Yellowstone Injunctions Not Automatic

A Yellowstone injunction allows a tenant that has been served with a notice to cure an alleged lease default to litigate in Supreme Court whether or not there has been a default, without the risk of losing the lease if the court finds a default. The injunction tolls the running of the tenant's time to cure the alleged default. So, even if there is a determination at the end of the lawsuit adverse to the tenant, the tenant still has time to cure and save the lease.

The common wisdom is that a Yellowstone injunction is routinely granted, and while more often than not it may be granted, such an outcome is not necessarily a foregone conclusion. Nassau County Supreme Court Justice Leonard B. Austin's recent decision in Gristede's Operating Corp. v. Centre Financial LLC, 16 Misc.3d 1132(A), illustrates circumstances where Yellowstone relief has been denied.

The Case

In Gristede's, the landlord sent the tenant a notice of default, dated May 3, 2007. The alleged lease violations set forth in the notice included: 1) failure to pay a 4% late charge arising out of late payment of minimum rent due April 1, 2007; and 2) failure to continuously and uninterruptedly keep the premises fully stocked and staffed during all business hours on all business days when the shopping center where the store is located is open for business. Specifically, the landlord claimed that the continuous operations clause of the lease was violated by Gristede's shutting down the butcher and fresh meat departments entirely, and sharply curtailing the bakery department.

Before the notice of default was served, the tenant had served a demand to arbitrate the issue of whether the landlord had acted unreasonably in refusing to consent to Gristede's request to assign the lease on the grounds that Gristede's allegedly was in default in the payment of rent and additional rent, and that the proposed assignee purportedly was not a 'high-quality chain grocery store' as required under the lease. In the notice of default, the landlord asserted that the tenant had no right to arbitrate the reasonableness of the landlord's refusal to consent to the proposed assignment until all defaults had been cured and the tenant was in full compliance with the terms and conditions of the lease.

Asserting that the tenant had failed to cure within the allotted time the defaults specified in the notice of default, the landlord served a notice of termination, dated May 25, 2007. After receiving the notice of termination, the tenant commenced a Supreme Court action seeking: 1) a declaration that it was not in material default of the lease and that the landlord did not have the right to terminate the lease; 2) money damages; and 3) a permanent injunction barring the landlord from taking any action to terminate the lease and/or to interfere with the tenant's possession of the premises. It moved for a Yellowstone injunction. The landlord opposed the motion and sought to stay the arbitration, arguing that if the arbitration and the Supreme Court action proceeded concurrently, there was a risk of conflicting determinations on the issue of whether the tenant was in default under the lease. (The arbitration had commenced but had been suspended after a full day's testimony.)

The Ruling

In denying the Yellowstone injunction, the court concluded that the tenant had failed to establish its willingness and ability to cure the alleged default. Citing the Appellate Division, First Department decision in WPA/Partners LLC v. Port Imperial Ferry Corp., 307 AD3d 234, the court stated that:

'While a tenant is not required to prove its ability to cure the claimed default prior to obtaining a Yellowstone injunction, there must be a basis for believing that the tenant desires to cure and has the ability to do so through any means short of vacating the premises.'

Justice Austin concluded that Gristede's had fallen short of the required showing because:

Its allegations do not indicate that it has any interest, inter alia, in remaining at the premises and curing the alleged violation of the Continuous Operation provision.

The court cited two Appellate Division, First Department cases, JH Parking Corp. v. East 112^th Realty Corp. 298 AD2d 258, and 403 W. 43 Street Rest. Inc. v. Ninth Avenue Realty, LLC, 36 AD3d 464, where Yellowstone relief had been denied because of failure to satisfy the willingness and ability to cure criterion. JH Parking Corp. turned on tenant's apparent unwillingness to cure any default. The defaults alleged were the tenant's failure to secure an amended certificate of occupancy for use of the premises as a parking lot, failure to legalize the premises and secure the necessary permits, and illegal sublet of the premises. In denying Yellowstone relief, Supreme Court relied on tenant's failure, for seven years (extending past tenant's initiation of the instant proceeding), to legalize use of the premises and obtain the appropriate documents despite professing to do so. The First Department affirmed, holding that:

[T]he record supports the motion court's conclusion that plaintiff would not or could not cure the alleged default by means short of vacating the premises, and therefore could not establish its entitlement to Yellowstone relief.

Lack of Ability to Cure

403 W. 43 Street Rest. Inc. v. Ninth Avenue Realty LLC, turned not on tenant's unwillingness, but on tenant's lack of ability to cure. The lease included a provision (Article 65) stating that at any time the landlord intended to demolish or substantially remodel or rehabilitate the building in which the demised premises were situated, the landlord 'shall have the absolute right, option and privilege to terminate this lease and the demised term hereof' by giving written notice at least 180 days prior to the date specified in the termination notice for the termination of the lease. The provision also stated that upon the termination date, the lease and its term would come to an end and the tenant was obligated to quit and vacate the premises and surrender them to the landlord. When the landlord served a termination notice, the tenant, before the termination date, commenced a Supreme Court lawsuit and moved for various relief including a Yellowstone injunction. The First Department affirmed the Supreme Court's denial of Yellowstone relief, stating:

As plaintiff retained no ability to cure, the court properly denied its application for a Yellowstone injunction '

In Gristede's, the court held there was a basis for denying the Yellowstone injunction other than tenant's inability and unwillingness to cure its default: the tenant's application for Yellowstone relief 'was made beyond the applicable cure periods under the lease'. Citing King Party Center of Pitkin Ave., Inc. v. Minco Realty LLC, 286 AD2d 373, and S.E. Nichols, Inc. v. American Shopping Centers, Inc.,115 AD2d 856, the court stated that '[t]here is no basis for a Yellowstone injunction where it is sought after the expiration of the period to cure or after the service of a Notice of Termination.'

B.M.G. Bagels Inc. v. Vorillas Properties LLC, NYLJ Nov. 9, 2005, p. 21, is another case where a Yellowstone injunction was denied on that same reasoning. There, the landlord sent a notice of termination under a lease clause giving it the right to terminate the tenancy on sixty days' notice if it elected to demolish the building or rehabilitate an entire floor. The tenant did not commence its lawsuit until after the termination date. The court stated that the tenant 'cannot obtain a Yellowstone injunction'because its lease had been terminated prior to the commencement of this action'.

A Yellowstone motion does not typically determine on the merits the issue of the purported default asserted in landlord's notice that gave rise to the Yellowstone motion. So, even if a Yellowstone motion is denied, the tenant will still have the opportunity to show that it is not in default under the lease. The risk that results to the tenant from not obtaining a Yellowstone injunction is that, since the cure period will not be tolled, if the tenant loses on the issue of default, it will not have an opportunity to cure and save its lease.

If a Yellowstone motion is denied, in what forum will the issue of whether the tenant has defaulted be determined? Typically, a Supreme Court complaint in a Yellowstone action seeks a declaration that the tenant has not breached the lease as asserted in the notice of default. Therefore whether a default occurred could be determined in Supreme Court.

However, a landlord who has been successful in defeating a Yellowstone motion presumably would not just sit by and let the default issue be adjudicated in Supreme Court. If there is no Yellowstone injunction, the cure period will expire, the lease will terminate and the landlord can commence a holdover proceeding in Civil Court. That should be a more expeditious proceeding than a Supreme Court lawsuit and, as such, advantageous to the landlord. By moving to Civil Court, however, the burden of proof on the issue of default shifts. In a Civil Court holdover proceeding, the burden of proof is on the landlord/petitioner to show, among other things, that the tenant defaulted as asserted in the notice of default. In a tenant's Supreme Court Yellowstone action, by contrast, the burden of proof is on the tenant to prove in the action (as distinct in the Yellowstone motion) that it is not in breach of the lease as claimed in the notice of default.

Depending on the circumstances, various other procedural issues may arise from denial of a Yellowstone motion and the resulting opportunity for the landlord to commence a summary proceeding. Should all claims be litigated in Civil Court? Can all claims be litigated in Civil Court? What if the tenant's Supreme Court action also includes damage claims and there is a no counterclaim clause in the lease which would bar the tenant from counterclaiming for damages in the landlord's holdover proceeding?

Suffice to say that while denial of a Yellowstone motion may occur far less frequently than the granting of such a motion, when such a denial occurs, the subsequent litigation can often become a multi-forum tangled web.

Warren A. Estis is a founding partner, and William J. Robbins a partner, at Rosenberg & Estis This article is an adaptation of an one that originally appeared in the New York Law Journal, a sister publication of this newsletter.

A Yellowstone injunction allows a tenant that has been served with a notice to cure an alleged lease default to litigate in Supreme Court whether or not there has been a default, without the risk of losing the lease if the court finds a default. The injunction tolls the running of the tenant's time to cure the alleged default. So, even if there is a determination at the end of the lawsuit adverse to the tenant, the tenant still has time to cure and save the lease.

The common wisdom is that a Yellowstone injunction is routinely granted, and while more often than not it may be granted, such an outcome is not necessarily a foregone conclusion. Nassau County Supreme Court Justice Leonard B. Austin's recent decision in Gristede's Operating Corp. v. Centre Financial LLC , 16 Misc.3d 1132(A), illustrates circumstances where Yellowstone relief has been denied.

The Case

In Gristede's, the landlord sent the tenant a notice of default, dated May 3, 2007. The alleged lease violations set forth in the notice included: 1) failure to pay a 4% late charge arising out of late payment of minimum rent due April 1, 2007; and 2) failure to continuously and uninterruptedly keep the premises fully stocked and staffed during all business hours on all business days when the shopping center where the store is located is open for business. Specifically, the landlord claimed that the continuous operations clause of the lease was violated by Gristede's shutting down the butcher and fresh meat departments entirely, and sharply curtailing the bakery department.

Before the notice of default was served, the tenant had served a demand to arbitrate the issue of whether the landlord had acted unreasonably in refusing to consent to Gristede's request to assign the lease on the grounds that Gristede's allegedly was in default in the payment of rent and additional rent, and that the proposed assignee purportedly was not a 'high-quality chain grocery store' as required under the lease. In the notice of default, the landlord asserted that the tenant had no right to arbitrate the reasonableness of the landlord's refusal to consent to the proposed assignment until all defaults had been cured and the tenant was in full compliance with the terms and conditions of the lease.

Asserting that the tenant had failed to cure within the allotted time the defaults specified in the notice of default, the landlord served a notice of termination, dated May 25, 2007. After receiving the notice of termination, the tenant commenced a Supreme Court action seeking: 1) a declaration that it was not in material default of the lease and that the landlord did not have the right to terminate the lease; 2) money damages; and 3) a permanent injunction barring the landlord from taking any action to terminate the lease and/or to interfere with the tenant's possession of the premises. It moved for a Yellowstone injunction. The landlord opposed the motion and sought to stay the arbitration, arguing that if the arbitration and the Supreme Court action proceeded concurrently, there was a risk of conflicting determinations on the issue of whether the tenant was in default under the lease. (The arbitration had commenced but had been suspended after a full day's testimony.)

The Ruling

In denying the Yellowstone injunction, the court concluded that the tenant had failed to establish its willingness and ability to cure the alleged default. Citing the Appellate Division, First Department decision in WPA/Partners LLC v. Port Imperial Ferry Corp. , 307 AD3d 234, the court stated that:

'While a tenant is not required to prove its ability to cure the claimed default prior to obtaining a Yellowstone injunction, there must be a basis for believing that the tenant desires to cure and has the ability to do so through any means short of vacating the premises.'

Justice Austin concluded that Gristede's had fallen short of the required showing because:

Its allegations do not indicate that it has any interest, inter alia, in remaining at the premises and curing the alleged violation of the Continuous Operation provision.

The court cited two Appellate Division, First Department cases, JH Parking Corp. v. East 112 th Realty Corp. 298 AD2d 258, and 403 W. 43 Street Rest. Inc. v. Ninth Avenue Realty, LLC , 36 AD3d 464, where Yellowstone relief had been denied because of failure to satisfy the willingness and ability to cure criterion. JH Parking Corp. turned on tenant's apparent unwillingness to cure any default. The defaults alleged were the tenant's failure to secure an amended certificate of occupancy for use of the premises as a parking lot, failure to legalize the premises and secure the necessary permits, and illegal sublet of the premises. In denying Yellowstone relief, Supreme Court relied on tenant's failure, for seven years (extending past tenant's initiation of the instant proceeding), to legalize use of the premises and obtain the appropriate documents despite professing to do so. The First Department affirmed, holding that:

[T]he record supports the motion court's conclusion that plaintiff would not or could not cure the alleged default by means short of vacating the premises, and therefore could not establish its entitlement to Yellowstone relief.

Lack of Ability to Cure

403 W. 43 Street Rest. Inc. v. Ninth Avenue Realty LLC, turned not on tenant's unwillingness, but on tenant's lack of ability to cure. The lease included a provision (Article 65) stating that at any time the landlord intended to demolish or substantially remodel or rehabilitate the building in which the demised premises were situated, the landlord 'shall have the absolute right, option and privilege to terminate this lease and the demised term hereof' by giving written notice at least 180 days prior to the date specified in the termination notice for the termination of the lease. The provision also stated that upon the termination date, the lease and its term would come to an end and the tenant was obligated to quit and vacate the premises and surrender them to the landlord. When the landlord served a termination notice, the tenant, before the termination date, commenced a Supreme Court lawsuit and moved for various relief including a Yellowstone injunction. The First Department affirmed the Supreme Court's denial of Yellowstone relief, stating:

As plaintiff retained no ability to cure, the court properly denied its application for a Yellowstone injunction '

In Gristede's, the court held there was a basis for denying the Yellowstone injunction other than tenant's inability and unwillingness to cure its default: the tenant's application for Yellowstone relief 'was made beyond the applicable cure periods under the lease'. Citing King Party Center of Pitkin Ave., Inc. v. Minco Realty LLC , 286 AD2d 373, and S.E. Nichols, Inc. v. American Shopping Centers, Inc.,115 AD2d 856, the court stated that '[t]here is no basis for a Yellowstone injunction where it is sought after the expiration of the period to cure or after the service of a Notice of Termination.'

B.M.G. Bagels Inc. v. Vorillas Properties LLC, NYLJ Nov. 9, 2005, p. 21, is another case where a Yellowstone injunction was denied on that same reasoning. There, the landlord sent a notice of termination under a lease clause giving it the right to terminate the tenancy on sixty days' notice if it elected to demolish the building or rehabilitate an entire floor. The tenant did not commence its lawsuit until after the termination date. The court stated that the tenant 'cannot obtain a Yellowstone injunction'because its lease had been terminated prior to the commencement of this action'.

A Yellowstone motion does not typically determine on the merits the issue of the purported default asserted in landlord's notice that gave rise to the Yellowstone motion. So, even if a Yellowstone motion is denied, the tenant will still have the opportunity to show that it is not in default under the lease. The risk that results to the tenant from not obtaining a Yellowstone injunction is that, since the cure period will not be tolled, if the tenant loses on the issue of default, it will not have an opportunity to cure and save its lease.

If a Yellowstone motion is denied, in what forum will the issue of whether the tenant has defaulted be determined? Typically, a Supreme Court complaint in a Yellowstone action seeks a declaration that the tenant has not breached the lease as asserted in the notice of default. Therefore whether a default occurred could be determined in Supreme Court.

However, a landlord who has been successful in defeating a Yellowstone motion presumably would not just sit by and let the default issue be adjudicated in Supreme Court. If there is no Yellowstone injunction, the cure period will expire, the lease will terminate and the landlord can commence a holdover proceeding in Civil Court. That should be a more expeditious proceeding than a Supreme Court lawsuit and, as such, advantageous to the landlord. By moving to Civil Court, however, the burden of proof on the issue of default shifts. In a Civil Court holdover proceeding, the burden of proof is on the landlord/petitioner to show, among other things, that the tenant defaulted as asserted in the notice of default. In a tenant's Supreme Court Yellowstone action, by contrast, the burden of proof is on the tenant to prove in the action (as distinct in the Yellowstone motion) that it is not in breach of the lease as claimed in the notice of default.

Depending on the circumstances, various other procedural issues may arise from denial of a Yellowstone motion and the resulting opportunity for the landlord to commence a summary proceeding. Should all claims be litigated in Civil Court? Can all claims be litigated in Civil Court? What if the tenant's Supreme Court action also includes damage claims and there is a no counterclaim clause in the lease which would bar the tenant from counterclaiming for damages in the landlord's holdover proceeding?

Suffice to say that while denial of a Yellowstone motion may occur far less frequently than the granting of such a motion, when such a denial occurs, the subsequent litigation can often become a multi-forum tangled web.

Warren A. Estis is a founding partner, and William J. Robbins a partner, at Rosenberg & Estis This article is an adaptation of an one that originally appeared in the New York Law Journal, a sister publication of this newsletter.