In a landmark decision, the Court of Appeals, New York State’s highest court, has endorsed a commercial tenant’s waiver of its right to seek a “Yellowstone” injunction, perhaps sounding the ultimate death knell for this common remedy for commercial tenants who are facing claims of default from their landlords. A Yellowstone injunction enables a tenant to toll the expiration of a default notice until a determination is made as to whether a default exists and whether it is the tenant’s responsibility to cure. The intent is to protect the tenant from being evicted while a determination is being made by the court on the underlying alleged default. We last wrote in February 2018 that the Appellate Division, Second Department had affirmed a lower court’s ruling in 159 MP Corp. v. Redbridge Bedford, LLC, enforcing a provision whereby a tenant waived its right to declarative relief vis-a-vis the issuance of a Yellowstone injunction because the Legislature had not enacted any legislation prohibiting such waivers. The Second Department decision created an apparent conflict with existing caselaw in the First Department, wherein waivers of declaratory relief in contracts were deemed void as against public policy. You can view the original blog post here.
The Court of Appeals has now affirmed the Second Department’s ruling in 159 MP Corp. and resolved the split with the First Department on the issue. Chief Judge Janet DiFiore, writing for the majority found that a waiver of the right to seek declaratory relief “does not reflect such a fundamental public policy interest that it may not be waived by counseled, commercial entities in exchange for other benefits or concessions.” [pg. 17] The Court’s ruling also relied upon the lack of any legislative protections for Yellowstone injunctions, as well as New York’s longstanding acceptance of the concept of freedom of contract as dispositive. The Court reiterated that “[f]reedom of contract prevails in an arm’s length transaction between sophisticated parties…, and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.” [pg. 6, quoting Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 695 (1995)]. The Court noted that while the Legislature already “recognized the utility of Yellowstone-type relief for some residential tenants,” such a benefit has been provided “only to a class of residential tenants indicates that the Legislature did not view this type of relief as fundamental for commercial tenants.” [pgs. 16-17]. However, the Court expanded on its reasoning by noting that the tenant’s waiver for declaratory relief did not impair its ability to pursue other legal remedies, such as seeking “damages on breach of contract or tort theories.” [pg. 13]. As such, “a Yellowstone injunction is not essential to protect property rights in a commercial tenancy which, of course, are governed by the terms of the lease negotiated by the parties.” [pg. 16].
The decision appears to put to bed the conflict between the First and Second Departments, but it is not without opposition. In his dissenting opinion, Judge Rowan D. Wilson posited that “freedom of contract is not a limitless right,” and that the Yellowstone injunction was a necessary protection for commercial tenants to avoid eviction while trying to determine their rights and responsibilities under their lease agreements. [Dissent, pg. 2]. In light of the fact that “ambiguity often strikes” lease agreements that are initially thought of as precise and clear, there remains a strong public interest “in adopting procedures that permit a timely and conclusive determination that preserves the object of the parties’ bargain.” [Dissent, pg. 8].
It appears the majority’s decision will, as stated in Judge Wilson’s dissent, result in the ultimate elimination of the Yellowstone injunction, as landlords will surely include waiver language in future leases and seek to enforce any such clauses in existing leases. Commercial landlords and tenants should contact their legal counsel to review existing leases to ensure clarity with regard to legal remedies in the event of default. Future leases should be negotiated with consideration given to the fact that waivers of declaratory relief are now likely to be upheld in New York’s courts. Commercial landlords should consider including provisions waiving a tenant’s right to declaratory relief in their commercial leases. Tenants, on the other hand, should take this decision into account when considering their negotiating positions and, if their lease contains a waiver of Yellowstone rights, determining how to respond to a notice of default.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.