Zillow, Inc. v. Capital One Bank, N.A.

Background

Zillow, Inc. subleased approximately 53,200 square feet at 130 Fifth Avenue in New York to Capital One Bank, N.A. The sublease ran from February 21, 2020, through October 30, 2024, unless ended earlier under the agreement. Zillow leased the premises from ROC-Fifth Avenue Associates, LLC, the primary landlord.

The sublease required Zillow to use commercially reasonable, good-faith efforts to obtain from the landlord a subordination, recognition, and attornment agreement, called an “NDA,” in a form and substance reasonably acceptable to the landlord and Capital One. If the NDA was not fully executed and delivered within 60 days, Capital One could terminate the sublease by giving notice before receiving it. Another provision required Zillow to obtain the landlord’s consent within 45 days, with a similar termination right if the consent was not delivered.

The parties agreed that one document could satisfy both requirements. Zillow obtained a letter signed by the landlord, Zillow, and Capital One on January 24, 2020. The opinion states that the letter was delivered within both deadlines and that the parties agreed it satisfied the landlord-consent requirement. Zillow alleged that Capital One had participated in negotiating and editing the letter, but did not object to it or identify any missing NDA terms when it received the completed document.

On May 13, 2020, Capital One notified Zillow that it was terminating the sublease because Zillow had not satisfied the NDA requirement. Zillow rejected the termination and demanded performance. Capital One reaffirmed its position on June 8, 2020. Zillow then sued, asserting claims for specific performance, breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory judgment, and attorneys’ fees and costs.

Motion and Arguments

Capital One moved to dismiss the complaint under Rule 12(b)(6), which allows dismissal when a complaint does not adequately state a claim for relief. Capital One argued that the letter contained only subordination and attornment provisions and lacked a nondisturbance or recognition provision that an NDA generally includes. It therefore argued that Zillow had not fulfilled its contractual duty and that Capital One had the right to terminate.

Zillow argued that the sublease did not require any particular NDA terms. Instead, it required an agreement whose form and substance were reasonably acceptable to the parties. Zillow also argued that Capital One’s participation in negotiating the letter, acceptance of it without objection, and delayed termination supported its claims that the letter satisfied the sublease and that Capital One acted in bad faith.

Court’s Analysis

For purposes of the motion, the court treated the complaint’s factual allegations as true and considered documents attached to, referenced in, or integral to the complaint. The court concluded that the sublease did not require the NDA to contain any particular terms or categories of terms. The agreement required only substance reasonably acceptable to the parties.

The court rejected Capital One’s argument that the absence of a provision generally found in an NDA necessarily made the letter inadequate. It stated that the sublease was unambiguous and that commercial expectations could not be used to change its express terms. Whether the letter was reasonably acceptable to Capital One was a factual question that could be assessed through the parties’ conduct.

The court found that Zillow had alleged facts supporting its claim that the letter was reasonably acceptable to Capital One. In particular, the allegations that Capital One helped negotiate the letter, accepted it without protest, and raised the alleged deficiency only after the 60-day period had expired could make it difficult for a factfinder to conclude that the letter was unacceptable. The court also stated that, if those allegations were undisputed, the case might later be resolved through summary judgment, a procedure that allows judgment without a trial when there is no genuine dispute over material facts.

Ruling

The court denied Capital One’s motion to dismiss as to all counts. It stated that, if Zillow’s allegations were proven, Zillow could establish that it fulfilled its obligations under the sublease, that Capital One’s termination breached the agreement, and that Zillow could be entitled to specific performance or damages based on the rent it would have received. The court also stated that Zillow could recover lawsuit costs under the sublease if the termination was wrongful.

The court left for a later decision whether Count III, alleging breach of the implied covenant of good faith and fair dealing, duplicated the other claims. The clerk was directed to remove Capital One’s motion from the list of pending motions.