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Commercial Tenant May Assert Claim For Rescission Where Certificate of Occupancy Prohibits Commercial Use

A landlord and tenant entered into a commercial lease providing that the premises would be used for commercial purposes. After the tenant had moved in, it discovered that the premises’ certificate of occupancy (CO) permitted only residential use. In Jack Kelly Partners LLC v. Zegelstein, 2016 N.Y. App. LEXIS 3635, 2016 N.Y. Slip Op. 3820 (1st Dep’t May 12, 2016), the appellate court ruled that the tenant could seek to rescind the lease.

The tenant in this case entered into a commercial lease, which required that tenant use the premises for “general offices of an executive recruiting firm” and provided that the tenant must not use the premises in a manner that violates the CO. After the tenant discovered that the CO allowed only residential use, it vacated premises.  The tenant then sued the landlord seeking to rescind the lease and obtain a declaratory judgment that tenant had no liability.  A lower court granted the landlord’s motion for summary judgment dismissing the complaint, but the appellate court reversed, finding that there existed “issues of fact as to whether the rescission cause of action can be proved” on these facts.

This decision involved the specific lease language and facts of this case, and does not hold that rescission will always be available. Other court decisions involving similar facts have denied tenants any such relief.  Prospective tenants should carefully review the CO before signing a lease and may wish to request a representation by the landlord that the intended use of the premises is legally permissible.