Scott E. Mollen

Commercial Landlord-Tenant – Yellowstone and CPLR 6301 Injunction Denied – Tenant Asserted Landlord Failed to Cooperate to Legalize the Building – Court Found Three Incurable Defaults and Tenant Failed to Meet Criteria for CPLR 6301 Preliminary Injunction

A plaintiff commercial tenant moved for a Yellowstone injunction and alternatively, a preliminary injunction pursuant to CPLR 6301, enjoining the landlord from terminating the tenancy. The tenant sought damages, based upon the landlord’s alleged failure to cooperate to legalize the building. The landlord had served a notice to cure (notice), wherein the landlord threatened to terminate the lease unless the defaults were cured. Certain defendants had moved to dismiss the complaint for a failure to state a cause of action. The court held that three defaults were incurable and that the tenant was neither entitled to a Yellowstone injunction nor a traditional preliminary injunction. The court also granted the motions to dismiss.

The subject building (Building) is one of two buildings located on the same block and lot. The tenant had sought to develop “a non-commercial art gallery and art foundation.” Pursuant to a lease and lease rider, dated May 1, 2015, the landlord leased part of the Building, consisting of approximately 7,000 sq. ft., plus the basement to the tenant (demised premises). One defendant “B” is an electrical contracting business that occupies the other building on the same lot (adjacent building).

The lease provided the tenant with an option to purchase “the building…in which the demised property is located. As a pre-condition to exercising the option, the parties agreed that the tenant may subdivide the single tax and zoning lots into two (2) separate tax and zoning lots” so that the demised building would be on one tax and zoning lot and the adjacent building would be on its own tax and zoning lot. The parties had also agreed that the option to purchase was “not entered into in reliance upon any representation or warranty made by either party.”

Following execution of the lease, the tenant began renovating the demised premises. The tenant had completed an Alteration Type 1 (Alt-1) application filing to the NYC Dept. of Buildings (DOB), seeking approval for its proposed use of the property. In October 2015, the landlord had signed the DOB Alt-1 application. However, the tenant asserted that “it could not file its plans” because the electrical contracting business, which is owned by one of the landlord’s principals, was not a permitted use, and the adjacent building was not a permitted structure.

The landlord asserted that it had made no representations as to the demised property or the option to purchase and the Lease required the landlord “to cooperate at no cost to itself.” At the landlord’s request, the tenant had not submitted its Alt-1 application to the DOB, “in an attempt to address the issues related to the development of the property.”

The landlord and the tenant had met, together with their consultants, but did not reach a resolution. Following such “impasse,” the landlord requested a “letter of no objection” from the DOB, as to “its use of the owner’s building based on a 1926 certificate of occupancy” (C of O) “that it had obtained from the tenant.” The DOB issued a Letter of No Objection with respect to the electrical contracting company’s use of the adjacent building for “electrical contractor use.” The tenant asserted “the letter of no objection, did not legalize the building occupied by [the electrical contracting business] since it was built in 1988, and such objection letters can only confirm the legal use of a building constructed before 1938.”

The plaintiffs thereafter filed the subject action, alleging that the landlord breached the lease by “failing to cooperate with the tenant to legalize the property….” The complaint alleged that the adjacent building, which “is a commercial establishment, does not comply with the zoning regulations applicable to the predominately residential neighborhood, and, prevents” the exercise of the option to purchase.

After the tenant on Aug. 3, 2016 filed the Alt-1 application, which had been previously be signed off by the landlord in Oct. 2015, the landlord served the tenant with a Notice to Cure, which alleged the following defaults under the lease:

1) deviation from…plans previously submitted to the landlord in that the basement work: (a) encroaches upon the party…wall separating the demised premises from the “adjacent property”…; and (b) has resulted in a lowering of the cellar floor…greater than…proposed on said plans;

2) excavation of the basement portion of the demised premises, and the locking of the door and removal of…stairs leading from the “adjacent property” into the basement of the demised premises,…without first obtaining the landlord’s written approval and/or permission from the DOB and because it…continues to prevent and/or interfere with the landlord’s right of access to the basement within the demised premises;

3) failure to (a) promptly furnish the landlord with copies of the application documents and drawings that tenant filed with the DOB…; (b) submit for the landlord’s approval, before any work is allowed to commence, the proposed contractors which your client seeks to use…; and (c) furnish the landlord with evidence that the requisite insurance is in effect on or before commencement of your client’s work.

Following an agreed upon extension of the cure period, the landlord alleged that the tenant had failed to cure the default. The tenant then sought the subject Yellowstone injunction or, alternatively, a preliminary injunction, pursuant to CPLR §6301. The court explained:

A Yellowstone injunction maintains the status quo by tolling the cure period so that a commercial tenant faced with a threat of the termination of its lease can protect its leasehold and, where there is an adverse determination on the merits, cure the default and avoid a forfeiture…. The purpose of a Yellowstone injunction is to stop the running of the cure period and maintain the status quo while the underlying dispute is litigated…. “[F]ar less than the normal showing required for preliminary injunctive relief’ is needed, as the “threat of termination of the lease and forfeiture, standing alone, has been sufficient to permit maintenance of the status quo by injunction”….

Thus, a party seeking a Yellowstone injunction relief must demonstrate that “it holds a commercial lease,” “it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease,” “it requested injunctive relief prior to the termination of the lease” and “it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises….” Unlike a traditional preliminary injunction, a plaintiff need not show a likelihood of success on the merits. However, “a plaintiff must demonstrate that ‘a basis exists for believing that a tenant…has the ability [to] cure through any means short of vacating the premises’….” Here, the tenant was a commercial tenant, which had received a notice to cure and had requested injunctive relief prior to the expiration of its time to cure. Thus, the salient issue was whether the tenant had “the ability [to] cure through any means short of vacating the premises.”

The lease provided that the tenant would make “no changes in or at the demised premises…without the owner’s prior written consent” and alterations by the tenant, “as per plans, specifications and applications approved by the DOB, if required, shall be subject to the written approval of the Owner before filing its Alt-1 application.”

Although the tenant argued that it had “made efforts and cured some of the purported breaches and is continuing to take…steps to remedy the other alleged defaults,” the record indicated that “at least three of the defaults…are incurable due to the tenant’s failure to obtain prior written approval from the landlord pursuant to the lease.” Prior to filing its Alt-1 application, the tenant had “performed construction work in the demised premises which deviated from the…plans previously submitted to the landlord.” Additionally, the Oct. 16, 2015 plans that the landlord had signed-off on “were altered, added or deleted by the tenant without the landlord’s approval, and submitted to DOB….” The tenant had also failed to obtain required insurance coverage. The court explained “a tenant’s failure to maintain insurance coverage as required by the lease is an incurable default.”

The tenant countered that it need not at this stage, prove its ability to cure. Rather, the tenant argued that it can and did cure the alleged defects. Here, the tenant’s construction work had been “in large part, contrary to the express provisions of the lease,” had been done notwithstanding the lack of the required prior approval of the landlord and there was also no indication that the tenant’s construction work was “substantially complete” before it sought judicial relief. The court denied the request for a Yellowstone injunction.

The court also denied the tenant’s request for a preliminary injunction pursuant to CPLR §6301. The court reasoned that the landlord had not made any contractual representations as to the demised premises, the improvements thereon or the use thereof and the landlord had provided “in good faith” cooperation “with the tenant by retaining consultants, at its own expense, to resolve the issues relating to the development of the demised premises.” The court opined that based on the foregoing, together with “the incurable nature of the tenant’s default,” the tenant could not demonstrate “a likelihood of success on the merits” as to its claims, “which include, breach of contract, specific performance, fraud, fraudulent inducement and unjust enrichment.”

The court further found that the “balance of the equities favors the landlord, since the purchase option” was “inchoate and does not ripen until the property is subdivided at the tenant’s own cost.” The court also held that the tenant “failed to demonstrate that it will suffer irreparable injury since it plans a non-commercial use of the demised premises.”

Accordingly, the court held that the tenant was neither entitled to a Yellowstone injunction nor a traditional preliminary injunction and also granted the defendants’ motions to dismiss. The sole cause of action asserted against such defendants was “conspiracy to defraud, based on the allegation that the moving defendants acted as agents for the landlord and filed incorrect documents with the DOB and certified the adequate completion of the work detailed in those documents.” The court held that the allegations were insufficient as a matter of law and that “a mere conspiracy to commit a [tort] is never of itself a cause of action….” The plaintiff had failed to properly plead a claim for “fraud under a theory of conspiracy, since there were no facts pled to support an inference that defendants, as agents, knowingly agreed to cooperate in a fraudulent scheme or shared a perfidious purpose of [landlord].”

Comment: Some tenants will enter into leases based on the assumption that the demised premises could be “legalized,” so as to permit the tenant’s contemplated use. Generally, parties to such leases should allocate the risk that the demised premises cannot be “legalized” or altered and allocate responsibility for doing the necessary land use work.

Even though a landlord or a tenant may be advised that it is possible to achieve their land use goal by a land use expert, such expert could be incorrect. Sometimes, experts make errors. Moreover, city agencies, such as the Dept. of Buildings may change their policies or practices. Therefore, it is usually prudent for parties to a lease to address what happens if land use approvals cannot be achieved within a specified time frame or cannot be achieved at all.

The Art Factory v. 740-748 Hicks Realty, Sup. Ct., Kings Co., Index No. 512987/2016, decided Oct. 25, 2017, King, J.

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