Pennsylvania Superior Court Rules Frustration of Purpose and Impracticability/Impracticability Doctrines Inapplicable to Default of Commercial Lease Resulting from COVID-19 Closures | Tucker Arensberg, PC
In Pennsylvania’s first appellate case involving the effects of government-ordered business closures due to the Covid-19 pandemic on a commercial lease default, the Pennsylvania Superior Court ruled that traditional doctrines of common law of frustration of purpose and impracticality/impossibility of performance failing to absolve a commercial tenant of default of lease for non-payment of rent that allegedly occurred as a result of the Pennsylvania Governor’s closing order.
In 9795 Perry Highway Management, LLC vs. Walter Bernard and Wynton Bernard, 2022 Pa. Great. 52 (March 29, 2022), the Tenant operated an escape entertainment room in the Landlord’s building. The tenant breached his lease in April 2020 by not paying his rent – shortly after Pennsylvania Governor Tom Wolf ordered non-essential businesses to close due to the Covid-19 pandemic. The lease did not include a force majeure clause allocating the risk of loss in the event of unforeseen events. The tenant informed the landlord that he is unilaterally terminating the lease on the same date that non-essential businesses were allowed to reopen in a limited capacity – June 5, 2020. The landlord eventually filed a judgment confession suit in July 2020, after which the tenant filed a motion to open or set aside the avowed judgment, arguing that he should be excused from paying any additional rent due to the Commonwealth Covid-19 Closing Order of March 2020 and the doctrines of frustration of purpose and impracticality/impossibility of execution.
Upholding the trial court’s refusal to open or vacate the avowed judgment, the Superior Court noted that no Pennsylvania authority was directly reviewing whether the government-ordered temporary business closures resulting from the coronavirus pandemic Covid-19 triggered the doctrines of frustration of purpose and impracticality. /impossibility of performance with respect to the termination of a commercial lease for non-payment of rent. The Court, however, cited with approval several New York cases that held that the doctrines were inapplicable to lease defaults involving a tenant’s non-payment of rent due to Covid-19 closings. See, for example, Hugo Boss Retail, Inc. vs. A/R Retail, LLC71 Misc.3d 1222(A), at *2 (NY Co. Sup. Ct. May 19, 2021); Gap vs. Ponte Garde New York LLC524 F.Supp.3d 224, 232-39 (SDNY 2021); 35 East 75th Street Corp. against Christian Louboutin LLC, 2020 WL 7315470, at *2 (NY Co. Sup. Ct. December 9, 2020); Greater New York Auto. Dealers Ass’n, Inc. c. City Spec, LLC70 Misc.3d 1209(A), at *9 (NY Civ. Ct. 2020).
Further noting that the tenant had been on a six-year lease for more than two years “when the COVID-19 pandemic caused the relatively short-term closure, approximately 78 days,” the Superior Court held that since the Escape Room could have reopened on June 5, 2020 (albeit at a 50% reduced capacity), this was hardly a “substantial frustration” sufficient to allow the purpose frustration doctrine to apply. Although the Tenant’s business may have been “less profitable”, this does not support a defense against lack of purpose. The refusal of the court of first instance to open the confessed judgment was therefore confirmed.
The apportionment of losses arising from the Covid-19 pandemic will likely be a hot topic for our courts for years to come. The Superior Court’s decision in 9795 Perry Highway Management is a first win for commercial landlords who, often like their tenants, are small businesses with obligations to mortgagees and other creditors.