ALBANY, N.Y., Feb 21 (Reuters) - Finding an exception to a longstanding real estate rule, New York's top court has held that a minimal encroachment by a landlord upon a tenant's space does not justify a rent abatement.

In a 6-1 decision released Tuesday, the Court of Appeals ruled that Eastside Exhibition Corp, which operates City Cinema on East 86th Street, was not entitled to a rent abatement after its landlord made renovations that took up 12 square feet of the two-story, 19,000-square foot movie theater.

"We recognize that there can be an intrusion so minimal that it does not prescribe such a harsh remedy (as rent abatement)," Judge Carmen Ciparick wrote for the court.

The decision carves out an exception to the "one inch" rule, a vestige of feudal common law that allows for a full rent abatement if a landlord takes even one inch of a leased property. Ciparick said the court's ruling was in line with more modern interpretations of real estate law.

"Given...modern realities that a commercial lessee is free to negotiate appropriate lease terms, we see no need to apply a rule derived from feudal concepts," she wrote.

Chief Judge Jonathan Lippman and Judges Victoria Graffeo, Robert Smith, Eugene Pigott and Theodore Jones concurred.

The parties entered into an 18-year lease in 1998. Four years later, in preparation to add two floors to the seven-story building, the landlord, 210 East 86th Street Corp, entered the theater and installed diagonal beams, called a cross-bracing, in the lobby. The lease prohibited a rent abatement while the landlord was making "repairs and improvements." The renovation bisected the lobby, changing the flow of foot traffic and encroaching upon a small part of a second-floor waiting area.

Eastside began withholding rent and commenced this suit, seeking the removal of the cross-bracing and an injunction of any future work not approved by Eastside. The company argued that the construction of the cross-bracing constituted an actual partial eviction from the 12 square feet occupied by the beams.

Former Supreme Court Justice Edward Lehner in 2005 dismissed the suit, finding that a "de minimis" taking on the part of the landlord did not justify a full rent abatement.

'SCHIZOPHRENIC' MAJORITY RULING

The Appellate Division, First Department, modified, holding that there was no de minimis exception to the "one inch" rule and sending the case back to the trial court to calculate the plaintiff's actual damages.

Lehner found Eastside could not prove any damages, and the First Department affirmed.

The Court of Appeals on Tuesday upheld the decision, but found there is a de minimis exception when a landlord's intrusion is clearly insignificant.

"We regard (Tuesday's decision) as nothing more than an application of the familiar de minimis principle, which we have never held or suggested to be inapplicable to actual partial eviction cases," Ciparick wrote.

In dissent, Judge Susan Read said that the "schizophrenic" majority opinion overruled two centuries of case law and opened the door for abuse by landlords.

"Now it is very risky for a tenant to withhold rent where the landlord wrongfully appropriates any portion of the leased premises," Read wrote, "because it is left up to the courts to determine whether the ouster is merely trifling in amount and trivial in effect."

Read warned that Tuesday's ruling should not be applied retroactively, because it could allow landlords with existing leases to make relatively small changes to properties.

'INEQUITY OF FULL ABATEMENT'

By rejecting the de minimis exception, the First Department was attempting to change state law to reflect the sophistication of modern leases, which are similar to contracts but continue to be treated by courts as simple temporary land deeds, said Benjamin Weinstock, the chair of the real estate department at Ruskin Moscou Faltischek. Weinstock was not involved in the case.

Howard Grun of Kaufman Friedman Plotnicki & Grun, who represented the landlord, said the "underlying issue in these cases has always been whether the intrusion is substantial."

"The court recognized the inequity of full abatement in a commercial case, where millions of dollars are at stake."

Grun said Eastside began paying rent after a settlement during trial, and does not owe the landlord back rent.

Eastside's attorney, David Rosenberg of Marcus Rosenberg & Diamond, did not return a call seeking comment.

The case is Eastside Exhibition Corporation v. 210 East 86th Street Corporation, New York State Court of Appeals No. 21.

For Eastside: David Rosenberg of Marcus Rosenberg & Diamond

For 210 East 86th: Howard Grun of Kaufman Friedman Plotnicki & Grun

(Reporting by Dan Wiessner)

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