Breach of lease need not be default.

Most commercial leases provide that if the tenant defaults, (other than non-payment of rent), the landlord may give notice that tenant has 30 days within which to cure the default.

If the tenant denies that a default exists, the tenant will usually seek an injunction, (commonly known as a "Yellowstone" injunction) to toll (stop) the cure period to enable the court to determine if a default really exists. If it is found that the tenant is in default, the injunction will allow time for the tenant to cure the default.

In the case of Waldbaum Inc, V. Fifth Avenue of Long Island Realty Associates, 625 N.Y.S. 2d 298, the Court of Appeals tackled the complexities of the right of a tenant to cure a breach of a lease and thereby avoid a default.

Waldbaum, an operator of a chain of supermarkets in the New York metropolitan area, leased space for one of its markets in the shopping center in Manhassett owned by Fifth Avenue of Long Island, the landlord. The lease was made for a term of 15 years, to terminate in March 1994, with two five-year renewal options. The renewal option provision of the lease specified that Waldbaum would not be entitled to renew if it was then in default of the lease.

In October 1991, two years before the term of the lease was to expire, the landlord notified Waldbaum that it was in default of the lease and gave the tenant 30 days to cure the default. The landlord claimed that because there were various violations placed on the supermarket by governmental agencies, Waldbaum failed to maintain and operate the supermarket as a "first class facility," as required by the lease.

The lease provided that the landlord could cancel the lease if the tenant failed to cure a default within 30 days after notice. The lease also stated that the cure period could be enlarged if the default could not reasonably be cured within 30 days, and that the cure period would be extended as long as tenant diligently continued its efforts to cure the default.

Within the 30-day cure period, Waldbaum sought a Yellowstone injunction to enable Waldbaum to have more time to cure the default, if indeed a default existed.

The trial judge in the Supreme Court of Nassau County granted the injunction and extended the cure period for 90 days, during which time a court-appointed referee would determine whether Waldbaum was in breach of the lease, and if so, to review Waldbaum's effort to cure its default.

In January, 1993 (a little over a year after the notice of termination, but before the term of the lease was to expire), the referee rendered his final report to the Supreme Court judge. The referee found that Waldbaum was indeed in default under its lease, but Waldbaum's plans for remodeling and improving the supermarket would bring back the supermarket to a first class facility, as required by the lease. The referee also recommended that the Yellowstone injunction be extended for six months to enable Waldbaum to complete the improvements, and at the same time, recommended that Waldbaum's renewal option be extended to 30 days after the completion of the cure. The Supreme Court judge confirmed the referee's report, including the extension of Waldbaum's option to renew until after the default under the lease was cured.

Both Waldbaum and the landlord cross-appealed the decision of the Supreme Court, and while the appeal was pending in the Appellate Division, Waldbaum served a written notice of its exercise of its option to renew the lease for an additional five years. This notice was given in a timely manner as required by the lease, well in advance of the time permitted by the trial judge.

The case ultimately went up to the Court of Appeals, which agreed with the landlord that clearly Waldbaum breached its obligations under the lease by not maintaining the supermarket as a first class facility. The Court of Appeals also agreed with the landlord that the Supreme Court erred in concluding that the tolling of the cure period under the Yellowstone injunction automatically extended the renewal option until the cure was completed. It ruled that the Yellowstone injunction only served to forestall the landlord from prematurely canceling the lease during its initial term in order to afford an opportunity for Waldbaum to obtain a judicial determination as to the alleged breach and what would be required to cure it. The Yellowstone injunction did not relieve Waldbaum of the lease requirement that it not be in default of the lease when it exercised its option to renew.

However, the Court stated that it does not follow that Waldbaum automatically lost its right to renew the lease because the complete cure of this default had not been accomplished at the precise time Waldbaum exercised its renewal option. It is clear that the breach was not curable within the 30 days, as required in the initial notice. Therefore, under the lease, Waldbaum was permitted as long a period to cure as was necessary, provided Waldbaum commenced reasonable efforts to cure.

A breach of a provision of the lease by Waldbaum does not necessarily mean that Waldbaum is in default of the lease. By definition, an event of default does not occur under the lease until Waldbaum failed to cure the default within the appropriate cure period. Thus, if Waldbaum complied with the cure requirements that it exercise diligent efforts to cure by restoring the supermarket to a first class facility, no default occurred. If there was no default, Waldbaum could exercise its renewal option.

The Court held that although there is every indication that Waldbaum complied with the cure provision by expending $3.5 million to upgrade the facility, a judicial determination to that effect was never made. Therefore, another evidentiary hearing was ordered to be held by the trial court. If the trial judge finds that Waldbaum did cure, its exercise of the renewal option was valid. Conversely, if the trial judge decides that Waldbaum failed to pursue the improvements diligently, Waldbaum would have been in default, and the renewal option would be of no effect.

(Edward U Schiff was senior partner of Schiff, Turek, Kirschenbaum, O'Connell LLP. This law firm was merged with Hartman & Craven LLP, a New York City law firm. Mr. Schiff is a Real Estate Partner at Hartman & Craven LLP.)