Since the beginning of the COVID-19 pandemic, we have seen a torrent of litigation concerning the interpretation of force majeure clauses and the applicability of the "frustration" and "impossibility" defenses to contract, especially as applied to commercial leases. Two recent New York State court preliminary rulings offer somewhat conflicting previews of how these doctrines may be applied to commercial leases in New York.
Both decisions, in the matters of Dr. Smood New York LLC, v. Orchard Houston, LLC, 2020 WL 6526996 (N.Y. Sup. Ct., Nov. 2, 2020) ("Smood") and The Gap, Inc., v. 170 Broadway Retail Owner, LLC, 2020 WL 6435136 (N.Y. Sup. Ct., Oct. 30, 2020) ("The Gap"), involved similar circumstances. The tenants in either case, a caf operator in Smood and a retail store operator in The Gap, brought claims that they were entitled to rent abatements since March 2020 on account of the various executive shutdown orders in New York State, as well as rescission or reformation of their leases.
In Smood, the Court rejected the tenant's request to enjoin the landlord from enforcing the lease, including by drawing upon the tenant's security deposit to fund overdue rent payments. The tenant argued that the executive shutdown orders caused property and physical damage to the premises, which triggered the casualty clause in the lease, and further that the purpose of the lease was frustrated because they could not operate their caf as contemplated by the lease. In denying the preliminary injunction, the Court held that the tenant could not show that they were likely to succeed on their claims, and therefore the tenant's obligation to pay rent continued unabated. The Court reasoned that the pandemic did not constitute a casualty because there was no physical harm to the premises, and further that the purpose of the lease was not frustrated because there was no "complete destruction of the basis of the underlying contract" in circumstances where the tenant had remained open for counter service and takeout since at least July 2020. Smood at *2. It is important to note that the ruling was a preliminary decision, merely denying an injunction, which requires a showing of likelihood of success on the merits. The guidance is helpful to landlords in that it held that the casualty and frustration of purpose claims were unlikely to succeed, but it is not a final ruling on the merits.
Conversely, in The Gap, the tenant sought a declaration that it was entitled to a refund of rent paid to the landlord since the executive shutdown orders took effect based on the lease's casualty provision, as well as rescission or reformation of the lease. The Court denied the landlord's motion to dismiss these claims and allowed certain of the claims to proceed. The tenant argued that the landlord was in breach of the casualty clause by collecting rent despite the tenant being unable to use the premises in the manner set forth in the lease, and further argued that the executive shutdown orders made performance of the lease objectively impossible. On both counts, the Court held that, because the Court must assume that all of the facts in the complaint are true on a motion to dismiss, the tenant had stated viable claims to relief based on the casualty clause, impossibility of performance, and for rescission of the lease. Notably, the Court rejected the reformation claim as a matter of law, and left open for later determination the question of whether the presence of a "business interruption insurance" provision or the absence of a force majeure clause in the lease would affect the tenant's ability to invoke the impossibility defense, noting that these were considerations to be addressed on a motion for summary judgment. While the tenant was required to post a bond in the amount of the outstanding rent arrears and for future rent, the Court enjoined the landlord from terminating the lease, pending a ruling on summary judgment or trial. Again, the ruling was a preliminary decision on a motion to dismiss, but tenants can take some comfort in the fact that the Court did not reject the tenant's arguments outright.