Landlord appeals from so much of a judgment of the Civil Court, New York County, entered February 19,, 2004 after a hearing on damages (Lucy Billings, J.) as awarded tenant a money judgment on its counterclaim in the principal sum of $2,307,223.15, plus interest, in a consolidated nonpayment proceeding and plenary action.

PER CURIAM:

Judgment entered February 19, 2004 (Lucy Billings, J.), insofar as appealed from, reversed, and a new trial ordered on the issue of damages, with $30 costs to abide the event.

Civil Court awarded tenant partial summary judgment on tenant's claim that landlord breached the parties' June 1995 lease by failing to procure an amended permanent certificate of occupancy permitting the demised first floor and second floor space to be used for "medical offices" (paragraph 40.2) and set the matter down for a trial on the issue of damages. The award to landlord for rent arrears in the principal sum of $341,299.76 is not in issue. Landlord's most recent temporary certificate of occupancy expired December 30, 1997. Landlord ultimately procured the proper permanent certificate of occupancy on June 13, 2001, five months after commencement of the instant litigation and 42 months after expiration of the temporary certificate of occupancy. Tenant renovated the space and subleased the first floor to its affiliate, undertenant East Broadway Medical Management Corp. in October 1996 at the rate of $33,000 per month.

After partial summary judgment and a hearing on damages, the trial court awarded $2,307,223.15 to tenant as "lost profits" from January 1998 through June 2001 for landlord's breach of its lease obligation. The judgment reflects damages for landlord's 42-month delay multiplied by the rate of $33,000 per month for each floor of demised space, as reduced by certain offsets totaling $464,776.85. In measuring tenant's economic loss, the trial court characterized tenant's claim as one seeking "lost income from subletting to facilities certified under Article 28 [of the Public Health Law] that could have located at the premises if they had the [certificate of occupancy] required for Article 28 facilities to operate." The court found that the enhanced reimbursement rate available under Article 28 for serving Medicaid and Medicare patients would have attracted such "predictably profitable" facilities to the premises' location on the Lower East Side. We reverse and remand for a new trial on tenant's damages.

The record reveals that tenant's damages arising from losses from tenant's failure to procure Article 28 healthcare facilities or providers were not contemplated by the parties at the time of execution of the lease (Ashland Mgt. v Janien, 82 NY2d 395 [1993]; Kenford Co. v [*2]County of Erie, 67 NY2d 257 [1986] ["Kenford I"] and 73 NY2d 312 [1989]["Kenford II"]). In particular, the lease did not provide for "Article 28 loss" as a basis for damages in the event of landlord's breach of its obligation to obtain an amended permanent certificate of occupancy. We further note that no reference to this type of damage was made in tenant's pleadings below.

Furthermore, in determining tenant's net money judgment, the trial court erred in calculating tenant's "total lost gross income" based solely upon the amount of monthly sublet rent reserved in the October 1996 sublease between tenant and its affiliated undertenant for the first floor. That sublease clearly was not the product of an arm's length transaction (see Matter of Queens-Nassau Nursing Home v Axelrod, 91 AD2d 776 [1982]). Here, tenant's president (Dr. Charles Knoll), who executed the main lease on tenant's behalf in 1995, was a 10% shareholder of both the tenant and its subtenant/affiliate. Moreover, all of the subtenant's principals were principals of the tenant (a holding corporation) which, in effect, negotiated the sublet rent with itself and concededly never demanded payment following the subtenant's own rent default.

Finally, tenant's damage award for lost profits was not proven with reasonable certainty (Ashland Mgt. v Janien, 82 NY2d at 403) and was speculative (Cambridge Assocs. v Town of N. Salem, 282 AD2d 702 [2001]). No expert testimony as to the fair rental value of the demised space for its intended use solely as "medical offices" for the period at issue was presented below.

Under the circumstances, a new trial is warranted on the issue of damages.

This constitutes the decision and order of the court.
I concur
I concur
Decision Date: June 23, 2005