Implied Covenant of Good Faith and Fair Dealing Requires Landlord to Consent to Renewal of Sidewalk Cafe Permit

On October 21, 2014, the First Department issued a decision in DMF Gramercy Enterprises, Inc. v. Lillian Troy 1999 Trust, 2014 NY Slip Op. 07110, illustrating the application of the implied covenant of good faith and fair dealing.

In DMF Gramercy Enterprises, the plaintiff sued the defendants over the defendant's refusal to consent to the plaintiff's continued operation of a sidewalk café in the space the plaintiff leased from defendants. The First Department affirmed the trial court's finding that this refusal breached the terms of the lease and, at any rate, "that the implied covenant of good faith and fair dealing would otherwise restrict defendants' ability to deny consent, and that they have failed to make a satisfactory showing of good faith in this case." As to the implied covenant of good faith and fair dealing, the First Department explained:

We note initially defendants' correct assertion that the sidewalk café is not part of the leased premises. . . . Nevertheless, the lease gives plaintiff the right to make use of the sidewalk space. . . .

Having determined that the lease allows plaintiff to use and occupy the sidewalk for the operation of a sidewalk café, it necessarily follows that defendants cannot withhold or revoke their consent to that use absent a good-faith basis. As the Court of Appeals has explained:

In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance. This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.

Because the stipulated facts demonstrate that the sidewalk café existed at the time of the lease's execution, plaintiff (through its assignor) was justified in understanding that the landlord promised to refrain from unreasonably withholding its consent to operate the sidewalk café. It is of no moment that paragraph 1(d) of the lease refers to the revocable nature of the right, if any, to maintain beyond the building lines, because that language does not go so far as to give defendants the right to revoke their consent for any reason whatsoever. Furthermore, paragraph 1(d) can be viewed alternatively as affirming that the landlord cannot guarantee the right because it is revocable by the City, the entity that owns the sidewalk and has the authority to grant sidewalk café licenses.

To permit defendants to withhold or revoke their consent at will would destroy plaintiff's right to receive the fruits of the contract inasmuch as those fruits are gained by operating the sidewalk café. As discussed above, the lease permits plaintiff to use the sidewalk for the operation of a sidewalk café, provided, of course, that such use is lawful. Plaintiff's sidewalk café can only be lawful if it obtains the consent of the landlord (a prerequisite to the grant of a license by the City). Accordingly, the landlord cannot obstruct plaintiff's operation of the sidewalk café by refusing in bad faith to consent. As the trial court observed, defendants did not reserve the right to terminate consent in their sole discretion. Therefore, their right to deny consent must be bridled by the implied covenant of good faith and fair dealing.

(Internal quotations and citations omitted).