First Step in Successfully Fending off a Yellowstone Application: Be Sure To Give Valid Notice of Default
August 19, 2021
Several weeks back, we reported on an apparent uptick in commercial lease disputes over the last 18 months in this new COVID era. It only follows that there would be a corresponding uptick in Yellowstone applications from commercial tenants embroiled in such disputes.
As most readers know, injunctive relief under Yellowstone preserves the “status quo” pending a dispute between a commercial landlord and tenant over this or that alleged event of default such that the landlord is prohibited, at least temporarily, from terminating the tenant’s tenancy until the court has an opportunity to hear and determine the nature of the dispute in due course.
The standard for relief under Yellowstone isn’t exactly a high bar, at least as far as injunctions go. An applicant need only show that it holds a valid and enforceable commercial lease; received from the landlord a notice of default; made a timely application for relief within the corresponding cure period; and has the ability to cure the alleged default should the court decide in the landlord’s favor. Yellowstone injunctions are even available when the alleged default is limited to the issue of nonpayment of rent — which, for reasons associated with the recent and ongoing pandemic, tends to be primary basis asserted of late.
Of course, a commercial tenant’s success under Yellowstone is made even easier if the landlord fails to give proper notice of default, which is precisely what happened earlier this year up in Buffalo in a case called Ronald Benderson 1995 Trust v Erie County Med. Ctr. Corp.
In Benderson, Erie County Commercial Division Justice Timothy J. Walker addressed a dispute involving an area hospital (landlord) and real-estate developer (tenant) under a commercial lease for certain retail space located in the lobby of the hospital.
The lease provided that, while in the process of leasing up the lobby retail space, the tenant-developer would be responsible for paying the landlord-hospital a “Partial Rent” amount…
determined by multiplying the Full Rent due for each month by a fraction the numerator of which is the total combined square footage of each subtenant open for business in the Demised Premises and the denominator of which is the total square footage of the Demised Premises.
That is, until such time as the “Full Rent” amount becomes due, which occurs…
once all the rentable space in the Demised Premises has been sublet and each subtenant is open for business (the ‘Full Rent Commencement Date’), [at which time] Lessee shall pay to Lessor an annual rental of $19,600.00 payable in equal monthly installments of $1,633.3 each for each year of the term (the ‘Full Rent’).
The initial lease term was for 10 years, with an option to renew for an additional 10 years at an increased “Full Rent” annual amount of $21,560.00 payable in equal monthly installments of $1,796.67.
The developer eventually exercised the renewal option for a second 10-year term beginning in the summer of 2013, at which time it began making pro-rated “Partial Rent” payments of $1,405.25 based on the 78% of the lobby it had leased up at the time. The developer timely made such payments without any objection from the hospital over the next seven years through the fall of 2020.
In September 2020, after significantly expanding its footprint and patient-flow in the interim, and after determining that the fair market value of its lobby space had substantially increased, the hospital attempted to serve the developer with notice under the lease’s default provision, which provided that…
if Lessee defaults in the payment of rent . . . , Lessor shall give Lessee notice of such default and if Lessee does not cure any default within thirty (30) days, after the giving of such notice . . . , then Lessor may terminate this Lease on not less than thirty (30) days’ notice to Lessee.
According to the court’s decision, the hospital’s notice “claimed for the first time that, six years earlier, on an unspecified date in 2014, the ‘Full Rent Commencement Date’ had occurred, . . . [and therefore] declared that ‘Lessee shall pay to Lessor an annual [as opposed to “Partial”] rental of $19,600 payable in equal monthly installments of $1,633.33 each for each year of the term.’”
The notice went on to state that “the renewal option . . . does not include a ‘Partial Rent’ period; it only permits for ‘new annual rent of $21,560.00 payable in equal monthly installments of $1,796.67′”; but that the developer “has continued to pay only ‘Partial Rent’ of $1,405.25/month for the space”; and that the hospital therefore was “providing notice of default.”
In November 2020, after attempts at resolution by the parties had broken down, the hospital demanded that the developer “quit and surrender” the entire lobby space, which prompted the developer to move for Yellowstone and other injunctive relief.
Justice Walker granted the relief requested, taking issue with the hospital’s default notice in at least three respects.
First, the court found the notice to be void because it conflicted with former Governor Cuomo’s statewide moratorium on commercial evictions in place at the time.
Second, the court found that the hospital’s notice “failed to trigger the commencement of the cure period” because it was sent to the wrong party at the wrong address, despite prior written notice to the hospital of a valid assignment of the lease by the original tenant-developer to the plaintiff.
Finally, and most substantively, the court found that the hospital’s notice was “so impermissibly vague that it was insufficient to commence a ‘cure’ period as a matter of law.” For one, the hospital “identified two different and logically inconsistent rental rates” — $1,633.33/mo. and $1,796.67/mo. — in the same notice. But the hospital also failed to explain how it was that the developer could even “cure” the alleged default in the first place. To wit, “the notice letter was silent as to whether ‘cure’ meant paying increased rent moving forward, paying back-rent for years in the past, or which amount of rent would apply in either case.”
In short, the court found that “the ‘cure’ period could not have expired because it was never commenced,” effectively serving as a stark reminder to commercial landlords and their counsel to be sure to provide “clear, unambiguous, and unequivocal” notice of default to the proper party at the proper address.