State/NYC Ordered Pandemic-Related Shutdown of Retail Store: Did Mandates Trigger Defense of Impossibility of Performance?

This was originally posted on the SGR Blog.

Commercial tenants sued by their landlords for non-payment of rent have resurrected a broad panoply of commercial contract “defenses” related to the pandemic-ordered shutdowns—such as casualty, frustration, and impossibility of performance. For the most part, the “defenses” failed. But, as a decision released late last week illustrates, the “defenses” are not always futile.

The Governor of New York (by Executive Order) and the New York City Council (by amendment to the Administrative Code) imposed a moratorium on commercial evictions and suits on personal guarantees where the non-payment of rent is caused by the COVID-19 pandemic. But the Orders and Code do not prohibit lawsuits against the tenant for rent.

267 Development LLC owns the property that was leased to a commercial tenant, Brooklyn Babies, and Toddlers, LLC, with Mary Ann O’Neil acting as guarantor.

Governor Cuomo signed Executive Orders closing certain businesses throughout New York State in response to the Covid-19 pandemic. Toddlers was one of the businesses forced to close pursuant to those Orders. Additionally, the Governor initiated a moratorium on residential and commercial evictions and foreclosures in 2020 that has been extended through May 21, 2021.

Development sued Toddlers as the tenant, and O’Neil, as guarantor, seeking $93,554.94 of rent arrears and attorneys’ fees pursuant to a 10-year lease. In opposition to Development’s motion for summary judgment. Toddlers and O’Neil relied in part upon a provision of the New York City Administrative Code–pursuant to which commercial landlords cannot seek monies for lease arrears from a non-tenant who personally guarantees a lease agreement on behalf of a business that meets the criteria as set forth in the provision. Specifically, that law refers to businesses that were forced to close as a result of the Executive Orders signed by Governor Cuomo.

However, the newly enacted Code provision protects only the guarantors of commercial leases and not the tenant itself. While Governor Cuomo signed Executive Orders that established a moratorium on residential as well as commercial evictions and foreclosures, there is no law preventing a landlord from seeking arrears from a commercial tenant.

On September 23, 2020, the New York City Council amended the Code and extended the prohibition against enforcement of guarantor provisions in commercial leases through March 31, 2021. And the amendment clarified its intent by stating that it applies to all personal guarantor agreements, regardless of whether those agreements were contained in the original lease or not.

Toddlers and O’Neil contended that Development’s motion must be denied because the lease had been suspended as a result of force majeure, the frustration of purpose, and/or impossibility of performance. But a force majeure clause was not included in the agreement and could not be asserted as a defense to a breach of contract claim. They also argued that, since their business was closed by the Governor’s Orders, performance under the lease was made objectively impossible.

New York law recognizes the common law doctrine of impossibility as a way to excuse performance when there has been an extraordinary intervening event. But 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.” The Court of Appeals has explained that “the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” 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.

The doctrine of impossibility was applied after the September 11 terrorist attacks in a Civil Court case. Telephone communications were disrupted throughout New York City after 9/11. As a result, the plaintiff, in that case, was precluded from timely canceling travel reservations. The Civil Court found that the performance of the travel contract was rendered impossible for a period of time immediately following the 9/11 attack where New York City was in virtual lockdown.

In this case, the Court found that the shutdown of Toddlers’ business precluded the performance of its contractual obligations. The government shutdown was unforeseeable and could not have been built into the lease. Under the circumstances presented, the Court found that performance under the lease was made impossible.

Query: Is the opinion an aberration or a portent of decisions to come?

P.S. Toddlers and O’Brien cross-moved for summary judgment on their counterclaim for “commercial tenant harassment.” The Administrative Code was also amended to define commercial tenant harassment. And a landlord may be held liable for “commercial tenant harassment” for attempting to enforce a personal liability guarantee that was not enforceable pursuant to the Code. Toddlers’ and O’Brien claimed that Development’s suit on the guaranty constituted commercial tenant harassment under the law. The Court agreed and found that they were entitled to summary judgment on their counterclaim.

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