A Kings County Supreme Court Commercial Division Justice recently rejected a restaurant tenant's argument that the Executive Orders issued in response to the COVID-19 pandemic frustrated the purpose of its commercial lease, and rendered the parties' performance impossible. The case joins a growing number of decisions nationwide (including those discussed here, here, and here) grappling with whether parties can avoid performance of contractual obligations as a result of the pandemic.
In BKNY1, Inc. d/b/a 132 Lounge v. 132 Capulet Holdings, LLC,1 the court entered a Yellowstone injunction in 2017 that prevented landlord from terminating the restaurant tenant's lease, which was a REBNY Standard Form of Store Lease. The injunction was granted, in part, based on the restaurant's representation that it was continuing to pay its rent, and would do so while the injunction remained in place. Accordingly, the obligation to pay rent was made an express condition of the injunction.2
Three years later, with the COVID-19 pandemic gripping the city, Governor Cuomo issued Executive Order 202.3, which directed the closure of all New York restaurants for in-person dining effective March 16, 2020. The tenant closed its restaurant and did not pay rent for April and May 2020. Based on the tenant's failure to pay rent for those two months, the landlord moved to vacate the injunction.
In opposition, the restaurant first argued that it was entitled to avoid paying rent because its inability to operate its restaurant as a result of COVID-19-related governmental restrictions frustrated the purpose of the lease. The court rejected this argument, holding that "the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense."3 The court reasoned that the initial term of the lease runs from "Nov. 2012 to Sept. 2021," and so "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."4
In reaching that conclusion, the court relied on, among other things, the Appellate Division, First Department's recent decision in Center for Specialty Care, Inc. v. CSC Acquisition I, LLC.5 In that case, issued in the midst of the pandemic in June 2020, the Appellate Division provided examples of where frustration of purpose applies, such as "where the tenant was unable to use the premises as a restaurant until a public sewer was completed, which took nearly three years after the lease was executed . . . and where a tenant who entered into a lease of premises for office space could not occupy the premises because the certificate of occupancy allowed only residential use and the landlord refused to correct it."6 The Appellate Division contrasted those examples with the case before it, where the tenant had been unable to obtain a required certificate from the Department of Health, but the parties had expressly stated in the contract that tenant would not have that certificate at the commencement of the lease.7
The court in BNKY1 also rejected the restaurant tenant's second argument, that it was excused from paying rent based on the doctrine of impossibility of performance.8 The court asserted that the doctrine did not apply where an unforeseen event merely renders performance "burdensome," absent "an express contingency clause" in the underlying contract that excuses performance.9 The court noted that far from containing an express contingency clause that excused the tenant's performance, Article 26 of the REBNY lease provided that the restaurant's rent obligations "shall in no wise be affected, impaired or excused . . . by reason of . . . government preemption or restrictions."10 Accordingly, the court held that the restaurant was required to continue paying rent.
The court also noted that its conclusion regarding impossibility of performance was reinforced by the fact that the restaurant failed to introduce evidence demonstrating that it was unable to pay the rent.11 In that regard, the court relied on its recent decision in 538 Morgan Ave. Props. LLC v. 538 Morgan Realty LLC,12 where it was held that a tenant operating a stone fabrication store that shut down during the pandemic was not entitled to a reduction in rent because, among other things, it had failed to demonstrate through testimony or documentation that it was unable to make the payments.13 However, and notwithstanding the court's suggestion that actual inability to pay rent might support a claim of impossibility of performance, under a long line of New York case law "where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused."14
We will continue to monitor new developments as more and more New York courts address similar arguments by landlords and tenants arising out of the COVID-19 pandemic and related governmental orders.
Footnotes
1. 2020 WL 5745631, 2020 NY Slip Op 33144(U) (N.Y. Sup. Ct., Kings Ctny., Sept. 23, 2020).
2. Id. at *1.
3. Id. at *2 (internal quotation marks omitted).
4. Id.
5. 185 A.D.3d 34 (1st Dep't 2020).
6. Id. at 42-43.
7. Id. at 43.
8. 2020 WL 5745631, at *2.
9. Id. (internal quotations omitted)
10. Id. (internal quotations omitted)
11. Id. n.4.
12. 2020 NY Slip Op 32780(U) N.Y. Sup. Ct., Kings Ctny., Aug. 20, 2020).
13. Id. at *10.
14. 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (1968).
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