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Topics: Breach of Lease; Default Judgment; Force Majeure; Late Rent; Letter of Credit
Note: To support its obligations under a sublease, One Step Up Ltd. (Subtenant/Applicant), an apparel manufacturer, obtained a USD 197,308.77 letter of credit in favor of Manhattan Beachwear, Inc. (Sublandlord/Beneficiary). Under the lease, Subtenant/Applicant would enter the premises in late 2019 and begin paying rent April 2020. Among other provisions, the lease provided that Sublandlord/Beneficiary could make “a demand for payment under said Letter of Credit and use, apply, or retain the whole or any part of the proceeds thereof … to the extent required for the payment of any Sublease Rents” or other defaults. The incorporated principal lease with non-party 1411 IC-SIC Property LLC (Landlord) also contained a force majeure clause.1
Beginning March 2020, the State of New York began issuing emergency pandemic orders and those regarding “non-essential businesses” affected Subtenant/Applicant. In May 2020, Counsel for Subtenant/Applicant sent Sublandlord/Beneficiary an email requesting a 6-month rent abatement as the building was allegedly closed. Believing the force majeure clause of the lease applied, Subtenant/ Applicant did not pay rent for several months. Sublandlord/Beneficiary then drew down the LC in full in July 2020. Shortly thereafter, Subtenant/Applicant sued Sublandlord/Beneficiary alleging three claims: (1) breach of lease; (2) breach of covenant of quiet enjoyment; and (3) a requested declaratory judgment that force majeure provisions excused its failure to pay rent. While Sublandlord/Beneficiary initially filed an answer, its counsel later moved to be relieved from the case. Ultimately, Sublandlord/Beneficiary failed to appear for further hearings and Subtenant/ Applicant moved for default judgment. The Supreme Court of New York, Engoron, J., granted the motion.
Subtenant/Applicant met the base requirements for default judgment, i.e. proof of service of process, adequately alleged facts to support a claim, default by opposing party, and evidence of the amount due. The Judge, however, declined to enter judgment on the basis of force majeure. While the Overlease contemplated force majeure, an express provision provided the sublease would control in the face of inconsistent terms; here, the sublease stated that the “covenant to pay [rent] shall be independent of every other covenant in this Sublease.” Thus, while Sublandlord/Beneficiary was entitled to demand sums under the LC “to the extent required” for unpaid rent, Subtentant/Applicant was entitled to judgment for the difference between the full LC value less actual rent owed. Accordingly, the Judge granted the motion in favor of Subtentant/Applicant and ordered the Clerk to enter judgment “in the amount of [USD]18,556.77 plus statutory interest from July 24, 2020.
1So referred to as the “Overlease”; force majeure was defined as “any acts of God, governmental restriction, requirements of Law … or any other cause or event beyond Landlord’s or Tenant’s reasonable control by which such party shall be hindered, delayed or prevented from performance of any act under this Lease.”