I periodically review and update the appellate case law relating to so-called Yellowstone proceedings – where the tenant under a commercial lease brings an action in Supreme Court to toll the time to remedy a default asserted by a landlord in a notice to cure and to enjoin the filing of a summary proceeding for eviction in Civil Court. In recent months, the First Department has issued five decisions relating to Yellowstone proceedings.
PJ Hanley’s Corp v. Kiwi Pub Corp., 2014 NY Slip Op 02730 (1st Dept. April 22, 2014)
Supreme Court denied tenant’s application for a Yellowstone injunction. And the First Department summarily affirmed.
Plaintiff’s failure to seek a stay of the order denying its motion for nearly six months after the order was issued, during which time the cure period expired, plaintiff’s sublease was terminated, and a holdover proceeding was commenced, bars appellate relief[.] It is therefore unnecessary to consider plaintiff’s other arguments.
Levkoff v. Soho Grand-West Broadway, Inc., 2014 NY Slip Op 01695 (1st Dept. March 18, 2014)
Levkoff sought a preliminary injunction to forestall the auction sale of shares in a cooperative. Levkoff allegedly had violated a “so-ordered …stipulation, requiring it to obtain defendant’s permission to sublet its non-rent-regulated apartment before – not after—entering into a sublease.” Supreme Court denied the motion and the Appellate Division affirmed.
Contrary to plaintiff’s contention, its request to stay the foreclosure and auction of one of its shares in defendant cooperative is governed by the standard for preliminary injunctions, and not the more lenient standard for a Yellowstone injunction. Accordingly, plaintiff had to “demonstrate a probability of success on the merits, danger of irreparable injury in the absence of an injunction and a balance of equities in its favor”…which it failed to do. As the motion court determined, plaintiff did not demonstrate a likelihood of success on the merits.
Building Service Local 32B-J Pension Fund v. 101 Limited Partnership, 2014 NY Slip Op 01544 (1st Dept. March 11, 2014)
The First Department addressed the viability of a landlord’s claim for “delay damages” (lost rent) in the context of a tenant- initiated Yellowstone proceeding based upon the following facts:
Defendant landlord leased a 24-story office building to plaintiffs tenants pursuant to several net leases that expired on December 31, 2011 (collectively, the lease). The lease contained several provisions governing repairs to the building. Section 33.01 required the tenants, at the end of the lease term, to surrender the premises in good condition (the Surrender Clause). Pursuant to § 12.01(a) and § 15.02, the tenants were required, during the lease term, to take good care of and make repairs to the premises and equipment therein (the Upkeep Clause). The lease further provided that if the tenants defaulted in their ongoing repair obligations, the landlord itself could perform the necessary repairs (§ 21.01[a]), and that the tenants were required to permit the landlord to enter the premises to do so (§ 20.01).
On December 23, 2010, the landlord sent the tenants a notice declaring that they were in default of the Upkeep Clause for failing to make repairs to certain building systems. The notice advised the tenants that if they did not commence the repair work within the 25-day cure period set forth in the lease, the landlord would exercise its right to enter and perform the repairs itself.
On January 13, 2011, the tenants filed a complaint in this action seeking, inter alia, a declaration that they are not in default of the lease and are not responsible for performing the repairs identified in the landlord’s default notice. The tenants also moved for a preliminary injunction preventing the landlord from entering the premises to cure the alleged default. The landlord opposed the application and, in the event the injunction were granted, requested a bond to cover the delay damages it would incur if it had to postpone the repairs until after the lease term ended. In other words, the landlord asked for a bond amount sufficient to cover the rent it would lose during the time it performed the repairs after the tenants vacated. On March 7, 2011, the motion court granted the preliminary injunction upon the condition that the tenants post a bond in the amount of $4,708,242. The tenants subsequently posted the bond.
On June 6, 2011, the landlord answered the tenants’ complaint and asserted a counterclaim alleging breach of the Upkeep Clause. The counterclaim sought damages to cover the cost of the repairs, along with delay damages allegedly incurred as a result of the tenants’ obtaining the injunction to prevent the landlord from entering the premises. On or before December 31, 2011, the end of the lease term, the tenants vacated the building and surrendered possession to the landlord. In October 2012, the tenants moved for partial summary judgment dismissing the landlord’s counterclaim to the extent it sought delay damages and for an order dissolving the bond. By order entered March 15, 2013, the court granted the tenants’ motion.
Supreme Court dismissed the counterclaim for “delay damages” and discharged the bond. Appellate Division affirmed as to dismissal of the counterclaim:
The motion court properly dismissed the landlord’s counterclaim for delay damages. It is well settled that lost rent is not recoverable as damages for breach of a lease covenant requiring a tenant to keep the premises in good repair. An action alleging breach of such a covenant can be brought either before or after the expiration of the lease term…the Court of Appeals identified two different measures of damages, depending on when the action is commenced. If the action is brought before the lease expires, a landlord can recover “the injury done to the reversion”…i.e. “the difference between the value of the premises with the improvement and absent the improvement”[.] On the other hand, if the action is brought after the expiration of the lease term, “the measure of the damages is the cost of putting the premises into repair”[.] In neither circumstance, however, did the Court of Appeals provide that lost rent is included in the measure of damages.
And reversed as to the discharge of the bond:
We conclude that the motion court prematurely discharged the bond because there has been no determination as to whether the tenants were entitled to the preliminary injunction[.] If the injunction was warranted, then the landlord will not be entitled to any damages arising from its issuance. However, if it is finally determined that the tenants were not entitled to an injunction, the landlord will be entitled to recover, against the undertaking, “all damages and costs which may be sustained by reason of the injunction”[.]
Although lost rent is not an available measure of damages on the landlord’s counterclaim, we cannot conclude, on this record, as a matter of law, that lost rent is not recoverable as damages against the undertaking. We note that the parties, on appeal, did not cite to CPLR 6312(b), and the motion court did not address that provision when it dissolved the bond. The tenants’ contention that the bond was properly vacated because the landlord did not lose any rental income as a result of the injunction presents issues of fact inappropriate for summary disposition. In reinstating the bond, we understand, as the tenants argue, that the landlord ultimately may not be able to prove actual damages, but it is not possible for us, at this juncture, to definitively resolve this factual issue.
Mount Sinai Hospital v. 1998 Alexander Karten Annuity Trust, 2013 NY Slip Op 05667 (1st Dept. August 20, 2013)
The Trust served Mt. Sinai with a notice of default and a 30-day notice to cure after the hospital refused to pay a March 2011 invoice” for 12 years of previously unbilled additional rent.”
At the time it commenced this action, Mount Sinai also moved for a Yellowstone injunction tolling the expiration of the cure period under the notice of default. The Karten Trust cross-moved for summary judgment holding Mount Sinai liable for the billed additional rent. At oral argument on the motion and cross motion, Mount Sinai argued that, on a search of the record, it should be granted summary judgment on the additional rent issue.
Supreme Court :
[G]ranted Mount Sinai summary judgment holding that it was not liable for the first 10 years of additional rent for which it had been billed (1999 through 2008), but granted the Karten Trust summary judgment holding Mount Sinai liable for the last two years of additional rent (2009 and 2010). The court reasoned that “the provision of timely statements detailing annual operating costs is a condition precedent to Mount Sinai’s [obligation to make] payment of those costs.” In support of this view, the court opined that the two-year safe harbor for late billing provided by section 49.04 of the lease
“implies that delays in billing of more than two years can be a waiver on the Trust’s part. Section 49.04, by providing a two-year outer limit on what may be waived, therefore defines the outer bounds of the phrase [in section 49.03, set forth at footnote 3, supra] ‘as soon as reasonably practicable.’”
Rejecting the Karten Trust’s argument that Mount Sinai was precluded from objecting to the billed additional rent by its failure to follow the dispute procedures provided by the lease, the court held that “providing a statement of operating costs less than two years from the date those costs accrued is a condition precedent to Mount Sinai’s obligation to contest the statement within 30 days” as provided by section 49.05. As to the additional rent for 2009 and 2010, for which Mount Sinai was billed less than two years after the expiration of the years in question, the court held that Mount Sinai “waived its right to contest the amount of the operating costs from two years prior to March 1, 2011 by failing to object to the Statement within 30 days as required under § 49.05 of the Lease.”
The First Department :
“[T]urned to the primary issue raised by this appeal, namely, whether it is a condition precedent to Mount Sinai’s obligation to pay additional rent for a given Comparative Year under the lease that the Karten Trust timely issue a statement of Operating Costs for that Comparative Year. To answer this question, it is helpful to review the Court of Appeals’ statement of the principles governing the operation of conditions precedent under New York law:
“A condition precedent is ‘an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises’[.] Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself . . . .
“Conditions can be expressed or implied. Express conditions are those agreed to and imposed by the parties themselves. Implied or constructive conditions are those imposed by law to do justice’[.] Express conditions must be literally performed, whereas constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial compliance is sufficient. The importance of the distinction has been explained by Professor Williston:
‘Since an express condition…depends for its validity on the manifested intention of the parties, it has the same sanctity as the promise itself. Though the court may regret the harshness of such a condition, as it may regret the harshness of a promise, it must, nevertheless, generally enforce the will of the parties unless to do so will violate public policy. Where, however, the law itself has imposed the condition, in absence of or irrespective of the manifested intention of the parties, it can deal with its creation as it pleases, shaping the boundaries of the constructive condition in such a way as to do justice and avoid hardship’[.]
And applied the law to the facts:
The lease in this case does not expressly provide that timely issuance of an Operating Costs statement is a condition precedent to Mount Sinai’s obligation to pay additional rent for that year. While section 49.03 of the lease requires that the landlord, “[f]ollowing the expiration of each Comparative Year, . . . submit to Lessee (as soon as reasonably practicable), a statement [of Operating Costs],” there is no language in the lease that explicitly makes Mount Sinai’s obligation to pay additional rent conditional on submission of the statement “as soon as reasonably practicable” after the end of the year. This conclusion is not changed by the two-year safe harbor provision of section 49.04, which merely provides that the landlord’s failure to bill for additional rent “for a period not to exceed two (2) years after the expiration of each Comparative Year, shall not constitute a waiver or in any way impair” the landlord’s entitlement to such additional rent — saying nothing about the effect of a delay in billing of more than two years. In this regard, it is noteworthy that section 42.04 (the pay-now-fight-later provision) expressly provides that the tenant’s up-front payment of billed additional rent is “a condition precedent to its right to contest [the] correctness” of the landlord’s statement of Operating Costs. Hence, it is clear that the parties knew how to create a condition precedent expressly when they consciously intended to do so.
It is not necessarily conclusive, however, that the parties did not make timely submission of a statement of Operating Costs an express condition precedent to Mount Sinai’s obligation to pay additional rent. As the Court of Appeals recognized in Oppenheimer & Co., in appropriate circumstances, constructive conditions precedent are “imposed by law to do justice” (86 NY2d at 690 [internal quotation marks omitted]). Indeed, in cases similar to this one, the landlord’s timely compliance with the lease’s notice requirement has been deemed to constitute a condition precedent to the tenant’s obligation to pay additional rent, even though the lease did not contain language expressly conditioning the tenant’s obligation to pay on the landlord’s giving timely notice[.]
Of course, under New York law, “all contracts imply a covenant of good faith and fair dealing in the course of performance . . . encompass[ing] any promises which a reasonable person in the position of the promisee would be justified in understanding were included”[.] Beyond question, a reasonable tenant would have been justified in understanding that the landlord would submit an additional rent statement for a given year within a reasonable time after the expiration of that year. The difficulty of verifying the landlord’s claimed operating costs naturally increases with the passage of time, and the tenant, for purposes of managing its own affairs, is entitled to deem accounts for a given year closed at some point. What the parties to this lease would have considered a reasonable time for this purpose can be discerned from section 49.04, the safe harbor clause providing that the landlord’s entitlement to additional rent will not be impaired by a delay in billing “not to exceed two (2) years after the expiration of each Comparative Year.” Accordingly, under this lease, we find that it is a constructive condition precedent to Mount Sinai’s obligation to pay additional rent for a given year that the Karten Trust submit a statement for such additional rent no more than two years after the expiration of that year. Since the Karten Trust served the additional rent statements on March 1, 2011, the constructive condition precedent to Mount Sinai’s obligation to pay additional rent was satisfied only with respect to the years that expired within two years before that date (2009 and 2010).
And concluded that:
On its cross appeal, Mount Sinai argues that the 12-year delay (from the end of 1998 to March 1, 2011) in submitting the statement of Operating Costs for the Base Operating Year should bar the Karten Trust from collecting additional rent for the remainder of the term of the lease. It is Mount Sinai’s position that the landlord’s obligation under section 49.03 of the lease to submit a statement of Operating Costs “as soon as reasonably practicable” after the end of the Base Operating Year should function as a condition precedent to the tenant’s obligation to pay additional rent for each subsequent Comparative Year of the lease’s term. Thus, according to Mount Sinai, it should not have to pay additional rent for 2009 or 2010, even though the additional rent statements for each of those years was submitted less than two years after the year ended. In this regard, Mount Sinai points out that the same requirement of submission “as soon as reasonably practicable” after the end of the year applies to both the Base Operating Year statement and the statement for each Comparative Year. Accordingly, contends Mount Sinai, if timely issuance of the Comparative Year statement is a condition precedent to the obligation to pay additional rent for that particular Comparative Year, then timely issuance of the Base Operating Year statement should be a condition precedent to the obligation to pay additional rent for all subsequent years.
Notwithstanding the epic 12-year delay in submitting the statement of Operating Costs for the Base Operating Year, we decline to foreclose the Karten Trust from collecting additional rent for the remainder of the term of the lease. As previously discussed, the condition precedent that we are applying to Mount Sinai’s obligation to pay additional rent for each Comparative Year is a constructive condition precedent — not a requirement that was “agreed to and imposed by the parties themselves”…but one that has been “imposed by law to do justice”[.]. “Where…the law itself has imposed the condition, in absence of or irrespective of the manifested intention of the parties, it can deal with its creation as it pleases, shaping the boundaries of the constructive condition in such a way as to do justice and avoid hardship”[.]
Given the flexibility the law affords us in the creation and shaping of a constructive condition, our treatment of the timeliness requirement for a Comparative Year statement as a condition precedent to the tenant’s obligation to pay additional rent for that year does not compel us to treat the timeliness requirement for the Base Operating Year statement as a condition precedent to the tenant’s obligation to pay additional rent for the remainder of the lease term. In our view, foreclosing the landlord from collecting additional rent for the entire remaining term of the lease would be too harsh a consequence here, even given the default that occurred in this case. Accordingly, the additional rent statements for 2009 and 2010 are not untimely under the lease, and because Mount Sinai has not followed the procedures of sections 42.04 and 49.05 of the lease for disputing the correctness of those statements, it is precluded from contesting them.
Definitions Personal Fitness, Inc. v. 133 E. 58th Street LLC, 2013 NY Slip Op 04892 (1st Dept. June 27, 2013)
The First Department summarily affirmed the denial by Supreme Court of the tenant’s motion for a Yellowstone injunction.
The record demonstrates that plaintiff chronically failed to pay its rent, having forced defendant to bring 10 nonpayment proceedings over the last seven years. This is a breach of a substantial obligation under the lease…and is a type of default that plaintiff cannot cure within the 15-day cure period provided for in the lease…Accordingly, plaintiff was properly denied a Yellowstone injunction, since that relief requires a showing that plaintiff is able to cure[.]
Defendant was not limited to a nonpayment proceeding under the term of the lease that provided for such proceedings for nonpayment. Chronic nonpayment is a violation of a different type than occasional nonpayment[.] Nor can plaintiff rely on any defect of the notice of default, since no such notice is even necessary for an action based on chronic nonpayment[.] Furthermore, contrary to plaintiff’s contention, there are no equitable considerations that would require a different result.
1400 Broadway Associates LLC v. 112-1400 Trade Properties LLC, 2013 NY Slip Op 04879 (1st Dept. June 27, 2013)
Landlord sent tenant a notice to cure based upon tenant’s failure to obtain consent to certain work. Tenant filed a Yellowstone proceeding; and landlord filed a counterclaim. Supreme Court declared that tenant was not in default; dismissed the landlord’s counterclaim; and discharged and released the tenant’s undertaking. The First Department affirmed.
The work identified in defendant’s December 2, 2008 notice to cure was not subject to the notice and consent requirements of article 9 of the parties’ commercial lease, which, read as a whole, requires notice to, and the consent of, the lessor only with respect to work that (1) constitutes a structural change, alteration or restoration to the building; (2) costs more than $200,000 in the aggregate; and (3) is not a necessary repair or required to comply with the law, pursuant to articles 7 and 8 of the lease[.] Defendant does not dispute that the work described in Items 1 through 7 of the notice to cure fell within the purview of article 7 or article 8 and therefore is not subject to the notice and consent requirements of article 9. Rather, it argues that the notice and consent requirements of article 9 are applicable to all alterations and all restorations of whatever kind, regardless of whether they were performed pursuant to plaintiff’s obligations under article 7 or article 8 or whether they involved a “structural” change, alteration or restoration. This argument ignores the plain terms of the lease.
The motion court properly calculated the total estimated cost of the work described in Items 8 and 9 of the notice to cure by aggregating the costs associated with those items only. Since Items 1 through 7 were not subject to the notice and consent requirements of section 9.01(a) of the lease, which pertains to “any structural change or alteration or restoration involving in the aggregate an estimated cost of more than [$200,000.00],” to include their costs would impermissibly rewrite the terms of the lease[.] Moreover, defendant offered no competent evidence to refute plaintiff’s showing that the estimated cost of the work described in Items 8 and 9 was no more than $45,000. Given that the challenged work did not meet the required monetary threshold, we need not consider defendant’s argument that its expert’s affidavit raised an issue of fact whether the installation of a new canopy in front of the building constituted “structural” work.
Yellowstone proceedings, spawned by contractual conditional limitations that trigger time-sensitive “notices to cure”, can be a trap to the unwary. Tenants (and their attorneys) must be attentive to, and cannot ignore, a “notice to cure”, because failure to address such a notice can lead to the loss of a valuable commercial leasehold estate.