Waiving the Right to <i>Yellowstone</i> Injunctive Relief

On further appeal to the high court of the State of New York, the intermediate court's decision was reversed because the tenant had not cured the defect within the 10-day cure period, and no TRO had been sought or granted.

In the years since the Yellowstone decision, however, courts have taken its outcome to mean that a tenant may ask for that case's namesake TRO — thus tolling the cure period until the underlying issues can be resolved — if the movant establishes:

• The existence of a commercial lease;
• The issuance by the landlord of a notice of default, notice to cure, or threat of termination of the lease;
• An application for a temporary restraining order made prior to the expiration of the cure period; and
• A desire and the ability to cure any alleged default.

An Innocuous Provision?

The tenants in 159 MP Corp. — two related entities — entered into leases with the predecessor landlord to obtain spaces to run a grocery store and to use a separate space to store items for the grocery store. Attached to each lease was a rider that stated the tenant agreed to waive its right “to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease. Any breach of this paragraph shall constitute a breach of substantial obligations of the tenancy, and shall be grounds for the immediate termination of this Lease …. In the event injunctive relief is sought by Tenant and such relief shall be denied, the Owner shall be entitled to recover the costs of opposing such an application, or action, including its attorney's fees …, it is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.” (A “summary proceeding” is properly known as a “Summary Proceeding to Recover Possession of Real Property,” an action that may be brought by a landlord or an out-of-possession tenant in accordance with New York State Real Property Actions and Proceedings Law (RPAPL) article 7.)

After four years in possession of the premises pursuant to a 20-year lease with option to extend for an additional 10 years, the successor-in-interest landlord presented the tenants with notices to cure a number of alleged violations of the lease; these included failure to obtain required permits and the creation of hazards, noises and nuisances. The notices stated that if the alleged violations were not cured within 15 days (by March 27, 2014), the landlord would terminate the tenancies and commence summary proceedings to recover possession of the premises.

About a week before the deadline for cure, the tenants commenced an action in state court for declaratory and injunctive relief, and also seeking damages for breach of contract. The tenants' complaint asked for declarations that the leases were in effect and that the tenants were not in breach of them. They sought to enjoin the landlord from asserting its complaints because, they claimed, it was the landlord who should have gotten the permits it accused the tenants of failing to obtain. They also asserted that the landlord had been aware for years of the manner in which the tenants were using the properties and had never complained before of any noise, safety or other nuisance issues, and that the landlord's recent change of heart was due not to any bad tenant behavior but to the landlord's desire to cash in on the Brooklyn properties' increased value.

The tenants also asked for a Yellowstone injunction, arguing that their right to cure must be preserved pending the outcome of the underlying disputes or their lucrative business and their substantial investment in it would be permanently destroyed by eviction. They claimed that they could meet all of the Yellowstone requirements because they had not violated the agreement, but that if the court found that they had done so, they were willing and able cure any breach. The landlord countered that the fact that the tenants even filed the claim seeking declaratory relief and an injunction itself breached the lease term under which they had waived any such rights, so that the landlord should be immediately entitled to cancel the lease and retake possession of the premises.

The trial court reasoned that “although the leases did not expressly prohibit Yellowstone applications, such relief was … encompassed within the broader provisions of [the waiver] … that prohibited declaratory judgment actions.” The court's rationale was, in other words, as follows: If the court would never be in a position to render a declaratory judgment because of the lease provisions prohibiting the tenants from seeking such, then the court would also not be in a position to grant a TRO pending an ultimate declaratory judgment that it could never grant. Thus, concluding that the waiver provisions amounted to an agreement to resolve any contractual disputes through summary proceedings, the trial court found for the landlord, dismissing the tenants' motion for a Yellowstone injunction and granting the landlord's cross motion for summary judgment.

Public Policy Concerns: Considered and Dismissed

The appellate court agreed with the lower court's reasoning, stating:

The plaintiff's argument that there is a distinction between a prohibited declaratory judgment action on the one hand and permissible Yellowstone relief on the other, is of no moment, as the latter cannot exist without the former. By nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it. … Accordingly, we hold that insofar as the plaintiffs expressly waived both declaratory and Yellowstone relief pursuant to the terms of Paragraph 67(H) in their lease riders, the Supreme Court properly denied their motion for a Yellowstone injunction.

That was not the end of the inquiry. Although the trial court had not been asked to address whether the inclusion in a commercial lease of a waiver of the right to seek a Yellowstone injunction was against the public policy of the State of New York, the appeals court considered it important to address this question.

The court observed first off that there is a well-established premise in New York and elsewhere — even in the U.S. Constitution (Article 1, Section 10, Clause 1) — that parties to contracts are, in general, free to agree to include in those contracts any provisions they choose, unless public policy is offended by those provisions. Some public policies are intuitive, while others have developed through case law or through legislative codification. For example, New York's legislature has specifically prohibited any waiver of the covenant of habitability in residential rental contracts.

In the case before it, the Second Department noted that the legislature has made no move to prevent parties from contracting away their right to seek declaratory judgment; endeavoring not to legislate from the bench, the court was not inclined to “create such a blanket prohibition here,” where the parties were sophisticated real estate law veterans. “The plain language of the [waiver] reflects the parties' mutual intent to adjudicate disputes by means of summary proceedings,” stated the court, and “[d]eclaratory and Yellowstone remedies are rights private to the plaintiffs that they could freely, voluntarily, and knowingly waive.” The tenants had not abandoned all their rights — such as the rights to receive notices to cure and the opportunity to correct any claimed breaches, to seek money damages, and to defend themselves in a civil court summary proceeding — so they must specifically have intended to give up their rights to seek declaratory judgment and Yellowstone injunctions, as was their prerogative as parties freely entering into a contract.

“Moreover, as a practical matter,” the court concluded, “the plaintiffs necessarily remain in possession of the demised premises if no summary proceeding is commenced against them, in which case inconvenience or prejudice to the plaintiffs is significantly reduced, if not eliminated altogether. If a summary proceeding is commenced, the plaintiffs are permitted to present whatever factual and legal defenses may be available to them. If the plaintiffs are vindicated at any such summary proceeding, they may continue to quietly enjoy possession of the premises without legal molestation. If the plaintiffs are unsuccessful with their summary proceeding defenses, they are, absent a mutual settlement of issues, properly evicted from the premises from which they would have no further right to use and enjoy and no procedural cause to complain.”

The Dissent: Rights Granted on Public Policy Grounds Are Not a Party's to Contract Away

Justice Francesca E. Connolly dissented, noting that the parties' right to shape the terms of a contract may be almost absolute, but that it is constrained by public policy considerations. In this case, that public policy involves the right to declaratory injunction, which is a mechanism that allows contracting parties embroiled in a dispute to learn what their rights and responsibilities are before the contractual relationship completely breaks down. A declaratory pronouncement from the courts promotes order and civility in contractual relationships and thus serves a public good, and that public good should not be deemed waivable by private parties, Justice Connolly argued. Even more pointedly, she said, the right to seek declaratory judgment regarding a lease protects a tenant's interest in real property, so “meaningful judicial review must provide the tenant with the opportunity to proactively protect their interest.” So, why would summary proceedings not suffice to do this?

According to New York's RPAPL 721, which sets out a list of parties entitled to commence a summary proceeding, lessees only have standing to bring such action if they are not in possession of the premises; for example, if they have a valid lease that gives them the right to occupy the property but a previous tenant has refused to leave.

So here the tenant must sit, notice to cure in hand, believing that the landlord has no valid complaint, yet unable to seek clarification of its own rights and duties under the contract. If the tenant files for a declaratory judgment in the courts it is in breach of the lease's waiver provision and the court will likely refuse to take jurisdiction over the case. Therefore, the tenant must wait for the landlord to commence a summary proceeding. If the landlord does not commence such action, and the time period for cure runs out, the tenant is now in a far more precarious position.

The majority in 159 MP Corp. was of the opinion that if the landlord never commenced a summary proceeding thereafter, then the tenant would not be aggrieved, as it would retain possession of the property and could continue in business as planned. But could the tenant really do that? The landlord might harass the tenant with unfair allegations of breach, and the tenant could do nothing but sit by and hope that the landlord would not move to evict. In such a situation, would any tenant consider it prudent to order more inventory, pump money into promoting the business or upgrade its equipment? According to the dissent, these types of problems represent the uncertain legal position that the mechanism of declaratory judgment was created to avoid. Therefore, she wrote, “[u]nder the circumstances presented here, it would be contrary to public policy to permit parties in the plaintiffs' position to waive their right to seek declaratory relief and, by extension, a Yellowstone injunction.”

Possible Problems for the Unwary Tenant

As pointed out by the dissenting opinion in 159 MP Corp., there are reasonable arguments for a prohibition on a tenant's waiver of declaratory judgment rights on public policy grounds, but the Appellate Division, Second Department, is not buying them. The lower courts had come to differing opinions on this issue, but now that the appeals court has rendered its decision, tenants of properties within New York's Second Appellate Department should be aware of the pitfalls of waiving their right to bring declaratory actions and, by extension, to receive Yellowstone injunctive protections. Going businesses are at substantial risk when landlords have the power terminate leases for what might be frivolous reasons, and even if the tenant wins in the end, the uncertainty engendered by giving up the right to declaratory judgment may not be worth any other concessions received in return.

Conversely, landlords wishing to keep as much control over the lease dispute process as possible will be highly interested in including lease terms similar to those disputed in 159 MP Corp. Based on the majority's holding in the landlord's favor, other landlords wanting to make sure that their similar waiver provisions are upheld will want to do several things:

• Make the waiver language clear and put it in large type or in capital letters, so it cannot be claimed to have been hidden;
• Have the tenant sign or initial the waiver language;
• Negotiate the lease; if it is simply full of boilerplate it will be less clear that the tenant affirmatively waived its rights; and
• Indicate just what consideration was given to secure the waiver, if possible (in 159 MP Corp., the appellate court merely inferred such consideration, but another court might not be so generous).

In addition, to be very clear, it would be best if the tenant specifically waived the right to Yellowstone injunctive relief, even though the lack of clarity on this issue did not perturb the Second Department in 159 MP Corp. Better safe than sorry.

*****

Janice G. Inman is Editor-in-Chief of this newsletter.