Court: Full Rent Abatement Not Appropriate Remedy for De Minimis Taking
Commercial real estate law has been applied largely the same way for hundreds of years, since feudal times. But a recent opinion by the Court of Appeals of New York, regarding a dispute between a Manhattan movie theater tenant and the owner of the building where it rented space for its multiplex cinema, has dramatically changed the amount of leeway owners will have when making unauthorized changes to tenant-occupied space. That is, changes that, in the past, might previously have given tenants the right to abate—or withhold—rent could now under certain circumstances be allowed without the harsh consequence of rent abatement for owners.
Controversy Over Unauthorized Improvement
The tenant signed a 28-year lease with the owner of a seven-story retail and office building to operate a movie theater with 1,150 seats and four screens. The lease permitted the owner to enter the tenant's space to make repairs and improvements and provided that there would be no rent abatement during the time such work is in progress. Under the lease, the tenant wouldn't have an allowance for the “diminution of rental value” arising from the owner making any repairs or improvements.
Three years later, the owner, without notifying or getting permission from the tenant, installed cross-bracing structures between two existing steel support columns on both of the tenant's leased floors, causing a change in the flow of customer foot traffic on the first floor and a slight reduction of the second-floor waiting area. The cross-bracing, which the owner later conceded was unaesthetic, was placed in preparation for the addition of two floors to the building.
The tenant stopped paying rent as a remedy for what it alleged was “actual partial eviction” by the owner and sued it, asking the New York Supreme Court for a permanent injunction— that is, an order from the court barring the owner from doing any further work in the space and directing it to remove the cross-bracing. The tenant asked the court for an abatement of its rent obligation. The court granted the tenant a temporary restraining order on any further work by the owner and ordered the owner to expeditiously complete the current work. During a trial that was later held to determine whether the cross-bracing constituted an actual partial eviction that would justify the tenant's abating its rent, both the owner and tenant agreed that the cross-bracing occupied approximately 12 square feet of the tenant's space.
The court dismissed the tenant's claim and ordered it to give the owner any unpaid rent. In its decision, the court stated that although the lease didn't grant the owner the right to permanently deprive the tenant of any portion of the space and that such a deprivation would normally result in the tenant being allowed to remain in the portion of the premises from which it was not evicted and withhold all rent, here, the owner's taking of 12 square feet of nonessential space in the tenant's lobby constituted a “de minimis” taking that didn't justify full rent abatement.
The tenant appealed, but an appeals court wouldn't give the tenant full rent abatement. The appeals court reasoned that “current owner and tenant realities make it particularly untoward automatically to apply harsh and oppressive strictures derived from feudal law that mirror the policies and concerns of that earlier society, and that in light of that, the remedy is to compensate the tenant for its actual damages.” But the tenant was unable to show that it had suffered any damages. The tenant appealed again.
Surprise Ruling from State's Highest Court
On appeal, the tenant essentially asked the Court of Appeals of New York to consider whether a minimal and inconsequential retaking of space that has been leased to a commercial tenant constitutes an actual partial eviction relieving the tenant from all obligation to pay rent. The appeals court concluded that, under the circumstances in cases like this one, where such interference by an owner is small—the taking of 12 feet of nonessential space, the flow of foot traffic being minimally impeded, and the visibility of unattractive cross-bracing—and has “no demonstrable effect on the tenant's use and enjoyment of the space,” total rent abatement isn't warranted. These changes were a “trivial interference” that didn't warrant injunctive or monetary relief, said the appeals court.
The appeals court acknowledged that “the withholding of the entire amount of rent is the proper remedy when there has been a partial eviction by an owner, because it involves a failure of the consideration for which rent is paid.” It went on to say that, “if such an eviction, though only partial, is the act of the owner, it suspends the entire rent because the owner is not permitted to apportion his own wrong.”
The reasoning behind the rule is that the tenant has been deprived of the enjoyment of its space by the wrongful act of the owner; thus, the agreement to pay rent has failed. This is true even if a tenant remains in possession of the space. The appeals court specified that this remedy of total abatement of rent for an actual partial eviction is long standing in New York and it did not overrule it. It just needed to address whether there can be an intrusion on commercial space that is of “such trifling amount that imposition of the draconian remedy of total rent abatement is unjustified…Not every intrusion amounts to an eviction which warrants full rent abatement and damages are an appropriate remedy when there has been no substantial interference with the use of the premises,” the appeals court stressed.
The appeals court stated that it didn't see a need to apply a rule, derived from feudal concepts, that any intrusion—no matter how small—on a tenant's rented space must result in full rent abatement. Rather, it recognized that there can be an intrusion so minimal that it doesn't prescribe such a harsh remedy. For an intrusion to be considered an actual partial eviction it must interfere in some, more than trivial, manner with the tenant's use and enjoyment of the premises.
The appeals court also noted that it wasn't aware of any past cases where a tenant was actually granted 100 percent rent abatement for a so-called “eviction” as trivial as the one here—a taking of less than one-tenth of one percent of the space that was located in a place where its absence has no measurable effect on the tenant's use. It concluded that the tenant had totally failed to demonstrate any actual damages or loss of enjoyment of the space due to the owner's cross-bracing occupying 12 square feet in a 15,000 to 19,000 square foot space. Such a minimal interference shouldn't result in any relief for the tenant [Eastside Exhibition Corp. v. 210 East 86th Street Corp., February 2012].
Tenants Will Think Twice
This case may help owners continue to collect rent and avoid litigation from tenants that are disgruntled about small changes that must be made in their space. Tenants that are familiar with the ruling in Eastside Exhibition Corp. v. 210 East 86th Street Corp. may realize that it'll be more difficult for them to prevail on their claims for rent abatement than in the past if they decide to sue their owners. This case shows tenants that they can't assume they'll be entitled to rent abatement if their owners make improvements or alterations they haven't agreed to or that aren't mentioned in the lease—especially if the change will have little or virtually no effect on their ability to do business. Although tenants will now have to consider more carefully whether it's worth a court battle like this one to stop the changes or undo them, or stop paying the rent altogether, it's still important for you to carve out specific rent abatement provisions in your leases that are favorable to you.
While a tenant could realize that the money it would save from rent abatement could be eaten up by protracted litigation— for example, this case dragged on for several years and through multiple appeals—you can entirely avoid any pushback to your changes with carefully drafted lease terms. And if your lease doesn't already include language but you'd like to alter or improve an existing tenant's space, consult your attorney before taking any action to see what rights you have.
The ruling discussed above is great news for owners, but you should still proceed with caution before construction: Ask yourself whether the interference is more than “trivial,” and whether you'll be seen as deliberately disturbing the tenant's enjoyment of its space, which could persuade a court that the tenant should be able to withhold its full rent.