In a matter of first impression, New York’s Second Department recently held that a waiver of the right to declarative relief in a commercial lease was enforceable and not violative of public policy. See 159 MP Corp., et al. v. Redbridge Bedford, LLC, 2018 WL 635946 (2d Dept. Jan. 31, 2018). In the case, the plaintiffs were two related entities that had entered into nearly identical leases for units in the subject building. The rider to each lease contained the following waiver provision:

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. Any breach of this paragraph shall constitute a breach of substantial obligations of the tenancy, and shall be grounds for the immediate termination of this Lease. It is further agreed that in the event injunctive relief is sought by Tenant and such relief shall be denied, the Owner shall be entitled to recover the cost of opposing such an application, or action, including its attorney’s fees actually incurred, it is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.

On March 12, 2014, the defendant landlord served each plaintiff with a Notice to Cure alleging that the plaintiffs had breached several provisions of their leases relating to the failure to obtain various permits, the creation of fire hazards, the existence of nuisances, and the refusal to allow the Fire Department to inspect the sprinkler system. The Notice to Cure also demanded that the alleged lease violations be cured within 15 days or the defendant would terminate the tenancies and thereafter commence summary proceedings to recover possession of the premises. In response, and before the expiration of the cure period, the plaintiffs commenced an action in the Kings County Supreme Court for a judgment declaring that the two commercial leases were in full force and effect and that the plaintiffs were not in violation of their obligations under the leases. Additionally, the plaintiffs moved for a Yellowstone injunction staying and tolling the cure period and enjoining the defendant from terminating the leases or commencing a summary proceeding for eviction.

The defendant asserted that the plaintiffs had “contractually waived the right to seek injunctive relief,” and cross-moved for summary judgment seeking dismissal of the plaintiffs’ complaint due to that waiver. Additionally, based on the waiver language, the defendant asserted that the very act of commencing an action for declaratory relief constituted a breach of the plaintiffs’ contractual obligations, which provided sufficient grounds for terminating the tenancies.

Ultimately, the trial court denied the plaintiffs’ application for a Yellowstone injunction. The court distilled that, “although the leases did not expressly prohibit Yellowstone applications, such relief was nevertheless encompassed within the broader provisions in the riders that prohibited declaratory actions.” The trial court interpreted the waiver of declaratory remedies provision as an agreement to resolve contractual disputes through the mechanism of summary proceedings. The trial court further explained that the waiver of declaratory remedies did not prevent any of the parties from performing the agreements, or from commencing actions seeking damages for either breach of contract or tortious conduct.

In upholding the trial court’s decision, the Second Department first held that, pursuant to the plain meaning of the waiver provisions contained in the lease riders, the plaintiffs expressly waived both declaratory and Yellowstone relief. In reaching this decision, the Court analyzed the rest of this lease provision, which further evidenced the parties’ mutual intent to adjudicate disputes by means of summary proceedings. Moreover, the Court disagreed with the plaintiffs’ argument that there was a distinction between a prohibited declaratory judgment on the one hand, and permissible Yellowstone relief on the other. The Court explained that “[b]y nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it.”

The Court also considered whether the waiver of declaratory relief would violate public policy. In addressing this issue, the Court noted that the parties were sophisticated entities that negotiated at arm’s length and entered into lengthy and detailed leases defining each party’s rights and obligations with great apparent care and specificity. The Court further explained that “to hold that the waiver of declaratory judgment remedies in contractual leases between sophisticated parties is unenforceable as a matter of public policy does violence to the notion that the parties are free to negotiate and fashion their contracts with terms to which they freely and voluntarily bind themselves.” The Court accepted the notion that parties to a contract must ordinarily remain free to make the agreements they wish on terms they deem satisfactory, no matter how unwise it might appear to a third party. The Court also noted that the State Legislature has enacted provisions that identify non-waivable rights in leases, such as the right of habitability. Because the State Legislature did not enact any prohibition on a tenant’s waiver of declaratory judgment remedies, “this Court, which is not a legislative body, should not attempt to create such a blanket prohibition here.” Finally, the Court held that the provision was enforceable because the plaintiffs were not without remedy, as they could raise these objections in a summary proceeding brought against them or a breach of contract action seeking monetary damages. The Court, therefore, upheld the trial court’s decision to enforce the waivers in the lease riders and declined to strike them.

However, in a lengthy dissenting opinion, Justice Connolly voted to reverse the trial court’s order, holding that such a provision violates public policy and is unenforceable. Justice Connolly explained that it is well settled that a party may only waive a right that is exclusively a matter of private right and where no considerations of public policy come into play. In other words, “when a right has been created for the betterment or protection of society as a whole, an individual is incapable of waiving that right; it is not his to waive.” Thus, Justice Connolly found that the right to bring a declaratory judgment action is not personal to an individual, but rather, such an action serves important societal functions and to waive such a right would be a violation of public policy. In the commercial landlord-tenant context, Justice Connolly found declaratory relief serves a public purpose of allowing a tenant to protect its property interest while contesting the landlord’s assessment of its rights. Finally, Justice Connolly noted that a tenant who waives the right to a declaratory judgment action and is served with a notice to cure is stuck in “a metaphorical limbo” whereby the tenant is unable to determine its future in the property and “would be faced with great uncertainties with respect to any decision-making related to improving the property, accepting deliveries of new stock or merchandise, or the negotiation of any type of long-term agreement with customers or suppliers.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Nicholas Racioppi, Jr. at nracioppi@riker.com, or Sarah Heba-Escobar at sheba@riker.com.