NEW YORK: An Introduction to Real Estate: Litigation

New York Real Estate Litigation: an Overview 

In New York, litigation in general – and real estate litigation in particular – continues to benefit from the remote tools that we were driven to develop in order to cope with the COVID-19 pandemic. Certain kinds of appearances that used to require attorneys to travel to the courthouse (and often spend hours of waiting time once they got there) are now handled efficiently through remote video or telephonic conferencing. That these tools appear to be here to stay is at least one positive legacy of the difficult pandemic years. In the sections that follow, we first discuss certain unique aspects of practice in New York state’s commercial division, where real estate disputes are often litigated. We then address some recent and ongoing developments.

Litigating in New York’s Commercial Division 

Much of New York’s real estate litigation is conducted in the commercial division of the Supreme Court of New York State, a specialized segment of the court established to adjudicate complex business disputes. The commercial division has its own set of judges, who adjudicate only commercial cases. It also has its own set of rules designed specifically to address the needs of such cases. A permanent Commercial Division Advisory Council – comprised of litigators, current and former members of the judiciary, and in-house counsel – continually studies the changing needs of the practice and regularly proposes and secures changes to those rules to meet those needs. The result is a modern, practical, and efficient system well-suited to business litigation in general, and to real estate litigation in particular. The judges of New York’s commercial division are well-versed in the principles and mechanisms of New York law that frequently arise in real estate litigation. But the ubiquitous use of Delaware limited liability companies for real estate transactions also often means that Delaware law applies to various aspects of disputes among members or investors in New York real estate developments. What results can be a complex combination of Delaware substantive law and New York procedural law – which the commercial division judges are also highly experienced in handling.

One other noteworthy aspect of litigation in the New York state courts is the interlocutory appeal. Many non-final orders are immediately appealable to the Appellate Division, New York’s intermediate appellate court. Absent a specific order to the contrary, an interlocutory appeal does not result in a stay of proceedings in the lower court and therefore does not delay the litigation. It can, however, enhance efficiency: for example, if an order denying dismissal or summary judgment is ultimately going to be reversed on appeal, it is better to know that right away than to have to wait until the case is litigated to conclusion. In an effort to improve that efficiency, beginning in January 2022 the Appellate Division launched a pilot program shortening the deadlines for interlocutory appeals of certain discovery orders in commercial division cases originating in New York County or Bronx County.

Recent and Ongoing Developments 

“Good Guy” Guaranties 

Certain recent developments in the law respecting “good guy” guaranties have taken some practitioners by surprise.

A good guy guaranty is a tool often used in connection with commercial leases: the guarantor agrees to answer for the tenant’s financial obligations for as long as the tenant remains in possession. If the tenant vacates the premises before the lease expires, the tenant may continue to be financially liable. But as long at the tenant was otherwise in full compliance with the terms of the lease when it vacated, the guarantor’s liability ceases.

Many in the industry had long understood this to mean that, as long as the tenant was current on its rent and left the premises in appropriate condition, the guarantor’s liability was automatically cut off as soon as the tenant vacated. And this makes sense: at that point, the landlord can (at least in theory) rent the premises to another tenant. But some recent cases have held that if the guaranty specifies that it terminates upon the tenant’s “surrender” of the premises (without separately defining that term), then the guarantor is not relieved from liability unless and until the tenant complies with whatever the lease itself requires for a valid surrender – which often includes acceptance by the landlord. In practice, this can mean that the landlord can keep the guarantor on the hook simply by refusing to formally accept the tenant’s surrender.

There is currently a conflict among New York’s lower courts over this issue, with at least one court going so far as to describe as “just nonsense” the notion that a landlord has this power – which many argue would defeat the whole purpose of this kind of guaranty. The New York Court of Appeals, however, is scheduled to weigh in soon: it has granted discretionary review in one such case. Briefing is complete in that case, but oral argument is not yet scheduled. The Court’s decision, when it comes, will hopefully provide clarity for practitioners and their clients – not just for litigation, but also in terms of best practices for drafting these documents in the first place.

The Continued Impact of COVID-19 

New York courts are still grappling with the impact of the COVID-19 pandemic on the real estate sector.

For example, the U.S. District Court for the Southern District of New York recently upheld a constitutional challenge to a New York City ordinance that made personal guaranties of commercial leases permanently unenforceable with respect to any rent arrears that arose between March 7, 2020 and June 30, 2021. An appeal from that ruling is set for oral argument at the end of May. An affirmance could give rise to a new wave of litigation over the enforcement of such personal guaranties.

Separately, for some time there was debate in the courts over whether certain pandemic-related executive orders tolled statutes of limitations or merely suspended them. If the orders had resulted only in a suspension, then any limitations period that would otherwise have expired between March 20 and November 3, 2020 would have been extended until after the suspension was lifted, but limitations periods that would not otherwise have expired during that time would remain unaffected. On the other hand, an actual tolling would mean that every single limitations period that began to run before (and had not expired by) March 20, 2020 was extended by 228 days. Although the Court of Appeals has not addressed the issue, all four divisions of New York’s intermediate appellate court have now ruled that the orders effectuated a tolling. This is especially significant in the world of real estate litigation, where many claims are subject to limitations periods as long as six years (for claims based on contract or fraud) – meaning the effects of a 228-day toll could continue for more than half a decade.