Recent New York Decision Holds Restaurant Responsible For Rent During The Pandemic

• Published date: 05 October 2020
• Subject Matter: Real Estate and Construction, Coronavirus (COVID-19), Landlord & Tenant - Leases, Operational Impacts and Strategy
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Jeremy Cohen, Eddy Salcedo and Owen Wolfe

A Kings County Supreme Court Commercial Division Justice recently rejected a restaurant tenant's argument that the Executive Orders issued in response to the COVID-19 pandemic frustrated the purpose of its commercial lease, and rendered the parties' performance impossible. The case joins a growing number of decisions nationwide (including those discussed here, here, and here) grappling with whether parties can avoid performance of contractual obligations as a result of the pandemic.

In BKNY1, Inc. d/b/a 132 Lounge v. 132 Capulet Holdings LLC,¹ the court entered a Yellowstone injunction in 2017 that prevented landlord from terminating the restaurant tenant's lease, which was a REBNY Standard Form of Store Lease. The injunction was granted, in part, based on the restaurant's representation that it was continuing to pay its rent, and would do so while the injunction remained in place. Accordingly, the obligation to pay rent was made an express condition of the injunction.²

Three years later, with the COVID-19 pandemic gripping the city Governor Cuomo issued Executive Order 202.3, which directed the closure of all New York restaurants for in-person dining effective March 16, 2020. The tenant closed its restaurant and did not pay rent for April and May 2020. Based on the tenant's failure to pay rent for those two months, the landlord moved to vacate the injunction.

In opposition, the restaurant first argued that it was entitled to avoid paying rent because its inability to operate its restaurant as a result of COVID-19-related governmental restrictions frustrated the purpose of the lease. The court rejected this argument, holding 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."³ The court reasoned that the initial term of the lease runs from "Nov. 2012 to Sept 2021," and so "a temporary closure of plaintiff's business for two months (April and May 2020) in the penultimate year of its initial term could not have frustrated its overall purpose."⁴

In reaching that conclusion, the court relied on, among other things, the Appellate Division, First Department's recent decision in Center for Specialty Care, Inc. v. CSC Acquisition I, LLC.⁵ In that case, issued in the midst of the pandemic in June 2020, the Appellate Division provided examples of where frustration of purpose applies, such as "where the tenant was unable to use the premises as...