Commercial Landlord-Tenant—’Yellowstone’ Injunction Granted—Tenant Had Commenced Diligent Efforts to Cure the Defaults Within the Allotted Time

A plaintiff not-for-profit tenant, which provides “community case management to disabled, geriatric and low income individuals,” appealed from an order of the trial court which had denied the tenant’s motion for a Yellowstone injunction and dismissed the action. The lease term was for in excess of 15 years and the tenant had agreed “to perform certain electrical, plumbing and HVAC work at the premises.” The work was completed in or about 2001. In March 2011, the landlord served the tenant with a “10-day” notice to cure (notice) alleging that the tenant had violated the lease by failing to obtain or provide the landlord with proof that the Landmarks Commission (Landmarks) had signed off on the work performed by the tenant and had failed to provide a mechanical ventilation certificate, proof of the structural stability of the work that was performed, and proof of a “sprinkler hydrostatic test.” The notice specified a “cure date” of April 15, 2011. The lease provided in pertinent part:

If the Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent…upon Owner serving a written ten (10) days’ notice upon Tenant specifying the nature of said default and upon the expiration of said ten (10) days, if Tenant shall have failed to comply with or remedy said default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said ten (10) day period and if Tenant shall not have diligently commenced curing such default within such ten (10) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days’ notice of cancellation of this lease upon Tenant… (emphasis added).

In response to the notice, the tenant provided a Landmarks permit, “a technical report regarding the mechanical ventilation certificate, and OP-38 self certification of plumbing inspection conducted by the sprinkler contractor, the approved sprinkler system hydraulic analysis, and the work plans stamped approved by City of New York Department of Buildings.”

The tenant received no response to its submission. On May 4, 2011, the tenant was served with a notice of termination, which stated that the lease would terminate as of May 16, 2011. The landlord thereafter extended the termination date to June 16, 2011. During the extension period, “all defects were cured except the City’s waiver of a further sprinkler hydrostatic test for the second floor premises. In order to obtain the waiver, tenant was obligated to provide the City with a copy of the building-wide hydrostatic test, and requested such from the landlord. Landlord, however, provided the tests of another tenant’s demised space, but did not respond to tenant’s further request for the building-wide test.”

The tenant thereafter sought a Yellowstone injunction. The trial court denied the Yellowstone injunction on the grounds that the motion was “untimely.” The trial court had opined that the Appellate Division, First Department’s decision in Becker Parkin Dental Supply v. 450 Westside Partners, 284 AD2d 112 (2001), “is no longer good law.” Becker held that “Yellowstone relief is appropriate even where defaults in a notice to cure are not capable of being cured within the time provided in the notice as long as all the lease requires is that the tenant commence diligent efforts to cure the defaults within the allotted time.” The First Department, disagreed that Becker “is no longer good law” and reversed.

Yellowstone relief protects against “leasehold forfeiture,” provided that a commercial tenant has the willingness and ability to cure, if the tenant is ultimately found to be in default of its obligations under a lease. The court cited the “public policy against the forfeiture of leases,” noting that such policy “serves to promote the economy and business in our City.” Here, such policy also “promotes beneficial services in circumstances such as those presented here, where tenant is a not-for-profit organization dedicated to providing community case management to disabled, geriatric and low income individuals.” The court opined that such public policy concern “takes on greater weight when a tenant diligently and in good faith attempts to cure the defect, but through no inaction of its own, can not do so….”

The court further noted that “where a notice of termination is premature under the terms of a lease, the notice is invalid, and thus the service of the notice will not bar a tenant from obtaining Yellowstone relief….” The court noted that a lease default provision may provide, “in addition to the specific number of days constituting a ‘cure period,’ for an unspecified longer period to cure.” In such instances, the court had previously held that “where a tenant with good faith and diligence commences curing within the specified period of time, but cannot complete the cure within that period, the unspecified longer period provided for in the lease governs the applicable ‘cure period’….”

Here, the lease contained not only a 10-day cure period, but also contained “an unspecified longer period of cure ‘if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said ten (10) day period.’” Given the facts, the court found that it could not be “reasonably argued” that the tenant could have cured all of the defaults within 10 days and the tenant had commenced curing the violation within the 10-day period by providing the landlord with documentation that the tenant believed would remedy its default. The court emphasized that the lease terms only required that the tenant commence diligent efforts to cure the defaults within the allotted time.

Additionally, the court noted that the Appellate Division, Second Department had “mistakenly asserted that this department had…’rejected the argument that a Yellowstone motion brought after the expiration of the applicable cure period may be deemed timely as long as it is made before the lease in question is actually terminated’….”

Finally, the court emphasized that “the plain language of the lease…provides for a scenario where tenant may not be able to cure a defect within the 10 day period; landlord should be bound by the terms of the agreement….” Accordingly, the court reversed, granted the Yellowstone injunction and reinstated the action.

Village Ctr. for Care v. Sligo Realty and Service, 6521N, NYLJ 1202548404769, at *1 (App. Div., 1st, Decided April 5, 2012), Before: David Friedman, J.P., John W. Sweeny, Jr., Rolando T. Acosta, Dianne T. Renwick, Sheila Abdus-Salaam, JJ. Decision by Acosta, J. All concur.

Rent Stabilization—Tenants Obtain Injunction Against Landlord Moving Assigned Parking Spaces From Outdoor Parking Lot to Nearby Indoor Parking Garage—Parking Was a “Required Ancillary Service”—Owner Requested Bond of $5 Million—Court Set Bond Requirement at $75,000

Plaintiffs were rent stabilized tenants of a Manhattan apartment complex. Lease riders gave the tenants assigned parking spaces in two outdoor parking lots (lot). Many of the plaintiffs had received notices from their landlord that their cars were being relocated to a nearby underground parking garage (garage). The landlord asserted that it had the right, under a lease rider, to change assigned parking spaces. The landlord sought possession of one of the lots as part of a real estate transaction, pursuant to which the lot would be conveyed to a third party and would be developed as a nursing home and elder care center.

The tenants moved to enjoin the landlord from terminating their rights to park in the subject lot and from relocating the tenants’ parking spaces to the garage. The landlord argued that if injunctive relief is granted, the tenants should be required to post “a bond of at least five million dollars for the first year or, alternatively,” there should be “a hearing on the amount of the bond.”

The outdoor parking was reflected in certificates of occupancy (C??of??O) issued in the 1950′s and promotional material from the 1960′s “touts the availability of optional on-site parking.” Originally, there were three outdoor parking lots. A third lot had been utilized in 2006 for construction of a condominium building. The 2006 building is the site of the underground garage where the landlord sought to relocate the parking spots.

The tenants asserted that the parking spaces are “a required ancillary service and cannot be modified or substituted without first obtaining the approval of the Division of Housing and Community Renewal (DHCR). The Rent Stabilization Code [RSC] defines an ancillary service as ‘those required services not contained within the individual housing accommodations which the owner was providing on the applicable base dates…. These may include, but are not limited to, garage facilities’….” A prior Appellate Division decision held that “[g]arage service provided to tenants in conjunction with the leasing of their apartments that is building-wide and not a service provided to an individual tenant is an ancillary service….” In the subject case, the court found that the parking spaces were “a required ancillary service,” since the service had been “provided prior to the base date of May 31, 1968.” The court noted that RSC §2522.5(e) provides that “a landlord may not modify or substitute a required service without first receiving approval by DHCR.”

The tenants argued that the change in the parking facilities constitutes a “radical shift in the manner by which the landlord delivers parking services to the tenants. They lose their convenient aboveground lots, which are available to them on a twenty-four hour basis.” Instead, they must “move to a less convenient underground location accessible by elevator or stairwell.” Plaintiffs maintain that the elevator and stairwell area “is not secure.” If the elevator is “not functioning, the garage is accessible only by stairs. The lot is operated by ['A'], an independent contractor which provides valet parking. Plaintiffs contend that they will have to wait for an hour to retrieve their cars and that valet service will increase their costs.”

The tenants further argued that although the landlord is required to provide parking, the garage is owned by a condominium. Under the condominium declaration, residents of the condominium have a preference and spaces for non-residents could be terminated upon thirty days’ notice, i.e., the tenants “could lose their spaces and be without legal recourse against [the condominium], which is not their landlord.” The landlord countered that since the lease riders vested the landlord with “the express right to relocate the parking spaces,” “such a move does not constitute a reduction in service.” The landlord further asserted that the tenants will receive “an upgraded secure parking facility upon the same terms and conditions as their existing lease riders” and the tenants’ complaints are “de minimus” and do “not give rise to a reduction of service.”

The court found that the tenants were “likely to succeed on their claim” that the current parking lot facility services “cannot be modified without prior DHCR approval.” The court further held that “a full administrative record must be developed before DHCR, the agency with expertise and regulatory authority, to determine whether [landlord's] attempt to move the tenants from their current aboveground parking lots to an underground facility at a different location constitutes an impermissible modification of services, or whether it is a minor inconvenience authorized by the lease riders.”

The court also found that the tenants would suffer irreparable injury absent injunctive relief. The court noted that “[w]hen bulldozers start plowing through pavement and construction begins, the parking spaces will be gone forever.” The court noted that the “legal right to a parking space as part of a rent-stabilized lease in Manhattan is a valuable service. Money damages will not suffice, as the tenants’ current outdoor parking convenient to their homes cannot be replaced.”

Additionally, the court found that the equities favored the tenants since the proposed construction of new buildings “are, at best, in the planning stage at this point” and “delay and uncertainty” was caused in part by the landlord. The court reasoned that the landlord “could have brought administrative proceedings before DHCR seeking a modification of the ancillary parking service….” Absent an injunction, the tenants would suffer an “immediate loss” of their “assigned parking spaces to which they have a present lawful possessory right.” The tenants only sought to “maintain the status quo pending DHCR’s determination as to whether [landlord] can modify the current parking service.”

Finally, the court explained that:

The fixing of the amount of an undertaking is a matter within the sound discretion of the court, and will not be disturbed absent an improvident exercise of discretion…. The amount of the undertaking must be rationally related to the defendants’ potential damages if the preliminary injunction later proves to have been unwarranted…. Its sufficiency depends upon the circumstances of the particular case…. The amount of the undertaking must not be excessive, and the court must not consider defendants’ speculative or conclusory claims of potential financial losses….

It is improper to require, as a condition of a preliminary injunction, an undertaking in an amount which would result in a denial of the relief to which the plaintiffs show themselves to be entitled…. By the same token, the amount of the bond must not be insufficient.

Here, the landlord asserted that “an injunction would block defendants’ development and construction of a residential high-rise building, thereby causing defendants more than $297 million in lost profits, resulting in ‘concrete losses of approximately $625,000 in expenses already incurred’….” However, the court believed that “a significant amount of regulatory work must take place before construction can begin” and the third party “must also obtain a bank loan or other financing before the project can move forward.”

The court opined that “it would be completely speculative to require a bond in the sum of $5 million per year in light of the fact that regulatory approval and financing have not yet been finalized.” The court also considered the fact that the tenants did “not have unlimited financial resources” and “[t]he astronomical amount sought by defendants would, in effect, deny plaintiffs injunctive relief.” The court sought to fix a bond amount that would “not result in the denial of the equitable relief to which the tenants have shown themselves to be entitled.” Given the “totality of the circumstances,” the court held that the tenants should “post a bond in the amount of $75,000.” The court did not believe that there were any issues of fact that presently required a hearing on the amount of the bond.

Comment: As this court observed, the amount of an injunction bond must be sufficient to protect the defendant from potential loss arising from the injunction. There must be a rational relationship between the bond amount and the reasonably foreseeable damages. Some defendants will seek a bond amount that is clearly excessive as a way of “defeating” injunctive relief. Some plaintiffs argue that the bond should be very low because they lack financial resources. The law does not require that a bond be based on a “means” test. A defendant should not be exposed to significant loss because a plaintiff lacks financial resources. Such approach could permit an interested party to “recruit” a plaintiff with modest means, in order to minimize the amount of the bond. Thus, in determining the amount of an injunction bond, the courts will consider the totality of the circumstances, including the amount of the defendant’s “real financial exposure.”

If a party believes that the amount of the bond is clearly inadequate or is excessive, it may seek relief from the Appellate Division.

Peyton v. PWV Acquisition, 111379/11, NYLJ 1202548642019, at *1 (Sup., NY, Decided April 5, 2012), Singh, J.

Landlord-Tenant—Rent Stabilization—Mitchell-Lama—Rent Regulatory Status Depends on Completion Date—Completion of Construction Is Determined by the Date of the Temporary Certificate of Occupancy

Following expiration of a “Thirty Day Notice of Termination of Month to Month Tenancy,” an owner commenced a holdover summary proceeding against the respondent tenant. The tenant asserted he “is…a rent stabilized tenant, not subject to eviction upon the grounds set forth in the Termination Notice.”

The dispositive issue was “whether or not the Building is subject to the Rent Stabilization Law” (RSL) and “Code” (RSC). The building was properly registered as a multiple dwelling with the NYC Department of Housing, Preservation and Development (HPD). The building had been operated as Mitchell-Lama housing until 2006, when a predecessor/owner had obtained “a certificate of no objection to its dissolution upon the repayment of mortgage loans pursuant to regulations governing Mitchell-Lama housing.” After the building left the Mitchell-Lama program, the building was treated as rent stabilized.

The tenant had been offered rent stabilized lease renewals and had engaged in administrative proceedings before DHCR with the owner, wherein the regulatory status of the apartment “was not even questioned.” The owner had commenced a DHCR proceeding seeking to adjust the initial legal regulated rent for the apartment, “asserting the existence of unique and peculiar circumstances.” DHCR had denied the owner’s petition, noting that “when the Building left the Mitchell-Lama program, it became subject to the [RSL] and [RSC].” Moreover, there had been a landlord-tenant proceeding wherein a housing court judge had issued a decision, never appealed, wherein the court noted that the building had become subject to rent stabilization. A subsequent settlement stipulation provided that the rent would be registered with the DHCR at $1,699.25, and that rent stabilization increases would be based upon that amount. The parties had further agreed that during the term of the tenancy, as well as that of any surviving spouse, the tenant would be given “a preferential lease and rent, with all increases to be based upon the stipulated preferential rent.”

Temporary certificates of occupancy (TCO) were issued on Nov. 29, 1973 and March 22, 1974. A permanent certificate of occupancy (C of O) was issued July 9, 1974. The tenant argued that the building had been treated as rent stabilized in error since the building had not been completed until after Jan. 1, 1974.

The court explained that “housing accommodations completed or substantially rehabilitated as family units on or after January first, nineteen hundred seventy-four,” are excluded from rent stabilization. The court noted that there is “neither statutory nor regulatory guidance for determining when a building is completed, as the term is undefined.”

A 1984 Appellate Division case “did not equate the completion of construction with the issuance of a permanent [C of O], but instead employed an evaluation of the status of construction on January 1, 1974….” The tenant argued that such decision was “entitled to ‘great deference.’” The owner countered that such case involved a building “located in a jurisdiction in which certificates of occupancy do not list a completion date, a fact that, petitioner asserts, caused the DHCR to have to resort to other means to determine the building’s completion date.”

The court explained that DHCR has “repeatedly found completion of construction to have occurred upon the issuance of a [TCO].” After citing prior judicial precedent, the court noted that the Emergency Tenant Protection Act of 1974, “leaves it to the DHCR to interpret the meaning of the term ‘completed’” and “‘that when statutory interpretation requires’ an evaluation of factual data and inferences to be drawn therefrom, the courts regularly defer to the governmental agency charged with responsibility for the administration of the statute….” Courts have also held that when determinations require “only an accurate apprehension of legislative intent,” such deference is not required.

Additionally, the court explained that whether the issue is entitled to deference or not, “under the circumstances presented here, …the standard utilized by the DHCR [is] entirely appropriate.” The first TCO listed all of the housing accommodations that appear on the permanent C of O. The second TCO “omits gas and electric meter rooms in the cellar, but otherwise makes no change.” The court held that the issuance, “prior to January 1, 1974, of the first [TCO], which included all of the Building’s housing accommodations, rendered the building completed prior to January 1, 1974, which renders the Building subject to the [RSL] and [RSC].” Accordingly, the court dismissed the proceeding.

Gaia by the Park v. Near, 69808/2011, NYLJ 1202551386494, at *1 (Civ., NY, Decided April 4, 2012), Lau, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.