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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.

New Jersey courts are continuing their trend of extending insurance coverage for third-party construction defect claims.  Following last year’s NJ Supreme Court decision in Cypress Point Condo. Ass’n, Inc. v. Adria Towers, LLC, 226 N.J. 403 (2016), which broadly interpreted the standard CGL policy to extend an insured developer’s coverage to include claims of damage caused by the work of subcontractors, the New Jersey Appellate Division recently issued a published decision approving a trial court’s use (though not its application) of the “continuous trigger” theory of insurance coverage to third-party construction defect claims, thereby, potentially extending coverage in such cases over multiple policy years.

In Air Master & Cooling, Inc. v. Selective Insurance Co.,  A-5415-15T3 (N.J. App. Div. October 10, 2017), the Appellate Division reviewed a trial court’s decision in a declaratory judgment action filed by a subcontractor against two of its insurers.  Those insurers had declined coverage and refused to defend the subcontractor in a construction defect litigation filed by the condominium association (the “Association”), on whose 101-unit building the subcontractor had performed certain HVAC work on the roof and in each individual unit.  The Association and certain unit owners claimed damage due to progressive water infiltration, which they attributed to defective workmanship, and the subcontractor was joined in the litigation as a third-party defendant.

The subcontractor had performed work at the building from November 2005 through April 2008.   In early 2008, unit owners began to notice water infiltration into their units and resulting damage.  A newspaper article published 2010 detailed the 2008 discovery of leaks by the unit owners.  In May 2010, the Association’s consultant issued a report identifying certain areas of the roof in need of replacement though noting it could not determine when the infiltration had occurred.

The subcontractor had three insurers from 2005 through 2015.  The insurer for the period November 2005 through June 2009, agreed to defend the subcontractor under a reservation of rights, as it was the insurer during the period the work was performed and at the time the first water infiltration was alleged to have been discovered.  The next insurer, Selective Insurance, provided coverage from June 2009 through June 2012, and disclaimed coverage, on the basis that the property damage was alleged to have manifested before the policy periods had begun.   The third insurer, with coverage from June 2012 through June 2015, also disclaimed coverage, and was dismissed from the subcontractor’s declaratory judgment case, without appeal, on the basis that its 2012 coverage commenced long after any leaks had started and any resulting damage manifested.

After some discovery was conducted, Selective moved for summary judgment, which was granted by the trial court.  The trial court applied the continuous trigger doctrine of insurance coverage in analyzing whether Selective owed the subcontractor a duty to defend the construction defect claim.  It determined conclusively, however, that the damage to the building had manifested itself before Selective’s June 2009 coverage began.

On appeal, the Appellate Division, while agreeing that the continuous trigger doctrine was applicable in the construction defect context, disagreed with the ultimate determination – or at least found that the record was not sufficiently developed to make that determination.   The appellate court, therefore, reversed the judgment in favor of Selective and remanded the case back to the trial court with guidance on the application of the continuous trigger doctrine in the construction defect coverage context.

The continuous trigger effectively grants continuous coverage to an insured in connection with a third-party damage claim from the date of the initial exposure to the harm through the date of the manifestation of the injury resulting from the harm.  The appeals court rejected the subcontractor’s attempt to extend the doctrine even further to extend to the date of “attribution” – that is, when the particular damage could be attributed to a particular insured.  Doing so would be akin to transforming policy to claims made policy from occurrence-based, and likely escalate premiums or deter policies from being written.  Instead, the court determined that the endpoint of the coverage, or manifestation (or “last pull of the trigger”), should be the date when the harm has sufficiently become apparent or manifests itself to trigger a covered occurrence.

The Appellate Division, guided by the precedential first-party coverage case, Winding Hills Condo Ass’n v. North American Specialty Ins. Co., 332 N.J. Super. 85 (App. Div. 2000), held that the manifestation occurs at that time of the “essential” manifestation of the injury, and not necessarily at the initial discovery of the injury.  The essential manifestation is “the revelation of the inherent nature and scope of that injury.”  In examining whether the May 2010 report (during Selective’s policy period) or 2008 unit owner observations of water infiltration (before Selective’s policy period) should be used as the manifestation or end date of coverage, the court found the record too sparse to make that determination.   There were no depositions, or other evidence, revealing who knew what and when about these construction defects, and the court refused to rely on hearsay statements of the unit owners in the newspaper article.

Accordingly, the court remanded the case back to the trial court for a determination of what information about the building defects at issue were or reasonably could have been revealed between the time of the unit owner complaints and the start of Selective policy in June 2009.   The appeals court also noted that the matter was further complicated by the fact that the water infiltration associated with the roof was not discovered until the May 2010 expert report, while the newspaper article does not mention the roof.  Thus, there were genuine issues of material fact as to, among other issues, when water infiltration problems on the roof first became known or reasonably could have been known.

The Air Master decision continues a trend in New Jersey jurisprudence of expanding, within reason, CGL coverage to insureds.  In particular, in construction defect cases, the courts have recently liberally interpreted policies and legal theories to afford more coverage to insureds.   Where construction defects cause progressive property damage, as in the common case of water infiltration, Air Master will help to guide insurers, insureds and their respective counsel in analyzing whether, based on the facts alleged by a third-party, coverage is available for particular policy years.   It is also likely to spawn additional discovery and expense in the underlying construction defect cases specific to those issues.

In an Advisory Opinion issued near the end of 2016, the New York State Department of Taxation and Finance has determined that the transfer of real property in New York State from an “exchange accommodation titleholder” to a taxpayer in connection with a so-called “reverse” like-kind exchange under Section 1031 of the Internal Revenue Code is not subject to the New York State Real Property Transfer Tax. In the more typical or “forward” like-kind exchange, a taxpayer sells real property (the “relinquished” property) and deposits the proceeds from such sale with a qualified intermediary.  Subject to the rules established under IRC Section 1031, the qualified intermediary holds the proceeds until the taxpayer has identified one or more “replacement” properties and the proceeds are then held by the qualified intermediary are used to acquire the “replacement” property or properties.  In a “reverse” exchange, the “replacement” property is acquired before the “relinquished” property is sold by way of an “exchange accommodation titleholder” or EAT.  The EAT holds title to the “replacement” property (generally using a newly-formed limited liability company that is disregarded for tax purposes) until the taxpayer transfers the “relinquished” property.  The Advisory Opinion concisely describes the process of a “reverse” exchange and the rules governing “reverse” exchanges.

The taxpayer provides the funds used by the EAT to acquire the “replacement” property; the EAT does not use any of its own funds.  The funds provided to the EAT are generally evidenced by a promissory note and secured by a mortgage on the “replacement” property.  The taxpayer is also responsible for maintaining the “replacement” property, usually by way of a lease.  The EAT leases the “replacement” property to the taxpayer until the exchange is concluded, with the rent paid to the EAT being consistent with the debt service payments made by the EAT on the mortgage securing the loan from the taxpayer for the funds used by the EAT to acquire the “replacement” property.

The opinion examines the exemption to the payment of the Real Estate Transfer Tax allowed under Tax Law § 1405(b)(4) with respect to “conveyances of real property without consideration and otherwise than in connection with a sale, including conveyances of realty as a bona fide gifts.”  The opinion further states that two conveyances are made for consideration in a “reverse” exchange: the purchase of the replacement property by the EAT and the sale of the relinquished property by the QI to a purchaser.  The EAT is considered to be acting as the agent of the taxpayer by holding title to the “replacement” property for the purpose of timing under a like-kind exchange, no consideration was found to have been provided for the conveyance of the “replacement” property from the EAT to the taxpayer, thus qualifying for the exemption under Tax Law § 1405(b)(4).  In addition, the fees that the EAT receives from the taxpayer for its services in acting as the “exchange accommodation titleholder” were not deemed to be consideration subject to taxation.

As a side note, the New York City Department of Finance came to a similar conclusion in a letter ruling back in 2003 as to properties located within New York City with respect to the application of the New York City Real Estate Property Transfer Tax; the full text can be found here.  The full text of the Advisory Opinion from the New York State Department of Taxation and Finance can be found here.