The Second Department recently released a decision which, if followed by commercial landlords, over time may signal the demise of Yellowstone proceedings. In 159 MP Corp. v. Redbridge Bedford, LLC, the Court (over a strong dissent) held that a written lease, negotiated at arm’s length by a commercial tenant, may include the waiver of a right to declaratory judgment relief – and held that such a waiver is not void and unenforceable as a matter of public policy.
A Yellowstone proceeding is, at its foundation, a declaratory judgment action. So, unless 159 MP Corp. is appealed to and reversed by the Court of Appeals, going forward commercial leases may include a waiver of the right to Yellowstone relief. Such a change would have dramatic procedural and evidentiary significance. In a classic Yellowstone proceeding, the commercial tenant is given the benefit of the doubt to maintain the status quo. Under 159 MP Corp., the historical assumptions and presumptions in favor of the tenant under the Yellowstone legal regime would no longer be available.
159 MP Corp. v. Redbridge Bedford, LLC, 2018 NY Slip Op 00537, App. Div. 2d Dept. (January 31, 2018)
The Second Department addressed the following issue of first impression:
[W]hether 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.
[U]nder the circumstances of this case, the commercial tenants’ voluntary and limited waiver of declaratory judgment remedies in their written leases is valid and enforceable, and not violative of New York’s public policy, particularly as the tenants in this instance did not waive other available legal remedies.
The Court summarized the facts:
On April 7, 2010, the plaintiffs, 159 MP Corp. and 240 Bedford Ave Realty Holding Corp., entered into leases for 10,000 square feet of retail space and 3,000 square feet of storage space, respectively, at premises located at 159 North 3rd Street, also known as 241 Bedford Avenue, also known as 160 North 4th Street, in Brooklyn. The original landlord on the leases, BFN Realty Associates, LLC, was later succeeded by the defendant, Redbridge Bedford, LLC. Each lease was to run for 20 years from May 1, 2010, with a 10-year renewal option.
Paragraph 67(H) in the rider of 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. 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 proceedings.
Four years later, on March 12, 2014, the defendant issued to each of the plaintiffs a “Ten (10) Day Notice to Cure Violations”…arising out of their alleged breaches of stated paragraphs of the leases and their riders. The plaintiffs’ alleged breaches included the failure to obtain various permits, the arrangement of the premises in a manner that created 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 lease violations be cured by March 27, 2014, which was 15 days from the date of the documents, otherwise the defendant would terminate the tenancies and thereafter commence summary proceedings to recover possession of the premises.
The prior proceedings:
On or about March 19, 2014, the plaintiffs commenced an action in the Supreme Court for declaratory and injunctive relief, and to recover damages for breach of contract. Specifically, the first cause of action was for a judgment declaring that the leases are in full force and effect and that there are no lease violations as alleged by the defendant. The second cause of action was for preliminary and permanent injunctive relief, enjoining the defendant from taking any steps to terminate the leases. The third cause of action was for a judgment declaring that the defendant is equitably estopped from terminating the leases based on usages of the premises of which the defendant had been aware without objection. The fourth cause of action sought money damages for the defendant’s own breaches of contract.
On March 26, 2014, prior to the expiration of the stated cure period, the plaintiffs moved by order to show cause for a Yellowstone injunction…staying and tolling the cure period and enjoining the defendant from terminating the leases or commencing a summary proceeding for eviction. In their supporting papers, the plaintiffs argued that although they disputed the claim that they had violated the leases, they were nevertheless ready, willing, and able to cure any breaches of the leases if obligated to do so. The plaintiffs maintained that the defendant, as the property owner, was instead responsible for the necessary permits and certificates of occupancy, and that the defendant had waived its other objections by having accepted years of rent payments with knowledge of the alleged violations.
The defendant interposed an answer dated April 25, 2014, denying the material allegations of the complaint and asserting an affirmative defense that the plaintiffs “have contractually waived the right to seek injunctive relief.” Contemporaneously, the defendant cross-moved for summary judgment dismissing the complaint based on the waiver language of Paragraph 67(H) in the two lease riders, contending that the mere commencement of the declaratory judgment action constituted contractual grounds for terminating the tenancies.
In opposition to the cross motion, the plaintiffs argued that the provision of the leases waiving the right to declaratory relief did not separately prohibit Yellowstone injunctions. Further, the plaintiffs argued that a blanket covenant not to sue cannot be interpreted to extend to actions to enforce the obligations of the leases at issue.
The decision of Supreme Court:
In the order appealed from, dated January 29, 2015, the Supreme Court denied the plaintiffs’ motion for Yellowstone relief. The court reasoned that although the leases did not expressly prohibit Yellowstone applications, such relief was nevertheless encompassed within the broader provisions of Paragraph 67(H) in the riders that prohibited declaratory judgment actions. The court construed the waiver of declaratory remedies as an agreement to instead resolve contractual disputes through the mechanism of summary proceedings. The court further noted that the waiver of declaratory remedies did not prevent any of the parties from performing the agreements, or from commencing actions seeking damages for either breach of contract or tortious conduct. The court did not address whether the plaintiffs’ waiver of declaratory judgment remedies in Paragraph 67(H) of the riders violated public policy, as the issue had neither been raised in the pleadings nor in any of the papers submitted in connection with the plaintiffs’ motion or the defendant’s cross motion. Finding that all the plaintiffs’ claims were actual or disguised causes of action for declaratory relief, the court denied the plaintiffs’ motion and granted the defendant’s cross motion for summary judgment dismissing the complaint.
On March 2, 2015, this Court granted the plaintiffs’ application for a temporary stay of the defendant’s enforcement remedies, which was thereafter extended by a decision and order on motion of this Court dated March 26, 2015, pending the determination of this appeal.
Yellowstone proceedings generally:
A Yellowstone injunction is not a creature of statute…It is, instead, a creation of case law originating in 1968 with the decision of the Court of Appeals in First Natl. Stores v Yellowstone Shopping Ctr.…While Yellowstone is a relatively brief opinion, its brevity should not be interpreted as lacking in importance since Yellowstone’s impact in landlord-tenant litigation is as strong today as it was when it was rendered nearly 50 years ago[.]
In Yellowstone, the landlord of commercial premises was contractually obligated to provide its tenant with a 10-day notice to cure for any default in the tenant’s performance of the lease, and the tenant’s failure to cure permitted the landlord to terminate the lease, re-enter the premises, and evict the tenant…The landlord served the tenant with a 10-day default notice for the tenant’s failure to comply with a sprinkler order issued by the Fire Department. In response, the tenant commenced an action for a judgment declaring that sprinkler compliance was the responsibility of the landlord rather than the tenant. Nine days later, the tenant moved by order to show cause for a preliminary injunction to enjoin the landlord from enforcing its remedies under the lease. However, the tenant did not seek a temporary restraining order…to prevent the landlord from enforcing default remedies while the motion for a preliminary injunction was pending. Absent a TRO, the cure period expired, and the landlord terminated the lease. The Supreme Court ultimately declined to exercise jurisdiction over the matter, finding that the tenant’s defenses could be asserted in a summary proceeding…On appeal to this Court, we reached the merits of the declaratory judgment action by unanimously finding that the tenant was the party responsible for sprinkler compliance under the relevant language of the lease…However, this Court split 3-2 on the collateral question of whether to recognize the tenant’s request for a preliminary injunction. The majority, invoking powers of equity, noted that since the tenant had acted in apparent good faith by promptly initiating its declaratory judgment action, it would be harsh and inequitable to allow a termination of the lease and the tenant’s eviction from the premises…This Court therefore permanently enjoined the landlord from commencing a summary proceeding on the condition that the tenant install and pay for a sprinkler system within 20 days…The dissent reasoned that since the tenant had, in fact, defaulted, and the lease was terminated while no injunction was in place, the courts were without authority to even recognize a continuing landlord-tenant relationship between the parties[.]
On further appeal, the Court of Appeals, while agreeing with this Court that the tenant had breached a provision of its lease by failing to install a sprinkler system at the premises, nonetheless agreed with the dissent that given the landlord’s 10-day notice to cure and the lease’s termination thereafter, the Supreme Court had no basis to fashion any relief for the tenant, legal, equitable, or otherwise[.]
Yellowstone is a case where the result might well have been different had the tenant sought and obtained a TRO at the outset of the litigation, to preserve the status quo and continue the lease while the declaratory judgment action was pending. Such are the vagaries and pitfalls of litigation. The true importance of the case is its implicit acceptance of a commercial tenant’s presumptive right of action to extend noticed cure periods and thereby forestall or avoid lease terminations and evictions until the merits of commercial lease disputes can be resolved by the courts[.]
The Yellowstone template:
In the years since the Yellowstone case was decided in 1968, the courts have defined the four elements that tenants must establish for Yellowstone injunctions: (1) the existence of a commercial lease, (2) the issuance by the landlord of a notice of default, notice to cure, or threat of termination of the lease, (3) an application for a TRO made prior to the expiration of the cure period, and (4) the tenant’s desire and ability to cure any alleged default by means short of vacating the premises…These elements are less stringent than those required for the issuance of standard preliminary injunctive relief under CPLR article 63…Perhaps the most contentious of the Yellowstone elements are the third element regarding the timing of the application for injunctive relief, and the fourth element regarding the tenant’s desire and ability to cure alleged lease breaches.
In this action, the Appellate Division found that the plaintiffs had timely sought Yellowstone relief at the trial and appellate levels, thereby effectively extending the cure period:
Paragraph 67(H) of the lease:
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[.]
A practical interpretation of the language of Paragraph 67(H) in the parties’ lease riders is that declaratory relief that is waived by the tenants includes Yellowstone relief such as that sought here from the Supreme Court…This is true in light of other language, also contained within Paragraph 67(H), that
“[i]t 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 proceedings” (emphasis added).
The plaintiffs’ argument that there is a distinction between a prohibited declaratory judgment action on the one hand, and permissible Yellowstone relief on the other, is of no moment, as the latter cannot exist without the former. By nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it. By contrast, breach of contract actions commenced by tenants lend themselves to standard injunctive remedies under CPLR article 63…Accordingly, we hold that insofar as the plaintiffs expressly waived both declaratory and Yellowstone relief pursuant to the terms of Paragraph 67(H) in their lease riders, the Supreme Court properly denied their motion for a Yellowstone injunction and granted those branches of the defendant’s cross motion which were for summary judgment dismissing the first, second, and third causes of action.
Finding that the lease waived both declaratory and Yellowstone relief instructing that:
A bedrock principle of our jurisprudence is the right of parties to freely enter into contracts. So fundamental is the right to contract without interference from any state, that it is ensconced in Article 1, Section 10, Clause 1 of the United States Constitution. Not only is the freedom to contract constitutionally protected, but 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[.]
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Leases, in particular, are known for the rights that tenants oftentime waive within the four corners of the documents. For example, tenants surrender rights by agreeing to the waiver of the right to a jury trial in nonpayment proceedings…the waiver of counterclaims…nonexcessive late fees for the untimely payment of rent [and] automatic rent escalation clauses[.]
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Here, 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. While standardized lease forms were used, the record reflects that each such lease agreement consisted of 39 paragraphs of initial or boilerplate terms, 9 paragraphs of “Rules and Regulations” incorporated into the leases by reference, a rider consisting of 36 paragraphs, and several initialed handwritten changes and deletions. Paragraph 67(H) in each rider contains the provision by which the tenants waived their right to declaratory judgment actions, in favor of, instead, expressly adjudicating disputes via summary proceedings.
The right to a declaratory judgment, inclusive of the Yellowstone relief sought here, is not so vaulted as to be incapable of self-alienation. As noted earlier, Yellowstone remedies are not a creature of any constitution or statute. [T]he principle of not enforcing contracts on grounds of public policy “must be cautiously applied”…To 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. The fact that with the benefit of hindsight, a party believes that it had agreed to an unfavorable contractual term, does not provide courts with authority to rewrite the terms of a contract or to extricate parties from poor bargains…Rather, parties to contracts must ordinarily remain free to make the agreements they wish, on terms they deem satisfactory, no matter how unwise it might appear to a third party…or to a party with the benefit of 20/20 hindsight. As aptly noted by the Court of Appeals, absent counteravailing public policy, if parties “are dissatisfied with the consequences of their agreement, the time to say so [was] at the bargaining table’“…Here, the plain language of the lease riders 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. We therefore enforce the waivers in the lease riders and decline to strike them[.]
Noting that the plaintiff/tenant had other avenues for relief:
The waiver provision is, itself, a limited one, thereby mitigating the public policy concerns. While the right to bring a declaratory judgment action was surrendered in Paragraph 67(H) in the lease riders, other judicial remedies remained available to the plaintiffs. Indeed, despite the provisions of Paragraph 67(H), the plaintiffs had the contractual right to receive notices to cure and an opportunity to correct any claimed breaches. The plaintiffs did not expressly surrender the right to seek money damages from the defendant if the defendant were to breach the contract or commit tortious conduct injurious to persons or property…The plaintiffs also did not surrender the right to fully litigate and defend themselves in any summary proceeding that the defendant might commence in Civil Court[.]
Moreover, as a practical matter, the plaintiffs necessarily remain in possession of the demised premises if no summary proceeding is commenced against them, in which case inconvenience or prejudice to the plaintiffs is significantly reduced, if not eliminated altogether. If a summary proceeding is commenced, the plaintiffs are permitted to present whatever factual and legal defenses may be available to them. If the plaintiffs are vindicated at any such summary proceeding, they may continue to quietly enjoy possession of the premises without legal molestation. If the plaintiffs are unsuccessful with their summary proceeding defenses, they are, absent a mutual settlement of issues, properly evicted from the premises from which they would have no further right to use and enjoy and no procedural cause to complain.
One Justice issued a strong and lengthy dissent, noting that:
The Yellowstone decision implicitly created a strategic remedy for commercial tenants to preserve their valuable property interest in the leasehold when served with a notice to cure defaults that are in dispute. By obtaining an injunction staying the running of the cure period prior to its expiration, a tenant could adjudicate the merits of the alleged lease default and, even if the tenant was ultimately found in default, it could still utilize the unexpired cure period to avoid lease termination. “While seemingly unremarkable, the Yellowstone case ushered in a new era of commercial landlord-tenant law in New York State. As a result of this decision, tenants developed the practice of obtaining a stay of the cure period before it expired to preserve the lease until the merits of the dispute could be resolved in court”…”Because Civil Court does not have jurisdiction to grant injunctive relief, stay applications necessarily [are] made in Supreme Court in conjunction with an action for declaratory judgment”[.]
“A Yellowstone injunction maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture”…While the Yellowstone injunction stays the cure period, it does not stay or alter the parties’ remaining rights and obligations under the lease…”It is well settled that in order to obtain a Yellowstone injunction, the moving party must demonstrate that: (1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises”…”[T]he courts, in granting Yellowstone relief, require far less than the showing normally required for obtaining preliminary injunctive relief”…which “reflect[s] and reinforce[s] the limited purpose of a Yellowstone injunction: to stop the running of the applicable cure period”[.]
The contractual waiver at issue in the case at bar is notable in that it facially prohibits the plaintiffs from commencing a declaratory judgment action with respect to any provision of the lease or notice sent pursuant thereto. However, the right to bring a declaratory judgment action is not personal to an individual, but, rather, such action serves important societal functions. “The general purpose of the declaratory judgment is to serve some practical end in quieting or stabilizing an uncertain or disputed jural relation either as to present or prospective obligations”…The declaratory judgment action serves an important public policy function in resolving controversies before they escalate into a breakdown of the contractual relationship: “[The declaratory judgment action] was designed to supply the need for a form of action that would set controversies at rest before they led to the repudiation of obligations, the invasion of rights and the commission of wrongs”…Thus, the declaratory judgment action promotes civility in contractual relations, allowing the parties to obtain a judicial interpretation of their rights and obligations so that, rather than suing for damages or specific performance after the fact, they may fulfill their promises to one another. “It is in fact a paradox to insist that P pursue D by coercive means when all P wants is a judicial statement resolving their dispute. 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”…In my view, contracting parties should not be permitted to execute broad waivers of the important right to seek declaratory relief.
More specific to the landlord-tenant context, the declaratory judgment action, together with the Yellowstone injunction, serve a valuable public policy role in relations between commercial landlords and tenants, providing a mechanism for a commercial tenant to “protect its valuable property interest in the lease while challenging the landlord’s assessment of its rights”…Without the Yellowstone injunction, “[t]he alternative for the tenant [is] to stand on his rights without correcting the violation, wait for the landlord to start summary proceedings in Civil Court and then defend against the landlord’s claim in that court. If he [wins], well and good; if he [loses] he forfeit[s] everything because the lease [has] terminated”…However, where the Yellowstone injunction is employed, “[i]f the tenant prevail[s] he ha[s] no further need for a stay. If he los[es], he [may] either cure[ ] the default during whatever part of the cure period remain[s] or the lease expire[s] and he [is] subject to removal by summary proceeding”[.]
Riesenburger Props. LLLP v. Pi Assoc., LLC, 2017 NY Slip Op 08294, App. Div. 2d Dept. (November 22, 2017)
Supreme Court denied the application for a Yellowstone injunction by Pi Assoc., LLC and James Pi.
The Appellate Division briefly summarized the facts:
In April 2003, the plaintiff landlord entered into a lease of certain commercial property with the defendant tenant, Pi Associates, LLC…Subsequently, the plaintiff served 15-day notices of default dated October 7, 2014, on Pi Associates and its principal, the defendant James Pi, alleging several defaults, which included the assignment of the lease, without the plaintiff’s prior written consent, to the defendant 3909 Main Street, LLC…In a written response, counsel for 3909 Main denied any defaults under the lease. On December 1, 2014, the plaintiff served 3-day notices of cancellation on Pi Associates, James Pi, and 3909 Main[.]
The prior proceedings:
On December 2, 2014, the plaintiff commenced this action seeking, inter alia, a judgment awarding it possession of the subject property. On December 4, 2014, more than 30 days after the expiration of the cure period, the Pi defendants moved for a Yellowstone injunction…In an order entered June 3, 2015, the Supreme Court denied the Pi defendants’ motion for a Yellowstone injunction on the ground that the motion was untimely. The Pi defendants then moved, inter alia, for leave to renew their motion. In an order entered October 14, 2015, the Supreme Court denied that branch of their motion[.]
The legal template:
A Yellowstone injunction maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture’ of the lease”…”To obtain a Yellowstone injunction, the tenant must demonstrate that (1) it holds a commercial lease, (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure, and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises’”[.]
“[A]n application for Yellowstone relief must be made not only before the termination of the subject lease . . . but must also be made prior to the expiration of the cure period set forth in the lease and the landlord’s notice to cure”…”Where a tenant fails to make a timely request for a temporary restraining order, a court is divested of its power to grant a Yellowstone injunction”[.]
Concluding that the application was properly denied:
Here, the Supreme Court properly denied the Pi defendants’ motion for a Yellowstone injunction because they did not move for injunctive relief until after the cure period expired and after the notice of cancellation of the lease had been served[.]
Glaze Teriyaki, LLC v. MacArthur Props. I, LLC, 2017 NY Slip Op 07770, App. Div. 1st Dept. (November 9, 2017)
Supreme Court, after a non-jury trial, dismissed several of defendant’s counterclaims.
The Appellate Division briefly summarized the facts:
Plaintiff owns a fast food restaurant. Defendant is plaintiff’s landlord. By notice dated October 23, 2013, defendant notified plaintiff that it was in default of the lease due to an improper exhaust system that violated the 2008 New York City Mechanical Code[.]
The prior proceedings:
On November 7, 2013, plaintiff commenced this action, seeking, inter alia, to enjoin defendant from terminating the lease and a declaration that plaintiff was not in default. Plaintiff then moved for a Yellowstone injunction and obtained a temporary restraining order.
On November 26, 2013, Supreme Court…(Eileen Bransten, J.), held a hearing on plaintiff’s request for a Yellowstone injunction at which defendant’s expert testified that MC §§ 506.5.6 and 508.1 require that restaurant cooking appliances and “[a]ll of the components of the kitchen hood exhaust system have to be interlocked,” including “the exhaust and makeup air systems,” so that all components work on a single switch, and no single component can be turned on without the other components being on. Based on the evidence presented, the court ruled that plaintiff had violated the Code, and thus the lease, by failing to have “interlocking mechanisms in the [cooking exhaust] hood and in the electrical work and in the precipitator;” that the notice to cure was appropriate; and that the condition was curable. The court directed plaintiff to cure by the next court date, December 17, 2013. After plaintiff’s counsel pointed out to the court that he had not had an opportunity to cross-examine defendant’s expert, the court stated that he would be afforded an opportunity to do so “if he so wishes.” However, counsel did not raise the issue at either of the next two court dates.
On December 17, 2013, a Tuesday, plaintiff advised the court that it had not yet cured the condition. The court directed that an electrician “fix the problem at [plaintiff’s] cost” by the following Thursday, December 19, 2013, to which plaintiff’s counsel responded, “Fair enough.”
The court further directed plaintiff’s counsel to bring proof on the next court date, January 8, 2014, that plaintiff had paid all rent and additional rent due.
On January 8, 2014, the court directed on the record that the Yellowstone injunction be lifted due to plaintiff’s failure to pay all sums due to the landlord under the lease. This directive was reduced to a written order entered on February 18, 2014, that denied plaintiff’s application for a Yellowstone injunction “for the reasons stated on the December 17, 2013 and January 8, 2014 records.”
On January 14, 2014, defendant served plaintiff with a notice of cancellation of the lease. On or about January 15, 2014, defendant filed an answer with counterclaims seeking a judgment of possession on its first counterclaim for failure to cure Mechanical Code violations; an order requiring plaintiff to cure the Mechanical Code violations on its second counterclaim; damages for breach of contract on its third counterclaim; a money judgment and judgment of possession on its fourth counterclaim for nonpayment of rent and additional rent; use and occupancy on its fifth counterclaim; and counsel fees on its sixth counterclaim.
By order entered July 28, 2014, plaintiff’s complaint was dismissed [and] defendants’ counterclaims were severed[.]
By order entered February 3, 2016, the Supreme Court…held that Justice Bransten’s earlier orders, none of which had been appealed, were the law of the case. It then scheduled a trial at which it limited the scope of evidence to be presented to “whether [plaintiff] cured the violations of the Mechanical Code requiring that [its] exhaust system, precipitator, odor equipment (the Exhaust System’) interlock with each other so that no cooking appliances are in operation when any part of the Exhaust System is not in operation.” The court reserved the issue of “payments, if any, owed by plaintiff to the defendant-counterclaimant for past rent, additional rent, and use and occupancy” for possible referral to a special master. A trial on the issue of whether or not the Mechanical Code violations had been cured was held on February 3 and 26, 2016. At trial, Joel Berkowitz, managing partner of Fireproofing Corporation of America…testified that FCA completed work to “interlock the precipitator with the exhaust fan” on December 31, 2013 (which was after the December 19, 2013 deadline set by Justice Bransten), but that plaintiff “wanted to keep the makeup air fan independent of the exhaust fan,” so work was not performed by FCA to interlock the makeup air fan with the other exhaust system components. Defendant’s expert also testified that, as of February 19, 2016, the makeup air fan was still not interlocked with the other components, in violation of the Code.
Despite its earlier ruling that Justice Bransten’s orders were the law of the case and that the only issue at trial was whether the Code violation had been cured, the trial court issued an order after trial, entered June 1, 2016, that found that defendant had failed to establish any violation of the Code, determined that the notice of cancellation was null and void, and enjoined defendant from terminating the lease based upon the notice. The court dismissed defendant’s first, second, third and sixth counterclaims, and referred the remaining counterclaims to a special referee to determine the amount of outstanding rent and/or use and occupancy and other charges owed[.]
The “law of the case” doctrine:
The “law of the case doctrine is designed to eliminate the inefficiency and disorder that would follow if courts of coordinate jurisdiction were free to overrule one another in an ongoing case”…Here, the trial court was prohibited from finding that plaintiff’s commercial kitchen exhaust system did not violate the Mechanical Code. The trial court adopted the earlier finding by Justice Bransten, referenced in the February 18, 2014 order, when it held that her orders were the “law of the case,” and limited the issue at trial as set forth above.
Plaintiff was afforded a full and fair opportunity to litigate this issue before Justice Bransten, and was offered the opportunity, if it wished, to schedule cross-examination of defendant’s expert…It did not do so, and essentially conceded the existence of the Code violation when its counsel responded, “Fair enough,” to the court’s directive on December 17, 2013 that the violation be cured at plaintiff’s expense.
[T]he evidence presented at the 2016 trial, including unrefuted expert testimony, established that plaintiff’s commercial kitchen exhaust system continued to violate MC § 508.1. The evidence demonstrated that the mechanical makeup air fan in plaintiff’s kitchen was operated independently of the exhaust system, by a separate switch, in violation of MC § 508.1 and that the violation had not been cured as of February 19, 2016.
Thus, defendant is entitled to the relief it seeks. Accordingly, defendant’s counterclaims are reinstated, and defendant is entitled to a judgment of possession and the issuance and execution of a warrant of eviction resulting from plaintiff’s continued holdover after its lease had been terminated as of January 21[.]
Swiss Institute v. 130 Second Realty, LLC and SM ITC I 130 Second, LLC, Sup. Ct. NY Co. (March 29, 2018)
Supreme Court outlined the facts and pending motions:
The plaintiff is a not-for-profit corporation that occupies the entire two-story building owned by the defendants pursuant to a 10-year lease commencing on August 2, 2016. In response to the defendants’ service a notice to cure a default, dated June 7, 2017, the plaintiff commenced this action for declaratory relief with respect to its rights and obligations under the lease. It also moves for a Yellowstone injunction…to stay termination of the lease and to enjoin the defendants from commencing or continuing any attempts to terminate the lease or evict it from the leased premises pending determination of the action.
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The plaintiff separately cross-moves for summary judgment on the first cause of action, which seeks a judgment declaring that its contractor is deemed approved to construct alterations qualifying for a refurbishment allowance under Art. 1.3 of the Lease and a money judgment in the amount of $262,113.56 for refurbishment work. The defendants oppose that cross motion.
The Court summarized the legal template:
The applicant for a Yellowstone injunction must establish that, “(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises”…It is well settled that a plaintiff need not admit responsibility for the alleged default set forth in a notice to cure in order to establish entitlement to relief under Yellowstone, provided that the plaintiff remains willing and able to cure, should a default be found[.]
Here, the plaintiff established its entitlement to a Yellowstone injunction by demonstrating that it holds a commercial lease, it received a notice to cure from the defendants, it requested Yellowstone relief prior to both the termination of the lease and the cure period, and it remains willing to cure any default found by any means short of vacating the premises…The plaintiff denies that it was in default of the lease by allegedly declining to execute an estoppel certificate in favor of the defendant landlords so that they could secure financing. The plaintiff alleges that it truthfully executed the certificate with conditions and exceptions, and that although the lease requires it to execute such a certificate at the defendants’ request, it cannot be compelled to execute a statement that it is untruthful. Specifically, the plaintiff asserts that it truthfully asserted in the certificate that the defendants have yet to provide it with a refurbishment allowance, as required by the lease, and failed properly to maintain structural portions of the roof, as required by the lease. The plaintiff further contends that it is entitled to an abatement of rent under the lease, inasmuch as the defendants’ failure to perform repairs to the roof has restricted its access thereto. The plaintiff nonetheless maintains its willingness and ability to cure any defaults, if ultimately found by the court…Therefore, the plaintiff’s motion for a Yellowstone injunction is granted.
205-215 Lexington Ave. Assoc. LLC v. 201-203 Lexington Ave. Corp., 2018 NY Slip Op 30369(U), Sup Ct. N.Y. Co. (February 28, 2018)
Tenant applied to the Court for a Yellowstone injunction restraining the landlord from taking any action to terminate the lease by reason of tenant’s exercise of an option to renew the time thereof after the time to do so expired.
The Court summarized the facts:
Landlord entered into a long-term commercial ground lease with Tenant’s predecessor in interest on February 27, 1963. Landlord also entered into an agreement with Tenant’s predecessor in interest, dated April 25, 1966, which authorized the construction of six specified connection, or cut-throughs…between the Premises and an adjoining building located at 215 Lexington Avenue…The leasehold interest was subsequently transferred and assigned, with Tenant taking over the Lease on May 23, 2000.
The Lease’s initial 55-year term expires on February 27, 2018. However, the Lease provides for two successive renewal terms of 22 years each. Pursuant to Article 21 of the Lease, to exercise its right to renew the Lease, Tenant must not be in default “in respect to a matter as to which notice of default has been given hereunder” and must, “at least twelve (12) months prior to the first renewal term [February 27, 2018, i.e. no later than February 27, 2017], . . . notify Landlord of its election to exercise the right to renew the term of this lease for the first renewal term.” Upon renewal, Landlord would receive an adjustment in the rent equal to 6% of the fair market value of the Premises “considered as vacant and unimproved, unencumbered by this lease” as of the commencement of the renewal term pursuant to section 21.02 of the Lease.
According to David Eshaghian…the Tenant’s managing member, when Tenant took over the Lease in 2000, the Premises had recently gone through a foreclosure sale, “was in dire need of repair and the vacancy rate was approximately 40%.” He states that Tenant made major improvements to the premises over the course of the tenancy with the intention of retaining the Lease for the maximum term. Since 2000, Tenant has allegedly spent approximately $2.4 million on improvements to the Premises, of which $1.5 million was spent in the last 5 years, and approximately $425,000 in the five months preceding the instant action. These improvements include, among other things, opening additional connections to 215 Lexington and constructing a sky bridge between the two buildings, repairing the façade, installing sprinklers, upgrading the elevator mechanicals, and most recently, renovating the lobby. As to the lobby renovation, Tenant allegedly spent: $23,700 on November 27, 2016 for architectural and consulting fees; $376,367 on May 2, 2017 for “Lobby Renovation & upgrade”; $21,376 on March 24, 2017 for light fixtures; and $13,400 on August 11, 2017 for automatic handicapped doors.
Tenant failed to issue its notice of renewal by February 27, 2017. Eshaghian states that this was due to “office failure caused by extenuating personal circumstance.” He states that Tenant is “in essence a family business run predominantly by [him], [his] daughter, and [his] spouse, together with a bookkeeper and a secretary” and that, at the time the notice of renewal was due, his adult son was facing serious health issues, which caused Eshaghian to let the renewal deadline lapse.
On May 3, 2017, Tenant received a “Notice of Lease Termination Date”…in which Landlord stated that, “in the absence of the required notice of election [of renewal], Landlord shall deem the Lease terminated as of February 27, 2018.”2 By letter dated May 5, 2017, Tenant attempted to exercise its option to renew the Lease for the first renewal term of 22 years, which Landlord rejected.
The pending motion:
Negotiations failed and Tenant commenced this action. By order to show cause, dated September 19, 2017, Tenant’s motion for a temporary restraining order was granted, enjoining Landlord from taking any action to terminate the Lease, commencing any legal proceeding against Tenant or interfering with Tenant’s use and enjoyment of the Premises, including, by leasing the Premises to a new tenant after February 27, 2018, pending the outcome of this Yellowstone/preliminary injunction application.
The applicable law as to Yellowstone relief:
As a preliminary matter, a Yellowstone injunction is not available in the present circumstances. A “Yellowstone injunction only serve[s] to forestall [a landlord] from prematurely cancelling the lease during its initial term, in order to afford an opportunity for plaintiff to obtain a judicial determination of its breach and what would be required to cure it.”…Here, the issue is not an alleged default under the Lease and Landlord’s threatened termination of the Lease, but Tenant’s failure to meet a condition precedent to renew the Lease. “It is settled that the grant of Yellowstone relief does not obviate the necessity to satisfy [a] condition precedent to renewal…” …As such, Tenant cannot rely on a Yellowstone injunction to permit it to “cure” its failure to satisfy the Lease’s condition precedent to renewal, a timely notice of renewal.
And, as to a preliminary injunction:
However, the Tenant also seeks a preliminary injunction pending the resolution of the instant action, and the Landlord disputes the Tenant’s entitlement to this relief.
“A party seeking a preliminary injunction must clearly demonstrate (1) the likelihood of ultimate success on the merits; (2) the prospect of irreparable injury if the injunction is not issued; and (3) a balance of the equities in the movant’s favor[.]”
First, the Tenant has made a sufficient showing of likelihood of success to warrant the issue of a preliminary injunction. Generally, when a tenant fails to provide notice of its intention to exercise an option within the time prescribed by contract, it forfeits the option…However,
[e]quity will relieve a tenant from a failure to timely exercise an option in a lease to renew or purchase if (1) the tenant in good faith made substantial improvements to the premises and would otherwise suffer a forfeiture, (2) the tenant’s delay was the result of an excusable default, and (3) the landlord was not prejudiced by the delay.
First, the Tenant has made a sufficient showing of likelihood of success to warrant the issue of a preliminary injunction. Generally, when a tenant fails to provide notice of its intention to exercise an option within the time prescribed by contract, it forfeits the option…However,
…Tenant’s recent expenditures on the lobby renovation—in particular, the $376,367 incurred on May 2, 2017, one day before it received the Notice of Termination and allegedly became aware of its failure to give timely notice of renewal—demonstrate that it made substantial improvements to the Premises with the intention of renewing the Lease, which may entitle it to protection against a forfeiture.
Rejecting the landlord’s argument:
Landlord argues that Tenant cannot demonstrate likelihood of success on the merits because it has unclean hands. Specifically, Landlord argues that, in contravention to Article 6 of the Lease, Tenant breached the Lease by making substantial alterations to the Premises without: (1) obtaining prior written Landlord approval of the individual projects; (2) obtaining prior written Landlord approval of the requisite architect or engineer detailed plans, specifications and cost estimates; and (3) furnishing to Landlord the requisite surety company performance bond. In addition, Landlord states that the additional cut-throughs, which Tenant created between the Premises and 215 Lexington, were in violation of the Cut-Through Agreement. Landlord claims that, under the Lease, it does not have the right to inspect the Premises and that Tenant concealed its alterations to the Premises. Landlord argues that Tenant may not rely on the alternations it made, in breach of the Lease and the Cut-Through Agreement, to procure equitable relief.
The argument is unconvincing. Section 14.01 of the Lease authorizes Landlord to enter the Premises “at all reasonable times for the purpose of (a) inspecting the same” and article 18 of the Lease further provides that, in the event of a breach of the Lease, the Landlord shall give Tenant written notice of the breach and an opportunity to cure, before declaring a default and terminating the Lease, which Landlord has never done. Tenant also avers that all the cut-throughs it made were authorized by the Cut-Through Agreement and Landlord does not provide any evidence to the contrary. Moreover, Landlord has “made no showing that [it] ha[s]been injured” by Tenant’s alleged breaches, therefore, its contention that Tenant’s “unclean hands bar it from obtaining the equitable relief of an injunction is…unavailing[.]
Accepting tenant’s position:
Tenant also demonstrates that its failure to give timely notice of its intention to renew the Lease was inadvertent, a result of its managing member’s inattention because of a family crises…There is also no evidence that the two-month delay in providing the notice of renewal prejudiced Landlord…Therefore, with regard to a showing of a likelihood of ultimate success on the merits, Tenant has demonstrated a prima facie right to equitable relief[.]
And stating as to irreparable harm and balance of the equities that:
Tenant also demonstrates that it may suffer irreparable injury because money damages are insufficient to make Tenant whole should it ultimately prevail due to the loss of its leasehold interest in the interim[.]
Lastly, the balance of the equities favors Tenant, because “where plaintiff face[s] possible eviction by defendant, the equities lie in favor of preserving the status quo.”…Landlord’s argument that the issuance of a preliminary injunction will leave the Landlord “wholly unprepared to transition the Premises and without a tenant managing the Premises and paying rent” is unpersuasive, when Landlord did not notify Tenant of its failure to renew until more than two months after the renewal date and, has submitted no evidence to show that it has taken steps to assume control or to find a new tenant in that time. Ultimately, “the only possible harm to [Landlord], if [it] prevail[s] in the action, is a delay in receiving a market rate rent for the commercial space, which can be mitigated by an appropriate undertaking.”[.]
106 Spring St. Owner LLC v. Workspace, Inc., 2018 NY Slip Op 30119(U), Sup Ct. N.Y. Co. (January 19, 2018)
Supreme Court addressed a motion for Yellowstone and other relief and, as follows, denied the application while scheduling an evidentiary hearing:
[P]laintiff’s request for a Yellowstone Injunction is DENIED pending a hearing. While the Plaintiff has sufficiently demonstrated the first two prerequisites to obtaining a Yellowstone, there remains a question of fact as to whether the Plaintiff has defaulted on the terms of the lease…Prior to granting a Yellowstone, the hearing will determine whether the Plaintiff has, in fact, defaulted on the proprietary lease. If the Plaintiff has, in fact, defaulted on its obligation by failing to maintain the water cooling tower then it will have jeopardized public health and safety in a manner which is incurable[.]
Serpin Intl. Gourmet Foods, Inc. v. Brooklyn Kings Plaza, LLC, 2018 NY Slip Op 30069(U), Sup. Ct. K. Co. (January 16, 2018)
Supreme Court addressed an application for a Yellowstone injunction; and described the pleadings and pending motion:
On August 14, 2017, Plaintiff, SERPIN INTERNATIONAL GOURMET FOODS, INC.…commenced this action against Defendant, BROOKLYN KINGS PLAZA, LLC…Simultaneously with the filing of the summons and complaint, Serpin filed an order to show cause seeking a Yellowstone injunction against Kings Plaza enjoining it from terminating Serpin’s lease and obtaining possession of the premises. Serpin operates a retail store within a shopping mall owned and operated by Kings Plaza. The complaint asserts two causes of action against Kings Plaza based upon allegations that Kings Plaza failed to provide adequate security: (1) breach of the implied covenant of good faith and fair dealing and (2) constructive eviction.
Thereafter, on September 1, 2017, Plaintiff filed an amended summons and complaint adding co-Plaintiff, FUNADDICT, LLC…and additional Defendants, THE RETAIL PROPERTY TRUST, A Massachusetts Business Trust…and QUEENS CENTER SPE LLC…In the amended complaint, Plaintiffs assert breach of the implied covenant of good faith and fair dealing and violation of Real Property Law…§235-c against RPT and Queens Center on the grounds that the early termination clauses of their respective lease agreements are unconscionable.
Simultaneously with the filing of the amended summons and complaint, Plaintiffs filed a supplemental order to show cause seeking a Yellowstone injunction enjoining RPT and Queens Center from terminating FunAddict’s lease and obtaining possession of the premises. FunAddict operates a retail kiosk within Roosevelt Field shopping mall, which is owned and operated by RPT. FunAddict also operates two retail kiosks within Queens Center Mall, which is owned and operated by Queens Center.
Thereafter, on or around November 15, 2017, Plaintiffs filed another order to show cause seeking an order reinstating Plaintiffs to possession of their respective space within the shopping malls owned by Kings Plaza and Queens Center. According to Plaintiffs, on November 2, 2017, Defendants removed their kiosks from their respective spaces and refused Plaintiffs access to the kiosks and their merchandise. Plaintiffs rely on Real Property Actions and Proceedings Law…§853 for reinstatement to possession of said kiosks and for treble damages due to Defendants’ alleged illegal use of self-help to effectuate Plaintiffs’ eviction.
All three Defendants oppose Plaintiffs’ motions for a Yellowstone injunction. Kings Plaza and Queens Center cross-move to dismiss Plaintiffs’ amended complaint and, upon dismissal, to schedule a hearing to determine attorney’s fees and costs as allowed under the parties’ respective lease agreements.
The facts as to Kings Plaza:
Kings Plaza does not dispute that Serpin is a tenant in possession at its shopping center pursuant to a written lease dated August 3, 2009. According to Kings Plaza, Serpin failed to pay rent starting in November 2016. As a result, Kings Plaza served a Demand for Rent upon Serpin providing that Serpin’s failure to pay the amount due by August 23, 2017 would result in the commencement of a summary proceeding under the RPAPL. Due to Serpin’s failure to pay, a non-payment proceeding was commenced against Serpin in Kings County Civil Court.
Kings Plaza argues that Serpin cannot satisfy the requirements for a Yellowstone injunction because (1) there was no threat of termination of the lease because the Demand for Rent only stated that the landlord would commence a non-payment proceeding if tenant failed to pay, not terminate the lease; (2) Serpin failed to obtain a stay of its time to cure prior to the expiration of the cure period and (3) Serpin cannot prove an ability to cure its monetary default.
Kings Plaza also argues that Plaintiffs’ complaint against it must be dismissed for failure to state a cause of action. Specifically, that the claim for breach of the implied covenant of good faith, which is premised upon the allegation that Kings Plaza failed to provide adequate security in its mall, cannot be sustained because the relevant lease, which is over 60 pages long, does not require the landlord to provide any security. Further, that because the complaint fails to reference any obligation in the lease upon which a breach of the covenant of good faith may be alleged, that this cause of action fails as a matter of law. Secondly, that Plaintiffs’ cause of action against Kings Plaza for constructive eviction also fails because Serpin continues to occupy the leased space and conduct its business and, therefore, there can be no constructive eviction.
The facts as to Queens Center:
In its separate cross-motion to dismiss, Queens Center submits that FunAddict sells LED light sneakers from two carts in the common area of its mall pursuant to licenses, not leases. That although the subject agreements are entitled “Specialty Lease Agreement,” the terms of the agreements support an interpretation that they are licenses rather than leases because Queens Center has not surrendered absolute possession and control of any given area to FunAddict. Specifically, that the “licensed areas” are movable carts located within the mall’s common area which can be unilaterally relocated by the landlord pursuant to the parties’ agreements. Secondly, that a license is revocable at will and without cause and that the parties’ agreement allows Queens Center to terminate the agreement upon three days written notice for any reason.
Because the parties’ agreements are licenses and not leases, Queens Center argues that a Yellowstone injunction is not proper. In addition, Queens Center argues that a Yellowstone injunction is not appropriate because the termination notices served on FunAddict did not request a cure of any default but instead informed FunAddict that Queens Center was exercising its absolute right to terminate the agreements on three days notice. Further, that even if the termination date was deemed to be a “cure date,” FunAddict’s application would be untimely since FunAddict failed to obtain a temporary restraining order prior to the termination date of September 6, 2017.
Queens Center also argues that Plaintiffs’ complaint must be dismissed as against it for failure to state a cause of action because Plaintiffs fail to set forth any contract provision or obligation upon which it relies to support its claim for breach of the implied covenant of good faith and fair dealing. Secondly, that Plaintiffs cannot assert a claim against it under [the RPL] because (1) the subject agreement are licenses and not leases and therefore, the RPL does not apply and (2) Plaintiffs’ allegation that FunAddict had no meaningful opportunity to negotiate and was forced to sign an unconscionable agreement is conclusory, especially in light of the fact that FunAddict is a Tennessee limited liability company that operates at least four retail locations throughout New York.
Concluding as to the request for Yellowstone relief that:
The Court first turns to Plaintiffs’ motions for a Yellowstone injunction against Kings Plaza, Queens Center, and RPT…The purpose of the Yellowstone injunction is to preserve the status quo such that “a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture”…” The party requesting a Yellowstone injunction must demonstrate that: `(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises’“[.]
Here, Plaintiffs have failed to demonstrate their entitlement to a Yellowstone injunction against any of the Defendants. With regards to Kings Plaza, presuming a threat of termination of its tenancy, Serpin fails to show an ability or intention to cure its default in paying past due rent totaling over $75,000.00. With regards to Queens Center and RPT, the respective leases were properly terminated with the requisite notice pursuant to the terms of the lease. Plaintiffs fail to point to any lease provision entitling them to an extension of the lease term or any other grounds upon which to find that the landlord’s notice of termination was improper.
Moreover, the Court finds that FunAddict’s lease agreement with Queens Center, under which FunAddict sells merchandise from a moveable cart/kiosk within Queens Center’s mall, constitutes a license agreement and not a lease. For an agreement to constitute a lease and thus create a landlord-tenant relationship, the intent of the parties controls and not the characterization of the agreement…”The central distinguishing characteristic of a lease is the surrender of absolute possession and control of property to another party for an agreed-upon rental”…A license, in contrast, gives no interest in land and confers only the nonexclusive, revocable right to enter the land of the licensor to perform an act…Here, the subject agreement allowed Queens Center to unilaterally relocate the moveable carts within the mall’s common area as well as revoke FunAddict’s occupancy of the carts upon a mere three days’ notice. These terms demonstrate that the parties’ intent was to enter into a license agreement and not a lease agreement.
Based upon the foregoing, Plaintiffs are not entitled to a Yellowstone injunction. In addition, Plaintiffs’ application for reinstatement to their respective kiosks at Defendants’ malls must also be denied[.]
Hair Bar NYC II, Inc. v. Assr Suzer 218, LLC, 2017 NY Slip Op 32752(U), Sup. Ct. N.Y. Co. (December 22, 2017)
Supreme Court addressed a motion for a preliminary injunction in a Yellowstone proceeding.
The Court outlined the legal template:
A party seeking a Yellowstone injunction must demonstrate that: “(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice of cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.”[.]
Summarily found that plaintiff had met the burden of proof with respect to the November 3, 2017 notice of default and outlined and rejected defendant’s argument:
Defendant argues that plaintiff’s application for a Yellowstone injunction should be denied because, inter alia, plaintiff has not shown that it is willing to cure the conditions cited in the notice to default.
The First Department has held that “[t]he proper inquiry is whether a basis exists for believing that the tenant desires to cure and has the ability to do so through any means short of vacating the premises[.]”
In proffering the argument that Hair Bar has no intention to cure as “Hair Bar never received permission to use these areas, and certainly not the written permission required under the lease”, defendant essentially seeks a summary declaratory judgment in its favor that plaintiff substantially violated the lease, before issue has even been joined. Such request is wholly premature.
Nor has defendant established bad faith on the part of defendant. The First Department has stated
[t]he cases cited by defendant involve situations in which the tenant either affirmatively indicated its refusal to cure…or acted in a thoroughly blatant fashion to demonstrate that it had no intention of curing an obvious breach, should it be found in violation of the lease…Here, plaintiff has clearly stated its willingness to [occupy only the premises demised under the lease[.]
Defendant has not shown such affirmative or flouting conduct on the part of plaintiff. In fact, plaintiff has submitted evidence that it is defendant that has refused to permit plaintiff to effectuate the cure involving plaintiff’s removing certain items from the office in question
MGR Resources Mgt, Inc. v. Barranca Family Trust, 2017 NY Slip Op 32544(U), Sup. Ct. K. Co. (December 5, 2017)
Supreme Court addressed defendant’s motion for summary judgment in a Yellowstone proceeding based upon a notice of default dated July 8, 2016.
The Court summarized the action and prior proceedings:
This is an action brought by a commercial tenant of real property located at 99 19th Street, Brooklyn, New York. The relationship between the parties has been contentious since approximately February 2016 when the Landlord’s Trustee’s son moved into the premises to operate his insurance business. On March 16, 2016, a notice of default was sent to the Tenant when the Landlord did not timely receive the rent for March 2016. A non-payment proceeding was then commenced in the commercial landlord and tenant Part 52 of Kings County Civil Court. That special proceeding was later discontinued, presumably when the Tenant paid the rent.
Notice of violation:
At about the same time, a Notice of Violation was served on the Landlord by the NYC Department of Buildings, which states that the rooftop billboard structure, which the Department refers to as an “arterial double faced roof sign structure,” had been vacant for more than two years, and, as a result, as it was in violation of the applicable laws and regulations for a billboard in an M3-1 zone, as it was both too big and too high and too close to the Gowanus Expressway, and had to be removed or legalized. The Notice references Zoning Resolution Sections 42-55 and 42-543 as being violated. Section 42-55 states [in relevant part] that a sign within 200 feet of an arterial highway cannot be an advertising sign and cannot be more than 500 square feet of surface area in size. Section 42-543 solely concerns billboard height requirements.
The notices of default:
On July 8, 2016, the Landlord, through its representative, attorney Alex Leibson, sent two Notices of Default to Tenant. The first, with regard to the billboard, claims to be both a Notice of Default and a Notice of Termination, and states that it provides the permitted thirty-day notice to terminate the Tenant’s use of the billboard…because the Tenant caused the Landlord to receive the Notice of Violation from the DOB, either because the Tenant kept the billboard vacant or displayed advertising (defined as a sign for a non-tenant of the premises) on it for a period of two years. The second Notice of Default states that the Tenant has breached the Lease in nine different ways. This Notice included claims that the Tenant “eliminated the parking spaces required for the second floor office and used the space as a metal recycling facility, constructed an office in the parking area, removed partitions, removed a door and replaced it with a new door that doesn’t comply with the law, painted the sprinkler system a color not permitted by the law, failed to allow the Landlord access to the Premises, and “improperly assigned the lease to another entity without the proper notice/consent of the landlord.” This Notice concludes that Tenant has thirty days to cure or the Tenancy will be terminated.
Filing of the Yellowstone proceeding:
Within the thirty-day cure period, on July 25, 2016, the Tenant commenced this action and simultaneously brought an Order to Show Cause seeking, inter alia, a Yellowstone injunction. It was signed by the Ex Parte justice of the day, contained a stay of the Notices of Default and was returnable on August 11, 2016 before the undersigned. There is no dispute that it was timely filed, that is, before the cure period expired.
The prior Orders of the Court:
On August 11, 2016, this court granted the Yellowstone Injunction in favor of plaintiff Tenant, and preliminarily enjoined the Landlord from terminating the Lease on the grounds in the Notices of Default and tolled the expiration of the two Notices dated July 8, 2016. Plaintiff was ordered to pay the monthly rent reserved in the lease and any other additional rent due under the lease pending the determination of the matter[.]
The Lease and Riders are dated June 20, 2013. The Lease is a standard Real Estate Board of New York office lease form. It is a five-year lease for the “warehouse” which is described as the entire two-story building and grounds, with options to renew, and states at Paragraph 2 that the Tenant shall use the Premises for “any and all uses of recycling scrap metal, aluminum, plastic and other permissible recycling materials, storage, and for no other purpose.”1 The first rider has additional provisions with regard to insurance, additional rent, Tenant’s renovation work [minor work], utilities and other items, but nothing with regard to the Tenant’s use of the premises other than a provision that the Tenant will not make excessive noise or odors or fumes or in any way interfere with the offices on the second floor of the premises. It is not known if there were any occupants in the second floor offices at the time the Lease was executed. There is no mention in the Lease of parking spaces, except that the “grounds” were included in the Lease.
The second rider, denominated “Additional Rider” is addressed to the use of the billboard on the roof of the premises. This rider allows Tenant to use the billboard. It states that the law restricts the use of the billboard to advertising for occupants of the Premises only, that Tenant will apply for any necessary permits before putting up any signs, and that if the law changes to allow advertising by other than businesses occupying the Premises, the Landlord has the right to give Tenant thirty days’ notice and “take back” the right to use the billboard. There is no separate amount of rent provided for in the Additional Rider for use of the billboard, nor is there any reference to a rent reduction if the Landlord “took back” the billboard.
In February 2016, the parties entered into an amendment to the Lease, called “First Amendment to Agreement of Lease.” This document changes the leased Premises to exclude a part of the second floor…and reduced the rent accordingly. The reason for the amendment, Mr. Barranca testified at his EBT, was so his son could use one of the offices for his insurance business. There are provisions in the Amendment about utilities, security, garbage removal and other items concerning the second floor which are not relevant to these motions.
The complaint has four causes of action. The First is for a Yellowstone injunction tolling the thirty-day cure period set forth in the Notices of Default. The Second is for a declaratory judgment that the Tenant has not defaulted under the Lease and that the Lease therefore is in full force and effect. The Third is for a declaration by the court that the Notices of Default are void and of no force or effect because they were signed by an attorney for the Landlord, and thus they cannot be the basis of a Notice of Termination. The Fourth cause of action seeks damages caused by Landlord’s “acts, omissions and failure to act” which resulted in the Tenant being unable to “install a sign on the exterior wall.”
Defendant’s Answer contains two counterclaims. The first seeks a declaration that the Tenant has breached the lease, and a trial for the determination of its damages. The second counterclaim seeks a declaration that the Tenant has breached the Additional Rider with regard to the billboard, entitling Landlord to terminate the Tenant’s permission to use the billboard and a trial to determine the amount of the Landlord’s damages.
In support of its motion for summary judgment dismissing the complaint and for summary judgment on the issue of liability on its counterclaims, defendant submits an attorney’s affirmation, an affidavit from Steve Barranca, the Trustee for the Trust which is the Landlord, the EBT transcript of Ms. Chang, the Tenant’s witness, copies of the Lease and riders and the pleadings, the Notices of Default, two notices of violation from the DOB, photographs, a copy of an affidavit from Tenant’s President from a prior motion, and copies of several documents in the court file.
Mr. Barranca states in his affidavit that plaintiff entered into possession of the premises pursuant to a lease and riders dated June 20, 2013…Plaintiff was precluded by the Lease from assigning the lease without the Landlord’s prior permission. The parties also executed an Additional Rider with regards to the use of the billboard…because plaintiff requested use of the billboard affixed to the roof. Under the Additional Rider, plaintiff was required to secure any permits necessary to use the billboard and to comply with all applicable laws and regulations.
On February 29, 2016, defendant received a Notice of Violation from the NYC Department of Buildings…for improper use, or lack thereof, of the billboard…The billboard had been left vacant for more than two years. The violation, as he understands it, resulted in the loss of the billboard’s “grandfathered” status as it does not conform to the current laws. The Notice of Violation requires the billboard to be removed or legalized. Barranca characterizes this as an irreparable harm to the Landlord, which cannot be cured or corrected by the plaintiff.
Barranca then avers that once the Landlord received this Notice of Violation, he visited and examined the premises for other potential defaults by the Tenant. Barranca states that the inspection revealed many breaches of the Lease, the riders thereto and the amendment thereof, as is described above and discussed in detail below. Upon discovering these defaults, defendant Landlord served two Notices of Default upon the plaintiff, one for the billboard and one for the remainder of the property leased by Tenant. Barranca avers that several of these breaches are incurable.
Barranca claims that as a result of a renovation plaintiff performed in 2013, without proper notice to or approval by the Landlord, several of the items in his list of defaults arose. He states that, although these improper renovations were finished in 2013, DOB has not yet signed off on them because the use of the building is no longer in conformity with the Certificate of Occupancy, itself an incurable breach under the lease.
Barranca claims (incorrectly, as is discussed below) that every attempt plaintiff has made to obtain a new Certificate of Occupancy following the 2013 renovations has been unsuccessful. A DOB printout…reflects that on August 18, 2015, a request for a “Letter of No Objection” for “Scrap Metal Recycling” was denied, with the comment “The current C/O doesn’t show metal sorting. Have to apply for new C/O.” The printout reflects that four additional attempts to obtain a “Letter of No Objection” were denied. The court notes that defendant’s [exhibit] consists of photos of what appears to be a scrap metal operation, with a prominently placed sign which says “Scrap King.”
Barranca states that, on May 12, 2017, subsequent to the issuance of the Notices of Default, DOB issued a Notice of Violation to the Landlord, citing “Occupancy contrary to that allowed by the Certificate of Occupancy” and “1st floor should be occupied as accessory attendant parking for 20 cars.”…The summons set a hearing date at the Brooklyn office of the Office of Administrative Tribunals and Hearings (OATH) on June 26, 2017. Barranca states that he forwarded the summons to his attorney, who, he was advised, forwarded it to counsel for plaintiff. Barranca states that plaintiff made no effort to cure the violation, nor did it appear at the hearing.
Barranca states that he attended the OATH hearing on June 26, 2017 with the Trust’s attorney and an architect. On June 30, 2017, OATH issued a decision…which found that the occupancy was “contrary to that allowed by the certificate of occupancy,” and imposed a fine of $1,200 against the Landlord. Barranca avers that the defendant Landlord paid the fine, even though the Lease makes compliance with the Certificate of Occupancy the responsibility of plaintiff.
In addition, defendant cites the affidavit of plaintiff’s President, Yi Lu Teng, submitted in support of its request for a Yellowstone injunction. Specifically, defendant points out Teng’s admission that there is no first floor partition, that he did remove a partition and a door on the second floor and on the second floor stairwell, with the consent of the Landlord, but defendant claims that there was no written consent to the alternations, as is required in the Lease. Mr. Barranca points out that Mr. Teng admits that plaintiff leases half of the second floor, and admits that the billboard exists in the same exact (unused) condition as when the Additional Rider was signed in 2013.
Defendant also cites the testimony of Michelle Chang at her EBT on behalf of plaintiff. Ms Chang is the human resources person for plaintiff and the comptroller of Scrap King USA, Inc. She testified that Scrap King USA, Inc. is the tenant at the premises and that MGR operates out of an office in New Jersey. She admitted that Scrap King was formed by MGR to operate the business. She said Scrap King USA, Inc. was a corporation formed by MGR after it signed the lease, and is a “daughter” corporation. Presumably she meant a subsidiary. In all of its business locations, MGR rents the premises, and then, after the rental, a new corporation is formed to do the work at the premises. The officers and directors of all of the corporations are the same, although the employees are different. She testified that the violations caused by MGR’s renovations have not been dismissed as yet because “they had not gotten around to it”[.]
Defendant also annexes printouts…from the NYS Department of State showing MGR and Scrap King are two separate and distinct corporate entities. The printout of the entity information for MGR Resources Management, Inc. reflects an initial filing date of October 28, 2010. Its home county is listed as Suffolk County. Its address for process is in Kearney, New Jersey. Its Chief Executive Officer is listed as Mr. Teng. The printout of the entity information for Scrap King USA Inc. reflects an initial filing date of May 13, 2013. Its home county is listed as Kings. Its address for process is listed as the subject premises. There is no Chief Executive Officer or Registered Agent listed.
Plaintiff supports its motion with an attorney’s affirmation and the same papers as defendant includes in its motion, including the pleadings and various documents from the court file, and copies of the Building Permits they obtained, printouts from the DOB web site and the EBT transcript of Steve Barranca.
Plaintiff annexes the deposition transcript of its witness, Michelle Chang. Ms. Chang testified at her EBT that the billboard was never used by plaintiff and that the right to use one side of the billboard was “given back” to defendant prior to the issuance of the Notice of Violation. She insisted that plaintiff never did anything to cause a violation to be placed by DOB for the billboard.
Ms. Chang testified that the second floor partitions were removed with the landlord’s consent. She noted that the second floor was surrendered back to the landlord for use by the landlord’s son as an insurance office and thus the area is no longer in the plaintiff’s possession. She testified that the Landlord’s son did some additional renovations to his part of the second floor.
The court notes that Ms. Chang had a great deal of difficulty with the questions as English is not her native language and she did not have an interpreter at the EBT. Thus, her responses may not be accurate.
Plaintiff also annexes the affidavit of plaintiff’s President, Yi Ling Teng, initially submitted in support of the original Yellowstone motion, in which he states that any problem with the billboard occurred prior to MGR taking occupancy. He avers, however, that MGR remains ready willing and able to get a permit to correct this violation if they have to do so.
Mr. Teng also avers that MGR could not have eliminated any parking spaces as is alleged in the Notice of Violation, because there is no on-premises parking, as the building is built full to the lot and there is only on-street parking. Mr. Teng avers that plaintiff has not built any metal recycling facility on any parking lot. Nor did they do anything else which was alleged to have occurred in the parking area, since there was no parking area at the premises when they rented it.
Mr. Teng states that there were no partitions on the first floor. Plaintiff did remove partitions and doors which separated two sets of stairs on the second floor and installed a floor-to-ceiling glass partition, but this was done with the knowledge and consent of the landlord. He says they obtained a permit from the City to install the partition and DOB signed off on it and the landlord consented. At any rate, he states that the alterations the Landlord complains about in the Notice of Default are now in the area occupied by the Landlord’s son’s insurance company and were performed by the insurance company, not by MGR. He states that the Tenant never painted the sprinkler system as is claimed. They had a DOB permit for the little work they did on the second floor and all the work was done to Code. The landlord also did work on the second floor after it took back half of it. Mr. Teng avers that there has been no assignment of the Lease. Mr. Teng stated that they’ve always given the Landlord access to make repairs. He states that the Tenant is ready and willing to do anything short of vacating the premises to remedy the problems, and that the Tenant has expended hundreds of thousands of dollars on its work at the premises.
Plaintiff also annexes the permits issued to plaintiff by the DOB for work and what they claim is proof of compliance with the permits…and an email exchange between Ms. Chang and Mr. Barranca concerning proposed renovations.
The legal template:A tenant seeking a Yellowstone injunction “must demonstrate that: (1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises”[.]
The alleged breaches of the lease:
There are three alleged breaches which defendant maintains are incurable. The remainder of the items in the Notices of Default are conceded by the Landlord to be curable, such as the color the Tenant allegedly painted the sprinklers, which clearly can be repainted. Therefore, the court will not address the items which Landlord concedes are curable. Defendant first maintains that plaintiff breached the lease by assigning it to Scrap King without proper consent from defendant in violation of the specific terms of the Lease, and that this breach is incurable. Defendant maintains that plaintiff’s failure to comply with the Certificate of Occupancy is a breach of the Lease and riders, which is incurable. In addition, defendant avers that plaintiff’s use, or rather its lack of use thereof, of the billboard, breached the terms of the Additional Rider and resulted in a Notice of Violation from the DOB which states that the billboard must be removed or legalized, which is incurable.
The assignment of the lease:
Pursuant to ¶ 11 of the Lease and ¶ 43(a) of the rider, any assignment of the Lease by MGR was required to be consented to in writing by Landlord unless the assignment is to “a controlled subsidiary company or to a parent company of Tenant (existing or future) or a company into which Tenant may be merged, or to an affiliated company.” An affiliated company is expressly defined as, inter alia, one having common controlling shareholders. However, ¶ 43(a) also requires Tenant to notify Landlord of a permitted assignment and to provide a written agreement “whereunder such assignee assumes liability and performance . . .”
Plaintiff’s President stated in his affidavit filed in support of the original Order to Show Cause seeking a Yellowstone Injunction that there was no assignment of the Lease. Further, plaintiff’s witness, Ms. Chang, testified at her EBT that Scrap King USA Inc. is the tenant at the premises. She testified that Scrap King was formed by MGR after it signed the lease, and that MGR forms a separate corporation for each of its locations, which she described as a “daughter corporation.” She testified that the officers and directors were the same as MGR’s but the employees at the location were employed by Scrap King. A subsidiary corporation or an alter ego corporation is not the kind of assignment that is forbidden by the Lease, and in any event, has not been held to be incurable, as long as it can be undone. Here, the Tenant avers not only that it will do what needs to be done to avoid forfeiting the lease…but that the creation of a subsidiary or affiliated corporation is expressly permitted by the Lease.
However, other than their witness’s testimony and the affidavit of the company President, plaintiff has submitted no evidence confirming what plaintiff’s counsel also calls a “father/daughter relationship” between the two corporations. Thus, while this alleged default cannot be considered incurable on the facts alleged, and in fact, there may be no default at all, neither party has established that it is entitled to summary judgment. The court cannot grant the Tenant’s request that the court declare that it is not in default, or summary judgment on the Landlord’s claim that the Tenant has breached the Lease by assigning the Lease.
Further, as the Tenant has demonstrated a willingness to cure the alleged breach, an injunction may be granted herein…Tenant shall provide the documentation and agreement required by ¶ 43(a) of the Lease to Landlord promptly.
The parking area:
The Landlord claims in its motion that the Tenant’s non-conformity with the Certificate of Occupancy is an incurable breach under ¶ 3 and ¶ 15 of the Lease and ¶ 53(i) of the rider. However, the Notice of Default sent to the Tenant dated July 8, 2016 does not make this claim, and instead states that the Tenant “eliminated the parking spaces required for the second floor office space and instead has used the space as a metal recycling facility.” The Notice did not really give the Tenant proper notice of what the problem was or how to cure it. The Tenant responded, in Mr. Teng’s affidavit in support of the preliminary injunction, that the building covers the whole lot and there is no parking lot. Clearly, the Tenant did not understand the issue when it received the Notice of Default, and it is not clear to the court that the Tenant understands the issue now.
After a half dozen calls by someone to 311, as reflected on the DOB website, the DOB issued a violation in May of 2017, which is annexed to the Landlord’s motion papers, but that was well after the Yellowstone injunction was issued. There is nothing in the Notice of Default that claims the Tenant’s use does not conform to the C of O, and the court was not made aware of this issue when the first motion, for a Yellowstone injunction, was argued in the summer of 2016. In that motion, it seemed that the Tenant had somehow interfered with the use of some of the parking spaces which were supposed to be available for the Landlord’s son, who is a tenant on the second floor.
The property is in an M3 zone, so the Tenant’s use does not appear to be a zoning violation, but there is no expert’s opinion on this point. The problem is that, according to Mr. Barranca’s testimony, he himself oversaw the construction of the building, a new building, in 2005, and sought and obtained a Certificate of Occupancy in 2006, for offices on the second floor, with 20 spaces for parking on the ground floor and an entrance lobby on the ground floor.
The certificate of occupancy:
In 2013, Mr. Barranca leased the premises to Tenant herein for use as a metal and plastic recycling facility, which use is specifically described on Page one of the Lease, and the Lease does not say a word about the Tenant (or the Landlord) needing to apply to amend the Certificate of Occupancy to obtain one that permits the intended use. Further, the court has not been provided with any information in the motion papers to determine what would be necessary, or at what cost, to change the Certificate of Occupancy to one for a scrap metal recycling facility. Neither side has provided an expert’s affidavit. This failure of proof prevents the court from granting summary judgment on the basis of this alleged default to either party.
The Tenant is granted permission in the Lease to perform minor renovations, and proceeded to obtain a Permit from the NYC Department of Buildings in August 2013 for “ALTERATION TYPE 2 — CONSTRUCTION EQUIPMENT — FENCE INTERIOR RENOVATION OF EXISTING COMMERCIAL SPACE AT 1ST & 2ND FLOOR AS PLAN FILLED HEREWITH. NO CHANGE OF USE, EGRESS OR CERTIFICATE OF OCCUPANCY.”…The application was submitted in June 2013 and lists “Scrap King USA, Inc.” as Tenant and was signed by Mr. Teng. It does not appear that the Landlord signed the application, and Landlord claims it did not, but this application for a permit does not in any way relate to the problem at hand, which is that the use of the space for the purpose described in the Lease is not permitted by the current Certificate of Occupancy.
The court must note that all of plaintiff’s efforts to obtain a “Letter of No Objection” have been unsuccessful, and the applications were seemingly pointless, as the Building Code requirements for a parking lot would probably be quite different from the requirements for a metal recycling facility. It is thus no surprise to the court that the DOB printout…demonstrates that, on August 18, 2015, a request for a “Letter of No Objection” for “Scrap Metal Recycling” was denied, with the comment “The current C/O doesn’t show metal sorting. Have to apply for new C/O.” The printout further reflects that on September 15, 2015, a request for a “Letter of No Objection” for “Scrap Metal Processing” was denied, with the comment “Apply for a change of Certificate of Occupancy.” The printout reflects several more applications for a Letter of No Objection, which were all denied for the same reason. It is not clear why the Tenant continued to apply for permission to do something that clearly could not be granted. The court wonders if Tenant, at this late date, understands what needs to be done to make its use of the premises legal.
Moreover, without more evidence, viewing the evidence available, such as it is, the equities weigh on the Tenant’s side[.]
Here, if it is possible to amend the C of O and Tenant is willing to do so, at its own expense, the violation is not incurable[.]
As the Tenant was not sent a Notice of Default that states that the use of the premises is in violation of the Certificate of Occupancy, and the Lease specifically provides that the premises may be used for a metal and/or plastic recycling facility, and the Lease does not require the Tenant to obtain a new Certificate of Occupancy for the intended use, coupled with the absence of any expert affidavit as to whether the Certificate of Occupancy can be changed without tearing down the entire building, and whether the office which Landlord retained can continue to exist above a recycling facility, the court must conclude that neither party has demonstrated that the actual breach can be cured, nor has either party demonstrated that it cannot be cured. The actual breach, a use not in conformity with the C of O, not the mere “elimination of parking spaces,” is only clear now that the City’s Notice of Violation has been issued and the Landlord’s lawyer and architect went to the OATH hearing. The Tenant has not demonstrated that it would be willing to cure, if the violation is curable, as it has not been informed of what would be required to cure by the Landlord or by its own expert.
The court notes that the Lease expires on May 31, 2018. If the cost of amending the C of O is too high, the Tenant can decide not to renew the Lease.
The billboard is a large metal structure on the roof of the building. It provides space for two signs, one facing the front of the building and one facing the back. In his affidavit, Mr. Barranca states that when the lease was executed in 2013, the plaintiff requested use and possession of the billboard. The parties executed an Additional Rider with regard to the billboard, making plaintiff Tenant responsible for “erection, installation and operation” of the billboard. Under the rider…the plaintiff was required to secure any permits necessary for the use of the billboard and to comply with all applicable regulations. On February 29, 2016, Barranca says he received a Notice of Violation from the NYC Department of Buildings for improper use, or rather, lack thereof, of the billboard…The Notice of Violation indicates that the billboard had been left vacant for more than two years. The violation, Landlord alleges, resulted in the loss of the billboard’s “grandfathered” status. DOB, in the Notice, orders that the billboard be taken down or legalized.
In opposition, the affidavit of Mr. Teng, plaintiff MGR’s President, avers that any problems with the billboard occurred prior to MGR taking occupancy and that the billboard remains in the exact same condition as it was in when the Additional Rider was signed. There is also the testimony of Ms. Chang at her EBT that the billboard was never used by plaintiff; in fact, she stated regarding the billboard, that “we just don’t have time to plan anything.” She then states that the right to use one side of the billboard was given back to defendant Landlord prior to the issuance of the Notice of Violation. She indicated that this agreement was made through emails, and was asked at her EBT to produce those emails. It is noted that none of these alleged emails are annexed as exhibits to plaintiff’s papers. It is also noted that Teng’s affidavit, which was originally submitted in support of plaintiff’s original motion seeking a Yellowstone injunction, makes no mention of plaintiff’s giving up any portion of its right to use the billboard. If that is the intent of the parties, the Additional Rider should be modified in writing.
Essentially, Chang and Teng admit that plaintiff took no action whatsoever to put a sign for their business on the billboard, but they assert that their failure to put up a sign is not a failure to comply with the terms of the Additional Rider. While the Landlord claims otherwise, the Lease and Rider do not require the Tenant to use the billboard, and do not say that the Tenant would forfeit the right to use it if they did not use it by a date certain, nor does it provide for liquidated damages, or anything which addresses the unusual regulations which apply to the billboard.
Landlord Barranca states that the DOB’s violation means that the billboard lost its “grandfathered” status and now has to be removed. That is not exactly accurate. First, it is a new billboard, built by Barranca in 2005, so, again, without an expert’s opinion, the court cannot understand how it was somehow entitled to be “grandfathered.” The Zoning Resolution requires that it not be used for advertising, but only for a sign for a business actually at the location, and requires that the billboard be a certain size. The Landlord seems to have built a billboard in 2005 that exceeds the legal size limit, which subjected it to the “use it or lose it” provision of the Zoning Resolution. It would seem that it could be made smaller if it is too large, and does not have to be removed entirely, but, again, there is no affidavit from an expert on this point. Nor is there any evidence as to how big and how high the billboard is, and how much it would have to be reduced to legalize it.
Neither the Lease nor the Additional Rider mentions the fact that the billboard structure was “grandfathered” and was otherwise non-compliant with the New York City Zoning Law, nor is there any requirement that the Tenant use the billboard by a date certain, as opposed to keeping it empty, or that the Tenant must clean any graffiti from it, or any reference to the Restrictive Declaration recorded against the property…which Barranca as Landlord signed in 2003, acknowledging the billboard’s status as non-compliant and that only non-advertising signs are permitted on it. Neither the Restrictive Declaration nor the Lease states that if the billboard structure is vacant for two years, the “grandfathering” would terminate and it would have to be removed or legalized.
The Zoning Resolution, placed on the internet by the City of New York for all to read, states…that “if, for a continuous period of two years, either the . . . active operation of substantially all the non-conforming uses in any building or other structure is discontinued, such land or building or other structure shall thereafter be used only for a conforming use.” [And also] states “A non-conforming sign shall be subject to all the provisions of this Chapter relating to non-conforming uses . . .”
Therefore, the court concludes that the Tenant did not breach the Lease by failing to put a sign on the billboard. The Notice of Default and Termination is void, and may not be the basis of the
Termination of the Lease. The parties may wish to modify the Additional Rider to reflect who is going to pay to legalize the billboard, and whether each party can use one side of it or something else. The Landlord’s Second Counterclaim, which seeks damages for its claimed loss of the billboard, is dismissed. Neither party may recover from the other any damages which result from the party’s failure to know the applicable law and regulations.
Art Factory Corp. v. 740-748 Hicks Realty LLC, 2017 NY Slip Op 51535(U), Sup. Ct. K. Co. (October 25, 2017)
The Art Factor and Tony Shafrazi moved for Yellowstone relief or a preliminary injunction in a commercial-landlord tenant action; and Yakov Stern, P.E. and Schneider Associates and Steven Schneider cross-moved to dismiss the complaint.
Supreme Court outlined the facts:
The Landlord is the owner of 740 Hicks Street, located on Block 534 Lot 29, Brooklyn, NY, the property that is the subject of this action. 740 Hicks Street is one of two buildings located on Block 534 Lot 29. A second building known as 39 West 9th Street, Brooklyn, NY is also located on Block 534 Lot 29. The Tenant, with the assistance of Edward Ziggy Rutan, a real estate consultant, identified the Demised Premises for the development of a non-commercial art gallery and art foundation, and pursuant to a lease and rider to the lease dated May 1, 2015…between the Landlord and Tenant, the Landlord leased a portion of the building located at 740 Hicks Street consisting of approximately 7,000 square feet plus basement…to the Tenant.
Plaintiff Tony Shafrazi is the principal of Art Factory Corporation., and guarantor of the Lease. Defendant First Quality Electric Corporation…is an electrical contracting business and occupies 39 West 9th Street…Defendant Yoel Guttman, is a principal of 740-748 Hicks Realty LLC and the owner of First Quality. Defendant Tovia Werzberger is an employee of First Quality. Defendants Steven Schneider and Yakov Stern are the respective principals of Schneider Associates and Yakov Stern, P.E.
In addition to the rental terms set forth above, the Lease provided the Tenant with an option to purchase the building and premises in which the Demised Property is located. As a pre-condition to exercising the option, the parties agreed that the Tenant may subdivide the single tax and zoning lots into two (2) separate tax and zoning lots with each of the respective properties, 740 Hicks Street, and 39 West 9th Street, resting on and within their own tax and zoning lot. The parties further agreed that the option to purchase is not entered into in reliance upon any representation or warranty made by either party[.]”
Upon execution of the lease by Mr. Shafrazi and Mr. Guttman, the Tenant began renovating the Demised Premises for use as a non-commercial art gallery. As part of this process, the Tenant, working with their contractors and architects, completed an Alteration Type 1 (“Alt-1”) application filing to the Department of Buildings…seeking approval for its proposed use of the property. In October 2015, the Landlord, by Mr. Werzburger, signed the DOB Alt-1 application, however, the Tenant claimed that it could not file its plans because First Quality’s electrical contracting business was not a permitted use, and the owner’s building was not a permitted structure. In response, relying on Paragraph 15 and 20 of the Lease and Paragraph 17 of the Rider, the Landlord indicated that it made no representations as to the Demised Property or the option to purchase. The Landlord further indicated that pursuant to Paragraph 22(b) of the Rider, it was required only to cooperate at no cost to itself. Notwithstanding these provisions contained in the Lease, at the request of the Landlord, the Tenant did not submit its Alt-1 application to the DOB in an attempt to address the issues related to the development of the property. In this regard, both the Tenant and Landlord acknowledge that the parties held a meeting, together with their respective consultants, on February 17, 2016, however, the parties were unable to reach a resolution.
Following this impasse, the Landlord, submitted a request for a Letter of No Objection to the DOB regarding its use of the owner’s building based on a 1926 Certificate of Occupancy that it had obtained from the Tenant. By letter dated February 26, 2016, DOB issued a Letter of No Objection to First Quality’s use of the owner’s building for “electrical contractor use.” According to the Tenant, the Letter of No Objection, did not legalize the building occupied by First Quality since it was built in 1988, and such objection letters can only confirm the legal use of a building constructed before 1938.
On July 27, 2016, plaintiffs filed the within action and notice of pendency. The complaint alleges that the Landlord is in breach of the lease for failing to cooperate with the Tenant to legalize the property, since the owner’s building which shares the same tax and zoning lot, is a commercial establishment, does not comply with the zoning regulations applicable to the predominately residential neighborhood, and, prevents the Landlord from exercising the option under the lease.
On August 3, 2016, the Tenant filed the Alt-1 application that had been previously signed off by the Landlord in October 2015.
The notice to cure:
Thereafter, the Landlord served the Tenant with a Notice to Cure dated August 9, 2016, which alleged the following defaults and violations under the lease:
1) deviation from the project plans previously submitted to the Landlord in that the basement work:(a) encroaches upon the party foundation wall separating the demised premises from the Adjacent Property.
…by approximately 22 to 24 inches beyond the centerline of the party wall/piles; and (b) has resulted in a lowering of the cellar floor 12 feet below the first floor, which is greater than the 10.5 feet proposed on said plans;
2) excavation of the basement portion of the demised premises, and the locking of the door and removal of the stairs leading from the Adjacent Property into the basement of the demised premises, because such excavation, locking and removal was performed without first obtaining the Landlord’s written approval and/or permission from the DOB and because it has and continues to prevent and/or interfere with the Landlord’s right of access to the basement within the demised premises.
3) failure to (a) promptly furnish the Landlord with copies of the application documents and drawings that Tenant filed with the DOB on or about August 3, 2016; (b) submit for the Landlord’s approval, before any work is allowed to commence, the proposed contractors which your client seeks to use for the work; and (c) furnish the Landlord with evidence that the requisite insurance is in effect on or before commencement of your client’s work.
The Notice to Cure provided that, if the alleged defects under the lease were not corrected by August 31, 2016, the Landlord would terminate the lease and evict the Tenant from the demised premises upon five (5) days’ notice. Thereafter, by consent of the parties, the cure period was extended several times during the period from August 31, 2016 to October 14, 2016, in order to address the claimed defaults contained in the Notice to Cure. According to the Landlord, as of October 13, 2016, the tenant continued to be in default of the lease pursuant to the Notice to Cure. By Order to Show Cause dated November 23, 2016, the Tenant now requests a Yellowstone injunction or, alternatively, a preliminary injunction, pursuant to CPLR §6301.
Upon signing the Order to Show Cause, over opposition, the Court granted the Tenant’s request for a temporary restraining order enjoining the Landlord from terminating or interfering with the lease pending the determination of the requested relief.
The legal template:
A Yellowstone injunction maintains the status quo by tolling the cure period so that a commercial tenant faced with a threat of the termination of its lease can protect its leasehold and, where there is an adverse determination on the merits, cure the default and avoid a forfeiture…The purpose of a Yellowstone injunction is to stop the running of the cure period and maintain the status quo while the underlying dispute is litigated…”[F]ar less than the normal showing required for preliminary injunctive relief” is needed, as the “threat of termination of the lease and forfeiture, standing alone, has been sufficient to permit maintenance of the status quo by injunction”[.]
A party seeking Yellowstone relief must establish that:
(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises…Unlike a preliminary injunction under CPLR Article 63, the plaintiff does not have to show a likelihood of success on the merits…However, a plaintiff must demonstrate that a basis exists for believing that a tenant . . . has the ability [to] cure through any means short of vacating the premises[.]
The undisputed facts:
In the case at bar, the parties do not dispute that the Art Factory is a commercial tenant, has received a notice of termination, and requested injunctive relief prior to the expiration of the time set forth in the notice and agreed upon extension. The issue for the Court to determine is whether the Tenant has the ability [to] cure through any means short of vacating the premises.
Article 3 of the lease:
Article 3 of the lease expressly provides that the Tenant shall make no changes in or at the demised premises of any nature without the owner’s prior written consent. Further Paragraph 8 of the Rider provides in relevant part that alterations by the Tenant in the Demised Premises, as per plans, specifications and applications approved by the DOB, if required, shall be subject to the written approval of the Owner before filing its Alt-1 application. It is well settled that courts adhere to the “sound rule in the construction of contracts, that where the language is clear, unequivocal and unambiguous, the contract is to be interpreted by its own language’[.]
While the Tenant contends that it has “made efforts and cured some of the purported breaches and is continuing to take various steps to remedy the other alleged defaults”, a review of the record indicates that at least three of the defaults under the lease are incurable due to the Tenant’s failure to obtain prior written approval from the Landlord pursuant to the lease. Prior to filing its Alt-1 application, the Tenant performed construction work in the Demised Premises which deviated from the project plans previously submitted to the Landlord. This deviation was determined after inspection by the Landlord’s engineer whose findings were contained in a report dated May 22, 2016. Additionally, the October 16, 2015 plans that the landlord signed-off on were altered, added or deleted by the Tenant without the Landlord’s approval, and submitted to DOB in its August 16, 2016 filing [an exhibit] annexed to the Landlord’s opposition papers shows that seven of the drawings filed with the DOB are dated April 25, 2016, which establishes that the Landlord’s approval and sign-off predates the Tenant’s August 2016 filing with the DOB. “When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms’…Moreover, the Tenant does not dispute that it failed to obtain insurance coverage as set forth in the Third Default in the Notice to Cure, which the Landlord argues is an incurable. The Court agrees. The case law has consistently held that a tenant’s failure to maintain insurance coverage as required by the lease is an incurable default[.]
The Court also finds that the Tenant has not established the grounds for a preliminary injunction pursuant to CPLR §6301. Notwithstanding the Landlord’s argument that the Tenant failed to establish a jurisdictional predicate for the relief requested under CPLR §6301, the breach of contract cause of action alleged in the complaint is sufficient for the Court to address the relief sought.
It is well settled that a party moving for a preliminary injunction must establish: (1) a likelihood of success on the merits, (2) irreparable injury, and (3) a balance of the equities in the movant’s favor…The record establishes that the Landlord made no contractual representations regarding the Demised Premises, the improvements thereon, and/or the use thereof, and that the Landlord engaged in good faith to cooperate with the Tenant by retaining consultants, at its own expense, to resolve the issues relating to the development of the Demised Premises. These circumstances, taken together with the incurable nature of the Tenant’s default, does not support a likelihood of success on the merits as to the causes of action asserted in the complaint, which include, breach of contract, specific performance, fraud, fraudulent inducement and unjust enrichment. The Court also finds a balance of the equities favors the Landlord, since the purchase option is inchoate and does not ripen until the property is subdivided at the tenant’s own cost. Finally, the Tenant has failed to demonstrate that it will suffer irreparable injury since it plans a non-commercial use of the demised premises. As a result, the Court finds that the Tenant has not met the criteria for the issuance of a preliminary injunction.