Freedom to Contract Injunction Waivers in Commercial Leases

By Holly P. Constants

Holly P. Constants is a 2022 graduate of St. John’s University School of Law in New York, New York.

Generally, contract law allows parties the freedom to waive their rights, including the right to seek injunctive relief in advance of any dispute between the parties. But consider a tenant that contractually waived the right to seek injunctive relief to maintain its leasehold in the event of a potential dispute over whether it breached the lease. Should the landlord be able to enforce this waiver?

Jurisdictions differ on contractual waivers of injunctive rights. In 2019, the New York legislature enacted a law forbidding such injunction-waiver clauses in commercial leases and barring their enforcement. N.Y. Real Prop. Law § 235-h (McKinney 2019). This legislation changes common law, in which such waivers would be enforceable. 159 MP Corp. v. Redbridge Bedford, L.L.C., 33 N.Y.3d 353, 363 (2019), superseded by statute, N.Y. Real Prop. Law § 235-h (McKinney 2019). Other jurisdictions, such as California, generally permit and enforce injunction waivers. See, e.g., Cal. Civ. Code § 3513 (West).

This article addresses the enforceability of injunction waivers, using commercial leases as an example. First, the article provides a general background on injunctive relief, focusing on a unique type of injunctive relief available to New York commercial tenants disputing potential lease defaults. Second, it examines various jurisdictions’ approaches to waiving injunctive relief, which are in part influenced by the type of injunctive relief sought and the identity of the parties. Third, it argues that freedom of contract should prevail and parties should have the right to negotiate contractual waivers of injunctions, just as they can negotiate many other terms. Lastly, this article concludes that the majority common-law solution of permitting and enforcing injunction waiver clauses better serves the interests of contracting parties than does New York’s more restrictive approach.

Injunctive Relief and Yellowstone Injunctions

An injunction is a remedy for a breach of contract that courts may grant when money damages are inadequate to redress a party’s injury. 12 Corbin on Contracts § 65.27 (2020). The type of injunctive relief requested—whether a temporary restraining order, preliminary injunction, or permanent injunction—depends on the contract and the particular issues involved. For example, a party may seek a preliminary injunction while the parties work to resolve their issues. Preliminary injunctions can be either prohibitory or mandatory. A prohibitory preliminary injunction would prevent a party from taking action and help maintain the status quo until there is resolution on the merits. A mandatory preliminary injunction would require a party to change its behavior. See, e.g., Tokyo Japanese Steakhouse, Inc. v. Sohn, 114 So. 3d 543, 545 (La. Ct. App. 2013).

Nearly half a century ago, the court in First National Stores, Inc. v. Yellowstone Shopping Center, Inc. granted New York tenants a new equitable procedural remedy, similar to a preliminary injunction, called the “Yellowstone injunction” or merely, a “Yellowstone.” 21 N.Y.2d 630 (1968). In First National Stores, the landlord and commercial tenant disputed which party was responsible under the lease to install a required sprinkler system. Id. at 634. The Appellate Division, Second Department, had held that the tenant was responsible and, therefore, the landlord had properly terminated the lease according to its provisions. Id. at 636. However, the court refused to terminate the lease because the “tenant act[ed] in good faith when it brought the declaratory judgment” and, instead, the court enjoined the landlord from evicting the tenant for 20 days to give the tenant time to cure the default. Id. at 637. The court of appeals reversed the lower court’s grant of injunctive relief, stating that the lower court did not have the authority to grant it because the lease had already expired and the tenant had not sought a declaratory judgment while the lease was in effect. Id. at 637-38.

Although the tenant in First National Stores could not take advantage of a Yellowstone, this unique New York injunction provides tenants an opportunity to maintain their leasehold while seeking to resolve disputes about whether they defaulted under their leases. Gabriel W. Block, “Fair Enough”? Revising the Yellowstone Injunction to Fit New York’s Commercial Leasing Landscape and Promote Judicial Economy, 14 Brook. J. Corp. Fin. & Com. L. 53, 53 (2019). A tenant typically seeks a Yellowstone injunction in support of a declaratory judgment action requesting a finding that the tenant is not in default of the lease. Ronald Greenberg, Natan Hamerman, Daniel Lennard & Zachary Naidich, Return of Yellowstone: The New York State Legislature Revives the Yellowstone Injunction, JD Supra (Jan. 14, 2020), https://bit.ly/3wT7KuR. Specifically, a Yellowstone injunction allows a tenant confronting a threat of lease termination to protect its investment in the leasehold by obtaining a stay that tolls the cure period to maintain “the status quo.” Graubard Mollen Horowitz Pomeranz & Shapiro v. 600 Third Ave. Assocs., 93 N.Y.2d 508, 514 (1999). Under this remedy, if the court determines that the tenant defaulted on the lease, the tenant can cure a default and avoid forfeiting the leasehold. Id. In other words, this remedy gives tenants who believe they have not breached an intermediate option before having to choose between two more drastic alternatives: (1) taking the potentially burdensome and/or expensive route of complying with the landlord’s demands or (2) challenging the landlord’s claim and risking forfeiture of the lease if the challenge does not succeed. 7C Current Leasing Law and Techniques—Forms § 13A.04 (2020). The remedy is available to New York commercial and residential tenants, although New York City commercial tenants take advantage of the remedy most frequently. Block, supra, at 53; see also Hopp v. Raimondi, 51 A.D.3d 726, 727 (N.Y. App. Div. 2008).

Before a court grants a Yellowstone injunction, a tenant must satisfy a fourfactor test. Graubard Mollen Horowitz Pomeranz & Shapiro, 93 N.Y.2d at 514. Although tenants do not automatically obtain the injunction, courts tend to grant the relief easily. See id. (citing Post v. 120 E. End Ave. Corp., 62 N.Y.2d 19, 25 (1984) (noting that “courts grant[ ] them routinely”); see also David Frey, Note, The Yellowstone Injunction, or “How to Vex Your Landlord Without Really Trying, ” 58 Brook. L. Rev. 155, 175 (1992) (stating courts have “chip[ped] away at what was left of the traditional standard of proof necessary for equitable relief” when granting Yellowstone injunctions). Unlike section 6301 of New York’s Civil Practice Law and Rule’s (CPLR), which requires that tenants must show likelihood of success on the merits and potential “immediate and irreparable” harm or loss before injunctive relief can be granted, N.Y. C.P.L.R. § 6301 (McKinney), the Yellowstone injunction does not require such proof, “even nominally[.]” Block, supra, at 58 (citing Trump on the Ocean, L.L.C. v. Ash, 81 A.D.3d 713, 715–17 (N.Y. App. Div. 2011); Orange Tea, Inc. v. Am. Wild Ginseng Ctr., Inc., 2012 N.Y. Misc. LEXIS 2958, at *9–10, 12 (Sup. Ct. June 4, 2012) (granting a Yellowstone injunction but denying relief under CPLR section 6301 based on a failure to show irreparable harm)).

Common Law’s Enforcement of Freedom of Contract versus New York Legislature’s Curtailed Approach to Injunction Waivers

Contracts, including leases, may contain a remedy section, which varies depending on several factors: (1) the type of contract, (2) the jurisdiction, and (3) the parties. A remedy section may have a clause waiving the right to seek injunctive relief, thereby limiting the available remedies in the event one party breaches the contract. See generally, e.g., Restatement (Second) of Contracts § 356 (1981); U.C.C. § 2-719 (1)(b); 2 Ent. L.3d Legal Concepts and Business Practices § 9:100 (2019).

A waiver is a party’s “intentional abandonment or relinquishment of a known right or advantage”, but not all waiver provisions are enforced. Alsens Am. Portland Cement Works v. Degnon Contracting Co., 222 N.Y. 34, 37 (1917). As a result, a court’s decision whether or not to enforce a contractual waiver illustrates the competing principles that are at play in allowing parties the freedom to contract. Mark L. Movsesian, Two Cheers for Freedom of Contract, 23 Cardozo L. Rev. 1529, 1547 (2002). Freedom to contract—parties making agreements on a range of subjects and choosing the terms they desire—has a long and important history in American jurisprudence. Id. at 1529. There is a tension in contract law between allowing individuals the freedom to form their own contracts and exerting public control in accordance with laws that reflect community values. Id. at 1547–48. Courts may choose not to uphold waiver provisions for a variety of reasons. Some waivers are prohibited by legislation, and others will not be enforced by a court for other reasons, such as being against public policy, being unconscionable, or being the result of a mistake. See, e.g., N.Y. Real Prop. Law § 235-h; 15 Corbin on Contracts § 79.1 (2020); 7 Corbin on Contracts §§ 28.27, 29.4 (2020).

As previously mentioned, the parties themselves are a major factor in determining whether to allow a waiver clause or to enforce an existing one. See Daniel D. Barnhizer, Inequality of Bargaining Power, 76 U. Colo. L. Rev. 139, 144 (2005). In a commercial landlord-tenant relationship, the landlord traditionally is viewed as the more powerful party, particularly during a lease negotiation. Block, supra, at 54. The creation of the Yellowstone injunction is just one example indicating the concerns many constituents and courts have expressed about this imbalance, and the desire to protect tenants. See, e.g., Adam Lindenbaum, NYC Bill Continues Expansion of Commercial Tenant Rights, Law360 (Oct. 16, 2019, 4:54 PM), https://bit.ly/3Ke3QAk (discussing the added statutory protections that strengthened the existing protections for landlord harassment against commercial tenants). The view of the power dynamic tends to be even stronger when the tenant is a small business, as such tenants typically have fewer resources and are less likely to obtain legal representation. See Robert A. Levinson & Michael N. Silver, Do Commercial Property Tenants Possess Warranties of Habitability? 14 Real Est. L.J. 59, 68 (1985) (equating a small commercial tenant’s lack of bargaining with a residential tenant); see also Curtis J. Berger, Hard Leases Make Bad Law, 74 Colum. L. Rev. 791, 791 (1974) (arguing for more tenant protections in leases, especially as most leases are standard forms with terms that are highly favorable to the landlord). In contrast, landlords and tenants negotiating large commercial leases have more equal bargaining power. See, e.g., Daniel B. Bogart, Good Faith and Fair Dealing in Commercial Leasing: The Right Doctrine in the Wrong Transaction, 41 J. Marshall L. Rev. 275, 277 (2008). In sum, the identity of the parties is one of the key variables in determining whether an injunction waiver provision will be enforced. In general, parties are able to contractually waive rights, with few limitations.

The Majority Approach Allows Waivers of Injunctive Relief

Jurisdictions typically allow parties the freedom to waive the right to seek injunctive relief as a remedy, regardless of the type of contract involved. For instance, in entertainment law, courts generally enforce waivers of injunctive or equitable relief when the provision is clearly expressed and unambiguously states there is an exclusive remedy provided by the terms of the contract. See Lone Wolf McQuade Assocs. v. CBS Inc., 961 F. Supp. 587, 596–97 (S.D.N.Y. 1997). As a result, injunctive waivers are normally used to prohibit a party from stopping the production or distribution of creative work when there is a dispute over credit rights. 2 Ent. L.3d Legal Concepts and Business Practices § 9:100 (2019). For instance, the Ninth Circuit enforced an injunction waiver provision, which the plaintiff acknowledged he had understood when he signed the agreement, that expressly limited the plaintiff’s remedies at law for damages in the event of a breach. Fosson v. Palace (Waterland), Ltd., 78 F.3d 1448, 1451, n.2 (9th Cir. 1996).

California provides another illustration of jurisdictions allowing parties to waive rights. While California places some limitations on contractual waivers of injunctive relief depending on the type of relief, California generally does not interfere with a party’s’ agreement. Indeed, California broadly allows “[a]ny one [to] waive the advantage of a law intended solely for his benefit.” Cal. Civ. Code § 3513 (West). Some Texas courts hold that if the parties’ contract did not contemplate injunctive relief, it is improper to grant, which therefore indicates that these courts essentially enforce waiving the relief. See, e.g., Metra United Escalante, L.P. v. The Lynd Co., 158 S.W.3d 535, 540 (Tex. App. 2004) (noting that “[b]ecause the management agreements contain no express language demonstrating that the parties contemplated intervention to maintain the status quo . . . [w]e . . . conclude that the issuance of a preliminary injunction is not appropriate when the underlying claims are subject to arbitration under the FAA.”). Injunctive relief is considered private if the main effect of the injunction would be to redress or prevent injury to an individual or a small group of individuals. McGill v. Citibank, N.A., 393 P.3d 85, 89 (Cal. 2017) (quoting Broughton v. Cigna Healthplans, 988 P.2d 67, 76 (Cal. 1999)). These private injunctive relief waivers are typically enforced. See Wright v. Sirius XM Radio Inc., No. SACV 16-01688 JVS (JCGx), 2017 U.S. Dist. LEXIS 221407, at *26–27 (C.D. Cal. June 1, 2017) (holding that McGill did not prohibit enforcement of the contract’s arbitration agreement because the injunction sought was for private relief). In contrast, California does not allow private parties to contractually prohibit injunctive relief under consumer protection statutes that provide a public injunction remedy, which is when the “primary purpose” of the injunction is for the benefit of the public, such as when the injunction would prohibit unlawful acts that threaten injuries to the public. McGill, 393 P.3d at 86. For example, relief requested under California Unfair Competition Law, the Consumers Legal Remedies Act, and the false advertising law is injunctive relief primarily benefiting the public, and, therefore, parties are prohibited from waiving it. Id. at 94 (quoting Broughton, 988 P.2d 67 (citing Cruz v. PacifiCare Health Systems, Inc., 66 P.3d 1157 (Cal. 2003))). As California courts have explained, a public injunction under California’s Unfair Competition Law directly benefits the public because it eliminates deceptive practices. Id. at 86 (quoting Broughton, 988 P.2d at 76 n.5). As a result, an exception California has carved out for prohibitions of contractual injunctive waivers is the waiver of the right to request public injunctive relief in all forums. Id. at 94; see also Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019) (holding the exception created in McGill was not preempted by federal law). The parties can specify where the relief is sought; they just cannot prohibit it completely.

Arizona illustrates another pro-freedom-of-contract example specific to the landlord-tenant context. In Chef Tian L.L.C. v. 668 N. L.L.C., the court recently affirmed the dismissal of a tenant’s claim that his waiver of injunctive relief in a commercial lease was unconscionable. No. 1 CA-CV 18-0108, 2020 WL 3056330, at *3 (Ariz. Ct. App. June 9, 2020). But see Food Pantry v. Waikiki Bus. Plaza, 575 P.2d 869, 875–76 (Haw. 1978) (stating the court was empowered by “its general equity jurisdiction” to prevent a leasehold from being forfeited despite a breach of the lease). The tenant claimed the clause was unconscionable because he had difficulty speaking English, and therefore he did not fully understand the terms when he entered the contract. Chef Tian L.L.C., 2020 WL 3056330, at *3. While the tenant was the sole manager of a limited liability company, the court nonetheless rejected the tenant’s argument and viewed the transaction as a commercial, rather than residential, transaction. Id. The court further opined that private parties in commercial contexts generally are better than courts at determining their contractual terms to suit their interests. Id. (citing 1800 Ocotillo, L.L.C. v. WLB Grp., Inc., 196 P.3d 222, 224 (Ariz. 2008)). The court held that there was no procedural unconscionability—an unfair bargaining process—because the tenant was an experienced businessman and the lease was straightforward. Id. (referencing the clear terms of the lease provision, “[n]one of Landlord’s obligations under this Lease shall be subject to specific performance or injunctive remedies, and Tenant waives all rights with respect to such remedies”). In addition, the court determined there was no substantive unconscionability because a waiver of remedies, even an entire class of remedies, was not unconscionable. Id. (concluding the issue of injunctive relief was moot for other reasons).

As a final pro-freedom-of-contract example, regardless of whether a contract attempts to waive injunctive relief, a mandatory arbitration clause at least implicitly waives the right to seek injunctive relief. (This claim assumes there is not a separate provision in the lease explicitly protecting the tenant’s right to seek an injunction.) Arbitration clauses are common contract provisions, and there is strong federal policy in favor of enforcing them. See Volt Info. Scis. v. Bd. of Trs., 489 U.S. 468, 478 (1989). In fact, the Supreme Court has stated that when a question arises about the scope of arbitration, the issues should “be resolved in favor of arbitration[,]” regardless of whether the problem is “an allegation of waiver, delay, or a like defense to arbitrability.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (1983) (emphasis added). As the general trend favors enforcing arbitration clauses, thereby preventing parties from seeking injunctive relief, so arbitration clauses illustrate the majority approach of upholding parties’ right to waive injunctive relief.

New York Common Law Favors Freedom of Contract

Recently, in 159 MP Corp. v. Redbridge Bedford, L.L.C., the New York Court of Appeals affirmed that a lease clause waiving the tenants’ right to seek declaratory relief was enforceable. 33 N.Y.3d 353, 363 (2019), superseded by statute, N.Y. Real Prop. Law § 235-h (McKinney 2019). In 159 MP Corp., the plaintifftenants sought a Yellowstone injunction to prevent the defendant-landlord from terminating their 20-year commercial leases while the dispute over whether the tenants were in default under the leases was resolved. Id. at 356. The landlord moved for summary judgment dismissing the motion arguing that the request for injunctive relief was barred by a waiver clause in the leases. Id.

In deciding whether the provision was enforceable, the court focused on New York’s “deeply rooted” public policy favoring freedom of contract as it “respects the autonomy of commercial parties in ordering their own business arrangements.” Id. at 359–60 (quoting New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 81 (1989)). Quoting the seminal New York freedom of contract case involving commercial leases, the court noted that enforcing an agreement by its terms to provide certainty to the parties was especially important in real property transactions, especially when the contract was negotiated by sophisticated and counseled businesspeople. Id. at 359 (quoting Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004)).

The court also noted that the tenant-plaintiffs did not challenge the enforceability of the clause on an established contract defense, such as unequal bargaining power or lack of counsel, but rather argued that the clause was against public policy. Id. at 360. The tenants contended that the right to bring a declaratory judgment action was “so central and critical to the public policy” of New York that it could not be waived even by counseled and sophisticated parties. Id. The majority was “unpersuaded” by this argument. Id. The court emphasized the tenants had other available judicial remedies that were not precluded by the clause, such as raising defenses in a summary proceeding. Id. at 364. Notably, the tenants could not be evicted from their leases until the landlord commenced a summary proceeding and established that the tenants breached the leases. Id. at 366. As the majority recognized, the tenants clearly and expressly waived their right to bring a declaratory judgment action while retaining other means to seek for redress. The waiver clause in question read:

Tenant waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease. . . . [I]t is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.

Id. at 356 (emphasis by the court). The court concluded the waiver was “clear and unambiguous, was adopted by sophisticated parties negotiating at arm’s length, and d[id] not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract.” Id. at 363. The majority elaborated that the legislature had “made certain rights nonwaivable in the context of landlord-tenant law,” but it had not made a commercial tenant’s right to waive declaratory relief nonwaivable. Id. at 367. (Other rights that tenants may waive include the right to a jury trial in nonpayment proceedings, waiver of counterclaims, and automatic rent escalation clauses. 159 MP Corp. v. Redbridge Bedford, L.L.C., 160 A.D.3d 176, 188 (N.Y. App. Div. 2018), aff’d, 33 N.Y.3d 353 (2019), superseded by statute, N.Y. Real Prop. Law § 235-h (McKinney 2019). The court pointed to RPAPL 753(4) as indicative of the legislature’s position on Yellowstone relief for commercial tenants, as the statute specifically gives New York City residential tenants a 10-day post adjudication cure period, which is nonwaivable, and thus, essentially provides tenants more protection than a Yellowstone injunction would. 159 MP Corp., 33 N.Y.3d at 367.)

In a lengthy dissent, Judge Wilson argued “freedom of contract is not a limitless right,” as it is not “an individual right of the contracting parties,” but rather its purpose is “the economic advancement of society.” Id. at 367, 373 (Wilson, J., dissenting). He stated that in cases such as the one at hand, where the object of the contract was the lease of space, society had an interest in the contract. Id. at 376–77 (noting that “[c]ertainty and stability in the contractual affairs of a neighborhood grocery has [sic] consequences for local residents and employees, not merely for the grocer”). Judge Wilson predicted this decision would lead to landlords including declaratory and Yellowstone relief waivers as a standard provision in leases, and that landlords would use these clauses to terminate leases on a tenant’s “dubious violation” whenever rent values increased sufficiently. Id. at 369.

Echoing Judge Wilson’s dissent, critics of the court’s decision in 159 MP Corp. claimed that if commercial lessors were allowed to include a clause waiving a tenant’s right to seek injunctive relief, the lessors would abuse this right and fabricate reasons to terminate the lease early. See Dan Schechter, Waiver of Commercial Tenant’s Right to Seek Declaratory and Injunctive Relief Is Enforceable, Even Though It Leaves Tenant with Little Practical Recourse, Com. Fin. Newsl., June 3, 2019 (“Commercial tenants will understand that if the neighborhood surrounding their leasehold gentrifies, landlords will invent pretextual grounds for termination, destroying the tenancy with little or no practical recourse, even when the lease is not in breach.”). For example, one critic argued that the lessor in 159 MP Corp. sought to “terminate the lease at all costs” to get a higher and more valuable use. Joel Binstok, Managing Principal, York Grp., L.L.C., Commercial Leasing CLE 10 (July 7, 2020) (transcript on file with author). Some referred to the waiver as “Draconian” and argued that even if the waiver was enforceable, that did not mean the waiver was necessarily a good idea. See Schechter, supra.

However, others predicted the holding would lead to “heavy negotiations” about waiver provisions between landlords and tenants, with landlords requiring tenants to waive Yellowstone relief completely, and tenants specifically negotiating for a provision protecting their right to Yellowstone relief. Massimo F. D’Angelo, Bye-Bye “Yellowstone”?, 261 N.Y.L.J. 4, 4 (2019). The following sample lease clause, which unambiguously waives a tenant’s right to seek Yellowstone relief, illustrates a lease provision that was recommended to landlords to include in their leases before the New York legislature intervened:

Landlord and Tenant, after due consideration and negotiation at arm’s length, and being fully advised by their respective counsel, hereby agree that the cure period for any event of default under this Lease shall not be the subject of any application or motion by the Tenant to a Court of law for a socalled “Yellowstone” injunction to enjoin Landlord from maintaining a summary proceeding against Tenant, and Tenant hereby expressly and knowingly waives and relinquishes all rights it might otherwise have to seek a “Yellowstone” injunction or other comparable equitable relief, if and when Landlord should have occasion to issue a Notice of Default and/or a Notice to Cure under the terms of this Lease after any Event of Default, as defined in this Lease.

Advanced Real Estate Topics, N.Y.S. Bar Ass’n, at 85 (2017) (emphasis added).

New York Legislature Prohibits Injunction Waivers in Commercial Leases

In response to the 159 MP Corp. decision, members of the New York State Legislature grew concerned there would be an increased use of injunction waiver clauses in leases and quickly passed N.Y. Real Prop. Law § 235-h. N.Y. Real Prop. Law § 235-h (McKinney 2019). The statute expressly prohibits commercial leases from containing “any provision waiving or prohibiting the right of any tenant to bring a declaratory judgment action with respect to any provision, term or condition of such commercial lease.” Id. (It is understandable that the legislature did not extend this relief to residential leases, as residential tenants are protected from eviction or loss of tenancy through an entirely different system of rules, which make it significantly harder to evict a residential tenant than a commercial tenant.)

The bill’s sponsor, Assemblyman Otis, argued that the provision would help protect small businesses and other commercial tenants from arbitrary eviction whenever landlords wanted to charge higher rents. 2019 N.Y. Assemb. B. No. 2554, N.Y. 242nd Leg. Sess., at 81–82 (June 4, 2019) (statement of Steven Otis, Assembl.). He stated the bill’s protection of tenants would also benefit commerce and New York’s neighborhoods. Id. at 86. Arguing in favor of the bill, Assemblywoman Glick added that small business tenants do not have the time or resources to challenge an eviction in court and that this “minor protection” would be “vitally” important to them, especially as business competition has increased with online retailers like Amazon. Id. (statement of Deborah Glick, Assembl.). Proponents of the bill focused solely on protecting the tenant, particularly small business tenants, and disregarded the landlord’s position in a lease transaction.

In opposition to the bill, Assemblyman Montesano argued it was completely appropriate to allow landlords to negotiate a tenant’s waiver of the right to seek injunctive relief because a lease is simply a contract that is negotiated by two parties—who typically are legally represented as in 159 MP Corp. Id. at 83 (statement of Michael Montesano, Assembl.). He opined that a tenant can merely negotiate to not waive the right, or any right, if the tenant did not want to do so. Id. Indeed, tenants often do waive rights in leases, such as waiving the right to a jury trial in a nonpayment proceeding, waiving counterclaims, and waiving the right to negotiate future rent with the inclusion of automatic rent escalation clauses and rent acceleration clauses upon the tenant’s default. 159 MP Corp., 160 A.D.3d at 188 (citations omitted). Montesano warned that passing this bill would interfere with the parties’ ability to negotiate and reminded the assembly that if the tenant disagrees with the eviction process, the tenant can still go to court. N.Y. Assemb. B. No. 2554, at 84 (statement of Michael Montesano, Assembl.). In concluding, Montesano stated landlords also have an important interest if a tenant is in default because the landlord also can be held liable for a tenant’s default. Id. at 85 (noting, for instance, that landlords can be held liable for defaults, such as a dangerous condition on the premises). Nevertheless, the bill passed with Montesano as the only member voting against the bill. Id. at 87.

The New York legislature’s prohibition of injunctive relief waivers in commercial leases is not only an outlier compared to New York’s generally prevailing freedom-of-contract public policy, but it is also an outlier compared to other jurisdictions and the New York common law’s approval of similar waivers.

Analysis The Unforeseen Consequences of § 235-h

Although the legislature enacted section 235-h as a protective measure, the legislature may have been shortsighted. Indeed, the main purpose of the law was to help small businesses and small business tenants. But there are also small business landlords who depend on the rent from their leases for their economic survival. See, e.g., Matthew Haag, New Threat to New York City: Commercial Rent Payments Plummet, N.Y. Times (May 21, 2020), https:// nyti.ms/3uO3j1F. This law could hurt a small business landlord because the landlord may be stuck with a defaulting tenant for months or years while a lease dispute is resolved. See, e.g., N.Y. Assemb. B. No. 2554, at 83 (statement of Michael Montesano, Assembl.). Yet, if the small business landlord had the option to include a waiver provision in the lease, the waiver could have been an added protection, and such protection would successfully satisfy the legislature’s goal in protecting small businesses.

Another potential consequence is that, despite the new law, landlords may still attempt to waive Yellowstone injunctions or injunctions generally in leases. Section 235-h only refers to declaratory judgment actions and does not explicitly prohibit waiving either of these remedies. N.Y. Real Prop. Law § 235-h (McKinney 2019); see Matthew Funk & Stephen P. Younger, New Legislation Bans Waivers of Declaratory Relief in Commercial Leases on Public Policy Grounds, Patterson Belknap: N.Y. Com. Div. Blog (Feb. 3, 2020), https://bit. ly/3qXYf9T; see also Dani Schwartz, So Long, “Yellowstone” Injunction Waivers? Not So Fast . . . , N.Y.L.J. (Jan. 23, 2020), https://bit.ly/3tZvefV. Therefore, there may be an initial increased burden on the judicial system while the courts clarify whether injunctive relief is included under the law. However, courts likely will conclude the law encompasses injunctive relief because of the policy and legislative history behind the statute. See Funk & Younger, supra (“the policy behind RPL Section 235-h (and its legislative history) would give weight to a tenant’s argument that such waivers are also against public policy”).

Parties Should Be Free to Negotiate Injunctive Relief Waivers in Commercial Leases

The New York State Legislature and the critics of the 159 MP Corp. decision failed to look at a lease transaction holistically and consider all aspects of the parties’ positions in a lease negotiation. Consistent with New York’s public policy, freedom of contract should prevail, allowing tenants and landlords to negotiate the waiver of injunctive relief, just as they are free to negotiate and waive other lease terms. See Vt. Teddy Bear Co., 1 N.Y.3d 470.

First, tenants have other forms of statutory protections outside injunctive relief. Addressing a main concern of the 159 MP Corp. decision—that all landlords would include a waiver of Yellowstone relief in leases, thereby making it easier for landlords to evict tenants— if a landlord specifically refers to the relief as Yellowstone in the waiver provision, a tenant still retains the right to seek injunctive relief, which is “always present[.]” Block, supra, at 59 (citing 233 E. 86th St. Corp. v. Park E. Apts., Inc., 131 Misc. 2d 242, 244 (N.Y. Sup. Ct. 1986)). The “general standard for injunctive relief,” 233 E. 86th St. Corp., 131 Misc. 2d at 244, allows tenants to seek a preliminary injunction and a temporary restraining order to maintain the leasehold while the dispute over the default is resolved. N.Y. C.P.L.R. §§ 6301, 6311, 6313 (Consol. 2018). In situations where a court holds that a commercial tenant breached the lease, another statute allows the tenant to seek a stay allowing the tenant to maintain the lease during an appeal. N.Y. C.P.L.R. § 5519(c) (McKinney 2020).

The lease itself may also already provide tenant protection. In New York, sophisticated commercial parties can be expected to analyze issues that may arise when there is a question about a default and tend to negotiate clauses in the event one was to occur. It is common for parties to include a “contractual Yellowstone” in the lease agreement. Adam Leitman Bailey et al., Commercial Leasing 39-4 (Joshua Stein et al. eds., 3d ed. 2017). This clause provides a procedure whereby a tenant can obtain some type of declaratory relief to allow the lease to remain in place while adjudicating whether a default exists. Id. (noting that, depending on the agreement, the clause may “contain agreed terms to be included in a Yellowstone injunction, should a court be inclined to grant one, such as the amount of the bond to be posted during the Yellowstone period, limitations on discovery, and a requirement for expedited litigation”). Unlike Yellowstone relief, the parties know exactly what to expect under this method and their intentions are respected.

Additional standard protective provisions of a lease include a notice and cure period, which covers the preevents to a default. Usually, commercial leases have a cure period that provides tenants 30 to 60 days to remedy an issue, which protects tenants from being automatically thrown out of their tenancy even if they did breach their lease. Frey, supra, at 175. Regardless of whether a lease contains a cure period of this length, the cure period is another term a tenant and landlord should, and are allowed to, negotiate. Interestingly, considering the concern about forfeiting the leasehold, sometimes courts have not granted Yellowstone injunctions when the lease did not have a cure period provision. See Boyarsky v. Froccaro, 125 Misc. 2d 352, 356–57 (N.Y. Sup. Ct. 1984). “The public policy concern over the forfeiture of a leasehold has, at times, surmounted this logical obstacle” and courts have granted the relief when the cure period had technically expired. Block, supra, at 67.

Second, as the court in 159 MP Corp. recognized, while negotiating a contract’s terms, tenants likely agreed to waive their right to injunctive relief “to obtain a valuable benefit, such as a rent concession or the inclusion of a cure period following a notice of default.” 159 MP Corp., 33 N.Y.3d at 364. Parties on both sides of a contract generally concede to some provisions as part of a negotiation, but they are also rewarded by gaining some value in other aspects of the contract.

Just as landlords can insert an injunction waiver clause, tenants can protect themselves by negotiating for a clause that does not waive their right to seek injunctive relief. For example, a tenant could include a clause such as the following: “The foregoing [shall not be] deemed to limit Tenant’s rights to obtain injunctive relief or specific performance or to avail itself of any other right or remedy which may be awarded Tenant by law or under this Lease.” Richard R. Goldberg, Retail Lease Agreement, SM002 A.L.I.-A.B.A. 1839 (July 26–29, 2006). Another variation of a clause preserving a tenant’s right to seek injunctive relief might be as follows: “Neither party shall be precluded by this Section . . . from seeking, from the courts of any jurisdiction, provisional or equitable remedies of a type not available in arbitration, . . . including temporary restraining orders and preliminary or permanent injunctions.” Mass. Continuing Legal Educ., Inc., Drafting the Agreement, BSPOB MA-CLE 6-1, at 38 (2016).

The right to request a nonwaiver applies to both large and small commercial tenants. If small tenants “keep[ ] their essential business concerns in the forefront of the lease negotiations,” then they “should be able to achieve leases that meet most of their needs. Landlords benefit from tenants with successful businesses and will usually agree to lease concessions that are reasonably designed to achieve this mutual goal.” Tova Indritz, The Tenant’s Rights Movement, 1 N.M. L. Rev. 1, 17 (1971).

Third, as jurisdictions outside of New York illustrate, there have been long traditions of freedom to contract, especially when the contract involves

a landlord-tenant relationship. Typically, the law assumes parties in a commercial lease are on a more equal bargaining level compared to those in a residential lease. See, e.g., Schulman v. Vera, 166 Cal. Rptr. 620, 625 (Ct. App. 1980). Jurisdictions have found it not only unnecessary to prohibit contractual injunction waivers, but also necessary to allow waivers of statutes and common law by commercial tenants in commercial leases. Practical Law Real Estate, Common Tenant Waivers in Leases (Commercial) (CA), Westlaw w-019-2202. It is notable too that other jurisdictions have not found it necessary to provide an equivalent option of Yellowstone relief for tenants.

In contrast to the normal deference afforded to landlords and tenants in deciding their own agreements, and other jurisdictions’ deference to the non-prohibition of injunction waivers, the New York legislature interfered with this contractual relationship. In enacting the statute, the legislature did not consider the holistic position of a landlord and should have been mindful about balancing the law’s effect on both parties, especially because an injunction stopping the cure period is never beneficial to a commercial landlord. Particularly in New York City, landlords are not necessarily the more powerful party in a lease negotiation. Although tenants are traditionally viewed as the “underdog” requiring additional protections, this position should be reconsidered, as there are increased vacancy rates “caused by growing online retail, rising rents, and regulatory burdens.” Block, supra, at 71 (citing Scott M. Stringer, Retail Vacancy in New York City: Trends and Causes, 2007–2017, Off. N.Y.C. Comptroller (Sept. 25, 2019), https://on.nyc.gov/3IVfTBb). Both small and large businesses are struggling to maintain their leaseholds in the current environment, between the inability to pay their rents and the continued increase of consumers using e-commerce. Connie Loizos, Commercial Real Estate Could Be in Trouble, Even After COVID-19 Is Over, Tech Crunch (Apr. 8, 2020, 9:46 PM), https://tcrn. ch/3DvivVk. New York City is one of the least profitable cities for landlords in the United States. Block, supra, at 54 (citing Angela Hunt, Least Profitable County for Rentals? New York, Data Shows, The Real Deal (Apr. 1, 2014, 3:10 PM), https://bit.ly/36MfKTC (stating, “Manhattan’s New York County [was] the least profitable market for landlords of all U.S. counties” in 2014)). The cost of injunctive relief and particularly Yellowstone relief for both landlords as well as the public might significantly outweigh the potential benefits the relief provides tenants. Block, supra, at 71. As previously discussed, tenants already have protection through statutory and case law that tends to favor tenants over landlords. Id. at 54.

In reality, landlords likely would not be so quick to evict a good tenant just to potentially profit more by charging a higher rent with a new tenant because having a stable tenant benefits a landlord. A reliable tenant is valuable to a landlord because it means a stable in-flow of cash. Robert Cox, Solutions for Commercial Tenants Facing Rent Challenges, Law360 (May 12, 2020), https://bit.ly/3LyoECV. Having a predictable income for a landlord is even more essential now in light of the effect COVID-19 has had on the commercial real estate industry. Id. (Of course, because of COVID-19, many tenants are currently struggling to pay their rent, but that discussion is beyond the scope of this article.) As Assemblyman Montesano argued in his opposition to section 235-h, landlords will not readily evict a commercial tenant in today’s market and economy simply because it is difficult to replace them. 2019 N.Y. Assemb. B. No. 2554, at 84 (statement of Michael Montesano, Assembl.).

If the legislature had allowed the parties to decide whether or not to include the waiver provision, some landlords who did initially choose to include it may eventually have decided against doing so. Indeed, if the waiver provision was part of the lease, “savvy tenants” may have “skimp[ed] on tenant improvements” as they may have believed there was no reason to invest money in the premises if they could be evicted at any time. See Schechter, supra. However, a “dull tenant” could negatively affect a landlord if the tenant’s sales were underachieving or could adversely affect a landlord’s neighboring properties, as landlords typically have adjacent properties. See id. These potential negative consequences could make landlords reconsider the waiver. In short, because of the variables pertinent to a lease negotiation, commercial landlords and tenants should not be prohibited from contractually waiving injunctive relief when the waiver is clearly expressed and unambiguous.

The Protection Provided by Prohibiting Injunction Waivers Does Not Outweigh Allowing Parties the Freedom to Contract

Injunctions are an equitable remedy that can be extremely beneficial to a party that has a legitimate concern over potentially forfeiting its leasehold. An injunction, especially a Yellowstone injunction, can be “an invaluable defensive tool to a commercial tenant.” Bailey et al., supra, at 39.17(D). As previously discussed, section 235-h was enacted— and the Yellowstone injunction was created—because the legislature and the judiciary believed it was necessary to protect the tenant from losing its entire interest in the property without the ability to litigate an alleged default. N.Y. Assemb. B. No. 2554, at 81–82 (statement of Steven Otis, Assembl.); First Nat’l Stores, 21 N.Y.2d 630. However, in lease disputes, New York courts have tended to be pro-tenant and have even “ignor[ed]” the lease to protect the tenant. Berger, supra, at 805. The 159 MP Corp. decision raised concerns that if waiver of the relief was allowed, “[h]awkish landlords” would include the waiver as a “boilerplate” clause in commercial leases, thereby reducing the number of tenants who could seek the remedy created to protect them. Block, supra, at 73 (citing David B. Saxe & Danielle C. Lesser, Goodbye “Yellowstone” Road: Is This the End of the “Yellowstone” Doctrine?, N.Y.L.J. (Mar. 20, 2018), https://bit.ly/375kfIQ). Landlords have been encouraged to include provisions in their leases waiving injunctive relief along with limiting other procedural tenant rights. See, e.g., Bailey et al., supra, at 39-4 (recommending landlords include a clause in leases with “agreed terms to be included in a Yellowstone injunction, should a court be inclined to grant one, such as the amount of the bond to be posted during the Yellowstone period, limitations on discovery, and a requirement for expedited litigation”).

There is particular concern in New York about protecting small business tenants, as New York has a strong public policy favoring small businesses and entrepreneurs. See NYC Small Business First, N.Y.C. Gov’t, at 3, https:// on.nyc.gov/36J2UFZ (reporting that in July 2014, Small Business First was launched by Mayor de Blasio in an effort to help small businesses by providing recommendations to make the government more effective and efficient in doing so). Bases for this policy include preservation of NYC streetscape, ensuring a diversity of businesses, strengthening NYC’s economy, anchoring communities, and adding vibrancy to the neighborhoods so as to preserve NYC’s appeal as a city where people want to live, work, and play. Id. As the legislature’s core concern was about protecting small businesses, at minimum the statute is overbroad and should have been limited to small commercial leases. A large commercial tenant is at least as sophisticated as a commercial landlord and, therefore, did not need additional legislative protection. Of course, this limitation would result in several issues that would need to be resolved, mainly how to define a small commercial lease. But this would not be an insurmountable hurdle. For instance, the court could consider factors such as the amount of square footage, the type of zoning, or the rent amount in question to determine whether the case involves a small commercial lease.

Although protecting small businesses is an important policy, especially considering COVID-19’s effect on the real estate industry, see, e.g., Loizos, supra, the legislature should have focused on providing small business tenants with more useful protection, such as granting tenants tax relief. See, e.g., Janaki Chadha, Swaths of New York City Small Businesses Face Extinction in the Wake of Coronavirus, Politico N.Y. (June 6, 2020), https://politi.co/3u0aJjl. (This article does not argue the legislation should have focused its efforts differently because of the effect COVID19 would have, as the legislation was passed before the full reality of COVID19 was understood, but rather argues there were still other protections the legislation could have provided.) Tax relief is a benefit to small business tenants that would not have interfered with the contracting parties’ right to make their own agreements. Another option the legislature could have pursued was prohibiting the enforcement of arbitration clauses, as they are “more restrictive than [a] declaratory judgment waiver” because a tenant cannot seek relief in court. 159 MP Corp., 33 N.Y.3d at 365. Even more relevant to the legislature’s concern would have been prohibiting landlords from eliminating the standard notice to cure provision because courts have rejected a tenant’s request for Yellowstone relief when there was no cure provision in the lease. See Boyarsky, 125 Misc. 2d at 356–57. Therefore, it could still be possible for a lease to include a provision essentially waiving a tenant’s right to injunctive relief, at least Yellowstone, which was the legislature’s concern. 2019 N.Y. Assemb. B. No. 2554, at 81 (statement of Steven Otis, Assembl.) (“the Yellowstone decision[ ] has protected small businesses and commercial tenants for over 50 years”).

Of course, small business tenants may not always have the resources to retain an attorney during lease negotiations, thus potentially placing them at a disadvantage depending on the party’s own sophistication. A NYC assistance program was specifically created, however, to redress this hurdle. The “Commercial Lease Assistance Program” provides eligible small businesses with free legal services to help sign, amend, renew, terminate, or address a commercial lease. NYC Business, Commercial Lease Assistance Program, https://on.nyc.gov/3DvadNo. Furthermore, as previously discussed, even if a small business tenant is a single individual, other jurisdictions hold the tenant to the same general standard that a commercial party is sophisticated and, thus, able to negotiate and understand the terms, including an injunction waiver, of a lease.

Even if a tenant cannot obtain legal assistance, and though it can be harder for small business tenants to negotiate because the lease is usually a draft form and there tends to be little negotiation regarding the terms, see Berger, supra, at 791, injunctive relief is not such an essential right that it cannot be a negotiated term. Allowing injunction waiver provisions does not upset the balance between freedom of contract and social values. See Lawrence A. Cunningham, Cardozo and Posner: A Study in Contracts, 36 Wm. & Mary L. Rev. 1379, 1396 (1995) (commenting that “Cardozo’s principal concern . . . was with the risks of interparty exploitation and the judicial need to balance freedom of contract with other social values”). As New York City landlords need tenants, they could very well concede to at least meet in the middle on the terms of the waiver. For instance, the provision could be drafted like the contractual Yellowstone provision. Moreover, even without section 235-h and even if a tenant could not insist upon the lease preserving its right to seek injunctive relief, a tenant could ultimately refuse to sign a lease containing an injunction waiver if the tenant feels that strongly about the right. Nonetheless, the availability to a tenant of injunctive relief in a commercial lease should not be fully determined based on “the power dynamics between landlords and tenants.” Block, supra, at 55 (stating the relationship dynamic should not be factored in when examining the value of the Yellowstone injunction).

Although a tenant who succeeds in obtaining an injunction during a dispute with the landlord can maintain the leasehold until the dispute is resolved, if the tenant is in default, it must still cure that default. In reality, therefore, the waiver prohibition merely extends the time that the tenant remains in breach. Even if the tenant is not granted injunctive relief, because the statute allows the tenant to at least argue for the relief, the landlord will incur additional expenses and is delayed in removing the tenant. Because of the potential added cost to landlords with essentially mandatory Yellowstone litigation, litigation costs may inevitably be passed along to a tenant in the form of higher rents yet also chill some leases from ever getting signed. See generally, e.g., Construction and Effect of Lease Provision Relating to Attorneys’ Fees, 77 A.L.R. 2d 735 (West 2020). Depending on the type of default, and whether the tenant plans to cure it, the public may end up suffering as well. The sooner the landlord can re-let the property, the sooner the public can benefit because, at minimum, active businesses generate higher taxes than an unoccupied property. Block, supra, at 65. A new tenant, who could be a small business tenant, would benefit by leasing the space and would also help the public by providing goods or services. Id. (citation omitted). In a city like New York, where “shuttered storefronts are anathema” to many industries that New York’s public policy strives to protect, it is important to ensure property is not only occupied, but also thriving. Id.

Despite the benefits small businesses bring to a community, an injunction right still primarily benefits a tenant, which is potentially in default, and not the public. Just as courts are concerned about the public interest when deciding to grant a preliminary injunction, see M. Devon Moore, The Preliminary Injunction Standard: Understanding the Public Interest Factor, 117 Mich. L. Rev. 939, 943 (2019), as any benefit a tenant brings to the community is secondary because it is the tenant who has the main interest in the leasehold, a contractual waiver of injunctive relief should be permitted. (This article does not argue a lease does not provide any societal value, as it appears Judge Wilson argued the majority in 159 MP Corp. did, but rather that the value does not rise to a level that a prohibition of injunctive waivers is needed. See 159 MP Corp., 33 N.Y.3d at 372–73 (Wilson, J., dissenting).)

In short, Yellowstone injunctions are “one of the most paralyzing tenant weapons that the judiciary has ever created.” Bailey et al., supra, at 39.17(D). The legislature’s decision to prohibit declaratory relief waivers significantly burdens landlords as the injunction is now essentially automatic because courts freely grant Yellowstone injunctions. Block, supra, at 58 (“It is the relative ease of obtaining a Yellowstone injunction that renders it problematic”). As parties are allowed to waive many other rights—and even courts “regularly uphold agreements waiving statutory or constitutional rights”—parties should also be able to waive the right to seek injunctive relief. 159 MP Corp., 33 N.Y.3d at 361. Even when lease provisions are considered “draconian,” courts have enforced them. Advanced Real Estate Topics, N.Y.S. Bar Ass’n, at 67 (2017) (citing Four Cees Jewelry Inc. v. 1537 Realty LLC, 11 Misc. 3d 1056(A), 815 N.Y.S.2d 494 (Sup. Ct. 2005) (enforcing a lease provision that allowed a landlord to shut off the electric within five days of a tenant not paying the electric bill)). Besides, implied in every contract is the duty of good faith and fair dealing, which equally applies to the negotiation of a lease. Restatement (Second) of Contracts § 205, cmt (a) (1981). But cf. Berger, supra, at 814–15 (arguing the standard form lease “dramatizes how painfully far the leasing practices . . . are from . . . contract integrity[,]” meaning “honesty or fairness of the contract and to its evenhanded completeness”). As the parties in a commercial lease are generally sophisticated parties, it is questionable to argue their deal was not fair or made in good faith.

Conclusion

The New York legislature unnecessarily intervened in the landlord-tenant relationship and their constitutionally protected right to contract. U.S. Const. art. 1, § 10, cl. 5. The legislature should have followed the majority approach in allowing parties the freedom to contractually waive injunction rights. Injunction relief waivers would not upset the balance between parties’ autonomy and public order. See Movsesian, supra, at 1548. Commercial parties, whether large or small, should be treated as sophisticated parties who are capable of negotiating their own terms to suit their needs. If parties can negotiate to include a waiver of injunctive relief, parties can also expressly negotiate that injunctive relief cannot be waived. The additional statutory protections granted to commercial tenants do not justify the hindrance imposed on parties’ ability to negotiate all terms of their lease. In conclusion, 159 MP Corp. produces a preferable outcome than the New York legislature’s law. Injunctive relief, including Yellowstone injunctions, is not so paramount to protect commercial tenants’ property rights that the legislature needed to intercede. 159 MP Corp., 33 N.Y.3d at 366. When injunction or declaratory action rights are freely, voluntarily, and knowingly waived, and the right’s primary effect is private to the parties, the deeply-rooted policy of freedom of contract should be the default, and parties should be able to waive those rights.

Published in Probate & Property, Volume 36, No 4 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.