Posts

Commercial Tenant’s Waiver of Yellowstone Relief Upheld by Appellate Court

In New York, the Yellowstone injunction is a form of legal relief used by commercial tenants who have been served with a notice to cure by their landlord to obtain an extension from a court to cure the default and prevent the landlord from terminating the lease until the dispute is settled or determined by the court.

The Yellowstone injunction takes its name from the landmark case National Stores, Inc. v. Yellowstone Shopping Center, 21 N.Y.2d 630 (1968). In National Stores, Inc., New York’s highest appeal court ruled that a commercial tenant, after receiving a notice to cure from its landlord, could seek a court injunction preventing the landlord from terminating its lease. Tenants have been filing applications for Yellowstone injunctions ever since.

Most lease defaults require a landlord to serve its tenant with a notice to cure. Generally, after the notice to cure expires, the landlord can then serve a notice terminating the tenant’s lease and then commence a summary eviction proceeding in civil landlord-tenant court which has limited jurisdiction and cannot issue a Yellowstone injunction extending the tenant’s time to cure. As a result, a tenant served with a notice to cure will often preemptively commence an action in the Supreme Court of the county where the property is located because the Supreme Court has the power to extend a tenant’s time to cure via a Yellowstone injunction (unlike the civil landlord-tenant court). County Supreme Courts routinely grant Yellowstone injunctions as long as the tenant can show it received a notice to cure and the time to cure has not expired (and provided there is a valid lease between the parties, and the tenant has expressed the desire and ability to cure the alleged default).

Once a Yellowstone injunction is granted, the tenant’s cure period will not run until the Supreme Court determines whether a default exists and often the cure period will be extended. If a tenant fails to file a Yellowstone injunction and the cure period expires, the tenant risks losing its lease in a civil landlord-tenant court proceeding because this court (unlike the Supreme Court) does not have the equitable power to extend the time to cure, and once a lease is terminated it generally cannot be revived. As a result, the Yellowstone injunction has been an important legal remedy used by tenants to challenge or extend the time to cure lease defaults without risking forfeiture of their lease.

However, recently, an appellate court ruled that a tenant which had a lease provision waiving its right to obtain a Yellowstone injunction could not extend or toll the time to cure its lease defaults for failure to obtain various permits and failure to allow sprinkler inspections by the FDNY. In 159 MP Corp. v. Redbridge Bedford, LLC, 71 N.Y.S.3d 87 (2nd Dept. 2018), the appellate court held that a commercial tenant’s waiver via a lease provision of the right to seek declaratory relief was legally enforceable, and by waiving its right to declaratory relief, the tenant also waived its right to seek a Yellowstone injunction. Further, the lease waiver language dictated that any dispute between the parties must be adjudicated in a summary eviction proceeding in civil landlord-tenant court.

The decision in 159 MP Corp. is significant because although many landlords have waiver provisions in their commercial leases similar to the waiver provision in the lease in 159 MP Corp., courts have been inconsistent in enforcing such provisions. Now, there is clear appellate law precedent making such Yellowstone waiver provisions binding and enforceable. This greatly enhances a landlord’s ability to enforce lease provisions and covenants such as requiring tenants to correct violations, complete alterations properly and maintain required insurance because, once a landlord serves a notice to cure, a tenant has a limited window to cure the default and, should it fail to do so, the tenant may have its lease terminated and then be evicted without the safety net of a Yellowstone injunction to fall back on.

As a result, it is advisable for landlords to include a provision in their leases waiving their tenants’ rights to seek declaratory relief and a Yellowstone injunction and, if a current lease does not have such a provision, it would be beneficial to add one in subsequent lease renewals. On the flip side, if you are representing a tenant, you should try to carve out some ability to obtain a Yellowstone injunction. Going forward, lease provisions affecting a tenant’s right to obtain a Yellowstone injunction will likely become one of the more focused on and important terms in commercial lease negotiations.

New Disclosure Requirements for Board Members

A new New York State law was recently enacted, effective January 1, 2018, which requires board members involved in interested transactions to provide disclosure of these transactions to the owners in their associations. The new law adds a new Section 727 to the New York Business Corporation Law (the “BCL”) and a new Section 519-a to the New York Not-for Profit Corporation Law (the “NPCL”) to ensure that boards are aware of the conflict of interest laws which apply to them and so owners are notified of any interested transactions. An interested transaction is a contract or transaction in which a board member has a substantial financial interest. (E.g., a board member’s contracting company doing work for the association.) (Note: although the BCL and NPCL generally only apply to cooperatives, it would be prudent for boards of homeowners associations and unincorporated condominiums to follow the same procedures.) The responsibility for compliance with these new legal requirements falls upon the association. Therefore, as a practical matter, managing agents and board presidents should try to ensure compliance by their associations.

In order to comply with these new legal requirements, at least once each year the association must:

1. Provide a copy of BCL Section 713, http://codes.findlaw.com/ny/business-corporationlaw/bsc-sect-715.html (or NPCL Section 715, if applicable, http://codes.findlaw.com/ny/notforprofit-corporation-law/npc-sect-715.html) to each board member. (Practice Tip: each board member should be required to sign a form stating that he or she received a copy of the statute at the time it is distributed.)

2. Provide an annual report to all owners that lists all contracts voted upon by the board which involved an interested board member or a report stating there were no interested contracts voted upon by the board. The annual report must include the following information for each specific contract that involved an interested board member:

a. A description of the work or services being performed, information on the contract recipient, and the amount and purpose of the contract;

b. A list of all meetings held by the board to discuss or vote on the contract, including board member attendance, how each board member voted, and the results of the vote; and

c. The date the contract would be and remain valid.

d. Each board member must sign the annual report.

e. If during the year there were no contracts voted upon which involved an interested board member, the board members must all sign and send to all owners a disclosure statement stating that “No actions were taken by the board that were subject to the annual reporting requirements pursuant to Section 727 of the BCL (or Section 715 of the NPCL).”

One practical way to comply with these new disclosure requirements would be to distribute the annual report together with the annual meeting notice which is sent to all owners each year prior to the association’s annual meeting.

Download PDF

Pop-up Shops and Other Short Term Use Arrangements : Lease or License?

In recent years, retail pop-up shops have become a growing trend among property owners looking to increase cash flow or traffic to their properties as well as businesses looking to reach new markets or test a new product while limiting their potential long-term lease obligations. This trend started gaining popularity during the depression of 2009 when property owners experiencing high vacancy rates needed to fill spaces and find new sources of cash flow, and has continued due to the increased competition e-commerce has placed on brick and mortar stores.

Because pop-up shops and other short term use arrangements such as shared office space (e.g. WeWork) seem to be a lasting trend, property owners interested in short term use arrangements must understand the differences between a lease and a license, and how a license provides a property owner with better protection in the event it needs to remove a business from its space in an expedited manner as explained below.

The fundamental difference between a lease and a license is that a lease provides the tenant with exclusive and irrevocable possession of the space, while a license merely grants the licensee the non-exclusive privilege to use the space which is revocable at will. As a result, while a lease grants the tenant a property interest in the space and creates a landlord-tenant relationship, a properly drafted license will not create a landlord-tenant relationship and the licensor (landlord) can circumvent the expensive and time-consuming process of a summary eviction proceeding by using self-help in the event the licensor needs to remove a licensee from its space.

Property owners interested in licensing space must be aware of the factors which would make an agreement be a considered a license instead of a lease. Simply naming an agreement a license does not make it so, and a poorly drafted license can have the potential of being interpreted to be a lease.

The main legal analysis and considerations of whether an agreement is considered a lease or a license depends on the access and exclusive control language in the agreement. A good indicator of a license is a provision which states that “the license granted under this license is and shall at all times be a non-exclusive, revocable license which can be terminated at will by licensor, and shall not be deemed to create any tenancy interest in favor of licensee with respect to the space or the related services provided under the license.” As you can see, it is critical that the property owner maintain control over the space, so security measures such as electronic keyfobs and other electronic access methods that can be controlled and turned off unilaterally by the property owner are a strong indicator of a license arrangement. In addition, property owners (licensors) should try to provide all services and furniture for the space with an express provision within the license agreement stating that the services and furniture are the property of the licensor and not the licensee’s property.

For example, in a 2002 lawsuit regarding a dispute over whether an agreement was a lease or a license, the Court ruled against the property owner and determined it unlawfully evicted the occupant of the space who was a tenant and not a licensee. See Nextel of New York, Inc. v. Time Mgmt. Corp., 297 A.D.2d 282, 746 N.Y.S.2d 169 (2002). In the Nextel case, Nextel entered into an agreement labeled as a license with Time Management to install cellular antennas on the roof of Time Management’s building and to occupy 200 square feet of interior space in the building. When Time Management tried to terminate the license and remove Nextel from the space using self-help, Nextel filed a Yellowstone injunction to stop the eviction and sued Time Management for wrongful eviction. The Court agreed with Nextel and found the agreement to be a lease (and not a license), and the self-help eviction to be unlawful. In reaching its decision, the Court looked to the parties agreement which stated that Nextel was to partition off an existing room in the building and install a door in order to create a space for its radio and electrical equipment, Nextel would retain title to the equipment it installed in the newly created space, and Nextel’s employees had exclusive use and unfettered access to the space and found that these provisions were “typical of a lease and conferring rights well beyond those of a license or holder of a mere temporary privilege.”

The bottom line is that no matter what you name the agreement and no matter how temporary the nature of the pop-up shop or other short term occupancy arrangement may seem, there are specific terms that must be included if a property owner wants to take advantage of the benefits conferred by a license such as self-help evictions. Property owners should be aware of the factors (i.e., revocability, control, access, and services) which distinguish a license from a lease agreement, and should have an attorney familiar with license agreements draft or review the license ahead of time to avoid the potential pitfalls of failing to draft a valid and enforceable license.

Download PDF

Using a Mechanics’ Lien to Collect Unpaid Broker’s Commission for Procuring a Commercial Tenant

In New York a real estate broker or salesperson can use a mechanics’ lien to collect an unpaid commission after procuring a tenant for a commercial landlord pursuant to New York Lien Law § 10.  This statutory right to file a mechanics’ lien against a landlord’s property was enacted in 1982 in order to address the growing problem of landlords refusing to pay commissions to brokers after a tenant was procured.  As a result of New York Lien Law § 10, instead of proceeding straight to potentially costly litigation, a broker has the ability to file a mechanics’ lien against the property (similar to a contractor or laborer), which makes it difficult for a landlord to sell or refinance the property without first paying the broker his or her hard earned commission.  In addition, after the lien is filed the broker can commence a lawsuit to foreclose on the mechanics’ lien and sell the property at auction to recoup the commission if the landlord remains uncooperative.

In order for a broker to file a mechanics’ lien for an unpaid commission, the broker must have (i) procured a commercial tenant for the landlord, (ii) for a lease term of more than three years, and (iii) pursuant to a written brokerage agreement.  The mechanics’ lien must be filed with the County Clerk where the property is located within eight months after the brokerage services have been completed (i.e., a written lease has been executed), and then served upon the landlord within thirty days after its filing.

Because the purpose of a mechanics’ lien is to impair title to another person’s property, and it is filed by the broker without first obtaining a court order or permission, the filing of a mechanics’ lien is a powerful remedy with potentially severe adverse consequences for the broker if not done correctly.  As a result, a broker must be sure to follow the strict filing and service procedures set forth in the statute, must ensure that the contents of the lien are correct, and file the lien against the correct property.  An incorrect filing will be defective, and the broker could be liable for damages if the filing clouds title to the wrong property and adversely affects an unrelated transaction.  Thus, it is best practice for a broker seeking to file a mechanics’ lien to consult with an attorney to ensure the lien is prepared, filed, and served properly.

Once a mechanics’ lien has been filed against a landlord’s property, the broker can use it as leverage to demand payment of the commission from the landlord.  This can be done by sending the landlord a letter demanding payment of the commission and threatening to foreclose on the property if it is not received by a certain date.  In addition, the recording of a mechanics’ lien against the property will protect the broker’s interest by making it difficult for the landlord to sell or refinance the property without satisfying the lien as part of the closing process.

In the event the landlord is uncooperative or refuses to pay the commission, the broker must foreclose on the lien within one year of its filing or renew it by filing a one year extension with the County Clerk pursuant to New York Lien Law § 19, otherwise the lien will lapse.  By foreclosing on the property, the broker will eventually be able to sell the property at auction and recoup the commission if the property has sufficient equity.  However, determining whether such equity exists can be a complex process dependent upon the number and order of creditors which must be paid first from the foreclosure proceeds before the broker gets paid his or her commission.

In order to determine the order in which creditors will be paid from the foreclosure proceeds, New York follows the “first in time, first in right” priority scheme, which means that in general any recorded judgments, liens and mortgages are fully paid at foreclosure in the order in which they are recorded against the property with the County Clerk.  However, the mechanics’ lien is an exception to this rule since its priority is determined either by the date the lien is recorded against the property, or it “relates back” to the date of completion of the brokerage services or the commencement of construction to improve the property.  In other words, a mechanics’ lien for an unpaid brokerage commission filed with the County Clerk within eight months after the date the brokerage services have been completed will take priority over and get paid ahead of other creditors and mortgages[i] that recorded their interests between the date of completion of the brokerage services and the recording of the mechanics’ lien.

In sum, a mechanics’ lien can be a cost-effective way for a commercial broker or salesperson to aggressively pursue a commission owed by a landlord via a lien foreclosure or by compelling payment as part of the closing process if the landlord tries to sell or refinance the property without paying the commission.

 

__

[i] In New York, a mortgage containing specific “trust fund” language may maintain its priority over a subsequently recorded mechanics’ lien provided certain statutory requirements are strictly complied with by the mortgagee.

Download PDF