Do Government COVID Business Closure Orders Frustrate the Purpose of a Commercial Lease?

In addition to their express terms, leases are governed by so-called common law rules that apply regardless of what the agreement actually says. One of these rules is a normally obscure and arcane doctrine known as “frustration of purpose,” which applies when performing lease duties is possible but pointless due to some unforeseen event or circumstance beyond the party’s control. A close cousin is the doctrine of impossibility, which comes into play when some unforeseen or supervening force renders performance impossible.

Although either party can use them, frustration of purpose and impossibility are most commonly cited by tenants as defenses for not paying rent. The classic example is where a fire destroys the property after the tenant leases it. Theoretically, the tenant could continue to keep paying rent; but since the purpose for leasing the property in the first place has been frustrated, the tenant is excused.

One of the unforeseen results of the pandemic has been to assign frustration of purpose and impossibility a central role in commercial leasing litigation. The key question: Can retail, restaurant, and other tenants that had to curtail operations as a result of COVID-19 shutdown orders rely on these defenses as an excuse for not paying rent? Here’s a look at the most significant court cases that have addressed the issue.

COVID Shutdown Does NOT Frustrate Purpose of Lease

Things certainly looked bleak for tenants when the cases first started being decided, with almost every court ruling that COVID-19 business disruptions do not, in fact, amount to frustration and impossibility excusing a tenant’s failure to pay rent. For whatever reason, all of these cases came from New York, including the following ruling:  

Facts: In March 2020, the governor issued COVID-19 emergency orders requiring retail, restaurant, and other public-facing businesses to shut down temporarily. One tenant affected by the order, a high-end fashion retail tenant on New York City’s Upper East Side, stopped paying its rent in March. The tenant claimed that it was “absolved” of its duty to pay rent because, when it signed the lease in 2013, neither party contemplated that a pandemic would lock down the country and significantly reduce visitors to its “highly visible and well-trafficked retail location.” Facing a state-wide moratorium on commercial evictions, the landlord decided to sue the tenant for damages. The tenant asked the court to toss the case without a trial.

Ruling: The New York court found the tenant liable for breach of lease and awarded the landlord back rent and legal fees.

Explanation: While it certainly hurt the tenant’s business, the shutdown order didn’t frustrate the purpose of the lease, according to the court. A court can’t “simply rip up a contract signed between two sophisticated parties” because an unforeseen economic event reduced foot traffic to the tenant’s store. Likewise, the court rejected the tenant’s impossibility defense, finding that it applies only in very narrow situations where it becomes objectively impossible for the tenant to perform, like when the leased property is completely destroyed. In this case, the store was “still intact” and the tenant was still “permitted to sell its products” [35 E. 75th St. Corp. v. Christian Louboutin L.L.C., 2020 N.Y. Slip Op 34063(U) (N.Y. Sup. Ct. Dec. 9, 2020)].

Other Courts Reject Frustration and Impossibility

Far from being an outlier, Louboutin is one of several cases in which courts have ruled against tenants seeking to rely on frustration and impossibility to excuse their failure to pay rent during COVID-19. Other cases:

• The fact that COVID-19 shutdown orders adversely affected its restaurant clients doesn’t frustrate lease or make it impossible for management and consulting firm tenant to pay rent on its office space [1140 Broadway LLC v. Bold Food LLC, 2020 N.Y. Slip. Op. 340178(U) (N.Y. Sup. Ct. Dec. 3, 2020)];
• Restaurant that was having financial difficulties even before the pandemic and which could still operate on a takeout basis couldn’t claim frustration or impossibility and had to pay its rent [111 Fulton St. Invs., LLC v. Fulton Quality Foods LLC, 2021 N.Y. Misc. LEXIS 471, 2021 N.Y. Slip. Op. 30348(U)]; and
• While the COVID-19 emergency order that forced a gym to shut down hindered its ability to perform, it didn’t destroy the property and thus wasn’t grounds for frustration or impossibility [Cab Bedford LLC v. Equinox Bedford Ave, Inc., 2020 N.Y. Misc. LEXIS 10861, 2020 N.Y. Slip. Op. 34296(U)].

COVID-19 Shutdown DOES Frustrate Purpose of Lease

For a while there, it looked like courts were going to take a hard line against tenants seeking refuge behind frustration of purpose and impossibility. But suddenly that sense of complacency has been shattered by a shocking new ruling, this one from a state that’s not New York.

Facts: A tenant leased retail space to operate a café in the chic Back Bay neighborhood of Boston. But then the pandemic struck and the governor ordered all restaurants and cafés to close down, leaving the tenant unable to pay rent. The landlord claimed breach of lease and sued the tenant for unpaid rent. Like so many of its counterparts in New York, the tenant claimed frustration of purpose. But when the landlord moved for summary judgment, the unthinkable happened.

Ruling: The Massachusetts court not only rejected the landlord’s motion but actually awarded summary judgment to the tenant.

Explanation: The tenant wasn’t in breach because the shutdown order frustrated the purpose of the lease. Frustration of purpose occurs, the court explained, when “an event neither anticipated nor caused by either party destroys the object or purpose of the contract, thus destroying the value of performance.” The courts in New York would have been hard pressed to disagree with that view. But while agreeing on the theory, the Massachusetts court reached the diametrically opposite conclusion by finding that the state COVID-19 orders did frustrate the lease.

The key difference: The Massachusetts court found that serving customers indoors was not only the primary but the only use permitted by or possible under the lease. Takeout and delivery weren’t an option because they weren’t part of the café’s business model; and the outside space was totally unsuitable for serving customers. Thus, by banning this only permitted use, the government COVID-19 orders did frustrate the lease and excused the tenant’s failure to pay rent [UMNV 205-207 Newbury, LLC v. Caffé Nero Americas Inc., Mass. Super. Ct. 2084CV01493-BLS2, Feb. 8, 2021].

What It Means

Although it’s a small sample size, the early cases offer a reasonably reliable sense of where courts will draw the lines on the frustration of purpose and impossibility defenses in the context of COVID-19 shutdown orders.