The Yellowstone injunction is implicated in nearly every lease for commercial real property in the state of New York, yet most landlords and tenants do not know what it is or how it affects them. Below is a succinct overview of its implications so that commercial landlords and tenants can better navigate lease disputes.

Stopping the Clock on a Cure Period

Yellowstone injunctions take their name not from the popular neo-Western drama series but from the New York Court of Appeals case of First National Stores v. Yellowstone Shopping Center that created this limited-purpose injunction. In that case, the landlord and tenant disagreed about who was responsible for installing a sprinkler system, which the court ultimately decided was the tenant’s responsibility. Although the tenant was able and willing to make the installation once the court said so, the tenant had not asked to pause the cure period, and the landlord had terminated the lease for default. New York’s highest court decided it was not empowered to extend the tenant’s deadline to cure its default and upheld the lease termination.

This case conceptualized and gave rise to the remedy referred to a Yellowstone injunction. Its purpose is to stop the running of the applicable cure period: it prevents a commercial landlord from prematurely terminating a lease for default until a court decides whether the alleged default is proper or not.

Only a commercial tenant can ask for such an injunction, and it must demonstrate that: (1) it has received a notice of default, notice to cure, or a threat of termination; (2) it has made its request to the court for an injunction prior to the termination of the lease; and (3) it is willing and able to cure the alleged default. Since these three factors are relatively easy to prove, such injunctions are commonly granted.

Although Yellowstone injunctions are a tenant’s remedy, they are not always one-sided and can provide protections for a landlord. New York courts have imposed conditions on injunctions meant to protect the landlord during the period of the stay. For example, in disputes concerning defaults unrelated to the payment of rent, courts have conditioned the injunction on the continued payment of rent or the posting of a bond. In disputes concerning the payment of rent, courts have required the tenant to deposit rent arrears in a jointly held escrow account and deposit monthly sums equal to rent in the account for the duration of the injunction.

Practical Implications

From a tenant’s perspective, time is often of the essence. Because most cure periods can be quite short (7 to 10 calendar days is typical), a tenant must act quickly if it receives a notice of default or notice of cure. This should involve having an attorney review the notice and the lease, assess whether an injunction remedy is available, and, if so, make an emergency application in court to stop the clock on the cure period.

Acting quickly not only preserves the tenant’s right to cure its default down the road if the court decides against the tenant, but it also provides the tenant some leverage by engaging the landlord in urgent litigation.

From a landlord’s perspective, these practical implications have led many landlords to require a tenant to waive its right to seek such an injunction. These waivers often go beyond Yellowstone injunctions to waive a tenant’s right to bring a lawsuit for a “declaratory judgment”—meaning a lawsuit brought in the Supreme Court of New York seeking an interpretation of the lease and giving the parties access to full discovery. As a result of such a waiver, tenants are typically limited to bringing their claims in an expedited, streamlined proceeding in the landlord-tenant part of the local court, which does not typically allow for discovery (and is, thus, less costly for the landlord).

However, a wave of new laws arose in 2019 with respect to declaratory judgment waivers, making it prudent for landlords to take stock of their commercial leases well before a dispute arises.

In 2019, the Court of Appeals upheld the enforceability of a lease provision waiving a commercial tenant’s right to bring an action for a declaratory judgment. In the case decided by the court, the Yellowstone injunction requested by the tenant as part of the action was also denied as waived.

Almost immediately, in response to the Court of Appeals decision, the New York State Legislature passed a law prohibiting such declaratory judgment waivers effective Dec. 20, 2019. Section 235-h of the New York Real Property prohibits and nullifies any provision in a commercial lease “waiving or prohibiting the right of any tenant to bring a declaratory judgment action with respect to any provision, term or condition” of its commercial lease.

Section 235-h raises more questions than it answers. First, Section 235-h has been interpreted to only apply to leases signed after Dec. 20, 2019. Therefore, waivers of declaratory judgment actions contained in older leases can still be enforceable.

Second, the prohibition’s scope is unclear and has not yet been tested in court.  Section 235-h prohibits waiving the remedy of a “declaratory judgment action,” but a Yellowstone injunction can still be available to tenants in other types of actions as well. This creates opportunities and risks for both tenants and landlords.

From a tenant’s perspective, a tenant whose lease only waives “declaratory judgment” actions can try to frame its lawsuit as one for breach of contract (i.e., a breach of the lease) and seek a Yellowstone injunction in that context. Although this type of action may not be ideal for the tenant, it is a potential workaround of the waiver that creates the same urgency and leverage that can promote an out-of-court resolution.

From a landlord’s perspective, a landlord may still try to require a more limited waiver of only a Yellowstone injunction (not declaratory judgments broadly) because Section 235-h does not call out Yellowstone injunctions specifically. Tenants, in turn, may try to resist or negotiate such a waiver depending on their relative bargaining power. Negotiations could include lengthening the cure period in exchange for a waiver or requiring the parties to participate in a mediation before the lease can be terminated.

Yellowstone injunctions and related waivers are frequently litigated, making it essential to stay updated on changes in the law.

Janet Kljyan is a member of Robinson+Cole’s business litigation group and Charles F. Martin III is a partner in the firm’s real estate and development group.

Reprinted with permission from the February 14, 2024 edition of the New York Law Journal© 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com