COVID-19: NY State Court Dismisses Commercial Tenant's Suit to Rescind Lease Based on Frustration of Purpose and Impossibility of Performance | Practical Law

COVID-19: NY State Court Dismisses Commercial Tenant's Suit to Rescind Lease Based on Frustration of Purpose and Impossibility of Performance | Practical Law

A New York court granted summary judgment in favor of a commercial landlord under a retail lease, dismissing the tenant's suit to rescind the lease and avoid millions in past due rent payments based on frustration of purpose and impossibility of performance.

COVID-19: NY State Court Dismisses Commercial Tenant's Suit to Rescind Lease Based on Frustration of Purpose and Impossibility of Performance

by Practical Law Real Estate
Law stated as of 12 Jan 2021 • New York
A New York court granted summary judgment in favor of a commercial landlord under a retail lease, dismissing the tenant's suit to rescind the lease and avoid millions in past due rent payments based on frustration of purpose and impossibility of performance.
On January 7, 2021, in Victoria's Secret Stores, LLC v. Herald Square Owner LLC, the Supreme Court of the State of New York, New York County, granted summary judgment in favor of a commercial landlord under a retail lease and dismissed the tenant's suit asking the court to rescind the lease and extinguish the tenant's obligation to pay rent based on the doctrines of frustration of purpose and impossibility of performance ().

Background

Herald Square Owner LLC (Landlord) and Victoria's Secret Stores, LLC (Tenant) were parties to a lease (Lease) for retail space in Herald Square in New York City. Tenant operated a flagship Victoria's Secret retail lingerie store at this location. As a result of the COVID-19 pandemic, many state and local governments, including New York City, issued mandatory closures for nonessential businesses causing retail commerce to collapse (see COVID-19: Select State and Local Business Closures and Reopenings Tracker (US)).
Under the Lease, Tenant:
  • Owed approximately $1 million in monthly rent.
  • Was required to continuously operate its business except under specific circumstances stated in the Lease.
Tenant stopped paying rent as of April 1, 2020 after the location closed in March 2020, as required under Governor Andrew Cuomo's executive orders regarding restrictions on nonessential businesses (see Executive Order Nos. 202.6 and 202.8).
Landlord issued a notice to cure after Tenant failed to pay rent for April, May, and June. Tenant did not make any rent payments after receiving the notice. Landlord then issued a notice of termination of the Lease but reserved all rights to past due rent payments.
Tenant filed suit against Landlord seeking to rescind the Lease and excuse Tenant's performance under the Lease due to:
  • Frustration of purpose.
  • Impossibility of performance.
Landlord moved for summary judgment.

Outcome

The court granted Landlord's motion for summary judgment and dismissed Tenant's complaint in its entirety.
The court rejected Tenant's arguments that:
  • The parties did not allocate the risk of Tenant not being able to operate is business under the Lease.
  • Tenant should be excused from performing under the Lease by the doctrines of frustration of purpose and impossibility of performance because of the government orders requiring Tenant to temporarily close its business.
The court instead relied on the terms of the Lease, which expressly allocated these risks to Tenant. The court determined that:
  • The Lease was drafted broadly enough to encompass a situation like this where a state law temporarily causes a closure of Tenant's business.
  • The parties agreed that this would not relieve Tenant's obligation to pay rent under the Lease.

Practical Implications

This case is another example of how New York courts are dealing with the myriad and complex effects of the COVID-19 pandemic on the real estate industry. For examples of similarly decided cases, see Legal Updates, COVID-19: NY State Court Rejects Commercial Tenant's Defenses of Frustration of Purpose and Impossibility and COVID-19: NY State Court Again Rejects Commercial Tenant's Defenses of Frustration of Purpose and Impossibility of Performance.
While these cases were decided on the merits on summary judgment motions, the trend in New York City shows that:
  • Commercial tenants may remain obligated to pay rent under the terms of a lease in the event of a pandemic.
  • The pandemic and related business closures ordered by state and local governments do not void the terms of a commercial lease agreement.
This case also represents the importance of carefully drafted commercial lease agreements, especially in a post-pandemic world. Practitioners should continue to monitor real estate developments related to the COVID-19 pandemic, including emerging trends in drafting strategies.