By Floyd G. Grossman and Michael J. Spithogiannis
A commercial lease is a vital asset to every commercial tenant.[2] The lease sets forth the rights, obligations and liabilities between the landlord and the tenant. Generally, the balance of power in such a relationship favors the landlord. In most cases, the landlord drafts the lease; and so-called “form leases” are written to afford the landlord an advantage if disputes arise. A recent case decided by a New York Appellate Court has permitted a further shift in the balance of power in favor of landlords, validating lease clauses where a tenant has agreed to give up important remedies.
The Appellate Court – recognizing that parties can negotiate any deal they wish as reflected in any properly executed contract – determined that a tenant may waive certain litigation strategies that have traditionally been available to prevent a premature – or even improper – termination of the lease.
THE DECLARATORY-JUDGMENT ACTION AND YELLOWSTONE INJUNCTION
It is no news that the tenant’s most prominent obligation under a lease is to pay rent timely – or face eviction. A commercial lease, however, may saddle a tenant with numerous other obligations not associated with payment of rent: maintaining the premises in good repair; curing building-code violations; completing specified work; filing for permits; complying with governmental rules and regulations; cleaning contamination; maintaining liability insurance. Failing to do any of these things may constitute a default under the lease, which would allow the landlord to take steps to terminate the tenancy. Most commercial leases have a built-in mechanism to start the ball rolling: usually a notice of default, and demand to cure within a stated time period, followed by a notice of termination if the deadline is not met.
Under procedures outlined in a common commercial lease, a landlord simply sends a notice of default. The notice specifies the alleged default; and alerts the tenant that if the default is not cured within the time specified, the landlord will terminate the lease by simply sending a notice of termination. Customarily, the time to cure found in commercial leases is ten days. Frequently, this time is much too short to cure the problem, regardless of the tenant’s prompt action and good faith. The landlord will nevertheless send a notice of termination as soon as the cure period expires, specifying the termination date of the lease. Once the lease is terminated, the landlord is free to sue in Landlord-Tenant Court to evict the tenant. Generally, a landlord-tenant proceeding brings swift relief to the landlord; and under circumstances described here, gives the tenant no opportunity to cure the default within a more reasonable time. So long as the landlord follows the procedures in the lease, the only question the Landlord-Tenant Court can consider is whether there was actually a default, not whether the tenant has enough time to cure.
Until now, there was a well-recognized procedure available for tenants to stop the cure period from expiring and hold off termination of the lease. This gave tenants opportunity to contest the default, without time pressure to cure. This procedure allowed the tenant to start a lawsuit in the Supreme Court – a court with whose power is broader than that of a Landlord-Tenant Court. This kind of case is called a “declaratory judgment action,” something the Landlord-Tenant Court cannot hear. The tenant would contest the default, but more importantly, the tenant would immediately ask the Supreme Court to enjoin expiration of the time to cure, thereby preserving the tenant’s right to cure if a default actually exists, and avoiding immediate termination of the lease until the Supreme Court decides the case on its merits. By contrast, the Landlord-Tenant Court has no power to grant these types of injunctions. An injunction preventing the time to cure from expiring has been a powerful tool. This relief – known as a Yellowstone Injunction – maintains the status quo between the landlord and tenant, and holds off termination of the lease while the parties litigate.
For fifty years, this procedure has been followed in New York courts, and has, to a large extent, levelled the playing field: the tenant could chart the procedural course of litigation, without risking imminent termination of its lease, and forfeiting its time to cure. This also gave the landlord incentive to negotiate a compromise rather than risk lengthy and uncertain litigation; perhaps the default is minor, or the tenant simply needs more time to cure.
THE DECISION BY THE APPELLATE COURT
The tables were turned on tenants in a recent decision by an Appellate Court, the first of its kind. The Appellate Court considered whether a fairly-negotiated commercial lease may include a provision waiving the tenant’s right to sue for a declaratory judgment or seek a Yellowstone Injunction. TheAppellate Court balanced the right to bargain as one sees fit, against public policy, and decided that a negotiated waiver was enforceable and not against public policy.
And with that, a powerful litigation weapon was removed from a tenant’s arsenal.
WHAT CAN BE DONE?
The good news is that the Appellate Court has asked the New York Court of Appeals – the highest court in the state – to review its decision. How the Court of Appeals will rule is unknown. Whatever the outcome, the eventual decision by the Court of Appeals will be the law in New York and govern all future leases.
In the meantime, a tenant is likely to face a landlord who insists on waiver of these rights when negotiating a new lease or a renewal terms.
How could you, a tenant, protect yourself? Knowledge is power. After reading this you are likely to know more about the subject than most. Be alert to these kinds of clauses as they will likely be appearing in future leases. Know the risks. How likely is it that such a clause would come into play? Will you, as a tenant, be faced with short deadlines to complete work, file for permits, cure violations, make repairs? If so, waiving the ability to seek a Yellowstone Injunction may impact your tenancy. Know your potential landlord. Rarely are commercial leases presented on a take-it-or-leave-it basis. Perhaps the landlord is eager to rent the space, and is more interested in finding quality tenants than looking for shortcuts to terminate leases. Knowing what is negotiable, and what is off the table will go a long way toward a successful lease negotiation. Commercial tenants are not without bargaining power. Know your litigation options. Even if the right to seek a Yellowstone Injunction and a declaratory judgment is waived, a tenant can still defend itself in Landlord-Tenant Court. Perhaps the tenant can demonstrate that it did not default, or that the landlord did not follow proper procedure for asserting a default or terminating the lease. A tenant may also explore whether remedies under Chapter 11 of the United States Bankruptcy Code are available to preserve its valuable leasehold, and hold off eviction. A well-counseled tenant is not without options, even if certain litigation remedies have been waived.
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[1] Dylan, Bob. “The Times They Are A-Changin’.” Album, “The Times They Are A-Changin’,” Columbia 1964.
[2] A commercial tenant is one who leases space for business use, as opposed to residential use.