The End of Yellowstone? Not Quite

Introduction

For over half a century, the New York State Court of Appeals’ decision in First National Stores v. Yellowstone Shopping Center, 21 N.Y.2d 630 (1968) has been used by commercial tenants to seek restraining orders tolling the cure period following the issuance of a notice of default by a landlord. Such “Yellowstone injunctions” protect tenants by preventing landlords from terminating the lease before a court can determine whether a tenant is actually in default. Even if the tenant is found to be in default, the Yellowstone injunction keeps the cure period open or “tolled” to allow the tenant to remedy the default once a determination has been made.

However, by affirming the Appellate Division’s ruling in 159 MP Corp. v. Redbridge Bedford, LLC, 33 N.Y.3d 353 (2019), the Court of Appeals agreed that a tenant’s waiver under a lease of the right to bring a declaratory judgment action does not violate public policy. In his dissent, Judge Wilson cautioned that “absent legislative action,” the “decision today will result in the elimination of the ‘Yellowstone injunction.’”1

Heeding this call, the New York State Assembly has come to the rescue of tenants with the passage of New York Real Property Law (RPL) Section 235-h on December 20, 2019, which took effect immediately and reads:

No commercial lease shall contain any provision waiving or prohibiting the right of any tenant to bring a declaratory judgment action with respect to any provision, term or condition of such commercial lease. The inclusion of any such waiver provision in a commercial lease shall be null and void as against public policy.

The Origin of Yellowstone Injunctions

In Yellowstone, a dispute arose between the landlord and a tenant in the Yellowstone Shopping Center as to who was to pay for the installation of a sprinkler system. After the tenant refused to pay, the landlord issued a notice of default. The lease gave the tenant a 10-day cure period following receipt of notice, after which the landlord could terminate the lease and evict the tenant. Instead of curing the default, the tenant sought a declaratory judgment to establish that the landlord was responsible for the sprinkler system. However, the tenant did not seek a restraining order while the action was pending, so the cure period expired and the landlord terminated the lease.

The trial court declined to hear the case and, on appeal, the Appellate Division, Second Department, “unanimously held that it was the tenant’s obligation to install the sprinkler system.”2 However, since the “‘tenant was acting in good faith when it brought the declaratory judgment action,’” the court decided that the lease should not be terminated, and gave the tenant 20 days to install a sprinkler system while “enjoin[ing] the landlord from instituting summary proceedings to evict the tenant.”3

The Court of Appeals disagreed, as the “tenant did not obtain a temporary restraining order until after the landlord acted,” and once it was established “that the tenant had in fact defaulted by not installing the sprinkler system, the conclusion had to be drawn that the lease was terminated in accordance with its terms.”4 Furthermore, the Court stated that “‘contract obligations must not be undermined by judicial sympathy. To allow this judgment to stand would constitute an interference by this Court between parties whose contract is clear.’”5

While not expressly acknowledging a tenant’s right to utilize a temporary restraining order to preserve the status quo at the outset of a declaratory judgment action to determine whether a default under a lease actually occurred, the decision made clear that a restraining order obtained after the expiration of the cure period was of no use. Such relief had to be requested at the outset.

159 MP Corp. v. Redbridge Bedford, LLC

After Yellowstone, a four-part test was established for tenants seeking the injunction: (1) the existence of a commercial lease; (2) issuance by the landlord of a notice of default; (3) an application for a [temporary restraining order] made prior to the expiration of the cure period; and (4) the tenant’s desire and ability to cure any alleged default by means short of vacating the premises.6 159 MP Corp. asked whether a tenant who satisfied this test could nevertheless be barred from obtaining a Yellowstone injunction by waiving the right to bring a declaratory judgment action by the terms of its lease.

n that case, the landlord issued a 10-day notice to cure alleging that the tenants, who shared a building and operated a supermarket, violated their leases by, among other things, failing to obtain permits and creating a fire hazard. Before the cure period ended, the tenants sued for declaratory and injunctive relief to establish that they were not in default and, in the interim, to prevent the landlord from terminating the lease. The landlord sought dismissal claiming that the tenants “contractually waived the right to seek injunctive relief” by agreeing in their leases that the tenant “waives 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.”7

The tenants argued that the language “waiving the right to declaratory relief did not separately prohibit Yellowstone injunctions.”8 However, the Appellate Division, affirming the trial court’s ruling in favor of the landlord, regarded the tenants’ arguments as “splitting hairs”: “By nature and definition, a Yellowstone injunction is inextricably intertwined with the court’s role in resolving whether a tenant has breached the lease.”9

The tenants’ claim that the waiver was against public policy was also rejected. Echoing the Court of Appeals in Yellowstone, the court stated: “[a] bedrock principle of our jurisprudence is the right of parties to freely enter into contracts,” adding that “the autonomy of parties to contract is itself a sacred and protected public policy.”10 The court acknowledged that the legislature has identified rights that tenants cannot waive11, but “[t]he right to a declaratory judgment, inclusive of the Yellowstone relief sought here, is not so vaulted as to be incapable of self-alienation.”12

The Court of Appeals adopted a similar view: “[T]here is simply nothing in our contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgment actions . . ., is so weighty and fundamental that it cannot be waived by sophisticated, counseled parties in a commercial lease.”13 In such cases, and absent “allegations of unequal bargaining power, coercive tactics or lack of counsel,”14 the Court explained that by “disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations, our public policy in favor of freedom of contract . . . promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.”15

Conclusion

Thus, it was up to the legislature to step in, and it did, by enacting RPL Section 235-h. The stated justification was “to enact such a provision as a matter of public policy and restore the right of commercial tenants to cure under a declaratory judgment action as has been the practice since 1968.”16 Otherwise, “landlords would be able to prematurely terminate leases whenever they wanted to force a tenant out, whether the default was legitimate or not, and the tenant who agreed to a waiver would have no recourse.”17

Yet, commentators have pointed out that Section 235-h does not specifically prohibit a waiver of the right to seek a Yellowstone injunction. Therefore, landlords may try to test the statute by including such a waiver in the lease, without requiring the tenant to also waive its right to bring a declaratory judgment action. If a tenant challenges this, a court will have to reconcile the intent behind Section 235-h with its text and decide which should prevail. Until then, to the relief of tenants and the dismay of landlords throughout New York State, Yellowstone injunctions are alive and well.