NY Appellate Court Shifts Balance of Power in Commercial Real Estate Leases: Upholds Yellowstone Injunction Waiver
In a recent decision by the New York Appellate Division, Second Department, a tenant’s waiver of its right to file an action for a declaratory judgment and a Yellowstone action was held to be enforceable and not contrary to public policy. The decision effectively allows landlords to include Yellowstone waivers in commercial leases, thereby gaining a substantial edge in subsequent disputes with tenants over alleged lease defaults. Tenants and their counsel should be forewarned about the adverse implications that these waivers create and their effect on a tenant’s rights.
Ever since the seminal decision of the New York Court of Appeals in First National Stores, Inc. v. Yellowstone Shopping Center, Inc., 21 N.Y.2d 630, 290 N.Y.S.2d 721 (1968), if a landlord served a tenant with a notice to cure a lease default, then the tenant, with relative ease, could file an action for a declaratory judgment and a Yellowstone injunction in New York Supreme Court. For nearly 50 years tenants, through the filing of aYellowstone action, essentially had the right to a temporary restraining order and eventually a preliminary injunction staying the time to cure. Typically, the tenant may secure a Yellowstone injunction on a simple showing of the existence of a notice to cure and that the time to cure had not expired. The tenant is not required to make any further showing or satisfy any of the traditional standards for the issuance of a preliminary injunction, such as “probable success on the merits”. The Yellowstone injunction not only effectively “tolls” the cure period available to the tenant to cure the default, while the issue of whether a default had occurred is litigated, but allows the dispute with the landlord to be determined in a Supreme Court plenary action (rather than Landlord/Tenant Court) where the Court has equitable powers and the parties can avail themselves of the full range of discovery available in that Court. The “clock” on the tenant’s cure period is not commenced until the Court determines that the alleged default did exist and, in some cases, with the Court determining that the cure period itself should be extended.
Upon the tenant’s cure period expiring following the landlord’s delivery of a notice of default, the landlord is free to serve a notice of termination and commence a summary eviction proceeding in Landlord/Tenant Court. At that juncture, the tenant will lose its lease if it ultimately determined that the default did occur. Unlike the Supreme Court, the Landlord/Tenant Court does not have the power to grant equitable relief, including “tolling” any time to cure.
Accordingly, without the protection of aYellowstone injunction, upon receipt of a notice of default from the landlord, the tenant is faced with the choice of either (a) avoiding the risk of losing the lease, by curing the default in question within the required cure period under the lease at whatever the cost may be (even though the tenant may have real grounds to believe that no default exist under the lease) or (b) risk losing the lease (by allowing the cure period to expire) with the hope that the tenant will convince the Court in the eviction proceeding that no default exists.
With the protection that a Yellowstone injunction provides tenants, landlords have been faced with the prospect of being forced to undertake an expensive and time-consuming litigation in Supreme Court over whether a default under the lease occurred, knowing that if the landlord prevails, the tenant could still, thereafter, cure the default and maintain its lease.
The Second Department Decision
How does a landlord prevent a tenant from getting a Yellowstone injunction? Up until the recent decision of the Appellate Division, Second Department in 159 MP Corp. v. Redbridge Bedford, LLC, 2018 NY Slip Op. 00537 (2d Dep’t. January 31, 2018), most commercial landlords assumed they had no means to prevent a Yellowstone injunction, since it was generally understood by real estate transactional lawyers and litigators that it was highly unlikely that courts would enforce a waiver of such an important right.
The Second Department’s three to one decision in 159 MP Corp. materially changes the commercial leasing landscape. In 159 MP Corp., the landlord was able to get the tenant to agree to a provision in the lease in which the tenant waived the right to file an action for a declaratory judgment and get the court to issue a Yellowstone injunction. The Court rejected the tenant’s argument that the waiver should be unenforceable as a matter of public policy and, after observing that the landlord and tenant apparently had relatively equal bargaining power, enforced the waiver.
In the absence of authority from the three other Appellate Division Departments and, of course, the Court of Appeals, 159 MP Corp. is now the law across the State of New York. Specifically, in a commercial lease, a tenant’s waiver of its right to seek aYellowstone injunction will be enforced.
Depending upon bargaining power, landlords may now consider having tenants agree to lease provisions which waive their right to file declaratory judgment actions requesting Yellowstone injunctions and, thereby, forcing tenants to have alleged defaults determined in a summary eviction proceeding in Landlord/Tenant Court without the benefit of the tolling of their time to cure. Tenants and their counsel need to be extremely wary of the impact of this waiver, and should attempt to negotiate them out of the lease to the extent of their bargaining power.
A potential middle ground, which we have recommended over the years (particularly where the tenant has little bargaining power to negotiate the complete removal of a waiver of its right to seek a Yellowstone injunction) is for the tenant to agree to the waiver, but with the tenant being giving time to cure following the determination in a summary proceeding in Landlord/Tenant Court that a default does in fact exist. Only time will tell whether 159 MP Corp. is upheld and, accordingly, it may be advisable for landlords to consider including such a right to cure in the waiver provision at the outset in order to enhance the chances that the waiver will be enforced in the courts.
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02.20.2018 | PUBLICATION: Other Publications | TOPICS: Litigation, Real Estate | INDUSTRIES: Real Estate