The Gap's Bid To End NYC Lease Over Virus Faces Skepticism

By Frank G. Runyeon
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Law360, New York (June 3, 2021, 10:44 PM EDT) -- A New York state appellate panel Thursday voiced doubts about The Gap Inc.'s argument that it can escape a 10-year Manhattan lease due to the COVID-19 pandemic given the "impossibility" of performing as a quality retailer while burdened by health safeguards such as plexiglass.

A four-judge First Department panel heard an appeal from Financial District landlord 170 Broadway Retail Owner LLC before the two ranking judges peppered Gap counsel with incredulous queries, casting doubt on the idea that the clothing retailer should prevail in its attempt to end its long-term rental deal due to a "retail standard" clause in its contract.

Before Gap counsel Joshua H. Epstein of Davis + Gilbert LLP could begin his argument, Justice Cynthia S. Kern questioned the first element of his argument.

"Overwhelmingly the cases and the courts have been finding that COVID does not constitute a casualty under the lease. Why aren't they dispositive?" the judge asked, referring to a provision in the contract allowing the renters to delay or reduce their rent due to a damaged rental space.

Epstein quickly noted that "cases have come down on both sides," citing one example of a New York court supporting COVID-19 as a casualty in a lease.

"But why can it be considered a casualty here when the terms of the agreement are rather clear?" asked Justice Sallie Manzanet-Daniels, the presiding judge.

"Let me just make one thing clear," Epstein offered. "This lease provides a standard, a retail standard for how Gap is supposed to operate in this store" which as of February 2014 required it to "'operate a store equivalent in quality to and generally consistent with a majority of tenants of the retail stores located in New York City.' That's what the Gap has to be able to do."

"So that's the purpose of this lease. That is what Gap bargained for," Epstein argued.

Justice Manzanet-Daniels wagged her head as Justice Kern cut the attorney off.

"But counsel, how does a temporary closure — we're not disputing there was a temporary closure of the store due to COVID, which was quite temporary, actually. How does that frustrate the entire purpose of a very extended lease over many, many years? How can you possibly make that argument as a matter of law?" Justice Kern asked, drawing an approving nod from Justice Martin Shulman.

Epstein offered that the court should look to the state of affairs when Gap filed its lawsuit — July 2, 2020 — and that the retailer was unable to provide the same service. "It couldn't do so. There were plexiglass dividers," Epstein said, as he was cut off again.

"So, counsel," said Justice Kern, wearing a wry smile, should the court "ignore all of reality" about what's happened with COVID-19 since the beginning of the lawsuit, including that "all the other Gap stores opened when this one didn't? We shouldn't take judicial notice of any of those things?"

"We're not asking the court to ignore reality," Epstein said in a low voice.

"If I might just add to that," Justice Manzanet-Daniels chimed in. "If I'm hearing you correctly, then every single tenant in New York City who has to utilize plexiglass in order to continue their business has a right to get out of their contract with their landlord?"

"That is not at all what I'm arguing," Epstein said, quickly adding that "very few leases" contain a "use clause like the one I just read into the record. There is a retail standard in this lease that appellant has never, ever mentioned to you. And there's a reason for that, because that shows the purpose of the lease."

"You're saying that provision wins the day for you?" Justice Kern asked, still smiling. "How does that provision win the day for you?"

"The day — today — is about a motion to dismiss," Epstein said, first citing the "liberal" legal standards afforded plaintiffs on such a motion. Moreover, the duration of the Gap's inability "to perform under the lease and run the store consistent with the retail standard" is a lingering question of fact.

"They're telling you the lease solves all the problems here. It's over. And isn't it funny they don't mention the retail standard? Because that shows you that what they're saying really isn't correct," Epstein said of opposing counsel. 

"Alright, thank you so much," Justice Manzanet-Daniels cut in.

Menachem J. Kastner of Cozen O'Connor, counsel for the landlord, argued that the retail standard does not mean what the Gap thinks it means.

"The use clause that he references is to protect the landlord," Kastner said, drawing a steady stream of nods from Justice Shulman. "It's a landlord protection clause that I know that the tenant is operating at that standard."

"The cases that he cites on casualty are all foreign jurisdiction cases, not New York cases," Kastner added, noting the local case Epstein cited was for a security deposit on a temporary lease where the court did not find COVID-19 was a casualty but merely raised it on a motion. 

"In many cases that we have except for that one case, the courts have found that COVID is not a casualty reading the exact same clause we have before this court," Kastner said, closing by citing case law that the courts should not interfere in contracts between sophisticated parties.

The panel reserved judgment and adjourned.

Justices Sallie Manzanet-Daniels, Cynthia Kern, Martin Shulman and Angela M. Mazzarelli sat on the panel for the First Department.

The Gap is represented by Jesse B. Schneider, Joshua Epstein and David S. Greenberg of Davis + Gilbert LLP.

170 Broadway Retail Owner LLC is represented by Michael B. de Leeuw, Menachem J. Kastner, Emily A. Shoor and Andrew Punzo of Cozen O'Connor.

The case is The Gap Inc. v. 170 Broadway Retail Owner LLC, appellate case number 2020-04770, in the New York State Supreme Court, Appellate Division, First Judicial Department.

--Editing by Janice Carter Brown.

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