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Don’t Demonize The Landlord (NY)
November 5, 2020
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<p style="text-align: justify;">COVID-19 has frustrated the restaurant industry causing many to close its doors and close prominent businesses and neighborhood staples. But who is to blame? There are a growing number of cases arguing whether parties can avoid their contractual obligation due to the pandemic.</p>
<p style="text-align: justify;">A recent <a href="https://www.wcmlaw.com/wp-content/uploads/2020/11/Decision.pdf">Decision</a> in Supreme Court, Kings County Commercial Division, made some ground in this argument when it rejected a restaurant’s argument that the recent Executive Orders, originating from COVID-19, frustrated its commercial lease rendering performance impossible. On March 16, 2020, Governor Cuomo issued Executive Order 202.3, requiring the closure of indoor dining in all New York restaurants.</p>
<p style="text-align: justify;">In 2017, the court in <em>BKNY1, Inc. d/b/a 132 Lounge v. 132 Capulet Holdings, LLC</em>, 2020 WL 5745631, 2020 NY Slip Op 33144(U) (N.Y. Sup. Ct., Kings Cty., Sept. 23, 2020), granted an injunction preventing a landlord from terminating a restaurant’s lease because the restaurant was continuing to pay rent, and would do so while the injunction remained in place. After the Executive Order was enforced, the restaurant closed and did not pay rent for April and May of 2020. Because the restaurant failed to pay rent, the landlord moved to vacate the injunction.</p>
<p style="text-align: justify;">The restaurant argued it was entitled to not pay rent because it was unable to operate its restaurant during COVID-19 restrictions and thus, the purpose of the lease was frustrated. However, the court rejected this because in order for the purpose of a contract to be frustrated, it “must be so completely the basis of the contract that both parties understood that without it, the transaction would have made little sense.” Because the original term of the lease was set to end in 2021, a temporary closure for two months does not frustrate its overall purpose.</p>
<p style="text-align: justify;">An impossibility of performance argument also failed for the restaurant because an unforeseen event makes performance burdensome when an express contingency clause is lacking in the contract, as was the case here. As such, the restaurant was required to continue paying rent during the closure.</p>
<p style="text-align: justify;">While this is the first of what may be many decisions of tenant and landlord disputes during COVID-19, as we loom toward a second wave, courts do not seem too sympathetic of a tenant’s failure or inability, rather, to pay rent.</p>
<p style="text-align: justify;">Thanks to Gabriella Scarmato for her contribution to this post. Any questions, please contact <a href="mailto:gcoats@wcmlaw.com">Georgia Coats.</a></p>