Do the COVID-19 pandemic and the governor’s emergency measures make a commercial lease void? | Patterson Belknap Webb & Tyler LLP

In the wake of the COVID-19 (“COVID”) pandemic, a common question that arises is whether commercial leases are enforceable when COVID and subsequent government responses defeat the purpose of the lease or make it impossible to enforce. There is no single answer, as the answer will depend on the underlying facts, but the absence of a contract force majeure provision of the lease will not preclude the use of common law defenses. This is demonstrated in a recent Bronx County Commercial Division decision by Judge Eddie J. McShan in 1877 Webster Ave. Inc. v. Tremont Ctr., LLC.[1]

In November 2019, the parties in 1877 Webster has entered into a ten-year lease under which the premises will be “only” used for a “first class NIGHT CLUB”.[2] In addition, the lease explicitly stipulated that the premises could not be used “for [any] other goal.[3] After the onset of COVID, the tenant filed an action to annul the lease on the grounds that the lease was being canceled on March 17, 2020 because the object of the lease was thwarted by COVID and subsequent executive orders from Governor Cuomo.[4]

The lessor has offered to lay off, among others, on the basis of documentary evidence, that is to say, the fully executed written lease that lacked force majeure disposition. The landlord claimed that the claims had to fail because the tenant had the option of spreading the risk of the pandemic by negotiating for a force majeure provision but chose not to. However, the sales division noted that the lack of a force majeure provision of the lease did not prevent a party from “alleging extra-contractual doctrines such as frustration of the object and impossibility of performance”.[5] Further, Justice McShan said, citing the Premier’s decision in Local 333, Mar. Div., Intl. Assn of longshoremen [6], that where the parties have not apportioned the risk, courts should not simply apply a “fixed rule or law”; instead, “justice is best served by assessing all the circumstances, the role played by the different parties and determining responsibility. “[7] The Court then proceeded to examine each of the tenant’s claims to determine whether the documentary evidence established a legal defense and warrants a dismissal.

First, McShan J. found that the tenant’s assertion that the purpose of the lease was thwarted due to COVID did not justify the termination. Referring to the doctrine of frustration of the object, McShan J. explained that the doctrine provides a defense against performance of a contract when the object of the contract is destroyed by an unforeseeable event. Here, McShan J. concluded, at this stage of the litigation, that the predictability of COVID is a factual dispute that is not resolved by documentary evidence.

Second, the Court dismissed the landlord’s motion regarding the alleged impossibility of performance. Once again, building on the precedent of the First Department,[8] McShan J. noted that the impossibility of performance offers a valid defense when the performance of a part is objectively impossible and the impossibility was caused by an unforeseen event against which the contract could not protect itself. .[9] The Court concluded that the dismissal was not justified because the signed lease could not resolve, at this preliminary stage of the litigation, the factual dispute over the predictability of COVID.

Third, the Court also dismissed the landlord’s motion to dismiss the tenant’s allegation of lack of consideration. Such a claim exists, McShan JA explained, citing Department Two, “wherever one who has promised to provide a performance fails, through no fault of his own, to receive, in some material respects, the agreed upon consideration for that performance.”[.]”[10] The court found that there was a real problem of fact as it was not clear whether the tenant would be able to reopen their nightclub as the government had started slowly lifting COVID restrictions. As a result, the court determined that the termination was not warranted as it was not clear whether COVID had completely deprived the tenant of their beneficial use and occupation of the premises they had negotiated in the lease.

The court, however, dismissed the tenant’s fourth cause of action, alleging that he was implicitly evicted because the landlord failed to take reasonable precautions to make the building safe to occupy. In this case, McShan J. found that the documentary evidence was sufficient to justify a dismissal. According to the lease, it was up to the tenant to maintain and repair the premises. Therefore, the court ruled that the maintenance of the premises was provided for in the lease and was a risk that was attributed to the tenant.

The decision of the Commercial Division should remind practitioners that the absence of a force majeure disposition of a lease does not constitute a waiver of common law doctrines relating to frustration of purpose and impossibility of performance.

[1] No. 29239 / 2020E, 2021 NY Slip Op 2113, 2021 BL 154332 (Sup. Ct. Bronx Cnty. March 29, 2021) (“Tremont Ctr.”).

[4] Governor Cuomo issued an executive order closing, among others, nightclubs because of COVID.

[6] City of New York v. Local 333, Marine Div., Int’l Longshoremen’s Ass’n, 79 AD2d 410 (1st Dep’t 1981).

[10] Username. (citing Fugelsang versus Fugelsang, 131 AD2d 810, 812 (2d Dep’t 1987).

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