COVID-19: NY State Court Rejects Commercial Tenant's Defenses of Frustration of Purpose and Impossibility | Practical Law

COVID-19: NY State Court Rejects Commercial Tenant's Defenses of Frustration of Purpose and Impossibility | Practical Law

A New York trial court granted summary judgment in favor of a commercial landlord seeking to recover unpaid rent under an office lease where the tenant asserted frustration of purpose and impossibility as defenses to its failure to pay rent.

COVID-19: NY State Court Rejects Commercial Tenant's Defenses of Frustration of Purpose and Impossibility

by Practical Law Real Estate
Published on 11 Dec 2020 • New York
A New York trial court granted summary judgment in favor of a commercial landlord seeking to recover unpaid rent under an office lease where the tenant asserted frustration of purpose and impossibility as defenses to its failure to pay rent.
On December 3, 2020, the Supreme Court of the State of New York, New York County, granted summary judgment in favor of a commercial landlord seeking to recover unpaid rent under an office lease where the tenant asserted the doctrines of frustration of purpose and impossibility as defenses to its failure to pay rent.

Background

1140 Broadway LLC (Landlord) and Bold Food, LLC (Tenant) were parties to a lease (Lease) for office space in New York City. KBFK Restaurant Corp. (Guarantor) executed a good guy guaranty in favor of Landlord. Tenant was in the business of supplying management services to restaurants. As a result of the COVID-19 pandemic, the demand for Tenant's services plummeted.
Tenant ceased paying rent in February of 2020 and vacated the leased office space five months later on June 30, 2020. The term of the lease was not due to expire until February, 2022.
Landlord filed suit against Tenant and Guarantor for, among other things, breach of contract due to Tenant's failure to pay the rent due under the Lease.
Landlord moved for summary judgment on the issue of Tenant's and Guarantor's liability. Tenant asserted three defenses based upon the economic fallout it suffered as a result of the COVID-19 pandemic:
  • Frustration of purpose.
  • Impossibility.
  • Casualty, as set forth in the Lease.

Outcome

The court granted Landlord's motion for summary judgment as to liability and ordered a subsequent trial to determine the amount of Landlord's damages.
The court found that:
  • The decline in Tenant's business and Tenant's resulting inability to afford to pay its rent does not fall within the ambit of frustration of purpose because:
    • frustration of purpose is a narrow doctrine in which the frustrated purpose must be so central to the contract, that without it the contract would not make sense; and
    • the building was still open to the public and that the Tenant had full access to and use of the office space.
  • The doctrine of impossibility was not applicable because:
    • for impossibility to serve as a defense, the performance of the contract must be rendered objectively impossible by the destruction of the subject matter of the contract; and
    • the use and occupancy of the leased office space by Tenant had not been rendered objectively impossible.
  • The casualty clause in the lease did not give Tenant the right to abate rent because the clause referred to physical damage to the leased office space and not to a decline in the Tenant's income.
The court limited its holdings by expressly stating that it was not taking a position on:
  • What combination of facts or circumstances might permit the successful assertion of the doctrine of frustration of purpose in the case of a generic office lease.
  • Whether a restaurant tenant could successfully assert the doctrines of frustration of purpose or impossibility.

Practical Implications

We are in the early days of the emergence of a new body of case law emanating from the myriad and complex effects of the COVID-19 pandemic on the real estate industry. This case represents one trial court's interpretation of a narrow, specific set of circumstances.
Because the specific impacts the Covid-19 pandemic may have on real estate law are as yet unknown, it will be critical for practitioners to monitor each new development, not only to keep current in a fluid environment, but also to try to discern any emerging trends impacting real estate law.