Commercial Lease Disputes Becoming a Little More Frequent than “From Time to Time”

Farrell Fritz, P.C.
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I think it’s fair to say that there’s been an uptick in litigation involving commercial lease disputes and retail property closings gone awry over the last 15 months.  And for obvious reasons.  The commercial real estate industry has taken a beating from COVID-19.

Some evidence of this of this uptick can be found in the decisions being handed down in the Commercial Division of late, which involve issues not exactly foreign to the forum but represent a bit of a departure from the more typical closely-held business disputes that, as Nassau County ComDiv Justice Timothy Driscoll once remarked, “are our bread-and-butter here in the Commercial Division.”

One reason for this, perhaps, is the subject-matter limitation found in Uniform Rule 202.70(b)(3), which expressly “exclud[es] actions for the payment of rent only” from commercial real estate disputes otherwise available for ComDiv adjudication.  After all, ComDiv cases are almost always all about money.  Not so in the context of commercial lease disputes, at least as concerns issues of rent.  Which means that commercial real estate litigators interested in taking advantage of the many benefits of having their clients’ disputes adjudicated in the the Commercial Division may need to get a little creative in their pleadings.

Last month, Manhattan ComDiv Justice Andrew Borrok issued a decision in Prada USA Corp. v 724 Fifth Fee Owner LLC involving certain suspension provisions in a commercial lease for high-end retail space in NYC.  The provisions gave the owner-landlord (Owner) the option to suspend the retail tenant’s (Prada’s) tenancy for up to three years for purposes of redeveloping its premises.  Upon exercise of the suspension option — which, by the way, Owner was permitted to do “from time to time” (more on that later) — Prada would be entitled to select a build-out model for its space in the redeveloped building and to receive liquidated damages in an amount up to $5 million “to compensate it for being displaced from its occupancy in the demised premises.”

In late 2018, Owner gave notice of its intent to exercise the suspension option, and in early 2019 Prada selected a layout for its new store, development of which was projected to begin by March 2020 and complete by March 2023.  In October 2019, however, Owner attempted to withdraw its notice “as if it was never given” because development of the building “was no longer feasible.”  Prada then sued for a declaration that Owner’s one-time suspension option was irrevocable and for $5 million in liquidated damages as a result of Owner’s anticipatory breach.  On summary judgment, Justice Borrok ultimately found that Owner could not revoke its option but that Prada was not entitled to liquidated damages because the suspension of its tenancy, which was premised on Owner’s redevelopment, never occurred.

Put another way, the approximately $5 million liquidated damages were meant to put the parties in as close a position as they could be notwithstanding a redevelopment-related suspension.  Neither party can profit from or arbitrate on a suspension notice that did not result in a surrender of occupancy or an actual renovation-related suspension or change to the premises.  The only potential issue for trial is whether, in the absence of a renovation, Prada [is entitled to] third-party costs or other foreseeable reasonable costs incurred prior to receiving notice from Owner of its intention not to proceed with the proposed building development.

Although Prada managed to obtain a declaration that Owner’s suspension notice was irrevocable, Justice Borrok declared in an earlier decision that Owner nonetheless retained the option to suspend Prada’s tenancy for future redevelopment purposes.  This ruling turned on a curious issue of contract construction involving the phrase “from time to time.”

In short, the lease’s suspension provisions expressly provided that “Owner shall have the option . . . , from time to time, . . . to suspend the possession of Tenant with respect to all of the Demised Premises.”  Prada contended that the phrase “from time to time” was synonymous with the phrase “at any time” and therefore should be “interpreted to confer a single one time only option.”

Now, I understand from my transactional real estate colleagues that use of the phrase “from time to time” is atypical in commercial leases, particularly as it relates to a party’s exercise of this or that right.  Confirmation of this fact was apparent in the parties’ underlying briefing — represented by Sullivan & Cromwell and Quinn Emanuel, no less — in which only one case was cited by Owner’s counsel for the proposition that “it is self-evident from the plain meaning of the phrase . . . that Owner has the right to exercise a Suspension Option more than once” (citing Sullivan v Harnisch, 96 AD3d 667 [1st Dept 2012]).  In fact, the First Department in Sullivan — a case involving an LLC member’s right to determine bonus compensation “from time to time” under an operating agreement — ruled that there was no limitation on when during the fiscal year the member could make such a determination, not how many times.

Given this paucity of practical and legal precedent, it comes as no surprise that Justice Borrok did not cite any authority to support his finding on the issue — which, as noted above, permitted Owner to retain the option.  Instead, the judge appeared to appeal to basic common sense when finding that:

These words mean exactly what they say and do not mean what they do not say — i.e., ‘from time to time’ necessarily means more than once. . . .   [T]he Lease does not provide any words of limitation limiting the Owner to a single option which is customary and necessary to include in these agreements when such limitation is intended.  And, ‘from time to time,’ can only mean more than one time.

As the title of this blog post suggests, the everyday usage of the phrase “from time to time” tends to mean more than once, confirming Justice Borrok’s finding in Prada USA Corp. v 724 Fifth Fee Owner LLC.  Still, its probably best to be a little less folksy when setting the specific parameters of a party’s material right in a commercial lease.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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