Does the COVID-19 Pandemic and Subsequent Emergency Actions by the Governor Make a Commercial Lease Voidable?

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP

In the wake of the COVID-19 pandemic (“COVID”), a common question that arises is whether commercial leases are enforceable when COVID and subsequent governmental responses frustrate the purpose of the lease or render its performance impossible.  There is not a one-size-fits-all answer, as the answer will turn on the underlying facts, but the lack of a contractual force majeure provision in the lease will not bar the use of common law defenses.  This is evidenced in a recent Bronx County Commercial Division decision by Justice Eddie J. McShan in 1877 Webster Ave. Inc. v. Tremont Ctr., LLC.[1]

In November 2019, the parties in 1877 Webster entered into a ten-year lease that the premises will be “solely” used for a “first class NIGHT CLUB”.[2]  Further, the lease explicitly stated that the premise could not be used “for [any] other purpose.”[3]  After the onset of COVID, the lessee filed an action for rescission of the lease on the ground that the lease was voided as of March 17, 2020 because the purpose of the lease had been frustrated by COVID and the subsequent executive orders by Governor Cuomo.[4] 

The lessor moved to dismiss, inter alia, based on documentary evidence, i.e., the fully executed written lease that lacked a force majeure provision.  The lessor asserted that the claims must fail because the lessee had the opportunity to allocate the risk of a pandemic by negotiating for a force majeure provision but chose not to.  The Commercial Division, however, found that the lack of a force majeure provision in the lease did not preclude a party from “alleging extra-contractual doctrines such as frustration of purpose and impossibility of performance.”[5]  Additionally, Justice McShan stated, quoting the First Department’s decision in Local 333, Mar. Div., Intl. Longshoremen's Assn [6], that where the parties did not allocate the risk, courts should not simply apply a “fixed rule or law;” instead “justice is better served by appraising all of the circumstances, the part the various parties played, and thereon determining liability.”[7]  The Court then proceeded to review each of the lessee’s claims to determine whether the documentary evidence established a defense as a matter of law and warranted a dismissal.

First, Justice McShan concluded that the lessee’s claim that the purpose of the lease was frustrated due to COVID did not warrant dismissal.  Reciting the doctrine of frustration of purpose, Justice McShan explained that the doctrine offers a defense against the enforcement of a contract when the purpose of the contract is destroyed by an unforeseeable event.  Here, Justice McShan concluded, at this stage of the litigation, that the foreseeability of COVID is a factual dispute that is not resolved by the documentary evidence.

Second, the Court denied the lessor’s motion regarding the claim of impossibility of performance.  Again, relying on First Department precedent,[8] Justice McShan noted that impossibility of performance offers a valid defense when a party’s performance is objectively impossible, and the impossibility was caused by an unforeseen event that could not be guarded against in the contract.[9]  The Court concluded that dismissal was not warranted because the executed lease could not resolve, at this preliminary stage of litigation, the factual dispute of whether COVID was foreseeable.

Third, the Court, likewise, denied the lessor’s motion to dismiss the lessee’s claim of failure of consideration.  Such a claim exists, Justice McShan explained, quoting the Second Department, “wherever one who has promised to give some performance fails, without its own fault, to receive, in some material respect, the agreed quid pro quo for that performance[.]”[10]  The Court found that a genuine issue of fact existed since it was unclear whether the lessee would be able to reopen its night club, as the government had begun to slowly lift COVID restrictions.  Accordingly, the Court determined that dismissal was not warranted because it was unclear whether COVID has completely deprived the lessee of its beneficial use and occupancy of the premises that it bargained for in the lease.

The court, however, did dismiss the lessee’s fourth cause of action, alleging that it was constructively evicted from the premises because the lessor did not take reasonable precautions to make the building safe to occupy.  Here, Justice McShan found the documentary evidence to be sufficient to warrant a dismissal.  According to the lease, it was the lessee’s responsibility to maintain and repair the premises.  Therefore, the Court ruled that the maintenance of the premises was bargained for in the lease and was a risk that was allocated to the lessee.

The Commercial Division’s decision should serve as a reminder to practitioners that a lack of a force majeure provision in a lease does not serve as a waiver of the common law doctrines of frustration of purpose and impossibility of performance. 

[1] No. 29239/2020E, 2021 NY Slip Op 2113, 2021 BL 154332 (Sup. Ct. Bronx Cnty. Mar. 29, 2021) (“Tremont Ctr.”).

[2] Id. at *1.

[3] Id.

[4] Governor Cuomo issued an executive order shutting down, inter alia, night clubs because of COVID.

[5] Tremont Ctr., at *3.

[6] City of New York v. Local 333, Marine Div., Int'l Longshoremen's Ass'n, 79 A.D.2d 410 (1st Dep’t 1981).

[7] Id. at 412-13.

[8] Warner v. Kaplan71 A.D.3d 1, *2 (1st Dep’t 2009).

[9] Tremont Ctr., at *4.

[10] Id. (quoting Fugelsang v. Fugelsang, 131 A.D.2d 810, 812 (2d Dep’t 1987).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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