Second Department Holds That Yellowstone Remedy Can Be Waived In A Commercial Lease

On January 31, 2018, the Second Department issued a decision in 159 MP Corp. v. Redbridge Bedford, LLC, 2018 N.Y. Slip Op. 00537, in which a divided Second Department panel upheld a decision by Justice Schmidt of the Kings County Supreme Court that denied a Yellowstone application and dismissed a declaratory judgment action seeking a ruling that the parties’ lease agreement was in full force and effect.

The procedural history followed a common pattern: the parties signed a commercial lease, four years later the landlord presented the tenant with a 10-day notice to cure, and, prior to the expiration of the cure period, the tenant (here, the plaintiff) commenced an action in Supreme Court seeking, inter alia, a declaration that the lease was in full force and effect, and a Yellowstone injunction preventing the cure period from expiring while the action was pending. (A Yellowstone injunction is a routinely-granted interim remedy in commercial lease disputes; it stays the running of any cure period while the existence of the underlying breach is determined by the court, thereby permitting the tenant to both contest the breach and then attempt to cure if they lose.) However, the landlord opposed the Yellowstone injunction on the grounds that the remedy was barred by the lease, which provided that 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. . . . It is further agreed that . . . it is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.”

The IAS Court denied the Yellowstone application and dismissed the action:

The court reasoned that although the leases did not expressly prohibit Yellowstone applications, such relief was nevertheless encompassed within the broader provisions of Paragraph 67(H) in the riders that prohibited declaratory judgment actions. The court construed the waiver of declaratory remedies as an agreement to instead resolve contractual disputes through the mechanism of summary proceedings. The court further noted that the waiver of declaratory remedies did not prevent any of the parties from performing the agreements, or from commencing actions seeking damages for either breach of contract or tortious conduct. The court did not address whether the plaintiffs' waiver of declaratory judgment remedies in Paragraph 67(H) of the riders violated public policy, as the issue had neither been raised in the pleadings nor in any of the papers submitted in connection with the plaintiffs' motion or the defendant's cross motion. Finding that all the plaintiffs' claims were actual or disguised causes of action for declaratory relief, the court denied the plaintiffs' motion and granted the defendant's cross motion for summary judgment dismissing the complaint.

The Appellate Division affirmed. First, it held that the lease provision did in fact prohibit Yellowstone applications, finding that “a tenant's preemptive action to have the court determine that the lease has not been breached is in the nature of declaratory judgment . . . . By nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it.” Accordingly, the fact that the lease term did not specifically mention Yellowstone applications was “of no moment.” Second, it held that a contractual prohibition on Yellowstone applications was not barred by public policy. The majority reasoned that the right to contract “is itself a sacred and protected public policy that should not be interfered with lightly,” that substantial rights were often waived by contract, especially in commercial leases (such as, for example, the right to a jury trial), and that the Legislature has already created a list of rights that may not be waived in an written or oral lease, which the courts should not supplement without good cause. More specifically, the majority held that “the right to a declaratory judgment, inclusive of the Yellowstone relief sought here, is not so vaulted as to be incapable of self-alienation;” and that the tenant’s retention of the right to other legal remedies (such as money damages) “mitigate[ed] the public policy concerns.”

In dissent, Justice Connolly agreed that the prohibition on declaratory judgments necessarily barred Yellowstone relief, but would have held that provision unenforceable as against public policy. The dissent argued that the right to a declaratory judgment was not just a personal benefit but also a social benefit: “The declaratory judgment action serves an important public policy function in resolving controversies before they escalate into a breakdown of the contractual relationship . . . . Thus, the declaratory judgment action promotes civility in contractual relations, allowing the parties to obtain a judicial interpretation of their rights and obligations so that, rather than suing for damages or specific performance after the fact, they may fulfill their promises to one another.” Specifically as relates to lease disputes, “the declaratory judgment action, together with the Yellowstone injunction, serve a valuable public policy role in relations between commercial landlords and tenants,” and “a summary proceeding does not provide an adequate substitute for the important rights forfeited by the broad waiver at issue here.” None of the waiveable rights enumerated by the majority “involve the fundamental and societally critical right of affirmative and meaningful access to the courts for judicial review, or a suitable substitute forum for dispute resolution.”

This decision is of great significance to any lawyer dealing with commercial leases or lease disputes—as the dissent noted, the tenant probably had no idea that it was waiving the right to obtain a Yellowstone injunction when it signed the lease, and a landlord’s ability to identify similar language in any particular lease will become a significant factor in future real estate litigation. It also remains to be seen whether the First Department will follow the majority or the dissent when this issue inevitably appears before it.

We litigate Yellowstone injunctions--a motion to prevent a landlord from evicting a commercial tenant of defaults under the lease--for both landlords and tenants. Contact Schlam Stone & Dolan of Counsel Niall D. Ó Murchadha at nomurchadha@schlamstone.com if you are involved in a dispute regarding the termination of a commercial lease because of a default under the lease.