This was originally published on the SGR Blog.
The commercial lease agreement between The St. Luke’s Hospital Center, as landlord, and WestSide Radiology Associates, as tenant, prohibited WestSide from assigning the lease without St. Luke’s prior written consent.
The lease rider defined an assignment as a transfer of a “Controlling Interest,” meaning “more than a fifty percent (50%) interest in the [stock of the corporate tenant]” or “the ability to control the decisions or affairs of the [corporate tenant].” And the lease required that any assignee be an active member of St. Luke’s medical staff with admitting privileges.
In April 2015, undertenant RadNet, Inc., in effect, acquired WestSide without notice to, or authorization by, St. Luke’s Hospital. The April 2015 transaction, consisted of a Purchase Agreement and ancillary documents, effectively gave RadNet “the ability to control the decisions or affairs of [the tenant]” within the meaning of the plain terms of the lease rider. And gave to Dr. John Crues, RadNet’s medical director and board member, the absolute right to restrict the WestSide shareholders’ ability to exercise their own rights and interests as shareholders and board members. Dr. Crues never had admitting privileges at St. Luke’s Hospital.
Though Westside and RadNet attempted to structure their transaction in a way to circumvent the lease’s no-assignment provision, they ultimately achieved what the lease prohibited, an unauthorized sale of WestSide to an unrelated third party. In this regard, although no transfer of stock occurred between WestSide and RadNet, the evidence showed that all of WestSide’s stock was irrevocably transferred into escrow, while its shareholders relinquished their right to sell or transfer the shares without the prior written consent of Dr. Crues. In addition, while the underlying lease between St. Luke’s Hospital and WestSide was excluded from the Purchase Agreement, RadNet’s subsidiary, and not WestSide, was obligated to pay the “real . . . property lease cost payments and expenses” for the premises.
With respect to use and occupancy, the liquidated damages clause in the lease, providing for use and occupancy at 1.5 times the rent in the event of a holdover or upon WestSide’s failure to surrender the premises after the termination date, was not an unenforceable penalty, since damages could not be anticipated in 2010 when the lease was executed, and the amount fixed was not plainly or grossly disproportionate to the probable loss
After a non-jury trial, Civil Court determined that WestSide breached the no-assignment provision of the lease and the Court awarded possession to St. Luke’s in a summary (holdover) proceeding, awarded use and occupancy in the amount of $431,560.23; and attorneys’ fees in the sum of $335,212.24. The judgment was affirmed on appeal (except for a reduction in legal fees).