Commercial Division Again Rejects Commercial Tenant Impossibility / Frustration Of COVID-19 Defenses | Farrell Fritz, PC
Earlier this year my colleague, Madeline Greenblatt, wrote on the emergence of a new body of case law emanating from the myriad effects of the COVID-19 pandemic on the real estate sector. In her blog, Madeline mentioned a recent decision of the Manhattan Commercial Division (Borrok, J.), rejecting a commercial tenant’s argument that he should be excused from paying rent on the basis of the impossibility and frustration of purpose doctrines. Madeline correctly predicted that we would see an increase in commercial lease litigation related to COVID-19. She was right.
Last week, the Manhattan commercial division at A / R Retail, LLC v Hugo Boss Retail, Inc. (2021 NY Slip Op 21139 [Sup Ct, NY County, May 19, 2021] [Cohen, J.]), once again rejected a commercial tenant’s use of the impossibility and frustration of purpose doctrines to excuse the breach of its tenancy obligations.
Background to the dispute
Located in the Columbus Circle Shops (the “Shops”) in Manhattan – a high-end, high-traffic mall in the Time Warner Center – the tenant, Hugo Boss, operates a two-story retail store (the “Store” ) pursuant to a 13-year Commercial Lease (the “Lease”) with the owner, A / R Retail, LLC (“A / R”). The lease includes a force majeure clause excusing the non-performance of certain obligations on the basis of events beyond the reasonable will of the non-performing party, including, among others, war, terrorism, cases of force majeure , strikes, or any order or regulation of or by any government authority.
On March 7, 2020, as the COVID-19 pandemic swept through New York City, Governor Cuomo signed Executive Order 202, declaring a disaster emergency for the whole of New York State. Decree 202 initiated a series of related executive decrees which, where applicable here, mandated the closure of commercial and retail stores. In accordance with the decrees, A / R closed the stores – including the store – on March 17, 2020.
Hugo Boss paid the rent under the lease for the month of April 2020, but did not pay the rent in full afterwards. On September 9, 2020, the Boutiques reopened to the general public and since then the Store has remained open (albeit with limited capacity). However, Hugo Boss’ business at the store has declined significantly since the pandemic. Although Hugo Boss continued to operate the store, he had not paid the rent in full since April 2020.
A / R and Hugo Boss have filed separate actions against each other based on overlapping theories of liability and defenses. In the first action, A / R asserted claims against Hugo Boss for breach of the lease and for attorney’s fees and costs. Hugo Boss has argued defenses and counterclaims based on the doctrines of goal impossibility and frustration. Moreover, Hugo Boss has made claims against A / R for, among other things, the annulment or reform of the lease on the basis of the doctrines of the impossibility and the frustration of the goal.
A / R sought summary judgment on its causes of action for a pecuniary judgment against Hugo Boss for amounts owed under the lease, and requested that Hugo Boss’s affirmative defenses and counterclaims be dismissed.
The Court’s decision
The Court first determined that A / R had established its prima facie right to a judgment on a question of law because it was “undisputed” that Hugo Boss had not paid the rent and other charges due. under the lease. The Court then concluded that Hugo Boss had not raised questions of fact which could be considered sufficient to justify the annulment or the reform of the lease based on the doctrines of the frustration of the object or of the impossibility execution.
The Court began its analysis with a brief discussion of the “coronation cases” and the legal principles underlying the doctrine of frustration of purpose. Describing the doctrine “as being restricted”, the Court explained that the doctrine is only applicable when the basis of the underlying contract has been. completely destroyed. Partial frustration – such as a decrease in business, where a tenant could continue to use the premises for a intended purpose – is not enough. Furthermore, the doctrine is not available “when the event which prevented performance was foreseeable and arrangements could have been made for it to occur”, or when the contract effectively deals with the particular calamity which finally hit the parties.
Applying these principles, the Court rejected Hugo Boss’ argument that the restrictions linked to the pandemic “completely contradicted” the purpose of the lease. Although the pandemic triggered several months of downtime, the resulting set of capacity restrictions only reduced – and did not completely eliminate – Hugo Boss’s ability to generate income from its operations. sale to detail. The Court recognized that while the adverse economic effects of the pandemic are undoubtedly real and significant, the temporary store closure and resulting restrictions have not “reached the trigger level of an extra duty. common law contract to cancel a 13 year lease. “
The court also found that the force majeure clause – which specifically addressed the risk of government restriction on the use of the premises – undermined Hugo Boss’ frustration with the defense of finality. While the lease did not explicitly mandate payment of rent in the event of a government shutdown or capacity limitation, the fact that the lease addressed the risk of government ordinances or regulations – and set out the specific grounds on which the prompt performance by the parties of their obligations could be excused (or not) – was, in the Court’s view, sufficient to demonstrate that government shutdowns and capacity restrictions were not “totally unforeseeable”.
Finally, the Court rejected the impossibility of a defense based on Hugo Boss’ performance. As the Court explained, the impossibility excuses the execution of a party “only when the destruction of the object of the contract or of the means of execution makes the execution objectively impossible” and is produced by ” an unforeseen event which could not have been foreseen or prevented in the contract. “Financial hardship or economic hardship, even to the extent of insolvency or bankruptcy, is insufficient.
To the extent that Hugo Boss’ impossibility argument rested on government orders – both during the shutdown period and thereafter – the Court concluded that the risk of such disruptions was not unforeseeable, as it was addressed in the force majeure clause of the lease. Additionally, it was not disputed that Hugo Boss was operating the store during the reopening period (September 2020 to present). Thus, the Court concluded that Hugo Boss’s performance under the lease was not “objectively impossible” even though his business was affected by the pandemic.
Casebook from New York rejecting the impossibility and frustration of goal theories in the aftermath of COVID-19
Since the pandemic struck, a number of New York City cases evaluating commercial rental disputes have concluded that temporary and evolving restrictions on a commercial tenant’s operations did not warrant cancellation or other relief based on the frustration of the goal or the impossibility of execution. Here is a non-exhaustive list of these cases:
- Gap Inc. v Ponte Gadea NY, LLC (N ° 20 CV 4541-LTS-KHP, 2021 WL 861121 [SD NY Mar. 8, 2021] [dismissing claims based on frustration of purpose and impossibility because the possibility of a government-mandated shutdown was contemplated in the lease’s force majeure event clause, which identified “governmental preemption of priorities or other controls in connection with a national or other public emergency”]);
- Valentino USA, Inc. v 693 Fifth Owner LLC (2021 NY Slip Op 50119[U] [Sup Ct, NY County, Jan. 27, 2021] [dismissing complaint, which asserted declaratory judgment claims based on frustration of purpose and impossibility, where lease explicitly stated that nothing contained therein, including “restrictive governmental laws or regulations,” certain cataclysmic events, “or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed in performing work or doing acts required” shall excuse the payment of rent]);
- Victoria’s Secret Stores, LLC v Herald Sq. Owner LLC (70 Various 3d 1206[A] [Sup Ct, NY County 2021] [dismissing tenant’s rescission claims based on frustration of purpose and impossibility where the lease did not excuse tenant’s obligation to pay rent in the event of “government preemption” or “orders” arising out of a “national emergency”]);
- 1140 Broadway LLC v Bold Food, LLC (2020 NY Slip Op 34017[U], * 3 [Sup Ct, NY County, Dec. 3, 2020] [rejecting tenant’s reliance on doctrines of frustration of purpose and impossibility, holding that tenant’s inability to pay rent as a result of the COVID-19 pandemic “does not fit into the narrow doctrine of frustration of purpose”]);
- 35 E. 75th St. Corp. v Christian Louboutin LLC (2020 NY Slip Op 34063[U], * 3-4 [Sup Ct, NY County, Dec. 9, 2020] [rejecting frustration of purpose and impossibility defenses where, among other things, the lease’s force majeure clause specifically provided that the nonpayment of rent was not an excusable default, but instead extended the period of performance for the amount of time the delay caused]);
- E. 16th St. Owner LLC v Union 16 Parking LLC (2021 NY Slip Op 30151[U], * 3-4 [Sup Ct, NY County, Jan. 13, 2021] [“That [tenant’s] the customer base has been reduced due to the pandemic is not a basis for concluding that the goal frustration doctrine should apply here. “]);
- Cab Bedford LLC v Equinox Bedford Ave, Inc. (New York Bulletin 2020 Op.34296[U] [Sup Ct, NY County, Dec. 22, 2020] [noting that a shutdown lasting a few months does not frustrate the purpose of the entire 15-year lease]);
- Mept 757 Third Ave. LLC vs. Grant (New York Bulletin 2020, op.30592[U] [Sup Ct, NY County, Mar. 1, 2021] [“[A] reducing potential income does not amount to completely thwarting the object of the contract. “]); and
- BKNY1, Inc. vs. 132 Capulet Holdings, LLC (New York Bulletin 2020, op. 33144[U], * 3 [Sup Ct, Kings County 2020] [“Inasmuch as the initial term of the lease, as amended by the March 2012 rider, is for approximately nine years (Nov. 2012 to Sept. 2021), a temporary closure of plaintiff’s business for two months (April and May 2020) in the penultimate year of its initial term could not have frustrated its overall purpose.”]).
Although an overwhelming number of New York courts have dismissed commercial tenants’ frustration with the theories of purpose and impossibility, at least one New York court has held that the tenant’s performance under the lease in question had been made impossible by the COVID-19 pandemic. (see 267 Development, LLC v Brooklyn Babies and Toddlers, LLC, N ° 510160/2020 [Sup Ct, Kings County, Mar. 15, 2021]). However, the owner has since filed a re-argument / renewal motion and a notice of appeal. The re-argumentation request is fully submitted and awaiting a decision.
In recent cases where tenants have sought to evade their rent obligations during the pandemic, courts in New York have looked at the specific terms of each lease, rather than the highly unusual circumstances of the COVID-19 pandemic. , to decide whether the tenant’s performance under the lease was excusable due to frustration or the impossibility of the purpose. The majority of New York courts that have addressed the issue seem to agree that the doctrines of impossibility or frustration of purpose are not available when (as in most cases) the lease addresses the possibility of a judgment imposed by the government, or tenant business eventually resumed. operations (even with limited capacity).