Appellate Division, Second Department, Enforces Waiver Of Declaratory Relief In Commercial Lease Resulting In The Denial Of Tenent’s Yellowstone Injunction

• Posted on: Feb 9 2018

On January 31, 2018, the Second Department decided 159 MP Corp. v. Redbridge Bedford, LLC.  The Court in 159 MP, recognized that the “appeal raises an issue of first impression in the appellate courts of New York…” to the extent that it “address[ed] the question of whether written leases negotiated at arm’s length by commercial tenants may include a waiver of the right to declarative relief that is enforceable at law or, alternatively, whether such a waiver is void and unenforceable as a matter of public policy.”

The plaintiffs in 159 MP are related entities that leased from the defendant landlord commercial retail and storage space in Brooklyn for use as a supermarket and related purposes.  The commercial leases executed by the parties contained provisions that reads as follows:

[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.  Any breach of this paragraph shall constitute a breach of substantial obligations of the tenancy, and shall be grounds for the immediate termination of this Lease.  It is further agreed that in the event injunctive relief is sought by Tenant and such relief shall be denied, the Owner shall be entitled to recover the costs of opposing such an application, or action, including its attorney’s fees actually incurred, it is the intention of the parties hereto that their disputes be adjudicated via summary proceeding [(the “Waiver Provisions”)].

 Four years into a twenty-year lease (with an additional ten-year renewal option), tenants received from landlord a “Ten (10) Day Notice to Cure Violations” (the “Notice”).  In response, and prior to the cure period in the Notice (the “Cure Period”), tenants commenced an action in the Supreme Court for declaratory and injunctive relief and for breach of contract.  Also before the end of the Cure Period, tenants moved by order to show cause for a Yellowstone injunction staying and tolling the Cure Period and enjoining defendant landlord from terminating the leases.  (Yellowstone injunctions are fully discussed in Freiberger Haber LLP’s December 1, 2017 Blog Post: “Commercial Tenants Must Remain Aware of Yellowstone Injunctions”.)

Defendant landlord answered the complaint and, inter alia, asserted an affirmative defense that plaintiff tenants’ right to seek injunctive relief was contractually waived.  Landlord also cross-moved for summary judgment dismissing the complaint based on the Waiver Provision.

The Supreme Court denied tenants’ request for a Yellowstone injunction finding “that all the plaintiffs’ claims were actual or disguised causes of action for declaratory relief…”, and granted landlord’s cross-motion for summary judgment.

A divided Appellate Division, Second Department, affirmed the Supreme Court’s decision.  First, the Court held that tenants timely obtained Yellowstone injunctive relief.  However, in finding that such relief was unavailable to tenants in 159 MP, the Court stated that:

By nature and definition, a Yellowstone injunction is inextricably intertwined with the court’s role in resolving whether a tenant has breached provisions of the lease and, if so, whether any such breach shall be cured.  As here, a tenant’s preemptive action to have the court determine that the lease has not been breached is in the nature of declaratory judgment.  (Citations omitted.)

The Court rejected tenants’ argument that there was a distinction between the declaratory relief prohibited by the Waiver Provision and permissible Yellowstone relief because “[b]y nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it.”  Because “plaintiffs expressly waived both declaratory and Yellowstone relief pursuant to the [Waiver Provisions]”, the Court held that the Supreme Court properly denied the Yellowstone relief sought by tenants and granted landlord’s cross-motion for summary judgment dismissing the causes of action seeking declaratory relief.

Although tenants’ argument that the Waiver Provisions were void as against public policy was raised for the first time on appeal, the Court nonetheless addressed those arguments because “where a contract provision is arguably void as against public policy, that issue may be raised for the first time at the Appellate Division by a party, or by the court on its own motion.”  (Citation omitted.)  Upon consideration, the Court determined that the Waiver Provisions were not void.  Among other things, the Court relied on the fact that “[a] bedrock principle of our jurisprudence is the right of parties to freely enter into contracts” and that “our jurisprudence provides citizens with the freedom and opportunity to abandon rights and privileges.”  The Court also stated that while “[w]aivers of rights should not lightly be presumed,” the “parties were sophisticated entities that negotiated at arm’s length and entered into lengthy and detailed leases defining each party’s rights and obligations with great apparent care and specificity.” The plain language of the Waiver Provisions were found to “reflect[] the parties’ mutual intent to adjudicate disputes by means of summary proceedings.” Ultimately, the Court held that “[d]eclaratory and Yellowstone remedies are rights private to the plaintiffs that they could freely, voluntarily, and knowingly waive.”

The Court, in issuing its ruling, considered that notwithstanding the subject waivers plaintiffs had other remedies available to them to protect their interests.  For example, plaintiffs could have cured the breaches that were the subject of the Notice and sued landlord for breach of contract or otherwise.  Also, plaintiffs could have asserted defenses in any summary proceeding brought against them by landlord and, if successful, they would remain in possession.

In a lengthy dissent, Justice Connolly urged that the Waiver Provisions were void as against public policy and, therefore, unenforceable because their “enforcement…would deprive the plaintiffs of any meaningful means of accessing the courts….”

Tagged with: Commercial Leases, Commercial Litigation, Real Estate Law, Real Estate Litigation, Yellowstone Injunctions