On January 31, 2018, the Appellate Division, Second Department affirmed, in a 3-1 decision, the Kings County Supreme Court Commercial Division’s decision, denying 159 MP Corp. and 240 Bedford Ave Realty Holding Corp.’s (collectively the “Tenants”) motion for a Yellowstone injunction. The case raised an issue of first impression for New York appellate courts: whether a written lease provision that expressly waives a commercial tenant’s right to declarative relief is enforceable at law and as a matter of public policy. The Second Department ruled in the affirmative for both.
Tenants entered into separate leases with the original landlord—BFN Realty Associates, LLC—on April 7, 2010. Later, Redbridge Bedford LLC (“Landlord”) succeeded BFN Realty as the owner of the property.
Before signing the leases, the parties negotiated at arm’s length and entered into written leases that defined with specificity each party’s rights. The leases began with 39 boilerplate paragraphs. Then, a rider with 36 additional paragraphs, including handwritten additions and deletions, was added and nine “Rules and Regulations” paragraphs were incorporated. The provision in question is located in the rider at Paragraph 67(H), which provides that each 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. 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. It is further agreed that 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 actually incurred, it is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.
On March 12, 2014, the Landlord issued to each Tenant a “Ten Day Notice to Cure Violation.” The notice demanded that the alleged violations be cured by March 27, 2014. On March 19, 2014, Tenants commenced an action in Kings County Supreme Court, Commercial Division for declaratory and injunctive relief. On March 26, 2014, one day before the cure period expired, Tenants moved by order to show cause for a Yellowstone injunction.
On January 29, 2015, the Commercial Division denied the Tenants’ motion for a Yellowstone injunction and granted the Landlord’s cross-motion for summary judgment dismissing the complaint. The court found that the Tenants’ waiver of declaratory relief was enforceable and the waiver included Yellowstone injunctions. Further, the court construed the waiver as an agreement to resolve any contractual disputes through summary proceedings. And the court noted that, despite the waiver, the parties maintained other legal remedies.
The Second Department began its analysis by stating that “[a] Yellowstone injunction is not a creature of statute (see CPLR article 63). It is, instead, a creation of case law . . . .” The court explained that the requirements of a Yellowstone injunction are less stringent than those required under CPLR article 63 for a preliminary injunction. According to the court, to obtain a Yellowstone injunction, a tenant must establish: (1) the existence of a commercial lease, (2) the landlord issued a notice of default, notice to cure, or made a threat to terminate the lease, (3) the injunctive relief must be requested before the cure period expires or the lease terminates, and (4) the tenant is ready and able to cure the alleged defect by any means other than vacating the premises.
The Tenants argued that they satisfied all four elements; most importantly, they moved for the Yellowstone injunction before the cure period expired. Yet, the Second Department affirmed. It found that “declaratory judgment action” in the waiver provision included Yellowstone injunctions. And the waiver language represented a “clear manifestation of intent to relinquish” the right to seek a Yellowstone injunction.
The Tenants also raised a new issue on appeal—that the waiver was unenforceable on public policy grounds. Generally, a new issue that is raised for the first time on appeal will not be considered. But the Second Department—citing the Court of Appeals—ruled that when a party alleges that a contract provision is void as against public policy, the issue can be raised for the first time at the Second Department. Therefore, the court ruled on the merits of the public policy argument.
The Second Department ruled that the Tenants bore the burden to raise a triable issue of fact as to whether the waiver provision is void as against public policy since the Landlord, in its cross-motion, established its prima facie burden. The court began by noting that “[a] bedrock principle of our jurisprudence is the right of parties to freely enter into contracts.” And individuals have the freedom to waive their rights.
The court explained that a waiver given in a contract must clearly reflect the “intent to relinquish the protections that are otherwise afforded to the waiving party.” According to the court, a tenant’s rights are ordinarily determined by the lease, and the tenant may waive its rights during the bargained-for exchange. In certain situations, however, the legislature has identified rights that tenants cannot waive.
The court found that the Tenants failed to meet their burden. According to the court, the parties in this litigation were sophisticated entities that were free to contract with one another. And “the plain language of the lease riders reflects the parties’ mutual intent to adjudicate disputes by means of summary proceedings. Declaratory and Yellowstone remedies are rights private to the [Tenants] that they could freely, voluntarily, and knowingly waive.” Moreover, the waiver is limited, “thereby mitigating the public policy concerns” since the Tenants’ still retained other legal remedies. The court reasoned that since a Yellowstone injunction is a right created by the courts and the legislature has not enacted any statutory protections on this issue, the waiver was enforceable and did not violate public policy.
Redbridge has the potential of opening the door for landlords to demand that tenants waive Yellowstone injunctions in their leases. If tenants agree to such a provision and they cannot cure within the allotted time, they run the risk of losing their leasehold interest unless they can satisfy the requirements to obtain a preliminary injunction.