Commercial Landlord-Tenant—Waiver of Right to Seek Yellowstone Injunction Valid—Dissent Argued That Such waiver Is Violative of Public Policy

This decision involved an appeal by plaintiff commercial tenants (tenants), in an action for, inter alia, a judgment declaring that two long term “commercial leases are in full force and effect and that the [tenants] are not in violation of their obligations under the leases.” A trial court had “denied their motion for a Yellowstone injunction…and granted the [landlord's] cross motion for summary judgment dismissing the complaint.”

This appeal raised “an issue of first impression in the appellate courts of New York….” The salient issue was “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 Appellate Division (court) held that based on the facts of this case, “the…tenants' voluntary and limited waiver of declaratory judgment remedies in their…leases is valid and enforceable, and not violative of New York's public policy, particularly as the tenants…did not waive other available legal remedies.”

A rider to each 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. 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…. 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…, it is the intention of the parties hereto that their disputes be adjudicated via summary proceedings. [waiver]

Four years after commencement of the lease, the landlord issued Notices to Cure Violations (Notices to Cure), based on alleged breaches. The alleged breaches included “the failure to obtain various permits,” the creation of fire hazards, the existence of nuisances and noises, and the failure to allow for sprinkler system inspections by the Fire Department. The Notices to Cure demanded that the alleged violations be cured by March 27, 2014, “otherwise the [landlord] would terminate the tenancies and…commence summary proceedings to recover possession….” On or about March 19, 2014, the tenants commenced an action in the Supreme Court for declaratory and injunctive relief and damages for breach of contract. The complaint sought declaration that the leases are in effect and there were “no lease violations as alleged by the [landlord].” The tenants sought to enjoin the landlord from terminating the leases and asserted that “the [landlord] is equitably estopped from terminating the leases based on usages of the premises of which the [landlord] had been aware without objection” and that the tenants were entitled to money damages based on the landlord's breaches of contract.

The tenants sought a “Yellowstone injunction.” They denied that they breached the leases, but asserted that “they were…ready, willing, and able to cure any breaches…if obligated to do so.” The tenants claimed that it was the landlord's obligation to obtain “the necessary permits and certificates of occupancy [C of O],” and the landlord waived its other objections “by accepting years of rent payments with knowledge of the alleged violations.”

The landlord argued that the tenants “contractually waived the right to seek injunctive relief” and “cross-moved for summary judgment dismissing the complaint” based on the waiver, arguing that “the mere commencement of the declaratory judgment action constituted…grounds for terminating the tenancies.” The tenants countered that the waiver “did not separately prohibit Yellowstone injunctions” and “a blanket covenant not to sue” did not “extend to actions to enforce the obligations of the leases at issue.”

The trial court reasoned that “although the leases did not expressly prohibit Yellowstone applications, such relief was…encompassed within the broader provisions of [the waiver]…that prohibited declaratory judgment actions.” The trial court viewed the waiver “as an agreement to…resolve contractual disputes through…summary proceedings.” The trial court noted that the waiver “did not prevent any of the parties from performing the agreements,” or from suing for “damages for…breach of contract or tortious conduct.” The trial court did not address whether the waiver “violated public policy,” since that issue was not raised in the pleadings or in the moving papers. The trial court found that “all the [tenants'] claims were actual or disguised [claims] for declaratory relief,” denied the tenants' motion and granted the landlord's cross motion.

A movant for a Yellowstone injunction must establish “the existence of a commercial lease,” “the issuance by the landlord of a notice of default, notice to cure, or threat of termination of the lease,” “an application for a TRO made prior to the expiration of the cure period,” and a “desire and ability to cure any alleged default….” A traditional CPLR Art. 63 injunction requires that a movant demonstrate a likelihood of success on the merits, immediate irreparable harm and a balancing of the equities.

The court explained that “[a] practical interpretation of the [waiver]” is that the “declaratory relief that is waived by the tenants includes Yellowstone relief….” The court did not perceive “a distinction between a prohibited declaratory judgment action…, and…permissible Yellowstone relief….” The court stated that “breach of contract actions commenced by tenants lend themselves to standard injunctive remedies under CPLR Article 63….” Thus, the court held that the tenants had expressly waived “declaratory and Yellowstone injunction relief.”

In opposing the landlord's cross motion for summary judgment, the tenants argued that “the [landlord's] proof was insufficient, injunctive relief was independent of declaratory relief,…the waiver was a product of mutual mistake,” the landlord had breached the contract and “equitable estoppel barred the [landlord] from relying on the [waiver].”

“Where a contract provision is arguably” violative of public policy, that issue may be raised by a party for the first time at the Appellate Division, or “by the court on its own motion….” The court decided to address the merits of the public policy argument.

The court observed that “[a] bedrock principle of our jurisprudence is the right of parties to freely enter into contracts,” such right is “ensconced in…the United States Constitution” and “federal and New York courts have recognized that the autonomy of parties to contract is itself a sacred and protected public policy that should not be interfered with lightly….” and citizens have “the freedom…to abandon rights and privileges….” The court noted that tenants “oftentime waive” rights in leases, e.g., to waive “the right to a jury trial in nonpayment proceedings…. the waiver of counterclaims….”

Furthermore, the state Legislature “enacted protections for tenants that explicitly identify rights that may not be validly waived by them in oral or written leases,” e.g., “tenants may not waive the right of habitability.” However, “[t]he State Legislature has not enacted any…statutory provision prohibiting as void or unenforceable a tenant's waiver of declaratory judgment remedies….” The court noted that it “is not a legislative body” and it “should not attempt to create such a blanket prohibition here.”

The court also noted that waivers “must reflect a clear manifestation of intent to relinquish the protections that are otherwise afforded to the waiving party….” If “the consideration for a waiver is grossly unequal or of dubious value, the adequacy of consideration is not subject to judicial review absent fraud or unconscionability….” Here, the “parties were sophisticated entities that negotiated at arm's length and entered into lengthy and detailed leases…with great apparent care and specificity,” including the 36 paragraph rider and “several initialed handwritten changes and deletions.”

The court reasoned that “not enforcing contracts on grounds of public policy 'must be cautiously applied'….” and “[t]o hold that the waiver of declaratory judgment remedies in contractual leases between sophisticated parties is unenforceable as a matter of public policy does violence to the notion that the parties are free to negotiate and fashion their contracts with terms to which they freely and voluntarily bind themselves.” Additionally, courts lack the “authority to rewrite the terms of a contract or to extricate parties from poor bargains….” The court found that “[t]he plain language of the [waiver] reflects the parties' mutual intent to adjudicate disputes by means of summary proceedings. Declaratory and Yellowstone remedies are rights private to the plaintiffs that they could freely, voluntarily, and knowingly waive.” Accordingly, the court held that the waivers are enforceable.

The court also found that the waiver was not “unconscionable” based on the record on appeal. The record did not make clear “what good and valuable consideration the tenants may have received in exchange” for the waiver and any consideration was likely “aggregated within the broader bargains reached.”

The dissent contended that since in-possession tenants lack “statutory authority to commence summary proceedings under RPAPL 721,” enforcement of the waiver “leaves the [tenants] without affirmative judicial remedies.” The court opined that since the waiver is “a limited one,” public policy concerns are mitigated. Although the tenants gave up the right to seek a declaratory judgment, “other judicial remedies remained available to the [tenants],” e.g., “the right to receive notices to cure and an opportunity to correct any claimed breaches.” They retain their right to seek money damages if the landlord breached the contract or committed “tortious conduct” and had not waived their “right to fully litigate and defend themselves” in a Civil Court summary proceeding.

Furthermore, the tenants “remain in possession…if no summary proceeding is commenced against them, in which case inconvenience or prejudice to the [tenants] is significantly reduced, if not eliminated altogether.” If summary proceedings are commenced and the tenants are “vindicated,” they may continue in possession, “without legal molestation.” If the plaintiffs are unsuccessful in a summary proceeding, 'they are, absent a mutual settlement of issues, properly evicted….” and would have “no procedural cause to complain.”

The court further held that the “unequivocal language” demonstrates that the waiver is not, nor could have been, “a product of mutual mistake.” The court also believed that the waiver's legal fee language demonstrates the parties agreed “to the expedited and cost-saving procedures provided…by summary proceedings…, as compared with the lengthier and costlier declaratory judgment remedies under CPLR 3001.”

The tenants further argued that their breach of contract claim had been wrongfully dismissed. The tenants alleged that the landlord failed “to complete necessary work to obtain a new [C of O], which was required to convert the premises from an interim multiple dwelling…to commercial space” and that such failure “placed them, and their patrons, 'at risk.'” The court did not find specific lease language which addressed the alleged landlord obligations. Regardless, the court agreed that such claim “essentially sought declaratory relief that the [tenants] were not in breach of contract…or were excused from a finding of breach.” “The true nature of [that claim], while cloaked” as a breach of contract claim, was “a disguised request for a declaratory judgment, which the [tenants] waived….” Under the circumstances of this case, the court held that the breach of contract claim was properly dismissed.

The Dissent

A dissent asserted that “a broad provision in a commercial lease providing that the tenant waives its right to seek declaratory relief with respect to any provision of the lease, or with respect to any notice sent pursuant to the provisions of the lease, violates public policy and is,…, unenforceable.”

The tenants had denied the landlord's allegations and argued that “[the landlord] has realized how valuable our leasehold is and has chosen…to” evict us so that “it can profit from our hard work.” The tenants argued that the default notices lacked details “regarding the alleged lease violations, compromising the [tenants'] ability to prepare a defense to the allegations.” The tenants' engineer had asserted that based upon his review of various public records, “the configuration of the building was not a fire hazard, and…the only remaining work to be done under the pending [C of O] was the [landlord's] responsibility.” The engineer also stated that “for the application for a [C of O] to proceed,” the landlord had to submit a report with photographs to the DOB, pay certain fees to the DOB and await determinations regarding whether revised plans would be required.”

The dissent explained that Yellowstone injunctions provide “a strategic remedy for commercial tenants to preserve” their valuable leasehold interest “when served with a notice to cure defaults that are in dispute. A Yellowstone injunction stays the cure period “prior to its expiration.” Thus, a tenant may adjudicate the merits of an alleged default and, if the tenant is incorrect, it could still utilize the unexpired cure period to avoid lease termination. Since the Civil Court lacks jurisdiction to grant injunctive relief, “stay applications necessarily [are] made in Supreme Court….”

“There is no bright-line rule for determining whether a contractual clause violates public policy or for discerning the public policy with respect to a given subject matter.” Courts “may look to legislation, regulations and ordinances, and judicial precedent….” and evaluate “the prevailing practices and notions of the community as to what is in the interest of the general welfare of the society.” The dissent noted that “when a right has been created for the betterment or protection of society as a whole, an individual is incapable of waiving that right; it is not his to waive,”

After citing certain public policy examples, the dissent stated that “the right to bring a declaratory judgment action is not personal to an individual, but, rather, such action serves important societal functions,” e.g., it serves “some practical end in quieting or stabilizing an uncertain or disputed jural relation either as to present or prospective obligations'….,” it helps resolve “controversies before they escalate into a breakdown of the contractual relationship,” it permits parties to obtain “a judicial interpretation of their rights and obligations…, rather than suing for damages or specific performance after the fact, they may fulfill their promises….” The dissent opined that “to insist that P pursue D by coercive means when all P wants” is judicial guidance. “It's like ordering a person to threaten a neighbor with a stick when all he wants to do is have the neighbor sit down to table and reason together.”

The dissent noted, inter alia, that “the availability of some form of judicial review” is an important public policy consideration in upholding agreements to arbitrate….” In contrast, the waiver “divests the Supreme Court of jurisdiction to hear a declaratory judgment action….” The dissent believed that a summary proceeding, standing alone, does not provide “an adequate form of judicial review” for these kinds of disputes.

The dissent further explained that a tenant, faced with a seemingly baseless notice to cure, lacks standing to commence a summary proceeding. Such tenant would be dependent on the landlord commencing a summary proceeding to determine the validity of a notice to cure. The dissent noted that a landlord “could serve successive notices to cure, leaving the tenant in a metaphorical limbo, without recourse to initiate judicial proceedings for a determination of the tenant's rights.” Although a tenant could “theoretically remain in possession so long as the landlord accepted rent,” the tenant would have uncertainties as “to whether to improve the property, accept deliveries of new…merchandise, or to negotiate long-term agreements with customers or suppliers. The dissent argued that this is “the type of 'uncertain or disputed' jural relation that a declaratory judgment action seeks to rectify….” The dissent concluded that it would violate public policy “to permit parties in the plaintiffs' position to waive their right to seek declaratory relief and, by extension, a Yellowstone injunction.”

The dissent also reasoned that “since public policy protects the rights of society, the sophistication of the parties” is “irrelevant,” i.e., a party's sophistication may be relevant to “whether a contract is unconscionable,” but “a party's…sophistication does not grant it license to enter into contracts contrary to public policy….” The dissent noted that “the law also protects small businesspeople from…contracts that are against public policy.” The dissent reasoned that public policy should protect all parties from being bound by “harsh waivers that preclude them from affirmatively seeking meaningful judicial review to protect their leasehold….”

The dissent also argued the courts should not enforce waivers that were plainly “'the result of ignorance, improvidence, an unequal bargaining position[,] or w[ere] simply unintended'….” The dissent believed that the majorities' examples of permissible waivers for rights did not 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.” The dissent concluded that since the waiver would “deprive the [tenants] of any affirmative and meaningful means of accessing the courts, it violates public policy.” The dissent took no position as to “whether a more narrowly tailored contractual waiver pertaining to declaratory relief and/or Yellowstone injunctions would comport with public policy.”

The landlord had argued that if the court found the waiver to be unenforceable, “the consideration bargained for in exchange for the waivers would have to be restored to it.” However, the lease contained “a savings clause” that provides that if any lease provision is held to be “unenforceable, the remainder of the Lease…shall not be affected thereby….” Accordingly, the dissent asserted if the waiver is invalid, the leases would remain enforceable.

Finally, the dissent opined that the tenants had established its entitlement to a Yellowstone injunction and the landlord's cross motion for summary judgment should have been denied and the matter should have been remitted to the trial court for an appropriate undertaking.

159 MP Corp. v. Redbridge Bedford, App. Div., 2^nd Dep't, Case No. 2015-01523, Opinion by Dillon, JP. Chambers and Duffy, JJ. concur. Connolly, J., dissents in an Opinion.

Scott E. Mollen is a partner at Herrick, Feinstein.