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Commercial Division Considers Effects of COVID Executive Orders on Use and Occupancy Payments for Real Estate

A recent ruling by the Kings County Commercial Division offers a glimpse into how courts in New York may resolve COVID-19-related disputes regarding leases and real property, as well as how courts may handle situations in which the Governor’s executive orders, intended to stem the spread of COVID-19, have affected the abilities of parties to follow court orders issued prior to the pandemic. 

In 538 Morgan Avenue Properties et al., v. 538 Morgan Realty LLC et al., No. 507788/2015 (Aug. 25, 2020), Justice Lawrence Knipel considered, as relevant here, a dispute between a commercial tenant and property owner regarding use and occupancy payments in light of the COVID-19 crisis and related executive orders.

Plaintiffs 538 Morgan Avenue Properties LLC (“538 Morgan Properties”) and NY Stone Kitchen Depot, Inc. (“NY Stone”), and defendants 538 Morgan Realty LLC (“538 Morgan Realty”), SD Int’l Inc. (“SD Int’l”), and three named individuals had entered into an agreement in 2015 concerning the sale of defendants’ business and real property. Under that contract, NY Stone purchased SD Int’l’s business, including its assets, for $702,793.  The parties entered into a separate real estate contract whereby 538 Morgan Properties purchased the property where the business was located from defendant 538 Morgan Realty for $4 million. 

Plaintiffs allege that they made two initial rounds of payments for both the business (totaling $500,000) and the property (totaling just over $1.8 million).  Two months later, defendant 538 Morgan Realty canceled the real estate sales contract asserting a material breach by plaintiff 538 Morgan Properties for failing to pay the remaining $202,793 owed for the business, which it asserted was due the month prior.  Plaintiffs countered that payment was not in fact due in April, that their attempt to pay the remaining balance was denied by defendants, and that defendants were in breach when they canceled the contract in May 2015. 

Subsequently, plaintiffs moved for a preliminary injunction enjoining defendants from interfering with their tenancy at the property and defendants cross-moved to recover unpaid rent.  Plaintiffs’ motion was granted on the condition that they posted a bond and paid SD Int’l use and occupancy for the property in the amount of $21,252 per month, which was the amount they had been paying to SD Int’l since March 2015 when the parties entered into the agreement at issue.  This use and occupancy was to be payable until ownership of the property was transferred.

Plaintiffs moved for an order “modifying the preliminary injunction as issued in the case regarding the use and occupancy payments due in light of the Covid-19 crisis,” and the defendants cross-moved for an order upwardly modifying and adjusting the use and occupancy payable to 538 Morgan Realty, arguing that the previous monthly rate was well below market value. 

Under Real Property Law § 220, a landlord can recover use and occupancy for the reasonable value of the premises and for use of those premises.  As the Court noted, it is the general judicial policy of the courts to grant requests to set use and occupancy when a leasehold interest is the subject of civil litigation.[1]  Courts have broad discretion in determining the amount of such use and occupancy, but have “the obligation to appraise the actual value of the property taking into consideration whatever restrictions apply because of agreements between the parties, or to governmental decrees, or other factors.”[2] 

Plaintiff NY Stone, a stone fabrication business, argued that due to various executive orders issued by Governor Cuomo relating to COVID-19, including Executive Order 202.8, which first limited the number of employees that could work on-site and then prohibited them from working on-site altogether, it was unable to operate its business and had to close indefinitely on March 22, 2020.  At the time, NY Stone understood that the Executive Order 202.8 would expire on May 15, 2020, and thus asked the Court to modify the use and occupancy as previously imposed to waive any use and occupancy payments covering the March 22 to May 15, 2020 period.  Since Executive Order 202.8 barred plaintiffs from being able to operate at the property, plaintiffs argued that the obligation to pay use and occupancy should be suspended from March 22 until such time as they were legally permitted to resume business operations. 

Defendants argued that Executive Order 202.8 prohibits a landlord from evicting a tenant and assessing late fees, but does not alter the obligations of commercial tenants to pay rent, noting that commercial landlords were still required to pay the underlying taxes and that their mortgage obligations were not suspended during this period.  In support of their cross-motion for an upward adjustment of the use and occupancy, defendants submitted a rent study performed by a licensed appraiser in September 2019, who concluded that the fair market rental value of the property had roughly doubled from the amount previously ordered by the Court. 

On reply, plaintiffs conceded that Executive Order 202.8 did not apply to them directly because they were seeking a modification of use and occupancy, not rent.  Nonetheless, they argued that defendants failed to establish their entitlement to an upward modification of the use and occupancy amount because the appraiser’s rent study did not account for the impact of COVID-19.

In considering the parties’ arguments, the Court first noted that while the Executive Order 202.8 is silent as to use and occupancy and does not provide for rent forgiveness to those unable to utilize their work locations, the Court is empowered to modify use and occupancy upon a proper showing.  The Court held, however, that plaintiffs had failed to satisfy their burden to demonstrate that their use and occupancy should be modified in the form of forgiveness, as they merely claimed that they were unable to operate at the subject property, and failed to offer any evidence -- such as financial documentation or an accountant’s affidavit with supporting evidence -- that they were unable to pay for use and occupancy of the property.

The Court also denied defendants’ cross-motion, as the expert’s appraisal did not take into account the effects of COVID-19 on commercial rent prices in Brooklyn or on the local and national economy in general, and as such was insufficient evidence to support an upward modification of use and occupancy. 

This opinion shows that while courts may have discretion to modify previously entered orders to account for hardships related to COVID-19, parties should be certain to have sufficient evidentiary support for their claims.  Parties seeking to establish that Governor Cuomo’s executive orders have negatively impacted their business should not merely try to establish that the orders prevented them from utilizing their property for a certain period, but should also show that those orders prevented them from actually making payments that were owed.

By Jeff Kinkle, Ph.D. and Stephen P. Younger

[1] Citing Davis v. Cole, 193 Misc. 2d 380, 383 (Sup. Ct., NY Cty. 2002). 

[2] Citing 438 W. 19th St. Operating Corp. v. Metropolitan Oldsmobile, Inc., 142 Misc.2d 170, 173 (1989).