This was originally posted on the SGR Blog.
Certain defenses to claims by landlords against commercial tenants for rent accrued but unpaid during the pandemic have become almost “boilerplate.” The frustration of performance. Impossibility of performance. They were closed by casualty. But, as a recent case illustrates, joining that panoply is the defense that governmentally-ordered restrictions or shutdowns constituted a taking by eminent domain that excused the payment of rent.
111Fulton St. Investors, LLC is the landlord for a commercial space located on the ground floor of a building in Manhattan. Fulton Quality LLC entered into a lease for the premises in 2011 for a twelve-year term. Quality runs a restaurant at the site. Investors insisted that Quality was in default of the lease and pointed to an October 30, 2019 letter allegedly sent to Quality that sets forth the basis of the default. Quality later cured its defaults but stopped making payments in March 2020. Another default letter was sent in June 2020. Investors sued and moved for summary judgment seeking the amount it claimed was due.
Quality claimed that it had meritorious defenses that compelled the Court to deny the motion. The ongoing pandemic forced Quality to shut down its restaurant and, therefore, the purpose of the lease was frustrated. Quality also pointed to the “casualty clause” and “eminent domain” clauses of the lease as reasons to deny the motion.
Investors claimed that the frustration of purpose defense failed as a matter of law. Covid-19 was not a “casualty”. And the pandemic was not a “taking” under the eminent domain provision of the lease.
As an initial matter, the Court found that Investors met its prima facie burden of proof as to Quality’s default.
The doctrine of frustration of purpose requires that the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. The doctrine is a narrow one that does not apply unless the frustration is substantial.
The Court found that the doctrine was inapplicable. The record showed that Quality only made a partial payment of rent on March 1, 2020. Restaurants were not shuttered for indoor dining until March 20, 2020. Even if the Court entertained the notion that frustration of purpose could help a tenant avoid paying any rent while still operating a takeout business, it appeared that Quality had financial issues before the pandemic devastated the restaurant industry. On March 1, 2020, the pandemic did not prevent Quality from paying its rent, and it only paid $10,000 of the $34,097.23 due. While the pandemic certainly reduced Quality’s ability to improve its business, it was not the cause of the initial failure to pay the full amount due. Therefore, the purported defense did not raise an issue of fact.
Quality insisted that Section 10.1 of the lease (the casualty clause) rendered its performance under the lease as impossible. The Court disagreed. That provision referenced damage to the building (such as a fire) that rendered the commercial space unusable. A deadly infectious disease was not a “casualty.” Throughout 2020, Quality was able to operate by doing takeout and delivery, outdoor dining if it acquired the proper permits, and limited indoor dining during certain months. The physical space (and kitchen) was available. Customers decided not to place as many orders did not lead to a conclusion that the pandemic qualified as a casualty under the terms of the lease.
The Court also declined to find that pandemic-related restrictions qualified as taking sufficient to invoke Section 11.1 of the lease concerning eminent domain. No physical portion of the restaurant was taken for public or quasi-public use. Rather, governmental restrictions designed to save lives limited operations. Under Quality’s view, any regulation that limited the operation of a business would constitute a taking. The Court declined to endorse such a broad and expansive view of the definition of taking.
Because Quality did not dispute the amount claimed, the Court awarded Investors the amount sought in the complaint.