United States: Is There Wiggle Room For Performance Of Lease Obligations By Retailers Under New York Law?

Much has been written about the general applicability of the frustration of purpose, impossibility, and impracticability doctrines to performance of leases and other contracts in the wake of COVID-19 (including here). Many leases, including retail and other commercial leases, either have force majeure clauses that expressly exclude rent obligations or matters relating to the payment of monies from application thereof or lack force majeure clauses altogether, leaving tenants to look to other doctrines for possible relief from the ongoing business damage ensuing from the pandemic. In New York, the frustration of purpose, impossibility, and impracticability doctrines have, historically, been construed narrowly, especially when dealing with commercial leases. Yet there is reason, depending on the specific facts and the nature of the suspension of performance sought by lessees, to believe that New York courts may be willing to excuse performance of commercial leases, including leases held by retailers, due to COVID-19.

New York courts have generally applied these doctrines very narrowly with respect to performance under commercial leases. For example, in contrast to non-lease contracts where performance was excused due to 9/11¹, New York courts have held that "[t]he tragic events of 9/11 do not relieve defendants of their obligations under the lease. . . . A down turn in the economy partially resulting from the 9/11 tragedy . . . is not a valid reason for relieving a party from its responsibilities under a lease" because those events did not prevent the tenant from utilizing the property in question in the manner bargained for in the lease.²

In the retail context, New York courts have previously taken a similar approach. "[T]he underlying principle" of doctrines such as frustration of purpose and impossibility "is foreseeability,"³ and where the parties are sophisticated business entities entering into a commercial lease for retail purposes, courts often hold the retailer to a high standard as to what is "foreseeable." Frustration of purpose and similar doctrines only excuse performance if there is a "virtually cataclysmic, wholly unforeseeable event [that] renders the contract valueless to one party."⁴

Applying those principles, one court in New York held that a retailer could not rely on frustration of purpose where a flood destroyed its store.⁵ The court noted that the retailer was a sophisticated business entity, there had been four floods on the property during a fourteen-year period prior to the commencement of the lease, and the retailer had hired a vendor to perform an environmental evaluation of the property.⁶ The court suggested that the outcome might have been different if the retailer had been looking for temporary relief due to the flood, noting that "reasonable extensions, in a time of economic crisis and under the doctrine of temporary commercial impracticability," could be appropriate.⁷ But the court refused to let the retailer terminate the lease under these circumstances.⁸

In another case, a bank argued that it should be relieved from performance of a New York commercial lease because the US government prohibited the bank from continuing to operate at the leased premises as part of sanctions against what was then Yugoslavia.⁹ The court refused to excuse the bank's performance, holding that the government shutdown of the business was foreseeable because the bank's executives were aware of the possibility of US sanctions when the lease was signed.¹⁰

Another New York court rejected the contention that the economic downturn of 2008 could excuse a retailer's performance of a commercial lease signed in March 2008.¹¹ The court reasoned that the lease "was entered into by sophisticated commercial parties who could have anticipated the possibility that future events might result in financial disadvantage on the part of either party."¹² The court also rejected the notion that even temporary relief from the lease was warranted, holding that "[i]f that argument prevailed, every debtor in a country suffering economic distress could avoid its debts."¹³

What lessons do these cases hold for retail tenants in New York during the COVID-19 pandemic? First, foreseeability will likely be the driving force in whether retailers can invoke these doctrines. In most cases, it would be difficult to argue that COVID-19 is not a "virtually cataclysmic, wholly unforeseeable event," particularly for leases signed well before the pandemic arose. Moreover, government orders preventing what in many cases may be the purpose of the lease—operating a retail store—would render the contract valueless, even if temporarily. Where a retailer signed a lease at a time when the pandemic was foreseeable, however—such as when the pandemic was unfolding overseas, even if not yet in New York—a court may be less inclined to find that the pandemic was unforeseeable.

Second, some courts may be more lenient where the retailer is seeking temporary relief from performance, rather than to terminate the contract, as the court indicated in the flood case. Although another court rejected this argument in the context of the 2008 economic downturn, retailers may be able to distinguish the unprecedented COVID-19 pandemic from more frequent economic downturns.

Third, where a landlord of a retailer, understandably, initially closed a shopping center or other storefront as a precautionary measure in response to COVID-19, such will arguably bolster the retail tenant's invocation of the doctrines of frustration of purpose, impossibility, and impracticability.¹⁴ In fact, such voluntary closures may permit retailers to invoke other provisions in its lease, such as a co-tenancy provision, as other grounds upon which to seek a temporary or permanent suspension of performance obligations.

Landlords and retail tenants would be well-served to keep these principles in mind in order to address not only prior lease performance issues attendant to COVID-19, but also in connection with the country beginning the cautious process of beginning to return-to-work.¹⁵

Footnotes

1. 192 Misc.2d 743 (N.Y. Civ. Ct. 2002).
2. 2004 N.Y. Misc. LEXIS 1544 (N.Y. Sup. Ct. Aug. 9, 2004).
3. 923 F. Supp. 2d 351, 362 (N.D.N.Y. 2013).
4 508 F.2d 377, 381 (2d Cir. 1974).
5. 923 F. Supp. 2d at 363.
6. 923 F. Supp. 2d at 361-62.
7. Id. at 363.
8. Id.
9. 1998 U.S. Dist. LEXIS 15756 (S.D.N.Y. Oct. 8, 1998).
10. Id. at *8-11.
11. 2009 N.Y. Misc. LEXIS 6670 (N.Y. Sup. Ct. Sept. 10, 2009).
12. Id. at *11-12.
13. Id. at *13.
14. Retailers, however, still must contend with existing New York case law that suggests mere financial hardship is not a sufficient basis upon which to invoke he doctrines of frustration of purpose, impossibility, and impracticability. See, e.g., 923 F. Supp. 2d at 359; 2009 N.Y. Misc. LEXIS 6670, at *10.
15. While the within legal update is drafted with retailers in mind, the concepts set forth in this update nonetheless would apply to commercial leases, in general.