Daily Development for Thursday, January 8, 2004 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu LANDLORD/TENANT; LANDLORD'S REMEDIES; EVICTION; "YELLOWSTONE" INJUNCTIONS: In order to obtain a Yellowstone injunction, a commercial tenant need only prove that there is a basis for believing that such tenant has the ability to cure a default by any means short of vacating the leasehold. WPA/Partners LLC v. Port Imperial Ferry Corp., 763 N.Y.S.2d 266 (A.D. 1 Dept. 2003). A Yellowstone injunction allows a commercial tenant confronted with the threat of having its lease terminated to protect its investment in the leasehold and avoid forfeiture. The injunction acts as a stay tolling the cure period so that if an adverse determination on the merits is rendered, the tenant has the opportunity to cure the default. The device is in common use in New York and there are a few reports of its use in other states. This case involved a huge tenant investment - $22 million to renovate part of the historic Pier A in Battery Park in lower Manhattan. The City also agreed to pay some renovation costs in addition to the tenant investment. The tenant discovered later that the City had obtained State funding for a portion of the investment that it was required to make. Either because it felt that the rent had been negotiated based upon an out of pocket City investment, or because of other "dilatory conduct" on the part of the City (the opinion isn't exactly clear), the Tenant sought an adjustment of its rent ($440,000 per year, after a "ramp up" period) The tenant alleged that in fact there was an amendment agreed to by both parties, although never signed by the City, and that the City sent bills for the adjusted rent amount and accepted rent in that amount for an unspecified period of time. The City disputed all of the above allegations, and in June of 2000 it sought the unpaid balance based on the original rent for prior periods. It waited until May of 2001 to actually declaring that the amendment relied upon by the tenant was ineffective. Tenant promptly filed a declaratory relief action to establish that the amendment was valid and to declare the rent. Of course, the events of 9/11/01 altered the use patterns in Battery Park, which was adjacent to the World Trade Center. The City took possession of the property based uon a public emergency (not due to the alleged default) and used much of it for emergency storage. It did permit others to operate a ferry service from the docks, however. In October of 2001, the City brought a termination action based upon nonpayment of rent. It served the tenant at the location from which it had just ousted the tenant. This action was dismissed eventually because of failure of service, and the City brought a second action for termination and possession based upon nonpayment in summer of 2002. Tenant moved for a Yellowstone injunction of the eviction under this second action, alleging that the limited issues raised in this possession action precluded its allegation that it was not in default in rent due to the amendment. It sought a delay until it had its day in court on the declaratory relief action. The City responded that the tenant could not demonstrate that at the end of the injunction period it would be able to cure the default - a traditional requirement of Yellowstone injunctions. It pointed to authority stating that the party seeking a Yellowstone injunction must demonstrate that "it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises." The tenant argued that if it was successful in that action, it in fact would not be in default, and the question of its payment of the late rent would be moot. The court determined that tenant had sufficiently demonstrated that it had the "plausible means" of remedying the alleged default through its pre-existing declaratory judgment action even though the outcome of such action was uncertain. Since tenant had invested $22 million in the leasehold, allowing landlord to view tenant's nonpayment of rent as a forfeiture would allow landlord to "reap a windfall" in a case where the circumstances were still being litigated. The court acknowledged that this procedure went somewhat beyond the precedent to date, since the tenant had not demonstrated that it had the money to cure if it lost the declaratory relief action. But the size of the tenant's investment, which would be lost in the forfeiture, led it to set aside the question of whether the landlord could really be made whole if it won the declaratory relief action. The court didn't even require a bond. Comment: It appears that the improvements made by the tenant in this case would inure to the benefit of the landlord if forfeited. In the editor's view, it is this feature of the investment, and not the size of the investment itself, that makes the result sensible. If, for instance, the tenant had made custom improvements of special value to it, but less useful to other parties (such as specialized or patented manufacturing facilities) the editor would argue that it would be unfair to the landlord not to require a bond, regardless of the amount that the tenant stood to lose.