Transfer of Ownership of a Tenant Does not Constitute an Assignment of a Lease

On August 2, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Board of Directors of Big Deal Realty on Greene St., Inc. v. 60G 133 Greene St. Owner, LLC, 2020 NY Slip Op. 50885(U), holding that the transfer of an interest in a tenant does not constitute an assignment of a lease, explaining:

It is well settled that a transfer of an interest in a tenant does not constitute an assignment of a lease absent a contractual provision which provides otherwise.

In Dennis' Natural Mini-Meals, Inc. v 91 Fifth Ave. Corp, the landlord entered into a commercial lease with a corporate tenant for a street-level retail store and restaurant. The lease permitted the tenant to assign the lease provided that the tenant obtained the landlord's permission and the assignee was in the same business as the tenant. The tenant sold all of its common stock to another corporation, which assumed the lease and opened a new restaurant. The landlord served a notice to cure claiming, among other things, that the sale of the tenant's stock constituted an unauthorized assignment of the lease. The tenant moved for a Yellowstone injunction and sought a declaratory judgment declaring, inter alia, that its tenancy had not been properly terminated and it was entitled to immediate possession of the premises. Following a non-jury trial, the court dismissed the tenant's complaint in its entirety, declared that that the tenant's lease was properly terminated, and awarded immediate possession of the premises to the landlord. On appeal, the First Department reversed and found in favor of the tenant, reasoning that a corporate tenant's transfer of all of its stock to a third party does not constitute a breach of a nonassignment provision of a lease even where the landlord's consent to an assignment to the transferee had previously been sought and refused. The First Department noted that it was of no moment that that the sale of stock was not to the originally intended assignee. As the First Department explained:

the rational is that a landlord entering a lease with a corporate tenant should be presumed to know that it is an artificial entity with a life distinct from the individuals who may from time to time be its owners. If a landlord wished to protect itself against such vicissitude, it could easily write into the lease a condition subsequent. One can certainly not be implied, however.

Here, like in Dennis, the Co-op could certainly have provided that transfers of interests in the tenant required Board approval and payment of the Flip Tax. They did not.

In Sea Cliff Delicatessen, Inc. v Skrepek, the landlord entered into a commercial lease with two individual lessees, John Beck and Jonathan Nebel, for a term of ten years. The lease provided that the Tenant or Successors shall not assign this agreement, or underlet or underlease the premises without the Landlord's consent in writing, and that the Tenant shall have the right to assign said lease to any purchaser of the business or corporation hereinafter formed by Tenant, and the Landlord's consent shall not be unreasonably withheld. The lease further provided that the lease term could be renewed for an additional term of ten years at a rent to be determined by the parties, and that if the parties could not agree on the rent, the matter would be referred to arbitration. Two months after signing the lease, Messrs. Beck and Nebel formed Sea Cliff Delicatessen, Inc. (Sea Cliff). Mr. Beck assigned the lease to Sea Cliff without first obtaining the Landlord's consent (Mr. Nebel was not a party to the assignment) and, two years later, Mr. Nebel sold all of his shares in Sea Cliff to Mr. Beck. Three years later, Mr. Beck transferred his entire interest in Sea Cliff to third-party purchasers. Prior to the expiration of the lease term, Sea Cliff attempted to exercise its renewal option, but the landlord refused to negotiate the renewal of the lease. Sea Cliff commenced a petition pursuant to CPLR Article 75 to compel arbitration. The court denied the petition and Sea Cliff appealed. The Second Department reversed on two separate grounds. With respect to Mr. Beck's assignment of the lease to Sea Cliff, the Second Department held that the landlord waived the consent requirement by accepting rent checks from Sea Cliff for approximately five years. Significantly, as it relates to the instant motion, and citing the First Department's decision in Dennis, the Second Department held that the transfer of Sea Cliff's shares to the third-party purchaser did not constitute an assignment.

Finally, and equally instructive, in Brentsun Realty Corp. v D'Urso Supermarkets, Inc., the landlord entered into a commercial lease with a corporate tenant. A rider to a commercial lease provided:

Tenant further agrees that it will not assign, mortgage, pledge or otherwise encumber this [*4]lease or any interest therein, or sublet the whole or part of the demised premises, without obtaining on each occasion the written consent of the Landlord. Consent to assignment shall not be unreasonably withheld by Landlord, and if consent is granted, Tenant shall remain liable on this Lease. Transfer or sale of fifty percent (50%) or more of the stock of the Corporation shall constitute an assignment of this Lease which must require Landlord's consent as set forth above.

In other words, unlike the case at bar, the lease contained a specific provision indicating that a transfer of beneficial ownership constituted an assignment. The tenant corporation subsequently merged with its parent corporation without executing an assignment or sublease. The landlord sued, alleging that the merger violated the lease's non-assignment provision. The Second Department held that the change of ownership and control of the corporate tenant resulting from the merger of the subsidiary corporation into its parent corporation did not constitute an assignment of the lease. Inasmuch as the lease in Brentsun expressly provided that a transfer of 50% of the stock of the tenant constituted an assignment of the lease, the court explained that this provision did not apply because the merger did not change the beneficial ownership, possession, or control of the tenant's property or leasehold estate, i.e., the lease terms were not violated.

Here, like in Dennis, Sea Cliff, and Brenstun, the Lease was not violated. In other words, the clear and unambiguous language of the Lease in this case provides that the Lessee shall not assign this lease or transfer the shares to which it is appurtenant or any interest therein. Undeniably, the lessee, 60G, did not transfer its interest in the proprietary Lease or transfer the shares appurtenant to the Lease. Nor did it transfer any interest therein as in the case where a co-op unit owner may wish to subdivide the co-op unit and transfer an interest in the co-op to another. Here, the transfer was a transfer of an interest in the lessee itself and the Lease does not proscribe any such transfer without Board approval or otherwise require payment of the Flip Tax upon any such transfer. By contrast, Sections 11-2101 (6)-(9) and 11-2102 (b) of the NYC Administrative Code and Sections 1401(b), (e) and 1402(a) of the New York State Tax law specifically provide that a transfer or acquisition of a controlling interest in any entity that owns an interest in real property (i.e., a change in beneficial ownership) is a triggering event requiring payment of the real estate transfer tax. Again, neither the Lease nor the By-Laws contain such a provision.

Having failed to provide a provision in the operative Co-Op documents that transfers in ownership of the Lessee are proscribed without Board approval or otherwise that the Flip Tax shall be due upon such transfer, the court shall not rewrite one under the guise of interpretation. Put another way, inasmuch as there is no restriction on the transfer of beneficial ownership of a lessee, the transfer was valid without obtaining consent and no Flip Tax is due. Therefore, 60G's motion to dismiss is granted.

(Internal citations omitted).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.