In late January, the Second Department issued a decision in 159 MP Corp. v. Redbridge Bedford, LLC that could have a profound impact on the adjudication of alleged tenant defaults in commercial real estate leases. In a matter that the Second Department identified as one of first impression in the appellate courts of New York, the court held that a voluntary and limited waiver of declaratory judgment remedies by a commercial tenant in a written lease does not violate New York’s public policy, particularly where the tenant did not waive other available remedies.
This waiver prevents the commercial tenant from availing itself of the most commonly used remedy in commercial real estate lease disputes: the Yellowstone injunction.
WHAT IS A YELLOWSTONE INJUNCTION?
In the typical landlord-tenant dispute involving a commercial lease, a landlord will send a notice to cure default to a tenant, requiring the tenant to remedy the alleged default within a specific time period set forth in the terms of the commercial lease. Failure to do so constitutes an event of default and entitles the landlord to institute summary default proceedings against the tenant.
For the past 50 years, since the New York Court of Appeals issued its seminal decision in First Nat’l Stores Inc., v. Yellowstone Shopping Center, Inc., commercial tenants have frequently responded to such notices by seeking an injunction from the court, declaring that the tenant is entitled to a stay of the cure period set forth in the commercial lease and the notice to cure default set forth by its landlord pending a judicial determination of the merits of the dispute.
These stays, which have come to be known as “Yellowstone” injunctions, effectively maintain the status quo while the action is pending.
A Yellowstone injunction is an attractive remedy for commercial tenants because it allows the tenant to remain in possession of the premises pending (often lengthy) court proceedings and is a relatively easy remedy to obtain. Unlike a typical preliminary injunction, which requires the moving party to show a likelihood of success on the merits of the underlying action, among other elements, a commercial tenant seeking a Yellowstone injunction need only show that it:
- Holds a commercial lease
- Received from the landlord either a notice of default, a notice to cure or a threat of termination of the lease
- Requested injunctive relief prior to the termination of the lease
- Has the desire and ability to cure the alleged default by any means short of vacating the premises.
In the Redbridge case, a commercial landlord issued a notice-to-cure letter to the tenants, demanding that alleged lease violations be cured. In response, the tenants commenced an action in Supreme Court for declaratory and injunctive relief and moved by Order to Show Cause for a Yellowstone injunction. In opposition to that motion, the landlord asserted an affirmative defense that the tenants had contractually waived the right to seek injunctive relief and cross-moved for summary judgment based on the waiver language contained in the rider to each lease.
After a detailed discussion of waiver in general and those rights that the state Legislature has explicitly identified as non-waivable in oral or written leases, the court found that the right to declaratory judgment “is not so vaulted as to be incapable of self-alienation.”
The court continued: To hold that the waiver of declaratory judgment remedies in contractual leases between sophisticated parties is unenforceable as a matter of public policy does violence to the notion that the parties are free to negotiate and fashion their contracts with terms to which they freely and voluntarily bind themselves.
The fact that with the benefit of hindsight, a party believes that it had agreed to an unfavorable contractual term, does not provide courts with authority to rewrite the terms of a contract or to extricate parties from poor bargains. Rather, parties to contracts must ordinarily remain free to make the agreements they wish, on terms they deem satisfactory, no matter how unwise it might appear to a third party or to a party with the benefit of 20/20 hindsight.
In reaching its decision, the Court found it noteworthy that the waiver was limited in nature, since plaintiffs retained the contractual right to receive notices to cure and an opportunity to correct any claimed breaches; did not expressly surrender the right to seek money damages from the defendant if the defendant were to breach the contract or commit tortious conduct injurious to persons or property; and did not surrender the right to fully litigate and defend themselves in any summary proceeding that the defendant might commence in civil court.
As a result of this decision, commercial landlords can, and should, include a provision in their standard commercial lease whereby the tenant waives its right to pursue declaratory relief. From a commercial tenant perspective, this decision provides another example of the need to retain experienced counsel to negotiate the terms of a commercial lease on your behalf.
As the Second Department plainly states, New York courts will hold commercial parties to the terms of their agreement, no matter how unwise that agreement may seem when the time comes to enforce its provisions.
Original column can be found on the Buffalo Law Journal website: