premises (hereinafter, the “local ordinance”). Because Tarrytown intended to operate an automobile dealership on the premises, this local ordinance presented an unwelcome surprise as well as a serious obstacle. Tarrytown argued that the practice of parking cars without license plates on a dealership lot was “essential to the business of selling automobiles.”[2] Indeed, common sense would tend to support that argument.

Despite knowledge that Tarrytown intended to operate a car dealership on the premises, the Landlord had not disclosed the existence of this local law to Tarrytown during their lease negotiation, and the lease itself contained no mention of the local ordinance. The terms of the lease explained instead that provisions in the lease related to the parking of automobiles were subject to “any restrictions of local law, zoning, or ordinance.”[3] The relevant local ordinances were neither mentioned nor described in the lease outside of this generalized provision. Surprised and frustrated by its discovery, in September, 2013, Tarrytown asked the Landlord for a release from the Lease given the commercially frustrating nature of this local ordinance. The Landlord refused.   

Tarrytown subsequently brought suit in New York supreme court against the Landlord seeking release from the lease. Specifically, it alleged that the Landlord fraudulently induced Tarrytown into signing the lease by refusing to disclose the local ordinance, and that the Landlord had breached an implied covenant of good faith and fair dealing by failing to disclose the ordinance. The Landlord brought a motion to dismiss Tarrytown’s complaint. The New York supreme court granted this motion to dismiss, but only in part, with respect to the cause of action alleging fraudulent inducement. The Landlord, believing that the supreme court erred by declining to dismiss the complaint in its entirety, and appealed the supreme court’s order.

On appeal, the Second Department ruled in favor of the Landlord, and found that the lower supreme court should indeed have dismissed Tarrytown’s complaint in its entirety. But why?

The Second Department explained that the implied covenant of good faith and fair dealing is breached “when a party acts in a manner that would deprive the other party of the right to receive the benefits of their agreement.”[4] Simply put, this covenant constructively includes any promises “which a reasonable [person]…would be justified in understanding were included” with the rest of the written contract.[5] It was Tarrytown’s contention that the lease carried with it an implied promise from the Landlord that the premises were legally suitable for their intended purposes. The Second Department, however, felt otherwise. It explained that the lease explicitly provided that “no representation concerning the suitability of the premises for [Tarrytown’s]…intended business” was made in the lease. Accordingly, the court declined to “impos[e] a duty on the Landlord to disclose zoning or local law restrictions” on the basis that doing so would impose a duty on the Landlord that was expressly disclaimed by the lease.[6] The Second Department even went one step further by explaining that, generally speaking, contracts such as this may “conclusively establish a defense to causes of action alleging breach of the implied covenant of good faith and fair dealing.”[7] In essence, this means that contracts which state that no representations are being made therein with respect to a certain matter cannot be later invalidated on the basis that the contract should have made such a representation. This judicial analysis appears not to hinge on fairness, but rather on the express defensive language within the contract.

This case may understandably leave New York entrepreneurs and commercial lessees feeling uneasy. After all, this precedent places the burden on lessees to conduct their own due diligence before signing a lease by researching and identifying local zoning laws, local ordinances, and other rules and regulations that could disturb business on the premises. Commercial lessees would be prudent to carefully negotiate with landlords for the inclusion of express warranties and assurances in the lease itself. By the same token, lessees should be wary of those clauses which disclaim representations in the agreement.[8] Otherwise, lessees may fall prey to obscure and unknown regulations that serve to plague the premises that they paid so much to lease. To all business people who are shopping now or in the future for commercial leases: good luck, and caveat emptor.

[1] See generally 1357 Tarrytown Rd. Auto, LLC v. Granite Properties, LLC, 37 N.Y.S.3d 341 (N.Y. App. Div. 2d Dept. 2016).

[2] Id. at 342.

[3] See id. at 343.

[4] Id., citing Frankini v. Landmark Constr. of Yonkers, Inc., 937 N.Y.S.2d 80 (N.Y. App. Div. 2d Dept. 2012)

[5] Id., citing Dalton v. Educ. Testing Serv., 663 N.E.2d 289 (N.Y. 1995)

[6] Id.

[7] Id., citing Minovici v. Belkin BV, 971 N.Y.S.2d 103 (N.Y. App. Div. 2d Dept. 2013)

[8] See “New York Court Reminds Tenants to Do Their Due Diligence,” Westlaw Practical Law Real Estate, Oct. 28, 2016.