Ambiguous Lease Clause Could Entitle Commercial Tenant to Rent Abatement During COVID Period

On February 24, 2022, the First Department issued a decision in Schulte Roth & Zabel LLP v. Metropolitan 919 3rd Avenue LLC, 2022 N.Y. Slip Op. 01261, holding that a clause in tenant-law firm Schulte Roth & Zabel's commercial lease entitling the tenant to a rent abatement under designated circumstances was ambiguous, and so the landlord's motion to dismiss the tenant's complaint for a rent abatement during the COVID period when most of the tenant's employees were working remotely was properly denied, explaining:

The motion court properly denied defendant's motion to dismiss the complaint on the ground that section 5.4 of the parties' lease agreement is ambiguous. A contract is ambiguous if "on its face" it is "reasonably susceptible of more than one interpretation" (Chimart Assoc. v Paul, 66 NY2d 570, 573 [1986]; accord Chen v Yan, 109 AD3d 727, 729 [1st Dept 2013]; see also New York City Off-Track Betting Corp. v Safe Factory Outlet, Inc., 28 AD3d 175, 177 [1st Dept 2006]). If a contract is ambiguous, a court may elook to extrinsic evidence to resolve the ambiguity (see Chen, 109 AD3d at 729; Hambrecht & Quist Guar. Fin., LLC v El Coronado Holdings, LLC, 27 AD3d 204 [1st Dept 2006]).

Section 5.4 of the parties' lease is ambiguous because on its face, it is reasonably susceptible of more than one interpretation. Section 5.4 provides that plaintiff is entitled to a rent abatement if "Tenant is unable to use the Premises, . . . due to Landlord's breach of an obligation under this Lease to provide services, perform repairs, or comply with Legal Requirements . . . other than as a result of Unavoidable Delays or Tenant Delays (or, if Tenant's inability to use the Premises . . . results, in whole or in part, from Unavoidable Delays and such condition continues for a period in excess of fifteen (15) consecutive Business Days)."

On the one hand, section 5.4 can be reasonably interpreted to mean that plaintiff will be entitled to a rent abatement only if plaintiff's inability to use the premises is a result of defendant's breach of its obligations under the lease. Pursuant to this interpretation, the condition within the parentheses is directly connected to the condition that comes before the parenthesis and means that the plaintiff would be entitled to a rent abatement if the plaintiff is unable to use the leased premises because the landlord breached an obligation under the lease, and the breach is caused, in whole or in part, by an Unavoidable Delay, as defined in the lease, if the Unavoidable Delay continues for more than 15 business days.

On the other hand, section 5.4 can also be reasonably interpreted to mean that plaintiff will be entitled to a rent abatement if one of two conditions occur. Specifically, the plaintiff would be entitled to a rent abatement if it is unable to use the leased premises, which is caused by either (i) landlord's breach of an obligation under the lease, or (ii) Unavoidable Delays that continue for more than 15 business days[*2]. Pursuant to this interpretation, the use of the disjunctive "or" at the beginning of the parenthetical clause distinguishes the second condition within the parenthetical as a separate and alternative condition to the first condition, which comes before the parenthesis. Moreover, as a separate condition, it does not require that the landlord breach an obligation under the lease in order for the plaintiff to be entitled to a rent abatement.

Because section 5.4 of the lease is ambiguous, defendant's motion to dismiss was properly denied. The parties shall proceed to discovery as extrinsic evidence will be necessary to resolve the ambiguity.

It is settled law in the First Department that a commercial tenant cannot avoid its rent obligations simply because of the pandemic or Governor Cuomo's 2020 shutdown orders. But if the lease provides for an abatement of rent in these instances, courts will enforce the lease as written. Thus, when drafting a commercial lease, it is incredibly important to make clear the exact circumstances under which a tenant may be entitled to an abatement--or else you could wind up in the same situation as the landlord here. The attorneys at Schlam Stone & Dolan regularly handle commercial landlord-tenant disputes. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning a commercial lease or a dispute between landlord and tenant.