February 24, 2021 Practice Points

New York Court Rules that Pandemic Orders Are a “Casualty”

An injunction and a declaratory judgment were granted, protecting a restaurant from eviction for nonpayment of rent.

By Ali Dehghan

In December 2020, the Supreme Court of New York, which is the trial level court in the State of New York, issued a judgment declaring that a plaintiff restaurant (referred to as the “tenant”) did not owe rent to the defendant landlord from March 2020 forward by virtue of the fact that the premises were rendered partially unusable due to a “casualty,” a term that was left undefined in the parties’ lease, but was construed by the tenant to include the state of emergency in New York engendered by the COVID-19 pandemic and consequent suspension of all indoor dining for several months. The court further ruled that the landlord may neither compel the tenant to replenish a security deposit that the landlord drew down to cover allegedly unpaid rent, nor evict the tenant from a commercial leasehold for failing to replenish the security deposit. In addition, the period for replenishing the tenant’s security deposit, as otherwise set forth in the lease, was tolled pending disposition of the action.

Simultaneously, the court issued a Yellowstone injunction prohibiting the landlord from terminating the subject lease and from commencing or continuing any attempts to terminate the lease or evict the tenant from the leased premises pending disposition of the action. In the order to show cause initiating the motion, the court temporarily restrained the landlord, pending the hearing of the motion, from “terminating the lease . . . instituting any action or proceeding in connection with terminating the lease . . . and enforcing any remedy upon the alleged defaults contained in the Replenishment Demand.” The court further tolled the alleged period for curing claimed defaults in the tenant’s failure to replenish the security deposit pending hearing of this preliminary injunction motion.

“The purpose of a Yellowstone injunction is to allow a tenant confronted by a threat of termination of the lease to obtain a stay tolling the running of the cure period so that after a determination on the merits, the tenant may cure the defect and avoid a forfeiture of the leasehold.” Hopp v. Raimondi, 51 A.D.3d 726, 727 (2d Dept 2008). An applicant for a Yellowstone injunction must establish that (1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.

Relying on the commercial eviction moratoria for nonpayment of rent in place, the court stated that even if the court were not inclined to grant Yellowstone relief, it would nonetheless be obligated to grant a preliminary injunction prohibiting the landlord from seeking to evict the tenant at least until January 1, 2021. The court concluded, however, that Yellowstone relief was warranted here. Section 9 (c) of the subject lease stated, as follows:

If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent . . . shall be proportionately paid up to the time of the casualty and then shall cease until the date that the demised premises shall be . . . restored by Owner.

In its decision, the court stated that the tenant has established that it is likely to succeed on its claim that the COVID-19 pandemic, and the consequent state-mandated suspension of indoor dining at restaurants constituted a sudden, unexpected, unfortunate set of circumstances; and, hence, a “casualty” within the meaning of the lease that rendered the premises unusable for a period of time, and thus relieved the tenant of its obligation to pay rent. Consequently, the court concluded that the tenant has shown a likelihood that it will prevail on its argument that, even if the lease otherwise permitted the landlord to draw down the security deposit to cover unpaid rent and rent arrears, under the unique circumstances of this case, the landlord was not authorized to do so in this instance.

The court further concluded that the tenant would clearly suffer irreparable harm in the potential loss of a leasehold in the absence of the injunction. Moreover, the balance of equities favored the tenant here, as any loss sustained by the landlord would be compensable by money damages. Hence, the court issued a Yellowstone injunction ruling that, pending final adjudication of the matter, the landlord and its agents were enjoined and restrained from terminating or cancelling the lease between the landlord and the tenant, and also from taking any action to evict that tenant from the leased premises.

Ali Dehghan is an associate with James G. Dibbini & Associates in New York City, New York.

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