Does Pandemic Mandated Closing Excuse Payment of Commercial Lease Rent? Court Rejects Defenses of Impossibility/Frustration of Performance

This was originally posted on the SGR Blog.

BKNY1, Inc. (tenant) operated the 132 Lounge on Montague Street in Brooklyn. 132 Capulet Holdings, LLC (landlord) sought an order vacating the Yellowstone injunction in favor of BKNY1 on the grounds that BKNY1 failed to pay rent for the months of April and May 2020.

The Yellowstone injunction was predicated on BKNY1’s representation, made on the record at a hearing, that it had paid (and would continue paying) rent. But BKNY1 failed to pay rent for the months of April and May 2020- claiming that the mandatory closure of BKNY1’s restaurant business during those months by Executive Order No. 202.3 relieved it of the contractual obligation to pay rent. BKNY1 had failed to cite — and the Court’s own review did not uncover — any provision of the lease excusing it from timely and fully paying its rent during (and notwithstanding) the state-mandated closure of its business.

Notably, neither BKNY1’s president nor its counsel demonstrated, by competent evidence, such as financial documentation or an affidavit by its accountant with supporting evidence, that BKNY1 was unable to pay the April and May 2020 rent.

The common-law doctrine of frustration of purpose was inapplicable under the circumstances. To invoke that doctrine, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. The doctrine applies when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating its purpose in making the contract.

But frustration occasioned by financial hardship did not excuse performance of the contract. The initial term of the lease was for approximately nine years (Nov. 2012 to Sept. 2021). So a temporary closure of BKNY1’s business for two months (April and May 2020) in the penultimate year of its initial term did not frustrate its overall purpose.

And the doctrine of impossibility of performance was not available to BKNY1. Generally, once a party to a contract has made a promise that party must perform or respond in damages for its failure, even when unforeseen circumstances make performance burdensome. Absent an express contingency clause in the agreement allowing a party to escape performance under certain specified circumstances, compliance is required.

Nothing in the lease permitted termination or suspension of BKNY1’s obligation to pay rent in the event of the issuance of a governmental order restricting the use of the lounge. To the contrary, the lease specifically provided that the obligation to pay rent “shall in no wise be affected, impaired or excused because [landlord] is unable to fulfill any of its obligations under this lease … by reason of … government preemption or restrictions”, which was the case here. Accordingly, Capulet’s motion for an order vacating the Yellowstone injunction on account of BKNY1’s failure to pay rent for the months of April and May 2020 was granted.

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