The ability to obtain a “Yellowstone” injunction has long been a saving grace for commercial tenants faced with a disputed default under their lease. A recent decision of the New York State Appellate Division, however, could shift the balance of power in commercial landlord/tenant relationships.

Typically, when a landlord notifies a tenant of an alleged default, the notice provides an opportunity to cure, the timeframe for which can be anywhere from a few days to a month, based on the terms of the lease. If the default is not cured prior to expiration of the relevant time period, the lease and the tenant’s rights to the property can be terminated, which cannot be undone as a matter of law.  If the tenant disputes the basis for the default and seeks a determination from the court, it is essentially impossible for the court to resolve the dispute before the cure period expires.  In addition, the timeframes provided to cure alleged defaults offer little flexibility for a tenant to investigate the facts, come to a conclusion, and take corrective action. The Yellowstone injunction, so-named for the seminal case in which one was issued, is designed to protect tenants in these circumstances.

A Yellowstone enables a tenant to toll the expiration of the default notice until a determination is made as to whether a default exists and whether it is the tenant’s responsibility to cure. The threshold for granting a Yellowstone injunction is not a stringent one; the tenant need only show (1) it is a party to a commercial lease, (2) the tenant’s landlord has provided it with a notice alleging default, which provides a timeframe for the tenant to cure, (3) the expiration of the timeframe has not passed, and (4) if it is determined that a default exists, the tenant is ready, willing and able to cure the default. 159 MP Corp. v. Redbridge Bedford, LLC, No. 2015-01523 (N.Y. App. Div. Jan. 31, 2018).

This is a lower standard than what a party must typically demonstrate to obtain injunctive relief under New York law, making the issuance of Yellowstone injunction fairly commonplace in commercial lease disputes. This lower barrier to entry demonstrates New York’s longstanding public policy against the forfeiture of property interests. Vil. Ctr. for Care v Sligo Realty and Serv. Corp., 95 AD3d 219, 222 (1st Dept 2012). As with any contractual negotiation, the parties to a commercial lease can utilize their negotiating positions to preserve or waive certain legal rights. However, courts rarely enforce waivers of a right when the right is a matter of public policy, as the preservation of property rights by a Yellowstone injunction has long been held to be by the courts.

The recently decided case, 159 MP Corp. v. Redbridge Bedford, LLC, involved a commercial lease that included a provision whereby the tenant waived its right to declarative relief, e.g. the issuance of a Yellowstone injunction. The Appellate Division, Second Department affirmed the lower court’s ruling enforcing the waiver provision, on the basis that the Legislature had not enacted any legislation prohibiting such waivers. Absent such legislation, the court stated, the notion of barring the waiver of a right based on 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.” This decision marks a departure from existing case law declaring such waivers void based on public policy. See Sligo Realty.

In light of this apparent conflict between the First and Second Departments, which govern the five boroughs of New York City and surrounding counties, this issue appears ripe for appeal to New York’s highest court, the Court of Appeals. In the 159 MP Corp. case, the tenant must make a motion for leave to appeal to the Court of Appeals, and the Court can then exercise its discretion in granting or denying such a motion. The Court of Appeals may very well view the discrepancy between these neighboring courts as too divergent to remain unreconciled, and hear a further appeal. The decision on such an appeal would then provide guidance on the issue statewide.

Until then, however, New York commercial landlords should consider including provisions waiving a tenant’s right to declaratory relief in their commercial leases, whether the property is located in the Second Department (Kings (Brooklyn), Queens, Richmond (Staten  Island), Nassau, Suffolk, Westchester, Rockland, Putnam, and Orange counties) or not. Tenants, on the other hand, should take the Second Department’s decision into account when considering their negotiating positions and, if their lease contains a waiver of Yellowstone rights, determining how to respond to a notice of default. Landlords and tenants should consult with their legal counsel so as to stay abreast of such developments of the law, including the rights the courts can be relied on to protect and, more importantly, the rights they will not.

 

The New York City Building Code, Chapter 33, requires a developer to safeguard adjoining property during the conduct of all construction and demolition operations. Accordingly, a developer and an adjoining property owner may enter into a license agreement, whereby the adjoining property owner provides the developer with access to its property to install Code-required protections.  In return, oftentimes the developer, among other things, pays compensation to the adjoining property owner for such access.  If the parties cannot reach an agreement, the developer may seek to compel such access through the courts pursuant to Section 881 of the Real Property Actions and Proceedings Law.

While the Building Code does not explicitly provide a right to compensation, when these issues have been brought before them, New York courts have awarded compensation to adjoining property owners.  However, whether compensation is mandated and the amount of compensation is within the courts’ discretion.  Courts often consider the length of time for which access is necessary and the intrusiveness of the developer’s work on the use and enjoyment of the adjoining property by its owner and occupants.  Without clear guidance from the courts, a developer and an adjoining property owner need to give due consideration to the issue of compensation as illustrated below.

In her ruling released late last month, Manhattan Judge Arlene Bluth denied any license fee to the Condominium Board of the Fifth Avenue Tower, an adjoining property owner to the New York Public Library.  The Library will conduct a $200 million overhaul of its main Fifth Avenue branch.  In her decision, Judge Bluth specifically rejected the Condominium Board’s request for a $15,000 / month license fee.  It has been separately reported that the Condominium Board rejected the Library’s offer of a $3,500 / month license fee.  It appears that Judge Bluth may have denied any license fee to the Condominium Board based, at least in part, on the excessiveness of its demands.

In view of the lack of clear guidelines, developers and adjoining property owners should consult with their legal counsel and should be sure not to overplay their hands when negotiating license fees.

The New York City Council approved a bill on Thursday, November 30, that impacts thousands of small business owners located south of 96th Street in Manhattan. The bill modifies the threshold that businesses must meet in order to be exempt from paying the 3.9 percent New York City commercial rent tax, which is imposed upon businesses located south of 96th Street in Manhattan. Businesses operating in the Bronx, Queens, Brooklyn and Staten Island are not subject to the tax and are not impacted by this legislation. Though Mayor Bill de Blasio initially opposed the bill as it is projected to remove $38.6 million in revenue in fiscal year 2019, it is expected that he will sign the bill into law. The measure also had the support of Council Speaker Melissa Mark-Viverito. Once signed, it will become effective July 1, 2018.

Prior to the bill’s passage, businesses who paid more than $250,000 a year in base rent were required to pay the tax. The bill will raise this threshold, allowing businesses who make $5 million or less in annual income and pay less than $500,000 in annual rent to be exempt from the tax. The bill also provides a partial, sliding credit for (1) businesses making $5 million or less a year and paying between $500,000 and $550,000 a year in rent and (2) businesses making between $5 million and $10 million a year and paying less than $550,000 in annual rent.

The bill also provides exemptions for not-for-profit organizations and businesses located in certain areas, such as the World Trade Center area or those areas impacted by the Lower Manhattan Commercial Revitalization Program.

A credit for businesses that pay between $250,000 and $300,000 in annual rent, without consideration of annual income, is left unchanged.

Last week, New Jersey’s Appellate Division re-affirmed the principle that a court must strictly apply the terms of a construction contract when determining a dispute between contracting parties.  Where the contract terms speak directly to the issue in dispute, a court may not employ equitable considerations to determine the dispute even if the court believes that strictly applying the contract terms would be unfair to one of the parties under the circumstances.

While this is not a novel legal principle, the Appellate Division, in its unpublished opinion, Wallace Bros, Inc. v. East Brunswick Board of Education, Docket No. A-1432-15T3 (N.J. App. Div.  Nov. 9, 2017), reiterated this tenet in reversing a trial court that granted summary judgment to a general contractor that claimed it was owed final payment on a school construction project because the school board had waited too long to object to the contractor’s work.  The Appellate Division found that there were numerous material factual disputes between the parties when examining their allegations and the language in the parties’ contract.  It, therefore, reversed the trial court’s judgment, and remanded the case back to the trial court for further proceedings.  Critically, it appeared from the facts proffered by the school board that the contractor had not yet complied with the contract’s provisions regarding the right to receive final payment, such as the contractor’s obligations to provide standard close-out documentation and its failure to complete punch-list work.

Wallace Bros. serves as a reminder of how important it is for a contractor to review and, where possible, negotiate the terms of a contract before signing it, and then strictly comply with all contract provisions during the course of the project through completion.  In the public contracting context, as in Wallace Bros., the contractor generally must accept the terms of the contract on which it bids.  It then must strictly follow the procedures set forth in that contract when seeking payment for its work, particularly those provisions which explicitly set forth prerequisites to payment.  For example, change order provisions will typically require written documentation signed by the owner setting forth the additions or changes to the specified contract work, along with the price to be paid for that work, before such work is even performed, and therefore before payment is required to be made by the owner for any such work.

Also, as illustrated in Wallace Bros., contractors must be sure to compile and maintain their close-out documentation throughout the project, so that when it is time to submit their close-out packages in connection with final payment, they are not delayed tracking down or locating items such as subcontractor lien waivers, as-built drawings, and manufacturer warranties.  Note that in the private contracting context, a contractor may attempt to negotiate all contract provisions to try to ease the burdens of onerous payment and close-out requirements, as well as other critical terms, such as dispute resolution provisions and requirements relating to the performance and inspection of the work itself.

In sum, contractors must stay on top of their administrative duties and responsibilities in connection with their contracts.  No contracting party wants a construction dispute to end up in litigation, but if it does, the contractor will want to ensure that it has done everything by the book (or by the contract) to avoid getting tripped up by a technical contract prerequisite with which it failed to comply.

Parties objecting to development projects have traditionally been immunized from liability for common law torts, such as malicious prosecution, abuse of process and tortious interference.  This immunity, grounded in the well-recognized Noerr-Pennington doctrine, affords immunity to those who petition the government for redress.  (See  Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. 365 U.S.  127 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657 (1965) (holding that parties seeking relief from the government are generally afforded immunity unless such actions are objectively baseless).

While the immunity afforded objectors has been a difficult one to breach, recent decisions suggest that actions brought against these objectors require careful review of the facts and underlying circumstances before they can be summarily dismissed.  In order to overcome Noerr-Pennington immunity, a litigant must satisfy a two-prong test:  First, proof must be established that the actions of the objector were “objectively baseless,” meaning no reasonable litigant could realistically expect success on the merits of its claims.  Second, proofs must also establish that the conduct in question was brought with the specific intent to further wrongful conduct through the use of the governmental process – as opposed to the outcome of that process.  Importantly, the second prong is only considered if the challenged litigation is first found to be objectively meritless.

Recently, however, meeting the first prong has been made easier by our court’s consideration of an objector’s track record and the presence of other repeated failed filings.  (See Main Street at Woolwich, LLC v. Ammons Supermarket, Inc. 451 N.J. Super. 135 (App. Div. 2017).  In Main Street, the court relied upon a Third Circuit decision in holding that the trial court failed to properly consider the defendant’s alleged pattern of sham litigation.  Hanover 3201 Realty, LLC v. Village Supermarkets, Inc. 806 F.3d 162, 180 (3rd Cir. 2015), cert. denied __ U.S. __, 136 S.Ct. 2451 (2016).  By demonstrating that an objector has engaged in a series of unsuccessful administrative and/or court challenges, developers can establish that this activity represents a pattern of utilizing the process to serve the anticompetitive purpose of injuring market rivals.  Under such circumstances, a court could very well conclude that the claims of such objectors were not brought to redress any actual grievances, but rather to promote delay and cause injury.  Accordingly, this broad immunity can be lost where the conduct at issue is merely intended to interfere directly with the business relationships of a competitor.

As a consequence, before filing any action seeking government redress, a putative objector, much like any other litigant, should carefully evaluate the bases for its objections with a legal professional to ensure that they are both grounded in fact as well as supported by sound legal underpinnings.  To do otherwise is to invite abuse of process type claims that now have a much greater likelihood of success.  Reviewing any possible strategy that involves objecting to a rival’s application for development is now, more than ever, a critically important step to insulating the objector from exposure to counter-suits that were previously viewed as questionable nuisance type actions.