Yellowstone No More?: New York Highest Court Approves Waiver of Commercial Tenant Right to Seek Declaratory Judgment

A recent decision of the New York Court of Appeals – the State’s highest Court – has thrown a wrench in a common litigation process used by commercial tenants – the so-called Yellowstone injunction. The 4-3 decision in 159 MP Corp., et al. v. Redbridge Bedford, LLC involved a commercial lease in Brooklyn. The landlord sent a 10-day “notice to cure” contending that the tenant had failed to obtain certain permits and caused fire hazards in the building.

The tenant responded by filing a declaratory judgment action in court and asking for a Yellowstone injunction. That procedure stems from the Court of Appeals’ 1969 decision in First Natl. Stores v. Yellowstone Shopping Ctr., which held that once a commercial lease terminated after the expiration of a cure term, the lease could not be reinstated. Following that decision, to preserve the status quo so that the commercial tenant confronted by a threat of termination of its lease may protect its investment, state courts have allowed the tenant, before the expiration of the cure period, to ask for an injunction. Unlike the more onerous showing required under a normal preliminary injunction, the tenant need only show that it holds a commercial lease, that it filed before the end of the cure period, and that it is prepared to cure by any means short of vacating the premises. If the injunction is granted, the lease then stays in place during the litigation.

In 159 MP Corp., the Court of Appeal approved the ability of commercial parties to waive the right to seek declaratory relief, effectively cutting off the right to seek a Yellowstone injunction. In that case, the Lease provided that the 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 being the intention of the parties hereto that their disputes be adjudicated via summary proceedings.” Relying on New York’s “strong public policy in favor of freedom of contract,” the Court refused to find the waiver violated public policy.

The dissenting judges disagreed and would have held that the right to seek declaratory relief in a New York court cannot be waived by contract.

For those negotiating and litigating commercial leases in New York, this decision must be taken into account in the lease negotiation process and during the term of any lease with such a waiver provision. Both Landlords and Tenants should be aware of this decision and the significance of a waiver of the right to seek declaratory relief in their leases.

For more information on Yellowstone injunctions or the implications of this decision, please contact Matthew Kertz in our Commercial Real Estate Department and Lawrence Bluestone in our Commercial Litigation Department.