Court: Appellate Division of the Supreme Court of the State of New York; March 27, 1995; New York; State Appellate Court
The Supreme Court of New York County, under Justice Ira Gammerman, ruled on June 14, 1993, granting GSL Enterprises, Inc. partial summary judgment on its second counterclaim and first cross-claim. The ruling declared that GSL validly terminated the lease and was entitled to discharge the mortgage lien held by Manufacturers and Traders Trust Company (M.T. Bank). This decision was unanimously affirmed with costs.
Conversely, the court reversed an earlier order from May 24, 1993, which had granted M.T. Bank summary judgment dismissing Franklin Associates' first cause of action. The reversal resulted in a summary judgment favoring Franklin Associates, confirming that its surrender of the lease was binding and enforceable against GSL. Additionally, it established that Franklin was not liable for any lease obligations incurred after September 6, 1991, and that M.T. Bank would not be inequitably impacted by this declaration.
The case revolves around Franklin Associates' attempt to surrender its net ground lease of the Broadway American Hotel to GSL on September 6, 1991. Article Twenty-Ninth of the lease allowed Franklin to mortgage the leasehold interest without GSL’s consent. However, paragraph (B) stipulates that any lease cancellations, surrenders, or modifications are not binding on a leasehold mortgagee without prior written consent, and the leasehold mortgagee has rights to remedy any lessee defaults.
Franklin had secured $9.25 million in mortgage loans from M.T. Bank for hotel renovations, providing limited personal guarantees from partners and pledging the lease as collateral. By March 1991, faced with financial difficulties, Franklin entered a second lease modification with GSL, which required a $2.6 million investment from Franklin for renovations, deferred a portion of its rent until September 1, 1992, and suspended the requirement for a $1 million security deposit until renovations were completed.
Paragraph 5 of the modification agreement stipulates that if the Tenant defaults on rent after September 1, 1991, and does not remedy the default within fifteen business days of receiving notice, the Tenant must peacefully surrender possession of the premises and provide necessary documentation, including a Surrender Agreement and a Termination of the Lease Memorandum. Upon surrender, the Tenant must also turn over operational documents, records, and materials related to the hotel. A mutual release from further claims between the Tenant and Landlord will occur if the Tenant’s architect certifies completion of required work or if funds for completion are secured, with all subcontractors paid and proper title maintained, except for the leasehold mortgage held by Manufacturers, Traders Bank (M.T. Bank).
If the elevators are not completed by the specified date, the Tenant must complete them at its own cost. Aside from these modifications, all other lease terms remain effective, and any alleged defaults are considered cured. The modification was executed by GSL and Franklin, with M.T. Bank's consent. It is indicated that after the completion date, Franklin could surrender the lease and release both parties from liability, but neither could terminate M.T. Bank's rights without its consent.
In late August 1991, Franklin notified GSL of its intent to surrender the lease and prepared the necessary documents. On September 6, 1991, GSL met with Franklin, who presented signed surrender documents, but GSL refused to sign without M.T. Bank's approval, which was denied. GSL issued a notice of default to Franklin for unpaid rent due on September 1, allowing fifteen days to cure. Following a request for M.T. Bank to manage the hotel, which was denied, GSL took possession to protect its interests. GSL then notified M.T. Bank of Franklin’s default and its right to cure it, receiving a response from M.T. Bank on December 23, 1991, indicating a willingness to discuss lease modifications while reserving all rights related to the lease and its mortgage.
GSL initiated a summary dispossess proceeding against Franklin after notifying M. T Bank of Franklin's failure to cure and providing the necessary notices. This led to a settlement on July 13, 1992, where Franklin agreed to a judgment of possession and a warrant of eviction, while both parties reserved their claims regarding the lease's termination on September 6, 1991, and any monetary issues for future resolution in a plenary action. Following the eviction on September 21, 1992, GSL informed M. T Bank that the lease was terminated and offered the bank an opportunity to request a new lease under the same terms. M. T Bank rejected this, arguing that the settlement implied a surrender, which violated the lease agreement, and that no determination of rent owed had been made.
In December 1991, Franklin filed a lawsuit against GSL seeking a declaration of proper lease surrender and an accounting of rights related to the premises. GSL moved to dismiss the complaint, citing the need to join M. T Bank as a necessary party, while Franklin cross-moved for summary judgment. The court denied the cross-motion on August 24, 1992, noting the lack of a signed release and ambiguous actions by GSL. Franklin was directed to amend the complaint to include M. T Bank.
Subsequently, GSL filed a counterclaim for an order requiring Franklin to cancel the lease and a cross-claim against M. T Bank to declare the lease's valid termination and remove the bank’s mortgage lien. GSL sought partial summary judgment on these claims, while M. T Bank cross-moved to dismiss Franklin's first cause of action. The court determined the lease was terminated and granted GSL a declaration of valid termination, discharging the mortgage lien. M. T Bank's cross-motion was granted, dismissing Franklin’s first cause of action, as Franklin’s attempted surrender lacked the necessary bank approval. Franklin's second cause for an accounting was referred to a Referee, with plans to consolidate it with a pending action from M. T Bank seeking recovery on loan instruments.
Franklin has abandoned its appeal of the June 14, 1993 order, while M. T Bank has not appealed or responded to Franklin's appeal from the May 24, 1993 order. Franklin contends that M. T Bank's prior consent to modify the lease negated the need for additional consent regarding Franklin's lease surrender. Franklin argues that M. T Bank's insistence on approving any surrender creates ambiguities in the 1991 lease modification that should be litigated rather than resolved summarily, and that the Civil Court’s judgment of possession does not eliminate Franklin's and GSL's right to litigate the surrender issue.
GSL counters that Franklin's surrender was ineffective without written agreement from both M. T Bank and GSL and asserts that summary judgment for Franklin is unjustified, which Franklin does not seek in its appellate brief. GSL argues that, even if an ambiguity exists, there are factual issues concerning the parties' intent and Franklin's compliance with the lease modification.
In response, the court agrees with Franklin, determining that the case hinges on straightforward contract interpretation rather than factual disputes. The court concludes that the modification agreement's clear language obligated GSL to accept Franklin's surrender and sign mutual releases upon Franklin meeting the conditions specified in the agreement. The court notes that M. T Bank's mortgage lien remains attached to the lease and does not affect GSL's obligations under the modification. GSL's later summary proceeding was aimed at terminating the lease rather than resolving the surrender dispute. The court reverses the previous ruling and grants summary judgment to Franklin on its first cause of action against GSL.
The IAS Court's June 14, 1993 order determined that the lease was validly terminated through a summary proceeding, which impacted GSL's ability to discharge the bank's mortgage lien but did not affect the relationship or rights between Franklin and GSL. The resolution of their rights depends on whether Franklin's surrender complied with the modification agreement. Jane Goldman, a principal of GSL, stated in her affidavit that the executors chose not to sign the surrender agreement out of concern for the bank’s rights as leasehold mortgagee. GSL’s attorney confirmed that there was apprehension about accepting the surrender without the mortgagee's consent, fearing that it could leave GSL liable for a lien exceeding $9 million after lease termination. Alan H. Goldman, another principal, highlighted the dilemma GSL faced, where Franklin stopped paying rent, yet GSL couldn’t lease the property to another operator due to the encumbering lease and mortgage. GSL’s current claim of factual issues regarding Franklin's compliance is contradicted by their own motives, as they wished to benefit from the renovated hotel without the mortgage liabilities. Additionally, GSL's argument that Franklin's default had not persisted for the required fifteen business days is inadequate to deny Franklin summary judgment, as Franklin’s surrender offer was ongoing and had not been withdrawn or rejected. Any remaining issues concerning amounts owed to GSL under the lease modification can be addressed in Franklin's second cause of action.
