Court Slams Tenant’s Use of Litigation as Lease Negotiation Tactic

A New York state judge harshly criticized a major toy retailer recently for using litigation as a tactic in negotiating a new lease for its Times Square store in Manhattan. The court faulted the tenant’s filing of a lawsuit during lease negotiations, emphasizing the fact that a borderline frivolous lawsuit used for negotiation purposes was a waste of taxpayers’ money and New York City’s resources, including its court system. 

            In early January, Manhattan Supreme Court Justice Charles Ramos dismissed the lawsuit, in which the toy giant tried to recover 12 years of property taxes it paid its landlord as part of its lease on its Times Square flagship store.

            “Counsel and their clients are admonished to consider that the citizens of this State pay a considerable sum to finance the operations of the Unified Court System,” wrote Ramos. He noted that the record revealed that the suit was commenced in the process of lease renewal negotiations. Litigation, with its expense and uncertainty, has been used from time to time as part of a negotiating strategy in circumstances similar to this case, Ramos acknowledged. “If such a strategy was being utilized here, it would represent an abuse of the judicial process and, to the taxpayers of this State, add insult to injury,” he stressed.

            In its suit, the tenant claimed that a provision in its lease with its landlord requiring it to pay signage taxes assessed by the city on its own signs exempted it from paying a proportionate share of its real estate taxes for the entire building. The clause requiring it to pay taxes on its own signs explicitly states that it’s exempt from paying taxes on any other tenants’ signs. The tenant noted that the total real estate taxes for the building were calculated by the building’s total income, including income derived from other tenants’ signs. Thus, it claimed, requiring it to pay a proportionate share of the property tax was effectively requiring it to pay taxes on other tenants’ signs.

            Ramos rejected that argument, saying the retailer was “conflating income derived from signs with taxes charged by the City.” The judge found that the lease was “unambiguous” in requiring the tenant to pay the real estate taxes. He noted that the retailer had paid the taxes for 12 years without objection, and that the lease had been negotiated between two “highly sophisticated” parties who would have clearly exempted the toy store from the property taxes if they had intended to.

            Counsel for the landlord argued that the tenant was seeking to rewrite the lease and to recover tens of millions of dollars of voluntarily paid back taxes, and the court properly recognized that the claims were without merit and never should have been brought in the first place [Toys “R” Us v. 44-45 Broadway Realty, January 2013].