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When parties are litigating over money, the question of who gets to hold the contested funds while the dispute is pending is often critical. This can become especially complicated in litigation over a commercial tenant's rent obligations where a Yellowstone injunction is involved. In such cases, much will depend upon the nature of the underlying dispute—and, in particular, the reasons why the tenant is not paying. A close examination of the case law shows why.

Background

A Yellowstone injunction—so named for the case out of which the concept arose, First Nat'l Stores, Inc. v. Yellowstone Shopping Ctr., Inc., 21 N.Y.2d 630 (1968)—is a species of preliminary injunction available to a commercial tenant whose landlord issues a notice of default and threatens to terminate the lease if the default is not cured within a certain period of time. It permits a commercial tenant that is able to cure the alleged default but disputes whether it should have to do so to toll the time to cure in order to obtain a court ruling on the issue. The tolling preserves the tenant's ability to cure the default (and thus avoid termination of the lease) if the court ultimately rules in the landlord's favor.

To get a Yellowstone injunction, the tenant has to show four things: (1) that it holds a commercial lease, (2) that it has received a notice of default from the landlord, (3) that it has applied for relief before the time to cure the default pursuant to the notice has expired, and (4) that it is willing and able to cure the alleged default by any means short of vacating the premises. There is no requirement that the tenant show a likelihood of success on the merits, irreparable harm, or that the equities balance in its favor. This makes the Yellowstone injunction substantially easier to obtain than any other kind of preliminary injunction. See Post v. 120 East End Ave. Corp., 62 N.Y.2d 19, 25 (1984).

A Yellowstone injunction is generally conditioned on the tenant paying a monthly sum—labelled "use and occupancy" but usually based on the rent set forth in the lease—for its continued use of the space. Often the tenant will also be required to post a bond to cover any damages the landlord will have incurred as a result of the tenant's actions if it turns out the landlord's position was correct. See, e.g., Koedderitzsch v. 541 Constr. Corp., 2008 WL 1998656 (Sup. Ct. N.Y. Co. Apr. 28, 2008).

This is straightforward in the typical Yellowstone scenario involving non-monetary defaults, such as the alleged unauthorized alterations and impermissible use that were at issue in Koedderitzsch. If the claimed default is a failure to pay rent, however, whether or not Yellowstone relief is available depends in the first instance upon what the landlord does in response. The tenant cannot pursue Yellowstone relief if the landlord simply commences a non-payment proceeding, because such a proceeding does not put the tenant's leasehold at risk: if the tenant loses, it can simply pay the rent. But if, instead, the landlord serves a notice to cure and specifies that absent a cure it will terminate the lease, Yellowstone relief is available. See, e.g., Lexington Ave. & 42^nd St. Corp. v. 380 Lexchamp Operating, Inc., 205 A.D.2d 421, 423-24 (1^st Dept. 1994).

This is where the question of use and occupancy—bluntly, who gets to hold the money—becomes more complicated. The purpose of a Yellowstone injunction is to preserve the status quo pending a determination of the underlying dispute. But where the underlying dispute is over whether rent is actually due, an order requiring the interim payment of an amount equal to the disputed rent could rightly be characterized as disrupting the status quo rather than preserving it. Courts generally will not award as interim relief the very thing that one of the parties is requesting in the underlying action.

On the other hand, given the ease with which Yellowstone injunctions are granted, a tenant should not be able to escape its obligation to pay for use of its space by simply disputing the rent.

Case Law

Cases that meaningfully address this conundrum are few and far between; often, use and occupancy is awarded as a matter of course with little or no analysis. But a closer look at cases that do contain a deeper analysis reveals a pattern: where use and occupancy is disputed, whether and to what extent it will be awarded may depend on the reason the tenant gives for not paying the rent the landlord claims is due.

On one side of the divide are cases where the tenant claims to be entitled to some form of rent reduction based on factors external to the lease—such as the condition of the premises, an allegation of misconduct by the landlord, or the like. In such circumstances, courts will generally require the tenant to pay use and occupancy as a condition to any Yellowstone injunction. Even here, however, what is awarded may not be the full amount claimed by the landlord (see, e.g., Metropolitan Transp. Auth. v. 2 Broadway LLC, 279 A.D.2d 315 (1^st Dept. 2001)), and the tenant may be directed to pay it into court rather than to the landlord directly (see, e.g., P.J. Clarke's on the Hudson LLC v. WFP Retail Co., LLP, 2014 WL 3533449 (Sup. Ct. N.Y. Co. July 17, 2014)).

On the other side are disputes involving whether the lease actually requires the tenant to pay any rent at all. These arise where the lease provides that the tenant's obligation to pay rent will commence upon the happening of a particular event (such as the issuance of a governmental approval) or the satisfaction of particular conditions (such as the completion of specified construction), and the parties disagree on whether or when the event occurred or the conditions were satisfied. In those instances, courts have been known to deny use and occupancy altogether (see, e.g., Global Business School, Inc. v. R.E. Broadway Real Estate, II, LLC, 38 A.D.3d 451 (1^st Dept. 2007)), or award it only if and to the extent that a portion of the rent is undisputed (see, e.g., 51 Park Place LH, LLC v. Consolidated Edison Co. of New York, 34 Misc.3d 590, 593-94 (Sup. Ct. N.Y. Co. 2011)).

Although none of these decisions expressly articulates a unifying principle, taken together they suggest one. If the parties' dispute is over whether the rent specified in their lease should be reduced or discounted because of external events, the tenant is effectively seeking to vary the terms of the lease based on those events. The presumption in such a case—whether it is stated or not—appears to be that the lease terms control until the tenant has demonstrated that they should not. This weighs against allowing the tenant the full benefit of the claimed reduction or discount during the Yellowstone period (although, as noted, the court may compromise by requiring the disputed portion to be paid into escrow rather than to the landlord).

If the dispute is over whether the lease requires the payment of any rent at all, however, by definition the court cannot look to the contract to determine what rent the tenant would be paying absent litigation. Under those circumstances, for the court to award use and occupancy equal to the amount claimed by the landlord as rent would pre-determine the parties' dispute about the meaning of the lease and—as then-Justice Sheila Abdus-Salam aptly put it—"improperly award [the landlord] all of the relief that it seeks." Duane Reade v. Stoneybook Realty, LLC, 2004 WL 5715409 (Sup. Ct. N.Y. Co. Jan. 20, 2004). This weighs against such an award.

This does not mean that a Yellowstone injunction in this context will be without cost to the tenant. As noted above, a Yellowstone injunction is often conditioned upon the posting of a bond—and if the parties' dispute is about the rent, the fact that the tenant is not paying interim use and occupancy will likely mean that the bond must be that much greater in order to provide adequate security to the landlord, particularly if it might be entitled to interest or late charges if rent is found to be owed. See Graubard Mollen Horowitz Pomerantz & Shapiro v. 600 Third Avenue Assocs., 93 N.Y.2d 508 (1999).

The ultimate question of whether either party actually gets to hold the money may nevertheless be important, and requires a more subtle analysis. The facts and circumstances at issue matter significantly, and must be weighed by both landlords and tenants. A sound strategy will depend on it.

Adrienne B. Koch is a litigation partner with Katsky Korins in New York.