NY COVID-19 Commercial Lease Decisions Lack Consistency

By Cassandra Porsch
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Law360 (January 13, 2021, 5:26 PM EST) --
Cassandra Porsch
Cassandra Porsch
Of the thousands of complaints that have been filed across the country as fallout from the COVID-19 pandemic, one of the largest subsets involves commercial leases.

Some landlords have sued commercial tenants for failure to pay rent and conversely, some commercial tenants have sued their landlords for a rent abatement or lease termination.

In New York, the first decisions following dispositive motion practice in these cases have started to emerge, demonstrating some harsh results toward tenants, but also a different result in the same jurisdiction. In terms of the legal principles at work, the result appears to be dependent on the judge rather than any clear precedent.

In 35 East 75th Street Corp. v. Christian Louboutin LLC,[1] state Supreme Court Judge Arlene Bluth granted the plaintiff landlord summary judgment on its claim for unpaid rent against its designer shoe retail tenant.

The retailer admitted that it had not paid any rent since March 2020, but argued that the doctrines of impossibility of performance and frustration of purpose absolved it of its obligations under the lease.

While New York state had completely shut down nonessential businesses between March and June of this year, Christian Louboutin's impossibility and frustration arguments hinged on the fact that the retailer had signed its lease in 2013 for a highly visible and well trafficked retail location on the Upper East Side of Manhattan, and that ongoing pandemic restrictions, even after nonessential businesses were permitted to reopen, prevented it from realizing the full benefit of that retail space.

In finding for the landlord for the full amount of the unpaid rent, Judge Bluth cited the First Judicial Department's authority case, Crown IT Services Inc. v. Koval-Olsen,[2] noting that the doctrine of frustration of purpose is narrowly applied and that "the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transition would have made little sense."

The court found that "this is not a case where the retail space … no longer exists," and that Louboutin was not prohibited from selling its products.

Judge Bluth also found that the doctrine of impossibility of performance could not excuse Louboutin of its lease obligations because "[i]mpossibility 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."

The court again noted that the physical location of the retail store was still intact and that the retailer was permitted to sell its products.

While in its counterclaims, Louboutin did ask for a rent abatement in the alternative to complete lease rescission, it asked to avoid paying rent until it could return to full use of its premises, rather than seeking relief from its rent for the three months that it was completely shut down.

Had Louboutin instead couched its alternative counterclaim as a rent abatement for the specific time period it was required to be completely closed as opposed to time spent operating at reduced capacity, it may have at least partially avoided summary judgment. The judge was clearly focused on whether it was permitted to sell or not prohibited from selling its products.

Louboutin most likely could have provided an employee affidavit explaining that no employees were allowed on the premises during the shut down period, and that it could not have even used the store stock to fulfill online orders. Under such circumstances, it was prohibited from selling its products from the leased premises during that specific time period.

The same judge used similar reasoning in 1140 Broadway LLC v. Bold Food LLC,[3] in awarding summary judgment for another landlord. In this case, a restaurant consultancy was sued by its commercial landlord for failure to pay rent on its office space.

Bold Food provided services including payroll and accounting to 11 restaurants, 10 of which closed in March 2020 and ultimately shut down permanently. The one restaurant that did not permanently close was still closed for several months, and generated only nominal cash flow when it reopened.

Judge Bluth once again held that the tenant could not use the doctrines of impossibility of performance and frustration of purpose to avoid any of its lease obligations, focusing on the fact that the tenant simply no longer needed its space because it no longer had any paying clients, not whether it could access or use its space during any of the relevant time period.

She specifically noted that "[t]his is not a case where the office space leased was destroyed or where a tenant rented a unique space for a specific purpose that can no longer serve that function (such as a factory that was condemned after the lease was signed.)" Rather, Judge Bluth noted that the defendants "could no longer afford the rent because restaurants no longer needed the management help that the tenant provides."

Here, Judge Bluth once again sidestepped the fact that regardless of whether it or not it still had clients to service, as a nonessential business, the tenant was unable to access the physical premises of its office during from March through June. This could indeed be analogous to a space being condemned or destroyed, if only for a specific time period.

While in its briefing the tenant did mention the time it was completely unable to access the premises due to the shutdown of in-person employment at nonessential businesses, it was not central to the tenant's arguments and the court completely bypassed this issue by failing to even acknowledge it in the ruling.

However, another judge in New York Supreme Court has not been willing to grant immediate summary judgment in favor of a commercial landlord and has raised the issue of the complete shutdown of nonessential businesses in the context of whether the tenant might be entitled to a rent abatement.

In International Plaza Associates LP v. Amorepacific U.S. Inc.,[4] a landlord sought summary judgment awarding unpaid rent against its cosmetic retail store tenant.

Like the tenants in the other cases, the retailer argued it should be excused from rent under the doctrines of impossibility of performance and frustration of purpose. The landlord sought a summary judgment award of its unpaid rent.

Judge Carol Feinman denied the motion. While not yet determining whether the tenant would ultimately prevail on its defenses, Judge Feinman found that the cosmetics retailer had the right to develop the factual record to demonstrate its expectations under the lease.

The judge noted that "the defendant's loss and at times lack of income due to COVID-19 is not just part of the up and downs during a commercial tenant's lease period."

She continued by observing that the shop had to be completely shut down from March through June, and that the retailer typically sold its cosmetics and beauty supplies by allowing customers to test the products, which had become significantly more difficult with social distancing and mask requirements even when the shop was permitted to reopen.

While its possible that the decisions between Judge Bluth and Judge Feinman might be distinguished based on the type of tenant and what level of physical contact would be needed to sell its product or services, the decisions seem hard to reconcile in light of the common facts in the three cases arising from the pandemic, mandatory shutdowns and ongoing business operation restrictions.

In other words, there does not seem to have been a consistent result with respect to the complete shutdown periods when none of the tenants were permitted to physically access their leased premises.

None of these COVID-19-related lease cases have yet reached any point of consideration on appeal.

In looking at the Appellate Division decisions in recent years dealing with the doctrines of frustration of purpose and impossibility of performance, there is at least one case offering some hope to tenants as to how these decisions would be received on an appeal.

In Jack Kelly Partners LLC v. Zegelstein,[5] a commercial executive recruiting tenant sought to rescind its lease for office space on the basis of, among other reasons, frustration of purpose and impossibility of performance due to discovering that the certificate of occupancy for the building required it to be used for residential purposes.

The New York County Supreme Court granted summary judgment for the landlord, finding that the tenant could have foreseen and contractually guarded against issues with the certificate of occupancy. The First Department, however, was willing to overturn this decision and send it back for a development of the factual record on the parties' intentions upon entering into the lease and foreseeability issues.

With respect to the frustration of purpose argument, the court noted that "without the ability to use the premises as an office, the transaction would have made no sense," as the tenant would not have lawfully been able to use the space for its intended purpose.

This decision is supportive for tenants in situations like those in the Supreme Court cases above, as the Appellate Division is clearly focused on a tenant's ability to lawfully use its leased space as intended.

For tenants who were not permitted to lawfully physically access their premises during the March through June shutdown of nonessential businesses, the reasoning in the Jack Kelly case clearly provides a rationale for some sort of abatement or other relief to the tenants from rent for those timeframes, at a minimum. Tenants striking out in the Supreme Court should therefore seriously consider pressing forward with an appeal.

Cassandra Porsch is counsel at Scarola Zubatov Schaffzin PLLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 35 East 75th Street Corp. v. Christian Louboutin LLC , No. 154883/2020 (Sup. Ct. N.Y. Co.).

[2] Crown IT Services, Inc. v. Koval-Olsen , 11 A.D.3d 263, 265 782 N.Y.S.2d 708 (1st Dep't 2004).

[3] 1140 Broadway LLC v. Bold Food LLC et al. No. 652674/2020, (Sup. Ct. N.Y. Co.).

[4] International Plaza Associates LP v. Amorepacific U.S. Inc., No. 155158/2020 (Sup. Ct. N.Y. Co.).

[5] Jack Kelly Partners LLC v. Zegelstein , 140 A.D.3d 79, 33 N.Y.S.3d 7 (1st Dep't 2016).

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