When a commercial tenant stops paying rent, that can seriously affect a board’s revenue stream. Boards can go to court and threaten to terminate the lease, but is there a stumbling block?
The Yellowstone injunction is a law that was created over 50 years ago in a case called First National Stores v. Yellowstone Shopping Center on behalf of commercial unit tenants in residential buildings. What the commercial tenant basically said to the court was that it needed a way to stop the clock ticking on an impending termination by the landlord because otherwise they would be subject to a serious and substantial loss.
So it’s basically a suspension of the time period in which you must cure your default?
Yes, but there are requirements that a commercial tenant must achieve. It must prove that it has a commercial lease and that it received a notice to cure that specifies a certain time period. By the way, these defaults don’t have to be money. It can be a tenant’s refusal to install sprinkler systems or a failure to repair sidewalks or to procure insurance — anything that is under the commercial lease. The tenant must get into court before the cure period expires to obtain a temporary restraining order and, most importantly, must prove that short of vacating the premises it has the means and wants to cure the default.
You recently represented a Manhattan co-op with a commercial parking garage that ran into the Yellowstone injunction.
The garage tenant had been failing to pay rent on a regular basis, and a substantial amount of arrears had accrued. Because the lease allowed for it, the board decided to apply the security deposit toward the outstanding rent. And there was another clause in the lease that required the commercial tenant to replenish that security deposit. And we gave them 10 days’ notice to cure that default. The tenant’s lawyer contacted my office, and we negotiated something that’s common in the industry called a tolling agreement, in which the landlord basically agrees to give the tenant more time to cure the default. Unfortunately, the tolling went on for a multitude of months, and we weren’t making much progress in attempting to settle the issue of the outstanding rent. The tenant was actually looking for changes in the lease. So we notified the attorney that he would have to go to the court to seek and obtain the temporary restraining order, which is a precursor to obtaining a Yellowstone injunction.
But you would obviously have preferred to come to an agreement.
Yes, because of the fact that lawsuits in Supreme Court can go for two, three years, maybe even more. The judge has to weigh the decision of whether to even grant the Yellowstone injunction, and in the meantime how is the co-op going to survive if the court enjoins it from moving forward in the collection of rent and outstanding arrears?
The answer is to file a cross-motion for what’s called use and occupancy rent while the case is pending. What we’re saying to the judge is: “Listen, you may want to give this injunction, but we don’t feel the tenant qualifies because they don’t have the ability or the means to cure, and they’re just trying to delay this case. But if you’re going to issue that injunction, we want you to keep the status quo between the parties. We want you to give us an order that says that they must pay the fixed use and occupancy rent pending this action.”
How much money are we talking about?
The tenant had arrears in excess of $1 million. There was additional money owed in this case because the tenant was also required to pay real estate taxes on the space that they were occupying in the building. The taxes were close to $500,000 a year, so the potential for the tax arrears alone was in the millions.
The second thing we asked for was to have money set aside so that we knew it would be there two or three years later after the resolution of this lawsuit. We asked the court to either have the tenant place money in court or obtain an undertaking or bond from an insurance company. That way, we won’t have to chase the tenant for our money. If the business is a going concern, perhaps you don’t have to worry, but if it’s not and they’re in trouble at the end of three years, you may have no recourse to obtain the money.
Were you able to get the occupancy rent and the bond?
The case is still pending, and we’re waiting for a determination by the court. We did ask for a substantial bond and for the standard monthly rent to be paid. It really is at the discretion of the court, but most of the time they will issue you the use and occupancy rent. The bond is a tricky issue.
A lot of commercial tenants will argue that the value of the property was enhanced by improvements they made to the property. And when they can prove that, the court could take into account the value of the improvements and say: “Well, you want a bond for $1 million. They said they improved the property for $500,000. So I’ll give you a $500,000 bond.”
What’s the takeaway here for boards?
When it comes to commercial tenants who want to use the Yellowstone injunction, the first step is to try to negotiate a deal rather than go straight to court. If that fails, you have to be aggressive. You must respond by requesting that the court provide you with the use and occupancy rent and the bonding if possible during the period of the litigation. That’s the best response you have to protect the interests of the co-op or the condominium.
As far as this particular case, what outcome are you expecting?
You never know. The decisions from the New York Supreme Court are up and down. There are some judges who believe that if you’re going to issue a Yellowstone injunction, everything should be status quo and rent should be paid — and that if there are outstanding arrears, something should be done in order to safeguard those arrears. There are other judges who feel that the payment of the occupancy rent is enough. It’s up to the judge, but obviously we have the right to appeal if the decision is something that doesn’t make sense based upon the law.