Enforcing Oral Commercial Leases in a Post-COVID-19 World

New York's Statute of Frauds, codified as General Obligations Law § 5-703 for conveyances and contracts concerning real property, has long served to bar enforcement of any commercial lease agreement for a term of longer than one year, unless that lease has been memorialized in writing and is signed by the parties to be charged. See G.O.L. § 5-703.

However, as many practitioners know, during the tumultuous COVID-19 pandemic and resulting upheaval in the real estate markets, not all commercial leases and other real estate contracts have been meticulously reduced to the four corners of a written document that would typically satisfy those standards. In fact, in myriad instances during the pandemic, landlords and tenants have attempted to seize on this provision as an opportunity to disavow their respective lease obligations for different reasons.

In particular, G.O.L § 5-703(4) expressly authorizes courts of equity to compel specific performance of real estate agreements when a party can demonstrate partial performance of their agreement. The New York appellate courts have upheld this exception and expressly stated that courts of equity may compel specific performance in such circumstances. For example, in Leonard v. Cummins, 196 A.D.3d 886, 151 N.Y.S.3d 510 (3d. Dep’t. 2021), the Appellate Division, Third Department, found that a claim regarding an alleged oral partnership agreement was colorable and could not be dismissed on Statute of Frauds grounds given the claimant’s financial contributions and investment of time and labor into a farming business. Similarly, in Korman v. Corbett, 183 A.D.3d 608, 123 N.Y.S.3d 192 (2d. Dep’t. 2020), a ruling that was issued by the Appellate Division, Second Department, in May 2020—two months after the pandemic rocked New York—found that an oral agreement to purchase a Brooklyn house following the owner’s passing was enforceable, based on the partial performance of the purchasers’ investment of time and energy in assisting the deceased elderly owner with her daily living, even though the parties failed to reduce the contract documenting such transfer to writing before the owner’s passing. (Editor’s note: One of the authors of this article, Massimo F. D’Angelo, represented the plaintiffs in Korman v. Corbett.)

These principles have been applied to commercial leasing arrangements with the same results. A dispute concerning an oral commercial sublease was resolved in the subtenant’s favor in Osmani v. Stein, 64 Misc. 3d 1238(A), 118 N.Y.S.3d 375 (N.Y. Civ. Ct. 2019), where the court found that a tenant breached an oral sublease for a hair salon business, and the tenant was required to reimburse the subtenant for her renovation expenses after the prime landlord forced the tenant to evict the subtenant.

Critically, allegations concerning partial performance may preclude summary judgment, and require significant fact-finding to adjudicate. A claim concerning ownership of a cooperative apartment’s shares and lease precluded summary judgment in Lauersen v. Antonopolous, 119 A.D.3d 404, 990 N.Y.S.2d 6 (1st. Dep’t. 2014), where the Appellate Division, First Department, affirmed an order denying summary judgment based on the plaintiff’s disputed right to own the subject apartment. Likewise, in Vizel v. Vitale, 184 A.D.3d 602, 125 N.Y.S.3d 166 (1st. Dep’t. 2020), a dispute between a commercial tenant and landlord regarding an oral modification of their lease and the lease renewal option raised material factual issues that could not be summarily decided without formal fact finding and creditability assessments at trial. Furthermore, allegations of partial performance must be “unequivocally referrable” to the purported oral agreement. See Anostario v. Vicinanzo, 59 N.Y.2d 662, 664, 450 N.E.2d 215, 216 (1983). Partial performance may be unequivocally referrable in some instances when there has been an investment of funds alone without further action. In Pinci v. Monaco, 61 Misc. 3d 1225(A), 111 N.Y.S.3d 807 (N.Y. Sup. Ct. 2018), the parties executed a letter of intent to sell a brownstone for a specified price and the contribution towards a deposit was deemed sufficient to plead a cause of action for specific performance under those circumstances.

In the commercial leasing context, tenants and landlords have been able to demonstrate partial performance in a variety of manners. For instance, a significant capital investment in expanded mining activities raised material factual issues suggestive of partial performance of a lease in Bowers v. Hurley, 134 A.D.3d 1191, 1193, 21 N.Y.S.3d 743, 745 (3d. Dep’t. 2015). Moreover, physical improvements and alterations of a leased property are also indicative of partial performance and the likelihood of an oral lease’s existence. See Tuttle, Pendelton & Gelston, Inc. v. Dronart Realty Corp., 90 A.D.2d 830, 455 N.Y.S.2d 830 (2d. Dep’t. 1982). In addition, the payment of rent or additional rent calculated pursuant to a purported oral lease agreement has also been deemed partial performance, as the Civil Court found in Carlyle Rec. Warehouses Corp. v. Scherlo, 94 Misc. 2d 226, 404 N.Y.S.2d 530 (Civ. Ct. 1978).

These cases indicate that tenants and landlords who sought to avoid delay (or potentially liability) by avoiding negotiating and executing clear lease agreements during the COVID-19 pandemic may have made a significant blunder because the Statute of Frauds will not relieve them of their verbal or “handshake” agreements. Conversely, given the trial and appellate courts’ consistent rulings upholding the Statute of Frauds exception codified in G.O.L § 5-703(4), many practitioners anticipate that oral commercial leasing disputes will simply blossom into fact-specific, discovery-intensive law suits concerning partial performance where litigants may still prevail despite not having reduced their contracts to writing. It will be interesting to see whether the New York Court of Appeals steps in to provide a bright-line rule in such cases, but until then, parties will be litigating over whether their partial performance is sufficient to circumvent the Statute of Frauds.