New York Courts Weigh In On How COVID-19 Affects Commercial Lease Disputes

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Through the continued uncertainty as to how COVID-19 might affect commercial real estate leases and the rights and obligations of landlords and tenants thereunder, the New York courts are attempting to carve out standards for how consequences from the pandemic can be interpreted in commercial landlord and tenant disputes. Three recent rulings take on the issue of tenants’ liability to pay rent during the pandemic and whether the defenses of frustration of purpose, impossibility of performance, and the definition of a casualty under a commercial lease relieve tenants of such liability. These recent decisions split support between commercial landlords’ right to enforce the rent payments and protections for tenants affected by the virus and government shutdown mandates.

In the ongoing case of 188 Ave. A Take Out Food Corp. v. Lucky Jab Realty Corp. (Index No. 653967/2020), the New York Supreme Court granted a Yellowstone injunction on December 21, 2020, in favor of the plaintiff tenant. The purpose of a Yellowstone injunction is to “allow a tenant confronted by a threat of termination of the lease to obtain a stay tolling the running of the cure period so that after a determination on the merits, the tenant may cure the defect and avoid a forfeiture of the leasehold” (Hopp v. Raimondi, 51 AD3d 726, 727 [2d Dept 2008]). The plaintiff in this case is the tenant of a casual dining restaurant who brought suit against the landlord defendant in August 2020, claiming it did not owe past rent to the defendant from March forward due to the property being “unusable due to a casualty.” Simultaneously with the suit, the tenant made a motion for a Yellowstone injunction in order to prevent the lease from being terminated and the tenant losing its leasehold interest. The granting of the injunction prohibited the landlord from terminating the lease and evicting the tenant, and tolled the period that the tenant would have to replenish the security deposit drawn on to pay rent prior to the disposition of the underlying action.

Unlike findings in prior New York Supreme Court cases, the Court ruled here that the tenant was likely to succeed on the merits of the case and granted the Yellowstone injunction. The ruling on the motion found that COVID-19 and the indoor dining suspension DOES constitute a casualty under the lease, that such occurrence “constituted a sudden, unexpected, unfortunate set of circumstances and, hence, a ‘casualty’ within the meaning of the lease that rendered the premises unusable for a period of time, and thus relieved the tenant of its obligation to pay rent.” Additionally, the Court noted that, in addition to relief granted through the Yellowstone injunction, the tenant is likely to prevail on its claim that the landlord defendant violated New York City Administrative Code § 22-902(a) by engaging in commercial harassment of a commercial tenant that has been adversely affected by the COVID-19 pandemic. This Section of the Administrative Code was implemented in May 2020 in response to the pandemic. It created a right for a commercial tenant to commence an action in the Supreme Court for a judgment restraining the landlord from harassing a commercial tenant whose business was impacted by COVID-19. The Court ruled that the landlord serving a notice to cure during a period when the tenant was unable to generate income due to the Executive Order and such action would cause tenant to vacate, or surrender the lease, constitutes harassment under the Code. This motion is a preliminary but notable step in the case and the case is scheduled for preliminary hearings, and rulings on merits are still to be tried in the upcoming year.

In two other recent New York Supreme Court cases (1140 Broadway LLC v. Bold Food, LLC (Index No. 652674/2020) and 35 East 75th Street Corporation v. Christian Louboutin L.L.C. (Index No. 154883/2020)), the Court grappled with tenant’s defenses for nonpayment of rent under the doctrines of frustration of purpose and impossibility of performance. In both cases, the Court granted landlords’ summary judgment motions maintaining tenants’ liability to continue to pay rent under their leases during the pandemic. Factual distinctions in these cases from the 188 Ave. A Take Out Food Corp. case above include that the premises were being used for office and retail space, which did not have as strict of restrictions as indoor dining from government mandates. The Courts found that, in one instance, the doctrine of frustration cannot apply to generic office space, and in the other instance, the doctrine of impossibility cannot apply to retail space that still exists and the tenant is not prohibited from selling its product.

The two cases in favor of the landlord were decided on their full merits, unlike the 188 Ave. A Take Out Food Corp. case, which was decided in the context of a Yellowstone injunction, which is a preliminary ruling. How these cases affect landlords and tenants going forward remains to be seen. However, the courts are making critical distinctions based on factual matters, and the types of defenses brought, to determine whether a commercial tenant will remain liable for rent payment during the ongoing pandemic and government mandates. We will continue to monitor and provide updates for the proceedings in the 188 Ave. A Take Out Food Corp. v. Lucky Jab Realty Corp. case and other cases and situations relating to commercial lease provisions and the COVID-19 pandemic.

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