This was originally posted on the SGR Blog.
Court Determines if Frustration of Purpose Defense Applied
The pandemic has unquestionably, materially, and adversely affected many businesses that have been directly impacted by New York State Executive and New York City administrative orders restricting work and other activities. But, as a recent case illustrates, those legal mandates and prohibitions may not suffice to sustain the defense of frustration of purpose,
Union 16 Parking LLC operates a parking garage at a building owned by East16th St. Owner LLC. TMO Parent LLC signed a good guy guarantee in connection with Union’s lease. Owner claimed that Union had not paid rent since April 1, 2020, and owed over $1 million through November 1, 2020. They argued that the lease did not permit Union to withhold rent under any circumstance. And did not contain a force majeure provision.
Union and TMO cited the ongoing pandemic as the reason they had been unable to pay rent. They claimed that their monthly business was down 60 percent in August 2020. And also claimed that, since the pandemic began, they lost revenue and incurred additional expenses to implement health and safety measures.
Union moved for summary judgment. In opposition, Union and TMO argued that the doctrine of frustration of purpose raised an issue of fact. They recounted the fact that the ongoing pandemic drastically reduced the number of people driving cars in Manhattan as people started working from home.
But Union and TMO admitted that the garage was not required to shut down despite the faced dramatic effects of the pandemic. But asserted that their monthly revenues were so low they were unable to pay the rent.
The doctrine of frustration of purpose required that 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 is a narrow one that does not apply unless the frustration is substantial.
The Court granted Owner’s motion for summary judgment. There was no doubt that the ongoing pandemic had caused harmful effects on all types of businesses in New York City. And Union and TMO appeared to have suffered a dramatic downturn in revenue that made it difficult, if not impossible, for them to pay the full rent. Although the Court noted that they did not argue, they made any good faith attempt to do so.
The downturn in the parking garage tenant’s business did not raise an issue of fact to defeat the Owner’s motion. The undisputed fact was that the garage was not shut down by pandemic-related orders — it was permitted to be kept open throughout 2020. That the customer base was reduced because of the pandemic was not a basis to find that the frustration of purpose doctrine applied.
The Court noted the consequences of application of the frustration of purpose doctrine. It could potentially permit Union and TMO to simply walk away from the lease and not have to pay anything to the Owner despite the fact that the garage had been continuously operating. The frustration of purpose doctrine was not intended to allow a tenant to avoid having to pay rent while running a business, even if the business had slowed. Applying that doctrine could justify applying it to every tenant who suffered a downturn in business, whether because of a pandemic or some other reason. But when the garage had been continuously up and running, the Court declined to permit the garage to run rent-free.
The Court granted Owner’s motion for summary judgment and directed the Clerk to enter judgment in the amount of $1,028,104.36 plus interest.