The Commercial Division Continues to Rule Against Businesses Seeking Financial Relief Amidst COVID-19 Shutdowns

Farrell Fritz, P.C.
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We all hoped ringing in the New Year would mean leaving some of the hardships from the COVID-19 pandemic behind in 2020. However, in just two short months, businesses struggling with rent and other financial obligations due to COVID-19 restrictions are getting little to no relief from the Commercial Division.

You first read Madeline Greenblatt’s post about Commercial Division Justice Andrew Borrok dismissing lingerie brand Victoria’s Secret’s lawsuit seeking to rescind its lease for its 20,000 square foot flagship store located in Herald Square, and avoid its $937,734.17 monthly rent obligation due to COVID-19 . In that case, the New York County Supreme Court rejected Victoria’s Secret’s argument that its lease agreement should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.”

Then, only two weeks ago, James Wicks and I wrote about a decision issued by Commercial Division Justice Timothy S. Driscoll in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In a case of first impression in New York, Justice Driscoll followed the lead of a majority of courts across the nation finding that loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage under commercial liability insurance policies.

Adding another decision to the list,  in Valentino U.S.A, Inc. v 693 Fifth Owner LLC,   Justice Andrew Borrok rejected Valentino U.S.A, Inc.’s (“Valentino”) attempt to be relieved of its $18,975,000.00 yearly rent obligations due to Coivd-19 shutdowns. In its complaint, luxury fashion company Valentino brought the following eight causes of action against its landlord Defendant 693 Fifth Owner LLC (“Landlord”) to avoid its obligations under its lease agreement (“Lease”) for its prestigious Fifth Avenue storefront in New York City: (i) declaratory judgment of frustration of purpose – lease termination; (ii) in the alternative, declaratory judgment of frustration of purpose – rent abatement; (iii) impossibility of performance – lease rescission; (iv) in the alternative, impossibility of performance – rent abatement; (v) rescission based on failure of consideration; (vii) constructive eviction; (vii) declaratory judgment; and (viii) injunctive relief. While Valentino unsurprisingly cited the series of executive orders issued by Andrew Cuomo limiting and/or prohibiting “non-essential” business operations, Valentino also argued that even in a “post-pandemic New York City (should such a day arrive)” the “social and economic landscapes have been radically altered in a way that has drastically, if not irreparably, hindered Valentino’s ability to conduct high-end retail business” from its storefront. Valentino further argued that factors such as unprecedented financial disruptions, decreases in consumer spending, and unparalleled unemployment would have long lasting effects on brick-and-mortar retail stores like Valentino’s.

The Landlord moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence), 3211(a)(7)(failure to state a claim), and 3211(c) (motion treated as one for summary judgment) arguing the lease agreement itself allocates to Valentino the risk of its inability to operate the premises and that financial loss does not equate to frustration or impossibility.[1] The Landlord pointed to several significant portions of the Lease including:

  • Section 2.3: Valentino promises to pay its rent “without any abatement, set-off or deduction whatsoever….”
  • Section 22.11: In the event of a governmental closure order or cataclysm, Valentino must continue to pay its rent.
  • Section 9.1: Valentino is required to comply with present and future governmental orders, whether foreseen or unforeseen.
  • Section 4.1: Valentino is not entitled to any set-off in rent liability based upon condition of Premises.
  • Section 21.11: In the face of cataclysmic events such as “failure of power, restrictive governmental laws or regulations, riots, insurrection, war, acts of terrorism, acts of God, floods, hurricanes, windstorms, fire or other casualty, condemnation or other reason of a similar or dissimilar nature…nothing contained in this Section shall operate to excuse Tenant from the prompt payment of Rent or any other payments or charges required by the terms of this Lease.”

The Court held that pursuant to Section 21.11 of the Lease, the parties expressly allocated the risk that Valentino would not be able to operate its business and that Valentino is therefore not forgiven from its performance, including its obligation to pay rent by virtue of a state law. Because the provision was broadly drafted, it was of no consequence that the COVID-19 pandemic was not specifically enumerated in the Lease. The Court further held that because Valentino failed to plead that it moved out of the premises or that the landlord substantially interfered with its use and possession, its claim for constructive eviction could not succeed. Evidence that Valentino was open for curbside retail and by appointment, or that Valentino vacated the premises only after the filing of the action, only hurt Valentino’s claim for constructive eviction. Based on these findings, Valentino’s complaint was dismissed in its entirety.

Upshot:

Recent decisions in the Commercial Division demonstrate that New York businesses have an uphill battle when seeking relief from rent and other financial obligations due to COVID-19 losses. In terms of rent obligations, claims of frustration of purpose and/or impossibility of performance are proving unsuccessful. Tenants should review their lease agreements for provisions which allocate the risk to tenants in the event of cataclysmic events.

 

[1] See 407 East 61st Garage Inc. v Savoy Fifth Ave Corp

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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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