In a recent decision, the New York Court of Appeals ruled by the narrowest of margins that a tenant's waiver of "declaratory judgment action[s]" in a commercial lease is an effective waiver of a tenant's right to obtain a Yellowstone injunction and not void as against public policy. 159 MP Corp. v. Redbridge Bedford, LLC, -N.E.3d -, 2019 WL 1995526 (N.Y. May 7, 2019), 2019 N.Y. Slip Op. 03526 ("159 MP"). This decision throws into doubt the viability of Yellowstone injunctions for commercial tenants.
The Yellowstone injunction is an important tool for commercial tenants to preserve their leases where they are faced with a possible lease termination based on a non-monetary default. In New York, when a commercial tenant has been served with a notice of default or a notice of cure, the tenant may obtain a Yellowstone injunction to stay the landlord's right to terminate the lease while extending the notice and cure period to maintain the status quo during the pendency of the legal proceedings. Yellowstone relief allows a tenant to seek a declaratory judgment that it is not in default, and, if the tenant is wrong, extends the cure period in the lease and allows the tenant to cure the defect after a judicial ruling on the alleged default. In 159 MP, the majority decision noted that in considering a Yellowstone injunction, courts will accept far less than the normal showing required for ordinary injunctive relief (159 MP, majority op. at 15). As a result, it has been recognized that courts grant Yellowstone relief "routinely to avoid forfeiture of the tenant's interest" (Post v. 120 E. End Ave. Corp., 62 N.Y.2d 19, 25 (1984)).
What did the court hold in the 159 MP case?
The issue on appeal in 159 MP was whether a lease provision waiving the tenant's right to commence an action for declaratory judgment was void as against public policy, given the Court's prior rulings regarding the importance of maintaining the lease pending a court's determination as to whether or not a default had occurred, and then providing tenant with an opportunity to cure. The majority opinion reasoned that because "freedom of contract is itself a strong public policy interest in New York," an agreement may only be voided after balancing the public interests on each side. (159 MP, majority op. at 8). The Court went on to hold that the case law discussing declaratory relief stabilizes "uncertainty in contractual relations but likewise expresses no concrete public policy so weighty that it would justify broadly restricting commercial entities from freely waiving in negotiations the ability to seek such relief" (Id. at 12).
The Court emphasized that the waiver of declaratory relief did not foreclose the tenant's ability to seek legal redress in the courts in the absence of a Yellowstone injunction. The Court noted that the tenant could still raise defenses in summary proceedings if commenced by the landlord, which would prevent the tenant from an eviction if the owners' allegations of default are baseless (Id. at 15-16). Moreover, the Court noted that the tenant retained its ability to seek damages on breach of contract or tort theories (Id. at 13). However, the Court's decision ignores the fact that if the tenant was wrong in challenging the existence of a default, its lease is terminated and it will have no opportunity to cure even the most technical of defaults.
What does this decision mean for commercial landlords and tenants?
It can be expected that the inclusion in a lease of a waiver of declaratory relief by the tenant will be a sharply contested point in commercial lease negotiations going forward.
Landlords should seek to insert a declaratory judgment waiver clause in their leases that would prevent the tenant from seeking a Yellowstone injunction. Tenants, on the other hand, should bargain to retain their right to seek declaratory relief as to whether or not they are in default before their lease is terminated. Although the majority of the Court of Appeals in 159 MP recognized the right of tenants to raise defenses against summary eviction proceedings in Civil Court, as well as the right to bring suit for damages, these may be meaningless remedies after the landlord has terminated the lease.
Tenants must therefore be mindful of any language in a commercial lease that waives their right to seek a declaratory judgment. Tenants should only agree to such clauses after considering the implications, knowing that Yellowstone relief will not be available in the event of a non-monetary notice of termination or notice of cure.
Is this the end of the Yellowstone injunction?
While the Court of Appeals' ruling in 159 MP has given landlords the green light to seek a tenant's waiver of their right to declaratory relief, future developments in this area should be monitored because it is far from clear whether the ruling will stand. The minority opinion suggested that the legislature take action to prevent the eradication of the Yellowstone injunction (159 MP, minority op. at 3). It remains to be seen whether the legislature will take steps to protect the rights of tenants to seek a Yellowstone injunction.