Advocate’s View: Appellate Courts Reject Commercial Tenant Attempts to Avoid Rent Obligations
September 14, 2022
During the Covid outbreak in 2020, New York and several other states issued restrictions on in-person business operations in an attempt to reduce the spread of the virus. These measures significantly impacted commercial real estate as tenants struggled to pay rent to their landlords.
While these restrictions first went into place nearly two-and-a-half years ago, courts are still dealing with the repercussions. In a series of appellate decisions this past summer, New York courts consistently sided with landlords and rejected arguments by commercial tenants operating retail stores and restaurants that they were excused from their rent obligations during the tumultuous time.
The First Department Rejects Arguments Advanced by Retail Tenant
In June, the Appellate Division First Department, which has jurisdiction over appeals arising from New York County and Bronx County, issued its decision in Gap, Inc. v. 44-45 Broadway Leasing Co. LLC, 206 AD3d 503, 503–04 (1st Dept. 2022). The plaintiffs, commercial tenants of retail space in Times Square, argued that “the Governor’s shutdown order, effective March 22, 2020, and subsequent health measures required for reopening after June 22, 2020, terminated their leases as a matter of law.” The court rejected the tenants’ argument that the legal doctrine of “frustration of purpose” applied because they were not “completely deprived” from using the leased premises as intended under the governing leases. The court noted that the tenants were permitted “to provide curbside and in-store pickup” and were allowed “to reopen at half capacity, with masking and social distancing.”
Under similar reasoning, the court rejected the tenants’ argument that Executive Order 202.8, which required certain businesses to reduce their in-person workforce by 100%, made it “objectively impossible to perform its operations as a retail store.” The court observed that it could not be impossible for the tenants to perform as the retail space had already reopened when the lawsuit was filed and because the leased premises were not physically destroyed. In the end, the court denied the tenants’ request for a temporary abatement of rent.
The Fourth Department Sides with Commercial Landlords
In July and August, the Appellate Division Fourth Department, which sits in Rochester and presides over appeals arising from 22 counties in Central and Western New York, issued two separate decisions rejecting commercial tenant arguments that they were excused from paying rent in the wake of Covid restrictions placed on businesses.
In Arista Dev., LLC v. Clearmind Holdings, LLC, 207 AD3d 1127 (4th Dept. 2022), a commercial landlord sued its tenant who operated a discount electronics store for nonpayment of rent from April 2020 through September 2020. The Erie County Supreme Court denied summary judgment to the landlord because it found “triable issues of fact whether [the tenant’s] nonpayment of rent during the COVID-19 pandemic was permissible pursuant to the [lease’s] casualty clause.” But the Fourth Department reversed because the casualty clause at issue only covered incidents having a physical impact on the premises, such as fires. In reaching this conclusion, the appellate court closely analyzed the language of the parties’ lease.
Citing the First Department’s Gap decision, the Fourth Department also rejected the commercial tenant’s argument that government restrictions frustrated the purpose of its lease and therefore excused its failure to pay rent. The appellate court noted the pandemic-related restrictions were “temporary” and held that the commercial tenant was not completely deprived of its benefit under the lease.
A month after deciding Arista, the Fourth Department considered similar issues in McLearen Square Shopping Ctr. Herndon, Va. Ltd. P’ship v. BadaNara, LLC, 2022 WL 3097485 (4th Dept. 2022). The guarantors of a commercial tenant, which operated a restaurant during the pandemic, argued (like the tenants in the Gap case) that the tenant was excused from paying rent under the frustration of purpose and impossibility of performance legal doctrines. The court rejected these arguments finding “although the governmental restriction at issue here precluded [the tenant] from offering in-person dining services, it expressly permitted restaurants such as [the tenant] to offer take-out or delivery services and frustration of purpose is not implicated by temporary governmental restrictions on in-person operations, as the parties’ respective duties were to pay rent in exchange for occupying the leased premises.” (internal quotation marks omitted). The court observed that while the pandemic has been “disruptive” for many businesses, the tenant’s performance was not rendered impossible because the leased premises were not destroyed.
These recent appellate cases demonstrate the uphill battle that most commercial tenants face in challenging their rent obligations during Covid. But like any contract, commercial leases are governed by their terms. The analysis will turn on the language of the lease and the specific terms the parties have negotiated. Following 2020, both landlords and tenants should consider including lease provisions protecting themselves in the event of government restrictions placed on business operations.
Robert P. Yawman is an associate attorney with the law firm Adams Leclair LLP. Adams Leclair LLP is a litigation law firm that concentrates its practice in a broad range of commercial and construction advocacy throughout upstate New York. Based in Rochester and Albany, the Adams Leclair team of dedicated attorneys provides our valued clients with specialized counsel, honed by decades of experience handling disputes and trying cases.
Rob can be reached at email@example.com