In a landmark decision, the Court of Appeals, New York State’s  highest court, has endorsed a commercial tenant’s waiver of its right to seek a “Yellowstone” injunction, perhaps sounding the ultimate death knell for this common remedy  for commercial tenants who are facing claims of default from their landlords. A Yellowstone injunction enables a tenant to toll the expiration of a default notice until a determination is made as to whether a default exists and whether it is the tenant’s responsibility to cure. The intent is to protect the tenant from being evicted while a determination is being made by the court on the underlying alleged default. We last wrote in February 2018 that the Appellate Division, Second Department had affirmed a lower court’s ruling in 159 MP Corp. v. Redbridge Bedford, LLC, enforcing a provision whereby a tenant waived its right to declarative relief vis-a-vis the issuance of a Yellowstone injunction because the Legislature had not enacted any legislation prohibiting such waivers. The Second Department decision created an apparent conflict with existing caselaw in the First Department, wherein waivers of declaratory relief in contracts were deemed void as against public policy. You can view the original blog post here.

The Court of Appeals has now affirmed the Second Department’s ruling in 159 MP Corp. and resolved the split with the First Department on the issue.  Chief Judge Janet DiFiore, writing for the majority found that a waiver of the right to seek declaratory relief “does not reflect such a fundamental public policy interest that it may not be waived by counseled, commercial entities in exchange for other benefits or concessions.” [pg. 17]   The Court’s ruling also relied upon the lack of any legislative protections for Yellowstone injunctions, as well as New York’s longstanding acceptance of the concept of freedom of contract as dispositive. The Court reiterated that “[f]reedom of contract prevails in an arm’s length transaction between sophisticated parties…, and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.” [pg. 6, quoting Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 695 (1995)]. The Court noted that while the Legislature already “recognized the utility of Yellowstone-type relief for some residential tenants,” such a benefit has been provided “only to a class of residential tenants indicates that the Legislature did not view this type of relief as fundamental for commercial tenants.” [pgs. 16-17]. However, the Court expanded on its reasoning by noting that the tenant’s waiver for declaratory relief did not impair its ability to pursue other legal remedies, such as seeking “damages on breach of contract or tort theories.” [pg. 13]. As such, “a Yellowstone injunction is not essential to protect property rights in a commercial tenancy which, of course, are governed by the terms of the lease negotiated by the parties.” [pg. 16].

The decision appears to put to bed the conflict between the First and Second Departments, but it is not without opposition. In his dissenting opinion, Judge Rowan D. Wilson posited that “freedom of contract is not a limitless right,” and that the Yellowstone injunction was a necessary protection for commercial tenants to avoid eviction while trying to determine their rights and responsibilities under their lease agreements. [Dissent, pg. 2]. In light of the fact that “ambiguity often strikes” lease agreements that are initially thought of as precise and clear, there remains a strong public interest “in adopting procedures that permit a timely and conclusive determination that preserves the object of the parties’ bargain.” [Dissent, pg. 8].

It appears the majority’s decision will, as stated in Judge Wilson’s dissent, result in the ultimate elimination of the Yellowstone injunction, as landlords will surely include waiver language in future leases and seek to enforce any such clauses in existing leases. Commercial landlords and tenants should contact their legal counsel to review existing leases to ensure clarity with regard to legal remedies in the event of default. Future leases should be negotiated with consideration given to the fact that waivers of declaratory relief are now likely to be upheld in New York’s courts. Commercial landlords should consider including provisions waiving a tenant’s right to declaratory relief in their commercial leases. Tenants, on the other hand, should take this 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.

On May 2, 2019, Nathaniel Lorenz was sentenced to 18 months in prison following his November 8, 2018 conviction on eight counts of wire fraud and one count of mail fraud for defrauding the government in connection with a bridge maintenance project administered by New York State and funded primarily by the Federal Highway Administration (“FHWA”).  Lorenz’s sentence and conviction serve as a warning that contractors who cut corners on government contracts do so at their own peril.

Lorenz’s company, ACME Powerwashing, Inc., contracted with the New York State Department of Transportation (“NYSDOT”) to provide cleaning and sealing services on a number of bridges in the Binghamton and Buffalo areas.  According to the indictment, ACME’s work involved powerwashing bridge decks and applying a chemical sealer.

ACME was required to purchase a specific chemical sealer and to submit documentary proof to the NYSDOT of the kind and amount of approved sealer used.  Lorenz was charged and convicted for purchasing less than the amount of materials required under ACME’s contracts with the NYSDOT, and then submitting fraudulent invoices to the NYSDOT which purported to show that ACME was in fact purchasing the appropriate amount of materials.  Although a company called Allied Building Products Corp. was the exclusive authorized seller of the sealer, Lorenz falsely represented to the NYSDOT on multiple occasions that ACME had purchased the sealer, in the required amounts, from a company called S.E. Brett, Inc.  In reality, Lorenz was the sole owner of S.E. Brett, and he had not purchased any of the required sealer from that company.

The sentence of 18 months—which was lower than the 46 months sought by federal prosecutors—will be followed by two years of supervised release and restitution in the amount of $600,000, which is the amount of loss that the parties agreed the government sustained by way of Lorenz’s fraud.

Following Lorenz’s conviction, the United States Attorney for the Northern District of New York stated:  “Nathaniel Lorenz ripped off New York State taxpayers by doing shoddy maintenance work on bridges New Yorkers depend on every day and then submitting phony paperwork to cover up his fraud.  Together with our state and federal law enforcement partners, we will continue to vigilantly watch over federally funded contractors so that taxpayers get what they pay for.”

This case demonstrates the grave risks attendant to misconduct in connection with government contracts.  Had Lorenz’s counterparty been a private citizen or entity, he may never have been federally charged, as the Department of Justice (“DOJ”) charging policy on mail and wire fraud provides that “[p]rosecutions of fraud ordinarily should not be undertaken if the scheme employed consists of some isolated transactions between individuals, involving minor loss to the victims, in which case the parties should be left to settle their differences by civil or criminal litigation in the state courts.”  While this statement in no way insulates fraud in private construction projects from federal investigation and prosecution, it suggests that such purely private conduct is not as likely to be of interest to the DOJ as is fraud in connection with public projects.  Indeed, the DOJ policy goes on to state that “serious consideration” should be given to the prosecution of “any scheme which in its nature is directed to defrauding a class of persons, or the general public, with a substantial pattern of conduct.”  Thus, the DOJ policy generally provides that a substantial element of public harm makes it more likely that a particular fraudulent course of conduct will be pursued as a federal criminal matter.

Commercial landlords can now add another item to the already interminable list of risks they face in their capacities as landlords: liability borne from a tenant’s trademark infringement. The notion that a landlord could be vulnerable to legal action for the actions of its tenant runs counter to many people’s understanding of fairness. Nevertheless, commercial landlords are finding themselves increasingly subject to trademark enforcement claims as well-known brands seek to take stronger action to protect their intellectual property. If landlords want to ensure they are protected from their tenants’ trademark violations they would do well to understand the potential risks they face when leasing their properties to certain tenants.

In March, the jury in Omega v. 375 Canal, LLC awarded a total of $1.1 million to Omega, Swatch and several other brands as a result of 375 Canal’s contributory actions of trademark infringement. Case No. 1:12-CV-06979-PAC (S.D.N.Y. March 4, 2019). The watchmakers alleged that vendors leasing space owned by 375 Canal were selling counterfeit products that utilized their brands’ trademarks. The plaintiffs were able to prove the landlord had direct knowledge of the nefarious sales practices being employed by its tenants given (1) several arrests in 2010 and 2011 for these sales were made at the subject property, and (2) the plaintiffs notified 375 Canal of these arrests. Though 375 Canal stated that the offenders were removed from the property, by 2012 the brands’ investigators were still able to purchase counterfeit products at the property. The landlord also had a history of being involved in trademark enforcement actions, having consented to an injunction against infringement on Louis Vuitton trademarks in 2006, and other public nuisance claims that sought to prevent 375 Canal from allowing its property to be used by imitators. In the end, 375 Canal was found liable for contributory trademark counterfeiting, with each of the four trademarks that were the subject of the proceeding accounting for $275,000 of the total $1.1 million award to the plaintiffs.

The Omega case is the most recent in a line of cases involving commercial landlords facing liability for trademark infringement conducted by their tenants. Landlords should work with their legal counsel to review existing leases and ensure their indemnification provisions provide enough protection against trademark enforcement claims and an ability to terminate leases for intellectual property infringement. Future leases should be negotiated with potential trademark risks in mind, and careful attention should be given to the types of tenants landlords are dealing with.

In the event a landlord has knowledge of potential or actual trademark infringement by a tenant, it is imperative that action be taken to correct the tenant’s conduct or remove the tenant from the property. In light of the Omega decision, popular brands know that commercial landlords have a responsibility to be an early line of defense in protecting their trademarks against vendors who seek to imitate their brands. Commercial landlords cannot turn a blind eye to the actions of their tenants, but instead need to be diligent and address the trademark infringement of their tenants.

In South Florida where planned communities are common, condominium associations—and homeowners’ associations—are often the norm, not the exception.  Florida Statutes Section 718.103 defines a condominium association as “any entity responsible for the operation of common elements owned in undivided shares by unit owners, any entity which operates or maintains other real property in which unit owners have use rights, where membership in the entity is composed exclusively of unit owners or their elected or appointed representatives and is a required condition of unit ownership.”

Similarly, under Florida Statutes Section 720.301, a homeowners’ association is defined as “a Florida corporation responsible for the operation of a community or a mobile home subdivision in which the voting membership is made up of parcel owners or their agents, or a combination thereof, and in which membership is a mandatory condition of parcel ownership, and which is authorized to impose assessments that, if unpaid, may become a lien on the Parcel. . . .”

Simply put, whether it is a Condominium Association or a Homeowners’ Association, it is that Association that is charged, generally through its Board of Directors, with managing and operating the development in question.

Disputes frequently arise between a condominium unit owner and the Association when that unit owner suffers damage to her unit because of something that occurred in a neighbor’s unit.  For example, a hot water heater that bursts in a second floor unit can flood and cause significant damage to the unit immediately below it.  Under such circumstances, is or can the Association be responsible for that damage?  The answer is it depends upon what was damaged.

Under Florida Statutes Section 718.113, maintenance of the common elements is clearly the responsibility of the Association.  As such, if there was damage to the drywall or ceilings in the downstairs unit, both which are considered common elements, that would be the responsibility of the Association although the Association would likely seek indemnification from the upstairs unit owner if his negligence caused the incident.

Common elements do not, however, cover “all personal property within the unit or limited common elements, and floor, wall, and ceiling coverings, electrical fixtures, appliances, water heaters, water filters, built-in cabinets and countertops, and window treatments, including curtains, drapes, blinds, hardware, and similar window treatment components, or replacements of any of the foregoing which are located within the boundaries of the unit and serve only such unit.” Florida Statutes Section 718.111(11)(f).   Assuming there was damage to any of these and assuming, again, the upstairs unit owner was negligent, the unit owner suffering the damage would have to look to that upstairs owner or his insurance company to address those damages.

The Appellate Division has once again confirmed that “distinctions between renters or property owners in the application of zoning and land use laws have no place in the application of legitimate objectives of zoning.”

In Tirpak v. Bor. of Point Pleasant Beach, A-5088-17T1/A-5147-17T1, decided Feb. 11, 2019, the property owner sought to remove a deed restriction imposed as a condition in connection with an earlier use variance. The restriction allowed for the use of the property as a two-family residence only if one of the units was owner-occupied.  The trial court vacated the condition after finding it legally impermissible and the municipality subsequently challenged that determination.

On appeal, the court confirmed that it was improper for the zoning board to condition its grant of a use variance on whether the residence was occupied by an owner or tenants.  In so doing, the court recognized the well-established principle that while zoning may be utilized to regulate the usage of property it cannot be applied to control the identity or status of the persons occupying the land. See DeFelice v. Point Pleasant Beach Bd. Of Adj.,  216 N.J. Super.  377 (App. Div 1987) and United Property Owners Ass’n of Belmar v. Borough of Belmar, 185 N.J. Super. 163, 165 (App Div. 1982)).  While the Zoning Board argued that the condition furthered the legitimate objectives of controlling noise and nuisance conditions, the court held that such objectives must be achieved through the police powers of the municipality, not its zoning laws.

In sum, a municipality may not employ its zoning laws in a manner that favors property owners and discriminates against tenants.