In a prior Prince Lobel Alert, “CORONAVIRUS: Issues for Commercial Landlords,” we discussed the possible defenses to payment of rent related to the unprecedented COVID-19 pandemic and governmental orders to close businesses. These defenses include force majeure, the doctrine of frustration of purpose and the doctrine of impossibility.
This week, Judge Kenneth W. Salinger, sitting in the Business Litigation session of the Massachusetts Superior Court, issued one of the first reported decisions on these defenses during the pandemic.
In UMNV 205-207 Newbury, LLC v. Caffé Nero Americas, Inc., the Court granted partial summary judgment to a commercial tenant, Caffé Nero, ruling that its obligation to pay rent was discharged during the three-month period in which it was prevented by governmental orders from serving customers indoors. The Court also ruled that Notices of Default and a Notice of Termination given during that period were invalid.
The decision is limited in a number of respects, and should not be viewed as a broad ruling excusing rent payments during the pandemic. The Court emphasized the narrow permitted use provided in the lease: “the operation of a Caffé Nero–themed restaurant under Tenant’s Trade Name, and for no other purpose.” The lease also limited Caffé Nero’s take-out menu to the same sit-down menu served indoors. Finally, this decision only addressed the three months when Caffé Nero was not permitted to serve customers inside its café, and does not address damages for the remaining portion of the 15-year term. The litigation continues, possibly to trial.
The doctrines of impossibility and frustration of purpose are sometimes referred to interchangeably, but Judge Salinger carefully differentiated them in his opinion. He wrote that under the impossibility doctrine, performance is excused when the parties assumed a state of facts would continue, but performance becomes impossible through no fault of either party. The Court’s decision was based on the frustration doctrine, that “the expected value of . . . performance has been destroyed by an unforeseeable event.”
The decision is also noteworthy because the lease contained protections for landlords typically found in well-drafted commercial leases, but the Court ruled they did not apply under the facts before it.
For example, the lease included a force majeure provision with a savings clause for money payments, “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 [force majeure events].” Here, the Court determined that the frustration of purpose analysis was independent of force majeure, so the savings clause did not apply.
Similarly, the lease contained a section affirming that the obligation to pay rent was independent of the Landlord’s obligation to perform its duties under the lease—the so-called “independent covenants” provision, which is unique to commercial real estate leases to make sure that rent is paid. The lease also contained other well-known and typical provisions that rent is to be paid “in all events” and “without setoff, deduction, counterclaim or defense.”
However, the Court insisted on reading the document as a whole and not focusing on specific sections. “It would have made no business sense for the parties to enter into a lease providing that Caffé Nero may use the premises for only one narrow purpose, but must keep paying rent even if the only permissible use is not allowed or no longer possible.” It may have made no business sense to the Court, but that is what the lease provided, and although such terms are typical in the real estate industry, they were not enforced here.
Conclusion
This decision may not survive if is appealed, and it is relevant primarily to leases with very narrow permitted uses. However, the decision will be a relevant discussion point in any negotiation of COVID-related rent relief between Landlords and Tenants in the months to come.
As stated in the Conclusion to our Alert circulated last March, “Landlords are generally in a strong legal position under their leases, but should take pro-active steps to protect themselves. However, like any long-term business relationship, there may be some room for non-legal give and take as we try to emerge from this crisis as best we can.”
This Alert has been prepared by Robert Schlein, Chair of Prince Lobel’s Real Estate Practice Group, and Caitlin Romasco, a member of Prince Lobel’s Litigation Practice Group active in litigation relating to real estate leases and commercial evictions. If you have any questions or require additional information, please contact Rob at [email protected] or 617-456-8098, or Caitlin at [email protected] or 617-456-8064.