A few months ago, a Commercial Division court granted summary judgment in favor of the plaintiff-landlord in a case involving a commercial lease for a gym that was closed due to COVID-19 restrictions.  The decision in Amherst II UE LLC v. Fitness Int’l, LLC, No. 806643/2021, 2021 NY Slip Op 51289(U) (Sup. Ct. Erie Cty. Dec. 8, 2021)—with extensive citations to recent cases—ultimately rejected the Defendant’s force majeure arguments and provides a good overview of the legal issues that have come up with commercial leases during the COVID-19 pandemic.

Background

The Plaintiff in this matter—Amherst II UE—owns a shopping center in the Town of Amherst, near Buffalo.[1]  The Plaintiff leased a portion of the shopping center to the Defendant—Fitness International—through a lease agreement dated April 25, 2013 and amended August 31, 2017.[2]  The Defendant operated a LA Fitness facility and health club at this location.  As the court noted, “[f]rom January 6, 2015 through February 28, 2020, Defendant paid in excess of $3,000,000 in rent to Plaintiff for a period covering approximately sixty-two (62) months.”[3]  The Defendant kept paying rent through March of 2020, when the Governor ordered the closure of all gyms and fitness centers in the state in response to COVID-19 pandemic.  Gyms in New York State remained closed under executive orders between March 17 and August 23, 2020 and between November 20, 2020 and December 15, 2020 (“Closure Period”)—with restrictions on capacity and amenities during the periods where the gyms were open.  The Defendant did not pay its obligations under the lease for the months between April 2020 and August 2020 as well as December 2020.

On March 18, 2021, the Plaintiff brought a breach of contract claim against the defendant for unpaid rent and common area charges for those months, as well as late charges, totaling $364,055.75.[4]  The Defendant answered—with affirmative defenses including impossibility, impracticability, frustration of purposes and failure of consideration— counterclaimed for, inter alia, the Plaintiff’s failure to abate rent for the closure periods and in light of the restrictions.[5] 

The case progressed quickly and the Plaintiff filed a motion for summary judgment on August 17, 2021—asking the Court to rule in its favor as to the breach of contract claim, with prejudgment interest, and to dismiss the defendant’s affirmative defenses and counterclaims.[6]  The Defendant opposed and cross-moved for summary judgement seeking “inter alia, a judgment in the amount of $54,019.07, representing the amount Defendant paid in rent and common area charges during the periods March 17, 2020 through March 30, 2020 and November 20, 2020 through November 30, 2020 (while the Health Club was closed in accordance with the Closure Orders), plus interest and attorneys' fees; an order dismissing the Complaint; and a declaration that no rent is owed to Plaintiff during the Closure Period.”[7]

Summary Judgment Decision

The Court started its legal discussion by noting that the resolution of the cross motions would involve analysis of the lease provisions. The Court observed the rules of construction dictate that courts should be reluctant to interpret commercial leases—negotiated at arm’s length by sophisticated parties—to include or exclude terms for which the parties did not specifically contract.[8]  The Court then noted that, for a breach of a lease, the “ Plaintiff must prove the existence of a valid and binding lease; Defendant's failure to pay rent; damages; and that Plaintiff performed thereunder.”[9]  Here the Court found that there was no dispute as to the validity of the lease, or the failure of the Defendant “to pay rent, common area charges, and late charges from April 1, 2020 through August 31, 2020 and the month of December 2020, resulting in damage to Plaintiff.”[10]  Therefore, the question was whether the Plaintiff performed.

On that point, the Court addressed the Defendant’s contention that Plaintiff breached the covenants providing the Defendant the exclusive use and control, the right to operate the premises as a health club, and the unfettered right to quietly enjoy it.[11]  The Court observed that a similar defense was flatly rejected in Cab Bedford LLC v. Equinox Bedford Ave, Inc. 2020 NY Slip Op 34296(U), at 5–6 (Sup. Ct. N.Y. Cty. Dec 22, 2020).  There, Justice Bluth rejected a similar argument on the grounds that  the COVID-19 closure of the Equinox gym in question was only temporary.[12]  Justice Bluth in Cad Bedford also noted that while the court empathized with Equinox’s position—trying to craft relief for commercial tenants in these situations could “yield wildly inconsistent and unfair results.”[13]  In the instant case, Justice Walker also expressed empathy for the tenant that was subject to a temporary closure, but “fully agree[d] with the position stated” by Justice Bluth.[14]  Therefore the Court rejected this defense and held that, “[i]n the light of the foregoing, . . . that Plaintiff satisfied the elements . . . regarding its cause of action for breach of the Lease , and has demonstrated prima facie entitlement to the relief requested.”[15]

The Court next rejected the Defendants argument that it was not bound by a lease provision stating that rent “shall be paid without notice, demand, counterclaim, offset, deduction, defense, or abatement,”[16] because the lease did not also include language stating that payment of rent is “absolute and unconditional.”[17]  Justice Walker noted that the “Defendant does not cite to a single case where such language was required in a commercial property lease” in order to enforce the obligation to pay rent and that the Defendant conceded that “such language is typically limited to equipment leases and financial arrangements.”[18] 

The Court also rejected the argument that the COVID closures constituted a “force majeure” that excused the Defendant’s obligation to pay rent.  Although the lease defined force majeure to include “any causes beyond the reasonable control of a party . . . ,” it also explicitly stated “[n]otwithstanding anything herein contained, the provisions of this Section shall not be applicable to . . . Tenant's obligations to pay Rent . . . or any other sums or charges payable by Tenant hereunder after the Rent Commencement Date.” [19]  Therefore, the Court held that even if the closures and restrictions constituted force majeure events, they did not eliminate the Defendant’s obligation to pay under the lease.  The Court also cited two recent Commercial Division decisions involving similar provisions—with respect to leases for Valentino and Victoria’s Secret stores—where the courts reached the same conclusion.[20]

The Court then moved to the Defendant’s affirmative defense of frustration of purpose.  Justice Walker explained that this doctrine “has been ‘limited to instances where a virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party’.”[21]  The Court held that the Defendant couldn’t meet this standard “because the Pandemic did not render the Lease ‘valueless’”; instead, the closures and restrictions were only temporary---with the Defendant operating at full capacity at the time of the decision.[22]  To bolster its point, the Court quoted from a decision involving a Christian Louboutin store in which another court rejected a frustration of purpose defense on the grounds that although the pandemic made some business models less profitable, "unforeseen economic forces, even the horrendous effects of a deadly virus, do not automatically permit the Court to simply rip up a contract signed between two sophisticated parties.”[23]

The Court also quickly dispatched the Defendant’s affirmative defenses with respect to impossibility and impracticability.  It observed that the defenses are one in the same under New York law, and only applicable when the means of performance are destroyed by an act of God, vis major, or by law.[24]  As the Court previously noted, performance had “not been rendered completely impossible or impracticable” by the pandemic; therefore, those affirmative defenses did not apply.[25]

Finally, the Court found meritless Defendant’s counterclaims for failing to provide credit on rent for closures and restrictions, breaches of the lease stemming from the Defendant’s inability to use the premises, and unjust enrichment as a result of the closures and restrictions.  The Court reasoned that they were “based on the same legal theories as the Affirmative Defenses, such as, inter alia, frustration of purpose, impossibility of performance, and commercial impracticability.”[26]

Conclusion

The opinion in Amherst II provides a good overview of the legal issues that have come up with commercial leases during the COVID-19 pandemic, including the application and effect of force majeure clauses.  This decision, and the cases cited in it, demonstrate that commercial tenants face steep odds in obtaining relief from rent payments related to COVID-19 closures/restrictions from New York courts.