Space's Increased Value Didn't Raise Rent Rate

Facts: A luxury retailer (subtenant) subleased space for its flagship store. The sublandlord was an affiliate of the owner of the building. The sublandlord informed the subtenant that the property would be redeveloped in two years, and, in the meantime, the subtenant would have to pay substantially increased rent—one reflecting a higher fair market value revealed by a property appraisal. The subtenant objected. The sublandlord informed it that it was in default and its sublease would be terminated.

The subtenant alleged that the owner colluded with the sublandlord to use the appraisal to drive up the rent in order to cause the subtenant’s default, in an effort to squeeze the subtenant out of its space to start the redevelopment earlier than planned. The subtenant asked a trial court for a Yellowstone injunction. A Yellowstone injunction permits a tenant confronted by the threat of lease termination to obtain a stay tolling the owner’s termination while the underlying alleged default—-here, the refusal to pay increased rent—-is litigated.

The sublandlord asked for a judgment in its favor without a trial. It wanted to evict the tenant immediately.

Decision: A New York trial court granted the Yellowstone injunction and set the rental rate.

Reasoning: Because the trial court granted the Yellowstone injunction, the subtenant couldn’t be evicted until after the rent rate issue had been determined. But the trial court noted that the sublandlord still was entitled to recover “reasonable compensation” for the use and occupancy of the premises in the meantime. The trial court determined that the current sublease rent rate was reasonable, despite the appraisal indicating that more could be charged for the space. That was because, if the subtenant were evicted immediately—which the sublandlord was attempting to do—the empty space would not produce any income, explained the appeals court.

• Giorgio Armani Corp. v. SL Green Realty Corp., August 2015