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Second Department Affirms Dismissal of Landlord’s Complaint Finding That Tenant Did Not Breach Lease Because Landlord Failed to Timely Obtain All Necessary Approvals for Landlord Build-out

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  • Posted on: Jun 27 2022

By Jonathan H. Freiberger

Issues relating to contract interpretation are a frequent subject addressed in this Blog.  “The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent and the best evidence of what the parties to a written agreement intend is what they say in their writing.”  Henrich v. Phazar Antenna Corp., 33 A.D.3d 864, 866-67 (2nd Dep’t 2006) (citations, internal quotation marks and brackets omitted).  Thus, “where the language [of a contract] is clear, unequivocal and unambiguous, the contract is to be interpreted by its own language.”  R/S Associates v. New York Job Development Authority, 98 N.Y.2d 29 (2002) (citations and internal quotation marks omitted). This is so because in “adjudicating the rights of parties to a contract, courts may not fashion a new contract under the guise of contract construction….”  Slatt v. Slatt, 64 N.Y.2d 966, 967 (1985) (citation omitted). 

“Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide.”  Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002) (citations omitted).  When a contract contains a merger clause “[e]vidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add or to vary the writing.”  W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990) (citations omitted).

These well-accepted rules of contract construction are particularly important in the context of real estate transactions because in such transactions “commercial certainty is a paramount concern.”  Vermont Teddy Bear Co., Inc. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004) (citations, internal quotation marks and ellipses omitted).  Such was the case in Hylan Ross, LLC v. 2582 Hylan Boulevard Fitness Group, LLC., a case decided by the Appellate Division, Second Department, on June 22, 2022.

The plaintiff in Hylan Ross, was a landlord/owner of property on Staten Island that entered into a lease agreement with defendant tenant to operate a Planet Fitness health club.  Defendant PFNY, LLC guaranteed certain of tenant’s payment obligations for the first ten years of the lease.  As to the landlord’s build-out requirements, the lease provided as follows:

The landlord was to complete construction of the building prior to delivery of the premises. Section 7.01(b) of the lease (hereinafter the Approvals provision) provided, in pertinent part: “Landlord hereby agrees that Landlord, at Landlord’s sole cost and expense, shall obtain any and all approvals, including any and all building permits, hereunder (collectively, the “Approvals”) and obtain a Certificate of Occupancy (temporary or permanent[)] for the Building. Landlord shall have a period of eighteen (18) months after the Effective Date (the “Approval Period ”) to obtain the Approvals.”

In the event the landlord was unable to timely obtain all approvals, the tenant had the right to terminate the lease.

When landlord failed to obtain required approvals prior to the expiration of the of the Approval Period, tenant sent landlord written notice of lease termination.  Arguing that it had timely obtained all required approvals, Landlord rejected the notice.   Thereafter, landlord commenced action alleging that tenant breached the lease and guarantor breached the guaranty by purporting to terminate same when all landlord Approvals were timely obtained.  Among other things, the complaint alleged that “the parties specifically agreed that, in accordance with industry standards, it would be the tenant’s responsibility to obtain certain permits, and other permits did not need to be obtained prior to substantial completion of construction.”  Supreme court granted defendants’ motion to dismiss pursuant to CPLR 3211(a)(1) and (7), in which defendants argued that “the lease unambiguously required the landlord to obtain all approvals, and that the plaintiff conceded that the approvals process was ongoing beyond the 18–month period set forth in the Approvals provision.”

In affirming supreme court, the Appellate Division relied on the contract interpretation principles set forth herein.  The Court rejected landlord’s contention that “in light of the provisions of the lease which required the landlord to promptly commence work following receipt of the ‘Approvals,’ and which provided the landlord two years from that date to deliver the premises, the ‘Approvals’ required by the Approvals provision included only those approvals which were necessary to commence construction, or at least did not include permits which generally are, or could only be, obtained after substantial completion of the building.”  The Court also rejected the claim that lease was ambiguous as to “which permits were included in the ‘Approvals’”. Thus, the Court found that plaintiff’s suggested limitation on the “Approvals” “to only those necessary to commence construction improperly adds a term and distorts the meaning of the Approvals provision.”  (Citations omitted.)  Moreover:

any ambiguity regarding the timing of permits which allegedly could not be obtained prior to substantial completion of construction would not impact all of the outstanding permits. The plaintiff may not rely on the parties’ communications and industry standards to modify the clear term of the lease that the landlord was responsible for obtaining the approvals.  [Citations omitted.]

The Court also rejected the contention that there was an oral modification of the of the lease relative to the Approvals because “plaintiff failed to sufficiently allege that there had been partial performance or reliance sufficient to defeat the no-oral modification clause of the written agreement.”  (Citations omitted.)

Thus, the Court concluded that “the clear terms of the lease utterly refute the plaintiff’s allegation that the tenant improperly terminated the lease.”  (Citation omitted.)

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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