Update On Lease Disputes & Covid-19: Is Covid-19 A Get Out Of Jail Card For Tenants?

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The number of lawsuits in the New York Supreme Court, New York County, concerning leases between commercial landlords and tenants continues to rise in the wake of the COVID-19-related shutdowns, indelibly impacting the legal landscape governing landlord/tenant  relationships moving  forward.  Moritt Hock & Hamroff is monitoring  these developments closely to keep its commercial real estate clients updated.

On August 17, 2020, we reported on The Gap Inc. et al v. 44-45 Broadway Leasing Co., LLC—The Gap and Old Navy’s lawsuit to enjoin the termination of their lease in Times Square for failing to pay rent  because of the pandemic’s devastating impact on retail commerce in New York City.  In that case, New York Supreme Court Justice Debra James granted the requested injunction, but as a condition of such relief, required The Gap and Old Navy to post a bond for 90% of the monthly rent—thus affording The Gap and Old Navy with limited, temporary economic relief.  That ruling is presently subject to an appeal by the landlord.

A number of other commercial tenants have also mounted attempts to obtain judicial relief from their lease obligations on the grounds that COVID-19 has rendered performance of the lease impossible and impracticable, or has substantially frustrated the purpose of the lease.  These claims have had varying degrees of success, depending in large measure on the particular judge assigned to each case.

For example, in Victoria’s Secret Stores, LLC et al v. Herald Square Owner LLC, Victoria’s Secret claimed that the lease for its premier Herald Square location—for which it paid $937,734 per month in rent—should be declared  unenforceable because of the government-mandated shut downs and the drastic reduction in foot traffic in Manhattan.   Victoria’s Secret sought an order excusing its performance under the lease based upon the legal doctrines of frustration of purpose and impossibility of performance.  Herald Square Owner, the landlord, moved for summary judgment dismissing the complaint on the ground that the subject lease specifically addressed the landlord’s inability to perform due to unforeseen circumstances, and provided that in such a case, performance would not  be excused.  Specifically, Article 26 of the lease, entitled “Inability to Perform,” provided that if landlord is unable to fulfill its obligations, “including but not limited to [based upon] laws, government preemption in connection with a national emergency or by reason of any rule, order or regulation by any federal, state or municipal authority . . .” tenant’s performance was not excused.  The landlord thus argued that these express provisions, reflecting the parties’ reasonable expectations in the context of contingent events, trumped the tenant’s frustration and impossibility defenses.  The motion for summary judgment is now fully submitted and a decision from Justice Andrew Borrok is forthcoming.

In Club Monaco U.S. LLC v. BSD Broadway Propco LLC, tenant Club Monaco sought an order (i) enjoining its landlord BSD Broadway Propco LLC from terminating its SoHo lease based upon its failure to pay late fees; and (ii) declaring the lease unenforceable as a result of the COVID-19 pandemic and the related government-mandated shutdowns.  As with Victoria’s Secret, Club Monaco claimed that the COVID-19 pandemic frustrated the purpose of its SoHo lease (with an annual rent of almost $5 million) and rendered performance impossible.  The court (Justice Shlomo Hagler) granted Club Monaco’s request for a temporary restraining order precluding termination of the lease, subject to a full hearing on the injunction after the motion is fully briefed.  In its opposition to the motion, the landlord argued that Club Monaco paid several months’ rent without protest, and was negotiating a potential modification of the lease, and only raised its arguments regarding impossibility and impracticability of performance after those negotiations broke down.  On October 19, 2020, after an evidentiary hearing, Justice Hagler granted the preliminary injunction on the condition that Club Monaco post a bond for $576,505.75.

Most recently, on October 9, 2020, Hugo Boss Retail, LLC filed an action, Hugo Boss Retail, LLC v. A/R Retail, LLC, seeking rescission of its lease and a declaration that the lease is unenforceable in light of the COVID-19 pandemic and related government shut downs.  In the alternative, Hugo Boss sought  an abatement of the rent due, in light of the months it was unable to use the premises, and a rent reduction based upon the limited capacity permitted in the store since it has been permitted to reopen.  Hugo Boss’ lease is for space in the Time Warner Center in Columbus Circle, with a rent of $692,026.07 a month.  Because the store is located in an internal mall, Hugo Boss was not permitted to reopen the store until September 9, 2020, and going forward, capacity has been limited to 50%.  Hugo Boss argues that in light of the public fears of COVID-19 and the decimation of retail patronage and tourism in New York, the purposes of the lease has been “unforeseeably frustrated” and performance has been rendered impossible. Notably, Hugo Boss’s alternative request for a rent abatement is based on language in its lease—specifically, Section 15.1(d), which provides for such an abatement “if the Premises are completely or partially damaged by fire or other hazard.” Hugo Boss claims that COVID-19 constitutes such a hazard.  The case is only in the early stages, with only the complaint being filed.   It will be interesting to see how the Court interprets the “other hazard” language in a lease provision that pertains to damage to the premises (as opposed to the tenant’s business).

Key Takeways:

    • Going forward, tenants (and borrowers) will likely be making “impossibility,” “impracticability,” “force majeure,” “impossibility of performance,” and similar arguments more frequently in light of the impacts of COVID-19.
    • To understand  the strengths and weaknesses of each side’s  arguments, it is paramount  to analyze the relevant agreements to determine whether events, such as a pandemic and related government-ordered shutdowns, were either contemplated in the governing agreements, or the relevant provisions are broad enough that the pandemic could fall within the language of the agreement – and which party under the governing agreements is required to bear such risk.
    • Increasingly, Courts will  be forced to grapple with these issues, and it will be important to observe  the trends of specific judges and the bench more generally. To date, a discernible pattern has yet to be established either by specific judges or the judiciary more broadly.
    • Going forward, in drafting agreements, it will be critical to expressly address future events, such as a pandemic and related government shutdowns, and specifically state who bears the risk of same.

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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