Case Study

Adam Leitman Bailey, P.C. Obtains Complete Agreement Between Landlord, Commercial Tenant, and Landlord Shareholders to Resolve Dispute Over Lease Renewal and Negotiation of a New Rent Schedule

In 2017, Adam Leitman Bailey, P.C. was approached by the President of a Landlord close corporation, whose shareholders (including the president) are all cousins, to assist in negotiating a new lease with the present Tenant of an 18 story building in mid-Manhattan, whose management had missed the deadline for exercising the Tenant’s right to renew the Lease at unfavorable rent terms that had been agreed upon in the 1990s.

Adam Leitman Bailey, P.C. reviewed the Lease and confirmed that the Tenant had clearly failed to exercise its renewal rights in a timely manner, and that, in effect, the Lease was terminated, and, if the Tenant wanted to continue to occupy and manage the building, Tenant would need to negotiate an entirely new rent schedule not tied to the unfavorable terms of the “terminated” Lease.

The Tenant contended that the Lease was not terminated; that the failure to exercise its renewal option timely was due to the ailing health of its principal at the time when Tenant’s right to elect to renew was due. The landlord rested on its right to terminate the Lease.

The Tenant sued to enjoin the Landlord from renting the building to a new tenant, contending that the Tenant’s failure to elect to renew the Lease timely was due to medical reasons, that the delay in exercising its renewal option was minimal, and that forfeiture of its Lease under these circumstances would be unconscionable.

Following the grant of a preliminary injunction by the Court, the Landlord and Tenant agreed to re-set the rent based upon an appraisal of the current Fair Market Value (FMV) of the building as of the expiration date of the prior Lease term.

In the interim, until the FMV was determined, Tenant agreed (pursuant to a court-ordered stipulation negotiated by Adam Leitman Bailey, P.C. and entered in 2018) to continue paying the monthly rent due under the prior lease terms, and further agreed to pay, after the completion of the appraisal process, any increase in rent that would be due for the interim period (the Deficiency Rent Period), in accordance with the current FMV determined under the appraisal protocol.

Each party chose an appraiser who provided an opinion of the current FMV. It was further agreed that, if the two appraisers did not agree on the FMV, they would jointly appoint a third appraiser to give an opinion, and that an FMV agreed upon by two of the three appraisers would be final and binding upon the Landlord and the Tenant, and the new rent annual rent schedule would be 6% of the agreed FMV.

The appraisal process was duly completed in accordance with this protocol, and all three appraisers jointly agreed upon the FMV from which the new rent schedule would be calculated.

The Tenant agreed to comply with the new rent schedule determined from the FMV agreed upon by the three appraisers.

The Tenant had continued paying the old rent after the expiration date of the initial Lease term, and the Tenant was ready to pay the rent deficiency amount to the Landlord, but, due to the onset of the COVID pandemic, Tenant proposed to pay half of the Deficiency Rent due immediately, but to pay the second half in fifteen monthly installments. Adam Leitman Bailey, P.C. negotiated an installment payment agreement for the rent deficiency (the “Use & Occupancy Payment Agreement”).

The only item at issue on the U&O Payment Agreement was the rate of interest – which was resolved very quickly, as there was very little difference between the parties on this point, and the amount of interest at issue was not worth fighting over for either side.

Upon full agreement on the installment agreement for the deficiency rent due, regular monthly rent payments, at the new monthly rent rate (which was substantially higher than under the prior lease terms), and the first of 15 monthly rent deficiency payments (under the Use & Occupancy Payment Agreement) were begun simultaneously, as of July 1, 2020.

The biggest obstacle to the agreement in this matter was not the Tenant, but the other shareholders of the Landlord close corporation (the president’s cousins) – who had been at odds with the president for many years. Adam Leitman Bailey, P.C. had to deal very diplomatically with these shareholders, to get the majority of them to come “on board” and vote with the president in accepting the terms of the U&O Payment Agreement, against the opposition of one shareholder/Board member who was represented by Philadelphia counsel.

Adam Leitman Bailey, P.C. arranged for a virtual Board/shareholder meeting by email (under Governor Cuomo’s Executive Order allowing email voting), and persuaded all of the other shareholders to vote in favor of the proposal.

Following the final agreement by Landlord and Tenant, a Stipulation of Discontinuance was submitted to the Court, the Stipulation was so-ordered, and the litigation was ended.

This matter required great patience and diplomacy from Adam Leitman Bailey, P.C. in dealing with all the shareholders, and particularly with one shareholder-board member who lives in in another State. He and the president had been at odds over longstanding issues concerning the president’s governance of the corporation, and, at times the co-signer threatened to stop co-signing corporate checks required for corporate business and to give his co-signing responsibility to someone else.

Nevertheless, Adam Leitman Bailey, P.C. was able to keep him from resigning; and he eventually agreed that Adam Leitman Bailey, P.C.’ss handling of the matter was done in the best interests of the corporation and of the shareholders. When this shareholder-board member decided to vote in favor of the U&O Payment Agreement, all of the other shareholders came along, except for the one shareholder who had counsel. But, it was clear by then that any possibility of a lawsuit by that dissenting shareholder had been avoided.

This was a three-year-long effort on the part of Adam Leitman Bailey, P.C. to ensure that its client (which was the Corporate Landlord) was able to negotiate a fair new rent schedule that will serve the interests of the Corporation and its shareholders for the next twenty years.

The Adam Leitman Bailey, P.C. attorneys who worked on this matter were John M. Desiderio and Adam Leitman Bailey.

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