CONTRACT INTERPRETATION IN THE TIME OF COVID

• Posted on: Jun 7 2024

By Jonathan H. Freiberger

A significant part of commercial business dealings involves the drafting and interpretation of contracts. Accordingly, when disputes arise amongst businesspeople, interpretation of the agreements governing the parties’ relationship becomes a critical aspect of commercial litigation. Rules of contract interpretation, therefore, are a frequent topic addressed in this BLOG. See, e.g., [here], [here], [here], [here] and [here].

“The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent.” Greenfield v. Phillies Records, Inc., 98 N.Y.2d 562, 569 (2002) (citations omitted). “‘The best evidence of what parties to a written agreement intend is what they say in their writing.’” Camuso v. Brooklyn Portfolio, LLC, 164 A.D.3d 739, 741-42 (2^nd Dep’t 2018) (quoting Slamow v. Del Col, 79 N.Y.2d 1016, 1018 (1992). Accordingly, “when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms [and e]vidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing.” W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990) (citations omitted). Such a rule “imparts stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses, infirmity of memory and the fear that the jury will improperly evaluate the extrinsic evidence.” Id. (citations, internal quotation marks, ellipses and brackets omitted).

Further, contracts must be interpreted “as a harmonious and integrated whole so as to give effect to its purpose and intent, and must be construed in a manner which gives effect to each and every part, so as not to render any provision meaningless or without force or effect.” HTRF Ventures, LLC v. Permasteelisa North America Corp., 190 A.D.3d 603, 607 (1^st Dep’t 2021) (citation and internal quotation marks omitted). Thus, “courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Vermont Teddy Bear Co., Inc. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004) (citation and internal quotation marks omitted). Put another way, “courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to include.” Id. (citation and internal quotation marks omitted). This is particularly so where an agreement “is negotiated between sophisticated, counseled business people negotiating at arm’s length.” Global Reinsurance Corp. of America v. Century Indemnity Co., 30 N.Y.3d 508, 518-19 (2017) (citation and internal quotation marks omitted).

On June 6,2024, the Appellate Division, First Department, decided 195 B Owner LLC v. Anthropologie, a landlord/tenant matter that involved the interpretation of the “taking” provision of a commercial lease in light of the COVID-19 pandemic. [Eds. Note: some of the facts recited herein were taken from the appellate record available on the NYSCEF electronic filing system.] The petitioner in 195 B Owner was the landlord and the respondent was the tenant under a commercial lease that, inter alia, permitted the tenant to utilize the subject premises “solely as and for the operation of a high-quality retail store selling (and displaying)” goods.” The lease contained a “taking” clause, which, in the event of a temporary taking, permitted a reduction in rent payments and a suspension of lease obligations. The lease defined a “taking” as “occurring when a ‘[t]enant is denied or deprived of either the use, occupancy and/or enjoyment of the [premises] and/or the ability to operate its business thereon or therefrom by action or decree of any lawful power or authority.’”

As a result of the COVID 19 pandemic Executive Orders requiring non-essential businesses to “reduce their in-person workforce at any work locations by 100% no later than March 22 at 8 p.m.” (bracket omitted), the tenant closed its store and did not operate as a retail store from March 22, 2020, to June 22, 2020. After the tenant stopped paying rent, the landlord commenced a commercial nonpayment proceeding in New York City Civil Court seeking almost $500,000 in unpaid rent and a warrant of eviction. The Civil Court, inter alia, denied the landlord’s motion for summary judgment finding that there was a taking under the “clear[] and unambiguous[]” “taking” language of the lease in light of the COVID-19 Executive Orders. On appeal, the Appellate Term reversed the Civil Court’s order finding that the record was insufficiently developed to determine if a “taking” had occurred because it was unclear whether the tenant was deprived of all use or occupancy of the space.”

On the tenant’s appeal to the First Department, the Court reversed the Appellate Term Order for substantially the same reasons articulated by the Civil Court. After discussing caselaw similar to that which is discussed herein, the Court found that a “taking” occurred. Thus, the Court stated:

Affording the words of the lease their plain meaning, a “taking” occurs under the lease in one of two ways: either when the tenant is deprived of “the use, occupancy and/or enjoyment” of the premises, “and/or” when it is deprived of “the ability to operate its business thereon or therefrom.” The phrase “and/or” is commonly used in contracts to reflect “both or either” of a set of conditions or items. [Citations omitted.]

Because the Tenant could not operate its business, the Court found a “taking” occurred. Rejecting the landlord’s assertion that such an interpretation would be “absurd, commercially unreasonable or contrary to the reasonable expectations of the parties,” the Court determined that such an interpretation “gives effect to the contract negotiated by sophisticated parties who allocated the risk of a government shutdown of tenant’s business operations at the premises to the landlord.” (Citation omitted.)

The Court also rejected the landlord’s claim that tenant’s continued use of the Premises to store goods demonstrated that it continued to “operate” its business during the pandemic. In this regard, the Court stated:

since the lease describes storage use as only “ancillary” to tenant’s “operation of a high-end retail store” selling goods, and only permits storage and office use “together with” the operation of a retail store. Since the Executive Order denied and deprived tenant of its ability to operate its retail store business on the premises, it resulted in a taking under the lease.

The Landlord also argued that “retail” also encompasses online transactions. This argument was rejected as well because the subject lease “specifically provides that use of the premises is “solely” limited to “operation of a retail store,” which plainly refers to a brick-and-mortar store located in the premises.”

Finally, the Court remanded the case for a calculation of damages reasoning that “[while] the use of the premises for storage does not negate the finding of a ‘taking’ under the lease, such use might nonetheless factor into damages as the taking provision provides, in relevant part, that ‘the Rent due [under the lease] shall be reduced proportionately by the square footage of the Leased Space which is so affected,’ indicating that some apportionment might be called for.”

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be, and should not be taken as, legal advice.