Who would believe that a Madison Avenue Bentley dealership, known for its high-end luxury automobiles, would not only have difficulty paying its rent but would terminate its lease well in advance of its original ten-year lease term? Yet, that is precisely what occurred in Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC.
In that case, two of the dealership's principals, Arthur and Brian Miller, executed a guaranty wherein they each agreed to be personally responsible for the payment of Bentley's lease related obligations for the Madison Avenue space. This document provided, in part, as follows: "[I]n the event Tenant shall not have been in monetary default under the Lease at any time during the first three (3) years of the Lease, this Guaranty and Guarantor's [sic] obligations thereunder shall cease and terminate upon the third (3rd) anniversary of the Commencement Date."
On September 29, 2003, some three years and three months after the lease had commenced, Bentley stopped paying the rent and vacated the space. Madison subsequently initiated a Supreme Court case seeking a money judgment against the Millers (as guarantors) for the balance of the rent due under the lease. Although the lease agreement clearly provided that rent was due "in advance on the first day of each calendar month," Bentley consistently paid the rent late, with the bulk of the payments made on or before the twentieth (20th) of each month. As a result of that delinquent payment pattern, the landlord argued that the guaranty's limitation or cessation of liability was never triggered.
The New York County Supreme Court dismissed the case against the guarantors finding that the landlord had waived its objection to the tenant's default by repeatedly accepting the late-rent tenders "without protest and without taking any action," like issuing a default notice or otherwise declaring the tenant in default of the governing lease. On appeal, the Appellate Division, First Department, affirmed the dismissal, noting as follows:
To determine whether the guaranty ever became effective and whether it remained in effect at the time Bentley vacated the premises, we must look to the lease to determine whether there was a "monetary default" by the tenant. If there was no "monetary default" under the lease, the condition precedent was not fulfilled and the guaranty, together with its "no waiver" provisions concerning landlord's enforcement of its rights and remedies, never had any force and effect. As previously stated, because landlord, by a course of conduct extending over a period of years, waived the tenant's late payment of rent, there was no "monetary default" by the tenant under the lease during the applicable three-year period, the guaranty neither took effect nor was extended, and the guarantors were never subject to its terms and obligations. Once waived, the default in timely payment of rent is extinguished and cannot later be revived, like a phoenix, into a material default for the purpose of extending the period of the collateral guaranty. Thus, the loss sought to be recouped in this action, resulting from a default (vacatur of the premises) that occurred three years and three months after the commencement of the lease, is not recoverable from the individual defendants.
One respected colleague--who is unaffiliated with the firm and shall remain nameless--has characterized this application of the waiver doctrine as "Phoenix poop," and, to support his position, cites to the plain and unambiguous terms of the governing guaranty. In particular, the Millers agreed to an "absolute and unconditional Guaranty of payment and performance," which was enforceable "without the necessity for any suit or proceedings on Landlord's part of any kind or nature whatsoever against Tenant, without the necessity of any notice of non-payment, non-performance or non-observance (except as expressly required under the terms of this Guaranty), or...of any other notice or demand to which the Guarantor might otherwise be entitled, all of which the Guarantor expressly waives...."
Additionally, the guaranty specified that it would not be "terminated, affected, diminished or impaired by reason of the assertion, or the failure to assert, by Landlord against Tenant of any of the rights or remedies reserved to Landlord pursuant to any provisions of the Lease."
Finally, the agreement provided that the guaranty would "in no way be affected, modified or diminished by reason of...any modification or waiver of or change in any way of the terms, covenants, conditions or provisions of the Lease by Landlord and Tenant, or by reason of any extension of time that may be granted by Landlord to Tenant, or by reason of any dealings or transaction or matter or thing occurring between Landlord and Tenant...."
Despite the clear and unequivocal nature of this language, the appellate court was troubled by what it perceived as the landlord's selective enforcement of the lease and guaranty. In other words, since Madison did not hold the tenant to the literal terms of the lease, the court was bent on disallowing the stringent enforcement of the guaranty. As the Appellate Division noted in its decision:
Having failed, over the course of three years, to give Bentley any notice that timely payment of rent would be required, landlord may not now insist that its tenant's failure to strictly comply with the timely payment condition of the lease constitutes a default.
Justice James M. McGuire, in a dissenting opinion, correctly observed that the majority's application of the "waiver" doctrine to guarantees would force landlords to jump through needless procedural hoops. As he noted:
Indeed, under [the majority's] analysis, Madison and all similarly situated contracting parties are encouraged to go to the time and expense of serving notices of default for any failure fully to perform as soon as legally permissible, regardless both of whether they have received assurances that payment or other performance is imminent and of how relatively inconsequential the particular default may be under the particular circumstances...Rather than induce contracting parties to travel down the less than sunny path to litigation at the drop of a hat, the law should encourage accommodation and reasonable forbearance. To say the least, no net gain results (except possibly to lawyers) from the approach of the majority and the motion court.
This appeal's outcome proves that lawyers can't be faulted for papering a case to death or making incessant "demands." And, besides, what's so awful about lawyers earning a living? After all, that's how some can afford those Bentleys.
For a copy of the Appellate Division's decision in Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC, please click on the following link:
http://www.courts.state.ny.us/reporter/3dseries/2006/2006_01747.htm
[Note: Just in case you were wondering, the 2006 Bentley Flying Spur sells at an extremely affordable manufacturer suggested base-price of $171,285 (including $2,595 delivery charge and $3,700 gas-guzzler tax). With 551 horsepower (479 pound-feet of torque from a 6-liter W-12 engine with twin turbochargers), the vehicle can travel from 0 to 60 in 4.9 seconds and can cruise at a top speed of 195 miles per hour.]