Frustrated Tenant Foiled by Frustration of Purpose Defense

Last month, a New York court once again rejected a tenant’s argument that it was excused from paying rent due to circumstances surrounding the COVID-19 pandemic.  In BKNY1, Inc. d/b/a 132 Lounge v. 132 Capulet Holdings, LLC[1], the court ruled that the common law defenses of frustration of purpose and impossibility did not excuse the tenant’s obligation to pay rent, despite the fact that there was a state-wide Executive Order that prohibited the tenant’s restaurant from providing in-person dining.

In BKNY1, the tenant signed a lease for an initial term of nine years from November 2012 to September 2021. Following the COVID-19 outbreak, the tenant closed its restaurant and did not pay rent for April and May 2020.  The landlord sued.

The tenant first argued that the Executive Order excused it from paying rent because such order’s mandatory closure of the restaurant frustrated the purpose of the tenant’s lease.  The doctrine of frustration of purpose generally applies when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating its purpose in making the contract.  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.” The court reasoned that the initial term of the lease was for nine years, 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.”  The court contrasted this set of circumstances with other cases where the doctrine of frustration of purpose did apply (for example, in one case, the tenant was unable to use its restaurant until a public sewer was completed approximately three years after the lease had been executed).

The tenant next argued that the doctrine of impossibility excused its obligation to pay rent. The court rejected this argument as well, concluding that the doctrine of impossibility does not apply where an unforeseen event merely renders performance burdensome, unless there is an express contingency clause in the underlying contract that excuses performance.  To the contrary in this case, Article 26 of the lease provided that the tenant’s obligation to pay rent “shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease . . . by reason of . . . . government preemption or restrictions.”

Several courts in New York have now held that the common law doctrines of frustration of purpose and impossibility will not excuse a tenant’s obligation to pay rent, although there have been a few notable exceptions in other jurisdictions. We should expect more decisions to come down throughout the U.S. in the next several months and will keep you posted.

[1] 2020 WL 5745631, 2020 NY Slip Op 33144(U) (N.Y. Sup. Ct., Kings Ctny., Sept. 23, 2020)

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