‘Yellowstone’ injunctions have been a long-standing remedy for tenants that have been served with a notice to cure or a notice default when challenging the legality of the notice. From its origin in the 1968 Court of Appeals decision in First Nat’l Stores v. Yellowstone Shopping Ctr., 21 N.Y.2d 630 (1968), the Yellowstone injunction has traditionally been used as a tool for tenants to litigate in Supreme Court whether or not there has been a default without the risk of losing their lease. Lexington Ave. & 42nd Street Corp. v. 380 Lexchamp Operating, 205 A.D.2d 421 (lst Dept. 1994). The purpose of the Yellowstone injunction is to maintain the status quo so that a commercial tenant may protect its valuable property interest in its lease while challenging the landlord’s assessment of its rights. Post v. 120 E. End Ave. Corp., 62 N.Y.2d 19, 26 (1984). If a motion is made before the expiration of the default notice, upon the granting of the injunction the cure period is tolled and the landlord is enjoined from terminating the lease or commencing a summary proceeding until the trial court renders a decision on the merits.
In order to obtain a Yellowstone injunction, the tenant must establish: (1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises. Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Ave. Assoc., 93 N.Y.2d 508, 514 (1999).
On May 7, 2019, the New York Court of Appeals held in 159 MP Corp. v. Redbridge Bedford LLC, 2019 N.Y. LEXIS 1310 (2019), that commercial landlords and tenants are free to waive declaratory relief, such as Yellowstone injunctions, so long as the agreement is a “negotiated arm’s length transaction by sophisticated, counseled parties.” Id. at *1. In reaching its decision, the majority relied upon a clause in the lease riders, which provided: “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 … . [I]t is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.” The Court of Appeals relied on the premise that upholding duly negotiated contracts is a more significant public policy consideration than preserving a party’s right to seek declaratory relief when the party has unambiguously waived that right in the contract.
Redbridge involved two tenants who operate a supermarket under two 20-year commercial leases with 10-year renewal options. In March 2014, the landlord issued 10-day notices to cure, alleging that the tenants had altered the premises without obtaining permits from the Department of Buildings (DOB), the configuration of the premises created fire hazards, the tenants failed to allow access for an inspection of the sprinkler system and the existence of a nuisance and excessive noise. The tenants maintained that no lease violations or defaults existed, as the proper DOB permits had been filed, the landlord’s predecessor was aware of the tenants’ configuration of the space and had acquiesced to the conditions. 159 MP Corp. v. Redbridge Bedford LLC, 2015 NY Slip Op 32817[U], *4 (Sup. Ct. Kings County 2015). The tenants timely commenced an action in Kings County Supreme Court, seeking a Yellowstone injunction as well as to recover damages for breach of contract. However, the Supreme Court denied the tenants’ motion, holding that the tenants had contractually waived their right to seek such relief pursuant to the lease riders.
On appeal, the tenants asserted that the waiver of declaratory relief violated public policy and that the leases did not specifically prohibit Yellowstone injunctions. Relying on CPLR §3001 and the decision in Hughes v. Lenox Hill Hosp. 226 A.D.2d 4, 13 (1st Dept. 1996), the Second Department disagreed, finding as a preliminary matter that a Yellowstone injunction is a form of declaratory relief. 159 MP Corp. v. Redbridge Bedford, 160 A.D.3d 176, 184 (2d Dept. 2018). The Appellate Division also held that enforcement of the waiver clause was not void as against public policy, emphasizing that the waiver clause did not leave plaintiffs without other available legal remedies and noting that plaintiffs retained the right to receive notices under the leases (and thus cure defaults), to seek damages for breach of contract and tort, and to defend themselves in summary proceedings. The Court of Appeals affirmed.
Court of Appeals Decision in ‘Redbridge’
In concluding that a clause waiving declaratory relief is not void as against public policy and is therefore enforceable, the Court of Appeals emphasized that “[f]reedom of contract is a ‘deeply rooted’ public policy of this state … and a right of constitutional dimension.” 159 MP Corp. v. Redbridge Bedford, 2019 N.Y. Lexis 1310, *7 (2019) citing New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 81, 538 N.Y.S.2d 217 (1989). Furthermore, the Court of Appeals noted that although it has the power to set aside agreements on public policy considerations, its most significant role is to enforce contracts—not invalidate them “‘on the pretext of public policy’ unless they ‘clearly …contravene public right or public welfare.’” Id. at *9. The court further found that the right to commence a declaratory judgment action, although a useful litigation tool, 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. Consequently, when parties to a contract express the terms of their agreement in a “clear, complete document, their writing should … be enforced according to its terms.” Id. at *6 (citing Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004)).
The court did note, however, that “[t]he public policy favoring freedom of contract does not mandate that the language of an agreement be enforced in all circumstances.” Id. at *8. Thus, contractual provisions which were agreed to under duress or coercion may not be enforced. Likewise, the doctrine of unconscionability would also protect against “unjust enforcement of onerous contractual terms which one party is able to impose [upon] the other because of a significant disparity in bargaining power.” Id. citing Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 68 (1978). Significantly, the tenants raised none of these defenses.
The Court of Appeals also took into consideration that the tenants were not left without a remedy. The tenants retained the right to judicial relief in a summary proceeding and the appellate process. In contrast, the Court noted, that arbitration clauses which are routinely enforced provide “no access to court for initial litigation of the merits and limited judicial review.” Id. at *17.
The dissenters’ view that Redbridge “will alter the landscape of landlord-tenant law” could not be more accurate. Id. at *25. Going forward, commercial landlords will undoubtedly seek to include a declaratory judgment waiver clause in new leases, which prior to Redbridge, had been invalidated by some courts. For example, in Aurelian Surdeanu v. 137 East 110th Street, 2003 NY Misc. LEXIS 2103 (Sup. Ct. NY County 2003), the court was faced with a provision similar to the one in Redbridge, which the trial court rendered unenforceable as against public policy, stating: “[s]ince plaintiff is a commercial tenant, he is not able to avail himself of the automatic ten day stay available to residential tenants in Civil Court under R.P.A.P.L. §753. Thus, a Yellowstone injunction is the only way a commercial tenant ‘when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture.’” Id. at *3. The court in Surdeanu also concluded that as the waiver was not limited to Yellowstone injunctions, it would also preclude the tenant from seeking any kind of declaratory relief, rendering the waiver entirely unenforceable. In contrast, the court in Aloyts v. 601 Tenant’s Corp., 2007 WL 6938117 (Sup. Ct. Kings County 2007), upheld a waiver clause and denied the tenant’s request for injunctive relief holding that the right to a Yellowstone injunction is not a constitutional due process right but merely a remedy afforded by case law where it is warranted by the circumstances and that the tenant’s rights are determined by the lease agreement.
In short, while courts in the past have issued inconsistent rulings with respect to the enforceability of a contractual waiver of declaratory relief, under Redbridge, such waiver is clearly enforceable and may well become fairly common in commercial leases going forward. At the very least, we would expect that a waiver of declaratory relief to become a point of negotiation among practitioners representing landlords and tenants. Moreover, given the ramifications of such a waiver, practitioners representing tenants would do well to explain the potential consequences of such waiver to their clients and to negotiate a longer cure period for defaults, as well as other concessions.
While Redbridge may be heralded as a victory for landlords, it is a decision which may prompt legislative action to provide a commercial tenant with a statutory right to cure lease defaults, as provided in RPAPL §753(4), in order to avoid a potential forfeiture of a valuable leasehold interest.
Maria I. Beltrani is a partner and Isaac D. Senior is an associate in the real estate and litigation departments at Schwartz Sladkus Reich Greenberg Atlas.