Is a pandemic shutdown considered a “casualty” or “frustration of purpose” in a commercial lease?

by | Sep 17, 2021 | Landlord & tenant representation |

As expected, the nonpayment commercial lease lawsuits stemming from New York’s COVID-related commercial shutdowns are starting to pour in and will further increase once the eviction moratoriums end in January 2022. Businesses which have been facing tremendous financial difficulties are arguing that they should not be forced to pay their rent or lease obligations when they were unable to operate.

Landlords who have been facing their own financial difficulties as they struggle to meet their obligations including property taxes and mortgages are seeking the rent that is due under the lease. The courts are now being called upon to determine the parties’ rights and obligations.

Some of the most common defenses that tenants are asserting with respect to the landlord’s claim for rent incurred during the pandemic include casualty, impossibility and frustration of purpose. These provisions are the key as to whether the landlord or the tenant will bear the burden of missed rent payments and the ultimate responsibility  will be determined by the terms of the lease.

A Key Case

A recent case involving Gap and its landlord in midtown Manhattan provide insight into the Court’s analysis of these doctrines. In Gap Inc. v. Ponte Gadea New York, LLC, Case No. 1:20-cv-04541-LTS-KHP, the tenant, Gap, sued its landlord claiming essentially that the shutdowns due to COVID and the reduced business that resulted should result in a release from its lease obligations. The Landlord counterclaimed for all rent that was due under the lease.

Three of the primary arguments made by Gap were that the pandemic resulted in a

a) “casualty” event according to the terms of the lease,
b) “frustration of purpose” that would nullify the tenant’s rental obligation, and
c) impossibility of performance under the lease

The Court rejected all of Gap’s arguments and found Gap liable for breach of lease and owed the Landlord a substantial rental obligation, including attorneys fees incurred in the lawsuit.

The Casualty Claim

A casualty clause is standard in most commercial leases. This clause provides that certain sudden and substantial physical damages to the Premises would result in termination of the Lease if the Landlord does not restore the Premises within a stated or reasonable time.

Here, the court found that the pandemic was not a casualty under the lease because there was no physical damage to the leased premises. A casualty must be something like a fire, lightning strike or other similar event that results in damage to the property that would require renovation. Since COVID was not such an event and did not result in the need for renovation, it was not considered a casualty.

Frustration of Purpose Claim

Gap also argued that the pandemic and the government shutdowns resulted in frustration of the purpose for the lease, namely, the ability to operate two storefront businesses on the premises.

The court also rejected this argument. To constitute frustration of purposes, the tenant must show that a “wholly unforeseeable event renders the contract valueless to one party.” Here, the Court found that the government shutdown was foreseeable and that Gap was also able to operate its business (albeit to a lesser degree) during the pandemic by offering curbside pickup. It also noted that other Gap locations were open to the public during the pandemic.

The fact that the lease may not have been profitable did not constitute a frustration of purpose.  The Court noted that Gap’s decision to not open the Premises during the pandemic was basically a business decision and did not excuse it from its lease obligation.

Impossibility Claim

The third claim was that the pandemic and governmental regulation made performance of the lease impossible. This claim was also dismissed. Impossibility is a defense to a breach of contract action only when performance is rendered objectively impossible by an unanticipated event that could not have been foreseen or guarded against in the contract. The Court again noted that Gap was able to operate its store to a lesser degree and that the government shutdown was in fact foreseeable  and even addressed in another provision of the lease.

Since it was not impossible for Gap to operate and the parties could have crafted a lease provision which would have addressed the parties’ obligations in the event of a government shutdown, the Court also dismissed the impossibility claim.

What Does This Mean?

Clearly, one of the most important takeaways from this case is that there are complicated economic and practical issues surrounding a landlord’s right to recover  – and a tenant’s obligation to pay – rent in commercial cases arising from COVID shutdowns.

Landlords who are seeking to recover their rents and commercial tenants who are being sued for rent need legal guidance from experienced real estate attorneys like those at Tane Waterman & Wurtzel, P.C. to navigate the financial and legal complications of these cases.