Caffé Nero Pays Zero

The ongoing question of whether COVID-19 excuses a tenant’s obligation to pay rent took another turn last month when the Superior Court of Massachusetts in Suffolk County ruled that a restaurant tenant did not have to pay any rent during the three-month period that it was prohibited from providing indoor dining due to a government order.  In UMNV 205–207 Newbury, LLC v. Caffé Nero Americas Inc. (2021 WL 956069), the court relied on the doctrine of frustration of purpose and ruled that Caffé Nero (“Tenant”) did not owe any rent to UMNV 205-207 Newbury, LLC (“Landlord”) for the period of March 24, 2020 through June 22, 2020.  In two previous cases, courts in other jurisdictions were willing to partially excuse a tenant’s rent (see The Gap, Inc. v. 44-45 Broadway Leasing Co. LLC, 2020 WL 4207345 (N.Y.Sup. 2020), awarding the tenant a 10% discount, and In re Hitz Restaurant Group, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020), providing for a 75% discount), but this is the first case to excuse 100% of the rent, marking a huge victory for tenants.

From March 24, 2020, until June 22, 2020, by order of the Governor of Massachusetts, all Massachusetts businesses were prevented from allowing consumption of food or beverages indoors.  As a result, Tenant stopped paying rent, and Landlord moved to terminate the lease in response. Tenant proposed alternative rent arrangements based on a percentage of sales from the premises, but Landlord was not receptive, so Tenant vacated the premises in October 2020.

Landlord brought a motion for partial summary judgment on the issues of Tenant’s breach of contract and the calculation of damages and costs through the date Tenant vacated. However, the court rejected this motion and granted partial summary judgment in Tenant’s favor.

The court based its decision on the frustration of purpose doctrine, which holds that a party to a contract is excused from performing its obligations if there is an unanticipated event that destroys the purpose of the contract and where the risk of such event occurring is not allocated to such party within the provisions of the contract itself. The court set forth a four part analysis to determine if the doctrine applies: (i) what was the main purpose of the contract, (ii) has some event caused a change in circumstances such that continued performance can no longer achieve that main purpose and the value to the party of continuing to perform has been destroyed, (iii) was the non-occurrence of that event a basic assumption of the contract, and (iv) did the contract allocate the risk of that event to the party seeking to be excused from performance.  Landlord argued that the risk was allocated to the Tenant via the force majeure and independent covenant provisions of the lease.  The court did not agree.

(i) Main Purpose

The court noted that under the lease, Tenant was only permitted to operate as a café with a sit-down restaurant menu “and for no other purpose.”   The court’s analysis found that “the entire purpose of the Lease was for Caffé Nero to use space inside the basement or walk-down level of UMNV’s building to serve high quality coffee, other drinks, and food to customers who could sit and consume them on the premises.” 

(ii) Change in Circumstance Frustrating Purpose of the Contract

Next, the court found that the purpose of the lease was indeed destroyed by the Governor’s order. The court seemed to suggest that had the lease permitted the Tenant to use the premises for other purposes that were not limited by the order (e.g., uses that were not limited to sit-down restaurant), then the Tenant’s rent would not be excused.

(iii) Non-Occurrence of the Event a Basic Assumption

The court reasoned that, in light of the limitations on the use of the premises set forth in the lease, a government order barring Tenant from operating for that use was an event that was basically assumed not to occur.

(iv) Risk Allocated under the Contract

Finally, despite Landlord’s claims, the court ruled that the force majeure and independent covenant provisions of the lease did not allocate the risk to the Tenant under these circumstances.  The force majeure provision stated in part (emphasis added):

“Neither the Landlord nor the Tenant shall be liable for failure to perform any obligation under this Lease, except for the payment of money, in the event it is prevented from so performing by … order or regulation of or by any governmental authority … or for any other cause beyond its reasonable control, but financial inability shall never be deemed to be a cause beyond a party’s reasonable control …, and in no event shall either party be excused or delayed in the payment of any money due under this Lease by reason of any of the foregoing.”

The court believed that use of the phrase “prevented from so performing by…” meant this provision only addressed the doctrine of impossibility (where performance is literally impossible through no fault of either party) and not the doctrine of frustration of purpose—where performance (the payment of rent) is still possible but the main purpose of the lease (the operation of a sit-down restaurant) is frustrated.

The court also rejected Landlord’s argument that the independent covenant doctrine should apply, finding that this doctrine would only be triggered if the Tenant tried to excuse its obligation to pay rent based on the Landlord’s breach of the lease; here, the Tenant based its right to stop paying rent on events caused by COVID-19, not the Landlord.

Accordingly, the court denied Landlord’s motion for partial summary judgment, excused Tenant’s rent obligations during the government order, and ruled Landlord’s termination of the lease was not effective.  The court implied that rent would be due after the Governor’s order was lifted and the purpose of the lease was no longer frustrated.

This decision is perhaps the most tenant-favorable decision to come out of the dozens of COVID-19 lease cases that have been decided in the past year.  As we have noted in prior Dirt Reports, many courts have ruled that the tenants owe all or most of the rent during COVID-19, even during government shut-down periods (see, e.g., The Gap, Inc., 2020 WL 4207345, and BKNY1, Inc. d/b/a 132 Lounge v. 132 Capulet Holdings, LLC, 2020 WL 5745631 (N.Y.Sup. 2020)).

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