COVID Rent: A Casualty of War

As COVID related lawsuits continue to trickle through the courts, what is beginning to emerge is a framework of cases addressing the question of whether rent is still due under commercial leases, with sometimes inconsistent conclusions.  In the early cases, it seemed the momentum was with the landlords as several courts ruled that the COVID pandemic did not excuse the tenants’ obligations to pay rent.  Last month, however, a few courts shifted to the opposite direction, ruling in favor of the tenants and holding that rent may not be due.  In the case of 188 Ave. A Take Out Food Corp. v. Lucky Jab Realty Corp. (2020 NY Slip Op 34311(U) (Sup. Ct.)), a New York Supreme Court found that the plaintiff tenant, 188 Ave. A Take Out Food Corp. (“Take Out”), was likely to succeed on the merits of its case and prevented the defendant landlord, Lucky Jab Realty Corp (“Lucky”), from terminating Take Out’s lease.

Take Out entered into a commercial lease with Lucky in 2017 for the purpose of operating an indoor dining restaurant. Following Governor Andrew Cuomo’s March 16, 2020, executive order prohibiting indoor dining due to the COVID pandemic, Take Out suspended its indoor dining operations. Take Out reopened briefly for take-out service in May 2020, but closed again until mid-July 2020, when it reopened exclusively for outdoor dining.  

Take Out stopped paying rent in April 2020, and Lucky began to draw down on Take Out’s security deposit to apply it against the allegedly outstanding rent. In August 2020, once the security deposit was exhausted, Lucky served a 15-day notice demanding that Take Out replenish the security deposit and threatening to terminate Take Out’s lease if Take Out did not timely do so. Take Out promptly commenced an action seeking a judgment (i) that Take Out did not owe Lucky any rent from March 2020 – August 2020 because its premises were partially unusable as a result of a casualty, and (ii) directing Lucky to reimburse Take Out’s security deposit and apply a rent credit to Take Out’s account.

Take Out’s lease provides that in the event of a casualty to the premises “. . . the damages thereto shall be . . . at the expense of Owner, and the rent and other items of additional rent . . . shall be apportioned from the day following the casualty according to the portion of the demised premises which is usable. . . . If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent . . . shall be proportionately paid up to the time of the casualty and then shall cease until the date that the demised premises shall be . . . restored by Owner.” While the term “casualty” is not defined in the lease, Take Out asserted that the COVID pandemic and the related governmental prohibition on indoor dining in New York is a casualty covered by the lease provisions.

In determining if the COVID pandemic and the related governmental prohibition on indoor dining could be considered a casualty, the court relied on prior case law to define a “casualty” finding that “the term ‘casualty,’ as employed in a lease, is generally defined as an ‘accident’ or an ‘unfortunate occurrence,’ that is, something other than a ‘common occurrence’ constituting a ‘sudden or unexpected’ event or series of events.” The court reasoned that the COVID pandemic and the related governmental prohibition on indoor dining was “a sudden, unexpected, unfortunate set of circumstances and, hence, a ‘casualty’ within the meaning of the lease that rendered the premises unusable for a period of time, and thus relieved the tenant of its obligation to pay rent.” Accordingly, the court found that Take Out proved, by clear and convincing evidence, that there is a likelihood that Take Out will prevail in its action on the merits of the case. The court also found Take Out established a likelihood of success on the merits with respect to its claim that Lucky’s notice threatening to terminate the lease violated Admin. Code of City of N.Y. § 22-902(a), which prohibits landlords from harassing commercial tenants adversely impacted by the COVID pandemic.

While these motions are merely preliminary, the court’s treatment of this restaurant tenant is notable in its divergence from previous COVID related New York Supreme Court cases covering restaurants and other types of commercial property such as office space and retail space, which ultimately maintained that the tenants in those cases were still liable to pay rent during the pandemic. We previously discussed a few of these decisions, including BKNY1, Inc. d/b/a 132 Lounge v. 132 Capulet Holdings, LLC (rejecting a restaurant tenant’s frustration of purpose defense where governmental restrictions on indoor dining caused the tenant to close for only two months during the penultimate year of its ten year term) and The Gap Inc. et al v. 44-45 Broadway Leasing Co., LLC (enjoining the landlord from terminating the tenant’s lease until the action is resolved on the condition that the tenant submits a bond equal to 90% of the past due rent), and others like 140 Broadway LLC v. Bold Food, LLC (rejecting an office tenant’s impossibility of performance and frustration of purpose defenses where governmental restrictions caused substantially all of its clientele to go out of business) and 35 East 75th Street Corporation v. Christian Louboutin L.L.C. (rejecting a retail tenant’s impossibility of performance and frustration of purpose defenses where governmental restrictions did not prohibit the retailer from selling its products) have been decided recently.

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