Commercial Division Again Rejects Commercial Tenant’s Impossibility / Frustration of Purpose Defenses in the Wake of COVID-19
May 27, 2021
Earlier this year, my colleague, Madeline Greenblatt, wrote about the emergence of a new body of case law emanating from the myriad effects the COVID-19 pandemic has had on the real estate industry. In her blog, Madeline discussed a recent decision from the Manhattan Commercial Division (Borrok, J.), rejecting a commercial tenant’s argument that it should be excused from paying rent based upon the doctrines of impossibility and frustration of purpose. Madeline aptly predicted we would see an uptick in COVID-19-related commercial lease disputes. Right she was.
Just last week, the Manhattan Commercial Division in A/R Retail, LLC v Hugo Boss Retail, Inc. (2021 NY Slip Op 21139 [Sup Ct, NY County, May 19, 2021] [Cohen, J.]), yet again rejected a commercial tenant’s reliance on the doctrines of impossibility and frustration of purpose to excuse non-performance of its rent obligations.
Background of the Dispute
Located at the Shops in Columbus Circle (the “Shops”) in Manhattan – an upscale, highly trafficked shopping mall in 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 landlord, A/R Retail, LLC (“A/R”). The Lease includes a force majeure clause excusing the non-performance of certain obligations based upon events beyond the non-performing party’s reasonable control, including, among other things, war, terrorism, acts of God, strikes, or any order or regulations of or by any governmental authority.
On March 7, 2020, as the COVID-19 pandemic swept through New York, Governor Cuomo signed Executive Order 202, declaring a State disaster emergency for the entire State of New York. Executive Order 202 kicked off a series of related Executive Orders which, as relevant here, mandated commercial and retail store closures. Pursuant to the Executive Orders, A/R closed the Shops – including the Store – on March 17, 2020.
Hugo Boss paid rent under the Lease for the month of April 2020, but did not pay rent in full thereafter. On September 9, 2020, the Shops reopened to the general public and, since then, the Store remains open for business (albeit at limited capacity). Hugo Boss’ business at the Store, however, declined significantly since the pandemic. Although Hugo Boss continued to operate the Store, it had not paid rent in full since April 2020.
A/R and Hugo Boss brought 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 attorneys’ fees and costs. Hugo Boss asserted defenses and counterclaims based upon the doctrines of impossibility and frustration of purpose. Separately, Hugo Boss asserted claims against A/R for, among other things, rescission or reformation of the Lease based upon the doctrines of impossibility and frustration of purpose.
A/R moved for summary judgment on its causes of action for a money judgment against Hugo Boss for amounts due under the Lease, and sought dismissal of Hugo Boss’ affirmative defenses and counterclaims.
The Court’s Decision
The Court first determined that A/R established its prima facie entitlement to judgment of matter of law because it was “undisputed” that Hugo Boss failed to pay rent and other charges due under the Lease. The Court then concluded that Hugo Boss failed to raise triable issues of fact sufficient to warrant rescinding or reforming the Lease based on the doctrines of frustration of purpose or impossibility of performance.
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 a narrow one,” the Court explained the doctrine is only applicable where the basis of the underlying contract has been completely destroyed. Partial frustration – such as a diminution in business, where a tenant could continue to use the premises for an intended purpose – is not enough. In addition, the doctrine is not available “where the event which prevented performance was foreseeable and provision could have been made for its occurrence,” or where the contract actually addresses the particular calamity that eventually befell the parties.
Applying these principals, the Court rejected Hugo Boss’ argument that pandemic-related restrictions “entirely frustrated” the purpose of the Lease. Although the pandemic triggered several months of shutdown, the resulting set of capacity restrictions only reduced – and did not completely eliminate – Hugo Boss’ ability to generate revenue from its retail operation. The Court acknowledged that, although the adverse economic effects of the pandemic undoubtedly are real and significant, the temporary closure of the Store, and resulting restrictions, did not “rise to the level of triggering an extra-contractual common law right to rescind a 13-year lease.”
The Court also concluded the force majeure clause – which specifically addressed the risk of government restriction on the use of the premises – undermined Hugo Boss’ frustration of purpose defense. Even though 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 orders or regulations – and stated the specific grounds on which the parties’ prompt performance of their obligations might be excused (or not) – was, in the Court’s view, sufficient to demonstrate that government closures and capacity restrictions were not “wholly unforeseeable.”
Finally, the Court rejected Hugo Boss’ impossibility of performance defense. As the Court explained, impossibility excuses a party’s performance “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” and is produced by “an unanticipated event that could not have been foreseen or guarded against in the contract.” Financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, is insufficient.
To the extent Hugo Boss’ impossibility argument was predicated on government orders — both during the shutdown period and afterward — the Court concluded that the risk of such disruptions was not unforeseeable, as it was addressed in the Lease’s force majeure clause. Furthermore, it was undisputed that Hugo Boss operated the Store during the reopening period (September 2020 to present). And so, the Court concluded that Hugo Boss’ performance under the Lease was not “objectively impossible” even though its business was affected by the pandemic.
Collection of New York Cases Rejecting Impossibility and Frustration of Purpose Theories in the Wake of COVID-19
Since the pandemic hit, a number of New York cases assessing commercial lease disputes have held that the temporary and evolving restrictions on a commercial tenant’s business do not warrant rescission or other relief based on frustration of purpose or impossibility of performance. Below is a non-exhaustive list of such cases:
- Gap Inc. v Ponte Gadea NY, LLC (No. 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 U.S.A., 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 Misc 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 L.L.C. (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] customer base was reduced because of the pandemic is not a basis to find that the frustration of purpose doctrine should apply here.”]);
- Cab Bedford LLC v Equinox Bedford Ave, Inc. (2020 NY Slip 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 v Grant (2020 NY Slip Op. 30592[U] [Sup Ct, NY County, Mar. 1, 2021] [“[A] reduction in potential revenue is not the same as completely frustrating the purpose of the contract.”]); and
- BKNY1, Inc. v 132 Capulet Holdings, LLC (2020 NY Slip 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 rejected commercial tenants’ frustration of purpose and impossibility theories, at least one New York court held that the tenant’s performance under the subject lease was made impossible by the COVID-19 pandemic (see 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, No. 510160/2020 [Sup Ct, Kings County, Mar. 15, 2021]). However, the landlord has since filed a motion to reargue/renew, and a notice of appeal. The motion to reargue is fully submitted and awaiting decision.
In recent cases where tenants have sought to avoid their rent obligations during the pandemic, New York courts have looked to 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 either frustration of purpose or impossibility. A majority of New York courts that have addressed the issue seem to agree that the doctrines of impossibility or frustration of purpose are unavailable where (as in most cases) the lease addresses the possibility of a government-mandated shutdown, or the tenant’s business ultimately resumed operations (even at limited capacity).