Key Points

  • The Appellate Division, First Department, unanimously reinstated a tenant's putative class claims for breach of the implied covenant of good faith and fair dealing and for a declaratory judgment that his lease's reletting fee and lease buyout agreement are void.
  • The panel held that allegations that the fees circumvent the landlord's duty to mitigate under Real Property Law § 227-e state a covenant claim, because a promise not to charge amounts barred by the statute is among the contract's implied promises.
  • The panel held that, whether or not the fees constitute liquidated damages, they must be enforceable in light of the public policy expressed in Section 227-e.
  • The classwide declaratory claim is not duplicative of the covenant claim because the enforceability of the provisions is a question separate from compliance in the plaintiff's own circumstances.
  • The unjust enrichment claim was properly dismissed because it falls within the scope of the parties' agreements.

A New York appeals court on Oct. 22 revived a tenant's proposed class action alleging that his landlord's flat fees for leaving a lease early unlawfully sidestep a state law requiring landlords to mitigate their damages.

A five-justice panel of the Appellate Division, First Department, ruled unanimously in an unsigned decision that tenant Sagar Desai had adequately alleged that a "reletting fee" in his lease and a two-month "leasebreak" fee in an accompanying buyout agreement could be void under Real Property Law § 227-e. The panel reinstated Desai's claims against Ninety Five Wall Street LLC and other defendants for breach of the implied covenant of good faith and fair dealing and for a classwide declaratory judgment, a ruling that would declare the two provisions void.

The panel held that a lease term that circumvents the statutory mitigation duty must yield to the statute and to public policy whether or not the term counts as liquidated damages. The ruling modifies a July 3, 2025, order by Justice Lyle E. Frank that had dismissed Desai's amended complaint in full.

The panel sided with Justice Frank on one claim. The justices held that Desai's unjust enrichment claim was properly dismissed because the dispute falls within the scope of the parties' written agreements.

Desai challenged two provisions. Paragraph 11 of his lease has the tenant agree that the reletting charge "is a reasonable estimate" of the landlord's damages "and that the charge is due whether or not our reletting attempts succeed." A lease buyout agreement appended to the lease requires a tenant to pay two months of rent to vacate before the end of the term, even if the landlord finds a new tenant to take over the lease immediately and at the same rate.

Desai alleged that both fees breach the covenant of good faith and fair dealing because they attempt to circumvent the landlord's duty to mitigate under Section 227-e. The defendants argued that the provisions are a reasonable and fair bargain struck by the parties. The defendants also contended that because the tenant did not breach the lease, the landlord had no damages to mitigate.

The panel rejected that reading at the pleading stage. The justices quoted the statute, which provides, "Any provision in a lease that exempts a landlord's duty to mitigate damages under this section shall be void as contrary to public policy." The panel then explained the statute's effect on a departing tenant's bill. "Under Real Property Law § 227-e, if a landlord's reletting efforts succeed expeditiously, a tenant may not owe anything at all, as plaintiff alleges should have been the case here," the panel wrote.

The covenant claim depends on a duty New York law reads into every contract. Quoting the Court of Appeals' 2023 decision in Singh v. City of New York, the panel wrote that the covenant requires the parties to avoid doing "anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." The covenant also includes all "promises which a reasonable person in the position of the promisee would be justified in understanding were included," the panel wrote, again quoting Singh.

The panel placed the mitigation statute within that implied promise. "As the amended complaint adequately alleges, a promise not to charge amounts barred by Real Property Law § 227-e is among those promises," the justices wrote.

The defendants had also argued that the reletting fee and the buyout agreement are not liquidated damages clauses. The panel held that the label does not decide the question. The justices wrote that "a lease provision that circumvents a statutory duty should be deemed void both under the statute and as a matter of public policy," citing the Court of Appeals' 2020 decision in Trustees of Columbia University v. D'Agostino Supermarkets Inc. "Whether or not the fees constitute liquidated damages, they still have to be enforceable in light of this State's public policy, which includes Real Property Law § 227-e," the panel wrote.

The panel also held that the declaratory judgment claim is not duplicative of the covenant claim. The justices found a justiciable controversy over whether the provisions are enforceable under Section 227-e. The panel wrote that this question stands "separate from whether defendants were required to and did comply with the statute in plaintiff's specific circumstances." The distinction lets the classwide challenge to the provisions proceed apart from the facts of Desai's own move-out.

On unjust enrichment, the panel relied on the Court of Appeals' 2005 decision in Goldman v. Metropolitan Life Insurance Co. The justices wrote that, given their ruling reinstating the covenant claim, the unjust enrichment claim "was properly dismissed as falling within the scope of the parties' agreements."

The ruling addresses only the sufficiency of the complaint. The defendants had moved to dismiss under CPLR 3211(a)(1) and (7). The panel held that "[a]t this stage the allegations are sufficient" to sustain the claim that the fees violate Section 227-e, a violation that "if established, would constitute a breach of the covenant of good faith and fair dealing."

The panel consisted of Justice Manzanet-Daniels, who presided, and Justices Mendez, Kapnick, Pitt-Burke and Parker-Raso. Desai was represented by Julian C. Diamond of Bursor & Fisher, P.A. The defendants were represented by Brittany K. Lazzaro of Tarter Krinsky & Drogin LLP.

The order reinstates the covenant and declaratory judgment claims as putative class claims. The panel awarded no costs on the appeal. The decision, Appeal No. 7317, is uncorrected and subject to revision before publication in the Official Reports.