In a recent case, an iconic Upper East Side luxury retailer sought to escape the obligation to pay $1.68m in rent because the pandemic destroyed the efficacy of the high-end/tourist/walk-in-and-buy business model for its branded shoes.
35 E. E. 75th St. Corp. claimed that Christian Louboutin LLC (the tenant in a building owned by E. 75th) had not paid rent since March 3, 2020. And argued that the amount due was comprised of the monthly payments of rent and real estate tax escalation charges for 2020/21.
Louboutin admitted it had not paid the rent since March. Instead, Louboubtin argued defenses under the impossibility and frustration of purpose doctrines. Louboutin argued that the ongoing pandemic implicated those doctrines and absolved Louboutin of its obligations under the lease.
Louboutin contended that when it signed the lease in 2013 no one could have predicted that there would be an infectious disease that would shut down the vast majority of businesses. Louboutin pointed out that its entire business was built on a highly visible and well trafficked retail location on the Upper East Side. And the lack of customer traffic had decimated the store's revenues.
Louboutin asserted defenses based upon frustration of purpose to terminate the lease, frustration of purpose for a rent abatement, impossibility of performance to rescind the lease and impossibility of performance for a rent abatement. It also asserted six affirmative defenses including failure to state a cause of action, impossibility of performance, frustration of purpose, failure of consideration, illegality and failure to mitigate.
E. 75th maintained that the sole dispute was whether the effects of the ongoing pandemic were a sufficient defense to paying rent due under a lease. And argued that the equitable defenses raised by Louboutin were inapplicable and had historically had narrow application. E. 75th pointed out that the parties included a force majeure clause for unforeseen events in the lease but that provision did not relieve Louboutin of its obligation to pay rent. E. 75th also argued that there were many reasons why retail stores succeeded or failed over the years and that Louboutin took a risk when it entered into a lease that extended from 2013 through 2029.
E. 75th insisted that application of Louboutin's logic would call into question the enforceability of all contracts when economic circumstances change. E. 75th speculated that if a tenant could get out of a lease when the market was difficult, then presumably a landlord could terminate a lease when the market wass competitive and charge a higher rent.
The pandemic had decimated retail stores across New York City, had made it nearly impossible for some businesses to pay the rent and the Court empathized with the difficulties facing those establishments. But the Court was tasked with assessing whether any of the doctrines Louboutin had identified raised an issue of fact that might compel the Court to deny a judgment to E. 75th.
The doctrine of frustration of purpose requires 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. The doctrine is a narrow one and does not apply unless the frustration is substantial.
The Court held that the doctrine had no applicability here. This was not a case where the retail space Louboutin leased no longer existed, nor was it even prohibited from selling its products. Instead, Louboutin's business model of attracting street traffic was no longer profitable because there were dramatically fewer people walking around due to the pandemic. But market changes happen all the time. Sometimes businesses become more desirable (such as the stores near the newly-completed Second Avenue subway stops) and other times less so (such as the value of taxi medallions with the rise of ride-share apps). But unforeseen economic forces, even the horrendous effects of a deadly virus, did not automatically permit the Court to simply rip up a contract signed between two sophisticated parties.
Of course, Louboutin would not have entered into the lease if it knew there would be a pandemic that negatively affected the retail market. But that was not sufficient to invoke the frustration of purpose doctrine.
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 the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.
The impossibility doctrine did apply here. The subject matter of the contract—the physical location of the retail store—was still intact. And Louboutin was permitted to sell its products. The problem was that it could not sell enough to pay the rent. That did not implicate the impossibility doctrine.
And here, the parties actually included a force majeure clause in the lease that specifically provided that it would not excuse Louboutin from having to pay rent. Instead, it purported to extend the period of performance for whatever the delay may have been. It did not contemplate that Louboutin could simply walk away with nearly a decade left on the lease and not pay any more rent.
The Court noted that these are difficult times for landlords and tenants (both commercial and residential) in New York City. And while the Court recognized the financial hardships that Louboutin had faced, it also observed that E. 75th's faced challenges too. Even though Louboutin was not paying rent, E. 75th still had its own obligations (such as paying property taxes) that must be fulfilled. Permitting the doctrines of impossibility or frustration of purpose to rescind an otherwise valid lease would simply allocate the loss to E. 75th. It was not this Court's role to ignore a contract and decide sua sponte who should take the financial loss.
Under those circumstances, where Louboutin signed a lease in 2013 and ran a retail store for many years before the pandemic, the Court found that E. 75th had met its burden as a matter of law. The Clerk of the Court was directed to enter judgment in favor of E. 75th and against Louboutin in the amount of $1,680,454.73 plus interest from November 30, 2020.
Originally Published by Smith Gambrell, December 2020
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