New York Real Estate Journal published an article on March 31 authored by Olshan Real Estate Of Counsel Thomas Kearns entitled “NYC’s Commercial Harassment Law and Tenant Relocations” (or here for NYREJ subscribers).
New York City’s Commercial Harassment Law has been in effect for 10 years with few headline cases reported. The increase of conversions of office properties to residential may, however, cause an uptick in filed cases. While the definition of harassment in the code includes some obvious wrongs (using force or threats), another less obvious prohibited act is “commencing unnecessary construction” near the tenant’s business that would “reasonably cause” the tenant to vacate. Work to convert an office building to residences may be deemed by New York courts to be unnecessary.
The other leg of the statute triggering liability is that the landlord intends to make the tenant vacate the premises. Given the complications of maintaining an operating office building in the middle of a typically very significant renovation to residential use, there is a high likelihood that the landlord will inquire as to the tenant’s willingness to vacate and that the failure to obtain vacant possession will increase the landlord’s costs and the complexity of construction. Once inquiries to the tenant regarding vacancy start, the landlord becomes subject to the statute and the results will depend on the impact the work has on the tenant and tenant’s possible remedies.
Landlords should expect New York courts to be sympathetic to tenants regarding the impacts of major construction so tenant’s remedies will quickly become the focus. Fortunately for landlords, the statute caps damages at $50,000 and landlords will fairly argue that the cap applies per property, not per incident. The statute permits the Court to award further compensatory or punitive damages and attorney fees.
Perhaps most troubling for landlords is the express right of the Court to issue an injunction against future harassment which could complicate the construction. While a court might be hesitant to permanently enjoin all construction, it could easily issue a temporary injunction pending an initial hearing and might require permanent steps such as after-hours requirements for noisy construction that could be expensive for landlords. Practical solutions to the issue include:
First, landlords should try to include an express early termination clause in leases and lease amendments where a repositioning of the office building is contemplated. The statute permits enforcement of early termination clauses. Of course, these clauses themselves can lead to much negotiation over the payments to the tenant for relocation and may be manageable for smaller tenants but not larger ones.
Second, once a landlord determines to try to vacate the building, counsel should be retained to help guide any discussions and correspondence. Landlords should not use phrases such as “the construction will be very disruptive”, or “it will be a mess here” or similar statements that a court could interpret as a threat.
Third, while some tenants will be happy to relocate for their own business reasons, others will not. To encourage tenants, the landlord should offer compensation – the Court may do so anyway. Common compensation would include moving fees, legal fees for the surrender and the new space the tenant needs to move to, and some amortization payment on account of any improvements the tenant made to the space in reliance on the original term. The tenant will no doubt ask for acceleration of any free rent periods spread over the remaining term and some compensation for the disruption in its business due to the move. That compensation is often measured in free rent for some period.
Fourth, if the existing rent is below the current market, the landlord may face a hefty demand for compensation unless the landlord can place the tenant in equivalent space in a building owned by an affiliate. In those cases, the landlord’s decision to pursue a relocation may become a comparison of the damages due the tenant versus its savings in construction costs.
In sum, the statute’s imposition of the risk of the payment of compensation including legal fees, the possible complications from an injunction, and the possible penalty all weigh in favor of a measured and reasonable approach to commercial tenant relocation discussions.
Thomas Kearns is Of Counsel in the Real Estate department with Olshan Frome Wolosky LLP, New York, N.Y.
Of CounselTom represents owners, operators and developers in the acquisition, financing, development, ground leasing, and sale of significant properties. His experience includes office towers, commercial condominiums, industrial ...