On September 23, 2010, in KB Gallery LLC v 875 W 181 Owners Corp, 2010 WL 3701381 (NYAD 1 Dept.), 2010 NY Slip Op 06697, the New York Appellate Division, First Department, upheld a June 8, 2010 Supreme Court, New York County, decision (see KB Gallery LLC v. 875 W 181 Owners Corp., No. 603766- 2009, slip op. at 3 (N.Y. Sup. Ct., Jun. 8, 2010)), which held that a commercial tenant could not maintain a Yellowstone application for injunctive relief that was filed after the default cure period under the lease had expired. In KB Gallery, the plaintiff KB Gallery, LLC (“KB”) obtained a temporary restraining order under the Yellowstone doctrine, which prevented the defendant landlord, 875 W. 181 Owners Corp. (“Owner”), from terminating KB’s lease for a breach of the lease’s subletting clause. Under the lease, KB was allowed to sublease its premises to a third party only if it obtained Owner’s consent prior to entering into the sublease.
Despite the consent requirement in its lease, KB entered into a sublease with a third party corporation to operate the premises as a children’s play center without first obtaining the landlord’s consent. In doing so, KB relied on the fact that the express terms of the sublease provided that the sublease’s validity was conditioned on obtaining Owner’s consent and that if such consent was not obtained within 15 days of execution, the sublease would become void. KB requested Owner’s approval of the sublease after execution of the sublease and allowed the sublessee to use the leased premises and commence operation of the play center without Owner's consent.
Owner did not consent to the sublease and on November 17, 2009, sent KB notice of default because of its actions in connection with subletting the premises and entering into a sublease without consent. The landlord’s notice gave KB until December 4, 2009, to cure the default. Thereafter, KB wrote to Owner stating that because of Owner’s denial of consent to the sublease, the sublease was effectively terminated as a matter of law and therefore no default existed.
In response to KB’s letter, on December 7, 2009, Owner sent KB a notice that the lease would terminate as of December 18, 2009, due to KB’s failure to cure the default before December 4, 2009. KB thereafter filed a Yellowstone application for a temporary restraining order on December 16, 2009 – 12 days after the cure period had expired.
The Appellate Division found that KB’s Yellowstone application should have been denied as untimely, reasoning that KB failed to provide a “good reason to permit a Yellowstone Order to issue…after the cure period has expired.” The Court summarily rejected KB’s arguments that “the sublease was conditional upon consent and that upon [Owner’s] refusal of consent the sublease became void by operation of law.” Noting that tenant’s position was an “astonishing proposition” in light of the fact that the play center subtenant remained in occupancy through the cure period, the Court rejected KB’s argument that a tenant “can sublet the [premises] without the requisite consent, permit its subtenant to commence occupancy and use of the premises in violation of the terms of the lease, and then if the landlord refuses its consent to what is already a fait accompli, the tenant can then avoid any responsibility under the explicit terms of its lease” by claiming the sublease was never in effect. In making its decision, the Appellate Division noted that KB cited no authority for its positions and vacated the previously granted Yellowstone temporary restraining order.
What this decision reiterates is that if a landlord terminates a lease for a tenant breach, the aggrieved tenant who seeks an injunction must file its Yellowstone application within the period of time required for cure under the lease.