The stark reality for most commercial tenants facing commercial lease disputes from the fallout due to COVID-19 and resulting governmental restrictions has been to find themselves faced with mainly pro-landlord decisions being delivered by New York Courts.
Thus far, in the overwhelmingly majority of decisions involving commercial lease disputes (where landlords have sought payment of arrears from tenants) New York Courts have historically been unpersuaded by certain common law defenses. The Courts have often concluded that, despite the COVID-19 pandemic and resulting disastrous economic consequences, the pandemic did not frustrate the purpose of a tenant’s lease or render performance under the lease impossible. In ruling in favor of landlords, New York Courts have held that the mere reduction in potential revenue is not the same as completely frustrating the purpose of the contract or making performance impossible, stating that there are times when outside factors reduce the profitability of businesses. As such, the fact that a business may be less profitable for the tenant is unavailing for tenants when seeking relief from contractual obligations.
However, on March 15, 2021, a Judge in Kings County New York issued a Decision and Order in 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, N.Y. Slip. Op 30796 (U) (Trial Order), in which the Court sided in favor of a tenant. The Honorable Loren Bailey-Schiffman concluded that the tenant's performance of its rent obligations was objectively impossible and was thus excused under the doctrine of impossibility during the period when the tenant was forced to close as a result of pandemic-related government orders.
The landlord had commenced an action for unpaid rent against the tenant, who had also personally guaranteed payments under the lease. While the Court correctly rejected the tenant’s argument that performance was excused by force majeure (unforeseeable circumstances preventing a contract from being fulfilled) as the lease lacked a force majeure provision, the Court did hold that the tenant’s performance under the lease was excused by the doctrine of impossibility.
The Court held that, “New York law recognizes the common law doctrine of impossibility as an avenue to excuse performance when there have been extraordinary intervening events. It is not enough to show that an event has rendered performance prohibitively expensive or impractical. Rather, the party invoking the doctrine must prove that the subject matter of the contract or the means of performance have been 'destroyed', such that performance is 'objectively impossible'.” Kel Kim Corp. v Central Markets, 70 N.Y.2d 900, 902 (1987). The Court of Appeals explained therein, “the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” Id. at 902. Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Kolodin v Valenti, 115 AD3d 197, 200 (1st Dept 2014).”
The Court concluded that the government shutdown rendered performance objectively impossible during the time the order was in effect, and that “[t]he government shutdown was unforeseeable and could not have been built into the contract.” Accordingly, the court denied the landlord’s motion for summary judgment and held that all of its causes of action against the tenant were barred by the doctrine of impossibility. Given the decision as to the impossibility of performance argument, the court did not reach a frustration of purpose analysis.
This decision is an indication that some courts in New York may be more willing to consider tenant impossibility arguments. While this is a lower New York court case, time will tell whether this argument is adopted by other New York courts and actually sets a precedent in the state.
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This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2021 Law Offices of Pullano & Farrow PLLC