Lease Dispute Might
Shake Up New York Law
New York office tenants may want to stop overstaying their welcome.
A state Supreme Court judge recently ruled that a so-called holdover tenant was liable for damages caused to a law firm that had to wait 18 months to move into its space. The next phase of the proceedings, which could start next month, will determine whether, and how much, fashion-design company Tahari Ltd. owes Kronish Lieb Weiner & Hellman LLP for overstaying its lease.
Brokers say holdovers happen all the time, particularly with small tenants, and that there are typically good reasons behind the delays. In many cases the renovation of a tenant's new space takes too long, or negotiations with its present landlord to renew fall apart at the last minute. An 18-month holdover is unusually long, however.
Tahari has filed an appeal. If the ruling against the company is upheld, it could shake New York's tenant-friendly legal system and give tenants a greater sense of urgency to move on time.
The recent case involves one of the most coveted blocks of office space in New York, the top floor of the 48-story Grace Building, which overlooks Bryant Park and has sweeping views of midtown and downtown. In 2001, Kronish Lieb exercised an option to lease the top three floors of the building, including the 48th floor, where Tahari's sublease was due to run out at the end of May 2003.
May came and went, and Tahari didn't move out. The landlord, Trizec Properties Inc. of Chicago, filed suit in June 2003 to eject Tahari. But Tahari, which had hired noted tenants' rights attorney David Rozenholc, alleged that Trizec had given the company an oral agreement to extend its lease.
In March 2004, a judge ordered Tahari evicted, but the firm still didn't leave. Finally, in December of that year, an appellate court unanimously denied Tahari's appeal and the firm moved out.
Usually the holdover tenant pays the landlord for damages. But in a break from custom, Kronish Lieb filed suit against Tahari in December 2004, saying the company had caused it about $1 million in damages by overstaying its lease.
"Everybody knows in New York you can hold over from six months to 10 months and not have a marshal padlock your door," says a broker from a large firm that frequently represents landlords. But, he notes, the typical holdover tenant is out no more than a month or two past its lease because of onerous charges built into most contracts.
Brokers say an 18-month holdover is unprecedented. "When you're hanging over for 18 months it seems to me you had no intention of moving out," says Stuart M. Lilien, a broker with Lansco Corp., a tenant-representation firm in New York.
Todd Soloway, an attorney with Pryor Cashman Sherman & Flynn LLP, which represented Kronish Lieb, says, "They were really doing this as a negotiating ploy. They really wanted to keep the space. It has spectacular helicopter views of the city."
Mr. Rozenholc says Elie Tahari, the company's founder, "had no other space -- that's why he held over. Tahari has other space in the Grace Building. It was of great value and interest to him to stay in the building. He did not want to have operations spread out over several buildings."
"In a tight market like New York if somebody doesn't move when they're supposed to it creates a lot of problems for other people," says Ted Jadwin, Trizec's general counsel.
Such events can create a domino effect. If Tenant A can't move out because Tenant B holds over in its new space, Tenant A typically still has to pay its own landlord damages -- even though it isn't at fault.
Tahari countersued Kronish Lieb and Trizec, saying it had had an agreement to sublet space from HBO, another tenant in the building, but that Kronish Lieb and Trizec "maliciously interfered" to prevent HBO from honoring its agreement with Tahari. An HBO executive swore in an affidavit that wasn't true.
Mr. Jadwin declined to comment on his firm's pending litigation with Tahari.
"The law firm basically interfered by intervening with the landlord because somebody in the law firm was angry" about being delayed, Mr. Rozenholc says.
Tahari also said in its countersuit that Trizec discriminated against Mr. Tahari, who is Israeli, because of his national origin, and that Trizec is responsible for damages because it prevented the firm from vacating the 48th floor. Trizec called that charge "ridiculous" in its court filings, since it was at the time trying to eject Tahari from the space.
Last month the same judge issued a summary judgment against Tahari, saying the firm was liable to Kronish Lieb for trespassing; a trial will be held to determine damages. Tahari has appealed that ruling.
"The big news is that the court allowed the new tenant to file a separate action against the old tenant," says Mr. Jadwin. "That's new law in New York and new law in the United States." He adds: "I think there are a lot of Kronish Liebs out there. It's costing them money because they can't move out."
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