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NY Court of Appeals Upholds Commercial Tenant's Yellowstone Injunction Waiver

In February 2018, we reported on the decision of the New York Appellate Division, Second Department, in 159 MP Corp. v. Redbridge Bedford, LLC, 160 AD 3d 176 (2d Dept 2018), which ruled that a tenant's waiver in a commercial lease of its right to file an action for a declaratory judgment and apply for a Yellowstone injunction is not contrary to public policy and is enforceable.

On May 7, 2019, a sharply divided Court of Appeals affirmed this ruling - effectively putting an end to Yellowstone injunctions. By a vote of four to three, with the majority and dissenting opinions spanning 48 pages, the Court shifted the balance of power between commercial landlords and their tenants in the State of New York, by giving landlords the right to require tenants to agree in the lease to a waiver of the tenant's right to file a declaratory judgment action and seek a Yellowstone injunction.

For over 50 years, First National Stores, Inc. v. Yellowstone Shopping Center, Inc., 21 N.Y.2d 630, 290 N.Y.S.2d 721 (1968) gave commercial tenants faced with a Notice to Cure from a landlord the absolute right to prevent the dispute from being litigated in Landlord/Tenant Court and freeze the status quo by stopping the clock on the time to cure the alleged default. A Tenant could simply file an action for a declaratory judgment in the Supreme Court. Typically, all the tenant had to show the Court was the existence of a Notice to Cure, and that the time to cure the alleged breach had not expired. There was no requirement that the tenant satisfy any of the usual standards for the issuance of a preliminary injunction, including "probable success on the merits." The Yellowstone injunction tolled the time to cure, prevented the landlord from commencing summary proceedings in Landlord/Tenant Court and often meant years of litigation in the Supreme Court.

In 159 MP Corp. v. Redbridge Bedford, LLC, 2019 N.Y. Slip Op. 03526, 2019 WL 1995526 (May 7, 2019), the Court of Appeals rejected the tenant's argument that the waiver should be unenforceable as a matter of public policy. After observing that the parties apparently had relatively equal bargaining power, the Court concluded that the waiver was enforceable. In simple terms, the Court changed the rules of the road by holding that commercial landlords can prevent tenants from filing Yellowstone actions by having the tenant agree in the lease that the tenant waives the right to file an action for a declaratory judgment.

Without the ability to seek a Yellowstone injunction, a tenant served with a Notice to Cure must cure within the time required under the lease or run the risk of an unalterable termination of the lease. More specifically, upon receipt of a Notice to Cure, the tenant will be placed in a difficult predicament. It must either (a) avoid the risk of losing the lease, by curing the default in question within the required time period at whatever the cost may be (even though the tenant may have real grounds to believe that no default exists) or (b) risk losing the lease by allowing the cure period to expire with the hope that the tenant can convince the Court in an eviction proceeding that no default exists.

One issue that was left unresolved is, irrespective of whether the right to a Yellowstone injunction has been waived, whether a commercial tenant can still argue that the cure period allowed under the lease is insufficient to permit the tenant to cure. Before 159 MP, a tenant could file an action for a declaratory judgment and ask for a Yellowstone injunction that would extend the time to cure. Moving forward, that right will be lost if the lease contains a Yellowstone waiver. In such event, the sole remedy available to the tenant is to raise the issue of insufficient time to cure as a defense in Landlord/Tenant Court.

Depending upon bargaining power, landlords may now consider having tenants agree to lease provisions under which tenants will 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 any toll on the tenants' time to cure. In response to such a Yellowstone waiver provision in a proposed lease, we anticipate, at a minimum, that a well-represented tenant will attempt to negotiate additional time to cure following a determination in a summary proceeding in Landlord/Tenant Court that a default does in fact exist.

159 MP is a game changer, which alters over 50 years of well-settled law. As noted in the dissenting opinion, it is now up to state lawmakers to enact legislation that would declare Yellowstone waivers unenforceable and provide tenants the right to file a declaratory judgment action seeking injunctive relief when a landlord serves a Notice to Cure. Until that time comes (and it may never come), the Yellowstone injunction is now dead in New York State!

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05.10.2019  |  PUBLICATION: Other Publications  |  TOPICS: Litigation, Real Estate, Construction, and Environmental  |  INDUSTRIES: Real Estate

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