Seyfarth Shaw recently scored a major victory for its landlord client, 1140 LLC, in an action against a commercial tenant for breach of a lease due to failure to pay rent during the COVID-19 pandemic. In ruling in favor of the landlord (which you can read here), the court rejected the tenant's defenses of frustration of purpose, impossibility of performance, and casualty based upon the COVID-19 pandemic.1 We believe that this is the first summary judgment decision by a New York state court on those defenses in the commercial leasing context since the onset of the pandemic.
The landlord brought suit for breach of a commercial lease for office space in Manhattan after the tenant stopped paying rent in February 2020 and vacated the premises in June 2020, well in advance of the February 2022 expiration of the lease. The landlord moved for summary judgment, arguing that there was no genuine dispute regarding the tenant's failure to perform its lease obligations.2 In response, the tenant argued that its primary business "involve[d] managing and consulting for a group of restaurants and the shutdown of restaurants renders its business model unprofitable." Accordingly, the tenant argued that its performance of the lease was excused under the doctrines of impossibility, frustration of purpose, and "casualty."3
The court stated that it "empathizes with the many business that have been adversely affected by the ongoing pandemic; here, both the landlord and the tenant have undoubtedly faced significant hardship."4 The court nonetheless rejected the tenant's arguments. With respect to frustration of purpose, the court held that the doctrine is limited to situations where the frustrated purpose is "so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense."5 The court reasoned that the present case was not a situation "where the office space leased was destroyed or where a tenant rented a unique space for a specific purpose that can no longer serve that function," but rather simply a case where "the tenant's industry experienced a precipitous downfall and [caused] the tenant to no longer be able [to] pay the rent."6 Accordingly, frustration of purpose did not apply.
Similarly, the court held that the tenant could not rely on the doctrine of impossibility because it applies only "when the destruction of the subject matter of contract or the means of performance makes performance objectively impossible" and where that destruction is "produced by an unanticipated event that could not have been foreseen or guarded against in the contract."7 Here, the court noted that tenant's business was not shut down by any COVID-19-related governmental orders: it "merely provided restaurants with consulting" and was thus "one step removed from the governor's public health orders relating to restaurants."8 The fact that restaurants no longer needed or wanted the tenant's services as a result of those orders "does not mean there was a 'destruction of the subject matter' contemplated in the contract," since the "subject matter" was "office space" in Manhattan. Accordingly, the court was "unable to find that the doctrine of impossibility has any application here."9
Finally, the tenant argued that, to the extent it was liable to the landlord for damages, the COVID-19 pandemic constituted a "casualty" under the parties' lease that entitled the tenant to a rent abatement. The court rejected this argument as well, holding that the lease's casualty provisions were limited "to physical damage, not the failure of [the tenant's] business to retain its clients."10
Although the tenant may yet decide to appeal, the court's decision is an important one for landlords and tenants in New York City, not only because it sheds additional light on how New York courts may interpret common-law defenses to lease performance in the wake of COVID-19, but also because it appears to be the first such decision on summary judgment, as opposed to a preliminary finding on a motion to dismiss or for injunctive relief. That said, as with all such cases, future court decisions will be heavily influenced by the particular facts and circumstances. For example, courts may be more willing to excuse performance for tenants who were more directly impacted by government orders. Indeed, the court specifically limited its holding to office leases, noting that this was not a case "where a tenant rented a unique space for a specific purpose that can no longer serve that function." Accordingly, it remains an open question as to the applicability of these defenses for commercial tenants, including restaurants and retailers, who may not be able to fully use their space for the unique and specific purposes of their leases due to COVID-19 and the ensuing government orders. In such cases, there may be a fact-specific inquiry before a court can determine whether these defenses apply. Accordingly, it is important to continue to monitor the latest court decisions on these issues.
1. 1140 Broadway LLC v. Bold Food, LLC, Index No. 652674/2020 (N.Y. Sup. Ct.).
2. Index No. 652674/2020, NYSCEF Doc. No. 30, at 1.
3. Id. at 1-2.
4. Id. at 3.
5. Id. (internal quotation marks omitted).
7. Id. at 4 (internal quotation marks omitted).
10. Id. at 6.
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