The Second Department of the New York State Appellate Division recently issued a decision that could fundamentally alter the leasing dynamics between commercial landlords and tenants. In 1968, the New York Court of Appeal pioneered a new wave of rights for commercial tenants facing termination of their leases based on a disputed default. The seminal case, First National Stores v. Yellowstone Shopping Center (21 NY2d 630), established the so-called Yellowstoneinjunction, a concept unique to New York which allowed a tenant to delay the expiration of a default cure period until a court decided whether a default existed and whether it was the tenant’s responsibility to cure the default. The recent Appellate decision in 159 MP Corp. v. Redbridge Bedford, LLC, No. 2015-01523 (N.Y. App. Div. Jan. 31, 2018), however, seems to step away from the tenant protection established in Yellowstone.
Under a typical scenario, a landlord will notify a tenant of an alleged default and provide the tenant with a certain number of days, based on the terms of the lease, to cure the default. If the tenant is not able to cure the default during the provided time period, the lease and the tenant’s property rights can be terminated. If the tenant disputes the default and seeks intervention from a court, the court often does not have enough time to resolve the dispute before the curing period expires. The Yellowstone injunction was meant to act as a remedy in these situations by essentially stopping the clock on a lease cure period triggered by a landlord’s default notice and restarting the clock only after a court determines that the default alleged in the landlord’s notice exists. The threshold for a tenant to obtain a Yellowstone injunction is far less onerous than the showing a party typically must demonstrate to obtain injunctive relief under New York Law, and courts routinely grant the Yellowstone injunction to avoid lease forfeitures. A tenant must only show: (1) it is a party to a commercial lease, (2) the tenant’s landlord has provided it with a notice alleging default, which provides a timeframe for the tenant to cure, (3) the expiration of the timeframe has not passed, and (4) if it is determined that a default exists, the tenant is ready, willing and able to cure the default. 159 MP Corp. v. Redbridge Bedford, LLC.
In an effort to reduce prospective Yellowstone injunctions, landlords often include language in their leases waiving a tenant’s right to commence Yellowstone proceedings or generally to commence “declaratory judgment actions.” Such language was at issue in 159 MP Corp. v. Redbridge Bedford, LLC, which involved a commercial lease that included a provision where the tenant waived the right to bring a “declaratory judgment action” with respect to any provision or notice sent pursuant to the lease. Four years into a twenty-year lease, the tenant received a “Ten Day Notice to Cure Violation” alleging the tenant failed to obtain various permits, arranged its premises in a manner that created a fire hazard, was responsible for nuisances and noises, and failed to allow for sprinkler system inspections by the Fire Department. Despite the waiver provision in the lease, the tenant disputed the allegations and commenced a Yellowstoneproceeding, arguing that the waiver was unenforceable as a matter of public policy. The Court was unconvinced, concluding that the tenant was a sophisticated party acting in a highly negotiated lease transaction and had other sufficient remedies even without a Yellowstone injunction, such as the right to cure the breaches that were the subject of the Notice and the right to sue the landlord for breach of contract. A lone justice on a panel of four dissented, arguing that declaratory judgments serve an important public policy role, allowing commercial tenants to protect their valuable property interests, and thus should not be waivable.
Based on this decision, New York landlords should make sure to include waiver provisions similar to those upheld in 159 MP Corp. v. Redbridge Bedford, LLC. Tenants, of course, should negotiate such waivers out of their deals. Both sides should take this recent decision into account when considering their negotiating positions and when determining how to respond to a default if the lease contains a waiver of Yellowstone rights.