Over the past year, we have discussed a number of cases involving several tenants’ failed attempts to avoid paying rent based upon COVID-related force majeure, impossibility, and frustration of purpose defenses (e.g., The Landlords Strike Back: Gap Ordered to Pay Rent Despite COVID-19). In many of those landlord-friendly cases, the courts ruled that the tenants were still obligated to pay rent despite the pandemic. As more decisions come out, however, some courts are finding that these tenant defenses do raise questions of fact—suggesting that it is likely that the tenants will ultimately prevail and be excused from paying some, if not all, of their rent.
In International Plaza Associates LP v. Amorepacific U.S. Inc. (December 14, 2020), an ongoing case with the New York Supreme Court (New York State’s lower level trial court), the court denied the landlord summary judgment for $314,000 in rent arrears against its tenant (a cosmetics manufacturer and retailer). The tenant’s primary defense relied on a claim of frustration of purpose, arguing that the COVID-related forced closure of the tenant’s shop from March 2020 to June 2020, as well as subsequent COVID restrictions, made it impossible for the tenant to use the premises for its intended purpose.
In the court’s denial of the landlord’s motion, the court signaled that it may be receptive to the tenant’s frustration of purpose defense because of the near impossibility of operating a cosmetics shop (where the business model is based on customers testing out products in the store) when customers are required to wear a face mask and maintain a 6 foot distance. This is in contrast to other courts’ decisions in cases 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).
The court noted that to succeed using a “frustration of purpose” defense, the tenant must present facts showing its attempt to conduct business as usual given the changed circumstances. It then must show that its failure to conduct business as usual is caused by a “reason never imagined, let alone foreseen by either defendant or plaintiff.” The tenant argued that this foreseeability factor is one that needs to be determined by findings of fact, as basing the inquiry on previously occurred events is impossible. The court agreed, concluding that the issue of whether the tenant could conduct its business in any meaningful way during the pandemic and the foreseeability of “this crisis that has never occurred in most of our lifetimes,” raised questions of fact requiring proper discovery and findings of fact that could not be satisfied by mere legal memorandum or oral arguments alone. It is important to note that the court did not hold that the frustration of purpose defense applied, but rather that factual discovery was required on this issue.
This decision joins other recent cases (e.g., COVID Rent: A Casualty of War) that give new hope to retailers in their efforts to avoid paying rent during the pandemic. Unfortunately, given the mixed results in cases throughout the country and even within states, there is still no clear answer as to who is on the right side when it comes to answering the question of whether rent is due.