Clear and Unambiguous Language Trumps Claim for Breach of Covenant of Good Faith and Fair Dealing

On September 22, 2021, the Second Department issued a decision in Woodmere Rehabilitation v. Zafrin, 2021 NY Slip Op 05039, affirming Justice Stephen Bucaria's order dismissing the claims of the trustees, as landlord, for breach of the lease and the covenant of good faith and fair dealing with respect to the right to operate nursing home beds. The trustees claimed that a provision in the lease requiring the tenant, a nursing home operator, to deliver the facility as a licensed first class nursing home did not grant them an interest in the right to operate the nursing home. As the Court explained:

[A] contract is to be construed in accordance with the parties' intent, which is generally discerned from the four corners of the document itself. Consequently, 'a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms'" (MHR [*3]Capital Partners LP v Presstek, Inc., 12 NY3d 640, 645, quoting Greenfield v Philles Records, 98 NY2d 562, 569). Additionally, "[i]mplicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance" (Dalton v Educ. Testing Serv., 87 NY2d 384, 389). "Encompassed within the implied obligation of each promisor to exercise good faith are any promises which a reasonable person in the position of the promisee would be justified in understanding were included" (id.at 389 [internal quotation marks omitted]).

Here, contrary to the trustees' contention, Woodmere's conduct of obtaining approval to relocate the 186 beds it was licensed to operate at the trustees' premises to its new facility, and to temporary decertify the beds pending construction, did not violate any express or implied terms of the lease. No terms in the lease, including the mandate that the premises be returned in "first-class condition suitable for the continuation of a nursing home," imposed an additional obligation upon Woodmere to transfer to the trustees its interest in the rights granted to it by the DOH and the Public Health and Health Planning Council to operate the 186 nursing home beds. Essentially, as expressed by the trustees in a letter to the DOH, they take the position that this lease provision obligated Woodmere to deliver a "licensed first class nursing home" (emphasis added). However, that position is inconsistent with the language of the lease recognizing that the premises would be returned in a condition permitting continuation of a nursing home "upon compliance with [applicable] license requirements of the . . . governmental agencies having jurisdiction over the operation and maintenance of nursing homes."

It may be that the trustees would have been unable, under the law applicable upon expiration of the lease in 2014, to obtain the necessary approvals from those governmental agencies to operate a nursing home at the premises. Significantly, the instant lease was initially drafted and executed prior to the enactment of "certificate of need" laws in New York, which prohibit the establishment of any nursing home without approval of the Public Health and Health Planning Council, or substantial acquisition or modification of a nursing home without approval of the DOH, all upon a finding of public need (see L 1964, ch 730, §§ 4, 5, 7; L 1965, ch 795; L 1970, ch 617; Public Health Law §§ 2801[1]; 2801-a, 2802). The requirements of these laws, and the barriers they may have created on the ability of the trustees or a proposed tenant to operate a nursing home at the trustees' premises, could not have been in the contemplation of the parties at the time the lease was executed, and a change in the lease to account for the changed laws cannot be presumed or implied (see Gimbel Bros. v Brook Shopping Ctrs., 118 AD2d 532, 534). It is noteworthy that the lease was amended on several occasions after enactment of the "certificate of need" laws, but no provisions were made in the various amended leases to clarify or adjust the parties' rights or obligations in relation to the changed laws.

In sum, Woodmere demonstrated, prima facie, that it did not breach the lease or the covenant of good faith and fair dealing by relocating and temporarily decertifying the 186 beds it was licensed to operate at the subject premises. In opposition, the trustees failed to raise a triable issue of fact. Accordingly, the Supreme Court properly granted that branch of Woodmere's cross motion which was for summary judgment dismissing the trustees' second cause of action against it and, for the same reasons, properly denied that branch of the trustees' motion which was for summary judgment on that cause of action.

The attorneys at Schlam Stone & Dolan LLP regularly litigate claims regarding real property and breach of contract. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning a lease or contract dispute.