The Secret’s Out: COVID-19 May Not Excuse Commercial Rent Obligations
January 28, 2021
The lingerie brand Victoria’s Secret (“VS”) has struggled in recent years. VS’ overtly sexy aesthetic has failed to keep up with shifting consumer tastes towards comfort and gender and size inclusivity. In 2019, VS canceled its marquee fashion show, which had run annually for 23 years, showcasing supermodels in VS’ trademark angel wings strutting the runway with millions tuning in to watch. In addition, the long-standing relationship between founder Leslie Wexner and convicted sex offender/disgraced financier Jeffrey Epstein has been given renewed attention, eventually leading to claims of a toxic culture of misogyny within the company.
VS also has been no match for COVID-19. After experiencing sharply declining sales in recent years, VS has been forced to shutter approximately one-quarter of all its US and Canadian stores in 2020.
In May 2020, VS became one of the first major brands to try to legally break one of its leases due to the coronavirus pandemic. However, on January 7, 2021, it was further dealt a blow by Commercial Division Justice Andrew Borrok who dismissed VS’ lawsuit against Herald Square Owner LLC (“Landlord”) seeking to rescind the lease (the “Lease”) for its 20,000 square foot flagship store located in Manhattan’s heavily foot-trafficked Herald Square and avoid its $937,734.17 monthly rent obligation.
In its Complaint, VS alleged that its Herald Square location was forced to close in March 2020 due to the coronavirus pandemic and Governor Cuomo’s Executive Orders ordering a statewide lockdown to combat it. It claimed that the Lease should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.” According to VS, the “purpose of tendering a monthly rent of $937,734.17 or more to operate a retail store is completely frustrated when that store cannot open . . . [or] can open at only a marginal capacity,” and the governmental actions prohibiting the operation of VS’ store during the pandemic render performance under the Lease to be impossible. It also alleged that COVID-19’s effect on retail could not have been foreseen by either party at the time the Lease was entered into.
Landlord’s Summary Judgment Motion
Landlord filed an Answer asserting two counterclaims against VS for breach of the Lease and breach of the Lease’s guaranty. On that same day, Landlord also filed a motion for summary judgment dismissing the Complaint, asserting that VS’ claims were defeated by Article 26 of the Lease, pursuant to which VS specifically anticipated a store closure in the event of a failure of the Landlord to perform any of its obligations due to “governmental preemption” or an “order” arising out of a “national emergency,” and that VS would still be required to pay rent under such circumstances. Therefore, Landlord argued that the doctrines of “frustration of purpose” and/or “impossibility of performance” are precluded when the risk was foreseeable, and when the Lease contemplated the precise risk in question and allocated that risk to VS. Landlord also stressed the fact that the Lease did not contain a force majeure clause.
VS’ Opposition Papers
The thrust of VS’ opposition papers was that Article 26 of the Lease only contemplated a “temporary store closure” and not “a massive, government-shutdown of all non-essential commercial activity in New York City” due to COVID-19. In the opening paragraphs of its opposition brief, VS appealed to the court’s heartstrings:
At the outset, we recognize this motion’s significance. This Court will likely be the first to rule on the novel issues presented, and its ruling will have sweeping consequences reaching beyond this action to the many other suits mirroring the allegations of the Complaint. . . But this case is about what happens when the unthinkable occurs; indeed, something so profound – so extraordinary – that it exceeds that which was reasonably possible or even perceivable when those “what ifs” were conjured. Where (as here) such an occurrence shatters the very core of a commercial deal, the frustration of purpose doctrine operates to rescind the contract. . . COVID-19 epitomizes such an event.
Landlord’s Reply Papers
In its reply papers, Landlord’s counsel reiterated that the issue is not whether the Lease specifically addresses a forced store closure as a result of COVID-19, but rather whether the Lease contemplated the risk of a forced store closure, and if so, how the Lease allocated that risk, which would be dispositive of VS’ claim.
Additionally, in a rather crafty maneuver, Landlord’s counsel submitted an affidavit in which he described visiting Herald Square in August 2020. Although VS’ store was boarded up, he visited the open neighboring stores and purchased various hipster items in those locations, submitting pictures and receipts from Macy’s (beard oil), H&M (socks), and Urban Outfitters (a waterproof earbud case). He also visited the fully-open VS’ West 125th Street store and purchased a fragrance called “Seduction.” The shopping excursion was done to show that “retail stores, and even a Victoria’s Secret store, can operate in Manhattan in the post-COVID-19 environment,” and that all VS was really arguing was that it could not operate its flagship store profitably.
In the end, the Court was persuaded by Landlord’s arguments and granted summary judgment dismissing the Complaint in its entirety, stating succinctly:
The Complaint is premised on the mistaken theory that the parties did not allocate the risk of tenant not being able to operate its business and that tenant is therefore somehow forgiven from its performance by virtue of a state law. This is contrary to the express allocation of these risks set forth in Paragraph 26 of the Lease Agreement . . . It is of no moment that the specific cause for the government law was not enumerated by the parties because the Lease as drafted is broad and encompasses what happened here — a state law that temporarily caused a closure of the tenant’s business. . . The parties agreed that this would not relieve the tenant’s obligation to pay rent.
The COVID-19 pandemic and the governmental actions taken have caused numerous financially strapped commercial tenants to commence lawsuits against their landlords seeking to rescind their leases and/or avoid paying rent premised on a force majeure clause in the lease and/or under the doctrines of impossibility of performance and frustration of purpose. There will undoubtedly be more such lawsuits in 2021. Recent decisions by Commercial Division justices, including this most recent decision by Justice Borrok, demonstrate the high bar that commercial tenants will have to surmount to be excused from their lease obligations given the Court’s narrow application of common law defenses in the face of conflicting lease language.