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Rockaway Improvement, LLC v. Danco Transmission Corp. - 9 Misc. 3d 210

Rule:

A tenant in possession pursuant to a lease which is subordinate to a mortgage, but who was not made a party to a foreclosure action, cannot be dispossessed by the purchaser at the foreclosure sale, but in such a case, the purchaser of the foreclosed property has two potential remedies: the commencement of a strict foreclosure action pursuant to N.Y. Real Prop. Acts Law § 1352, or a re-foreclosure action pursuant to N.Y. Real Prop. Acts Law § 1503.

Facts:

A corporate lessee, Five Bay Realty Corporation, had executed a 30-year lease with the prior owner of the premises. Thereafter, Five Bay was dissolved by the Secretary of State for nonpayment of taxes. After a foreclosure sale to petitioner Rockaway Improvement, LLC, Five Bay Realty sublet the premises to Danco Transmission Corp. and its corporate existence was revived. Rockaway filed a foreclosure action, but neither named nor served Five Bay Realtylesse, the corporate lessee, which subsequently moved for summary judgment. Over Rockaway's objection, the trial court granted summary judgment dismissing the holdover proceeding. Rockaway appealed.

Issue:

Did the foreclosure sale of the demised premises extinguish a corporate tenant’s right to remain in possession under an unexpired 30-year commercial lease where the tenant was not named or served in the foreclosure action?

Answer:

No

Conclusion:

The court found that the corporate tenant, Five Bay, was a de facto corporation under N.Y. Bus. Corp. Law § 403, as it executed the lease only four days prior to its incorporation and the actual terms of the lease did not commence until it was incorporated. The fact that the lessee might have had actual or constructive notice was insufficient to bind it with respect to the foreclosure action, as it was entitled to be named and served pursuant to N.Y. Real Prop. Acts. Law § 1311(1). The failure to include it in the action as such resulted in the failure to extinguish its right to possession of the premises under the lease.

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