COVID-19 and The Doctrines of Frustration of Purpose and Impossibility — Revisited

• Posted on: Jun 17 2022

By: Jeffrey M. Haber

Previously, this Blog examined the doctrines of frustration of purpose and impossibility of performance in the context of Covid-19 (here and here). 

The doctrine of frustration of purpose is narrowly applied.¹ “In order to invoke the doctrine of frustration of purpose, 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.”² In other words, the doctrine will not apply “unless the frustration is substantial”.³ There are many examples of situations in which one or both of the doctrines applied. Relevant to today’s article, such examples include situations where the tenant was unable to use the premises as a restaurant until a public sewer was completed, which took nearly three years after the lease was executed,⁴ and where a tenant who entered into a lease for office space could not occupy the premises because the certificate of occupancy allowed only residential use and the landlord refused to correct it.⁵ 

However, “frustration of purpose … is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence”.⁶ 

The doctrine of impossibility “excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.”⁷ The “impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”⁸

The doctrines of frustration and impossibility of performance were recently examined by the Appellate Division, First Department in The Gap v. 44-45 Broadway Leasing LLC, 2022 N.Y. Slip Op. 03980 (1st Dept. June 16, 2022) (here).

[Ed. Note: The factual discussion below comes from the parties’ briefing on appeal.]

In 2015, plaintiffs entered into two 15-year leases for commercial space in Times Square, New York. The leases required plaintiffs to operate the stores “continuously,” with the premises open “in [their] entirety,” for “at least” fourteen hours a day, seven days a week. 

The leases contemplated only limited reasons for the interruption of operations. The stores could close, and the rent would be abated, for the time needed to repair the premises in the event of “casualty.” The stores could also close without abatement if plaintiffs’ operations were delayed by some event “beyond Tenant’s reasonable control …, including, without limitation strikes, labor troubles, acts of terrorism, or the occurrence of an act of God.” The leases did not contain any provision for interruptions caused by governmental orders or restrictions.

As the pandemic took hold in 2020, Governor Cuomo signed a number of executive orders that were designed to address the spread of Covid-19. On March 20, 2020, the Governor issued an order that required all non-essential businesses to “reduce the in-person workforce at any work locations by 100%” by the evening of March 22, 2020. 

Some of the restrictions were lifted in early June 2020. Although non-essential businesses, such as retailers, were permitted to open their doors to customers as of June 22, 2020, they remained subject to extensive restrictions – restrictions that plaintiffs claimed made it impossible for them to resume their store operations. Plaintiffs further claimed that they could not reopen to in-person business until June 2021, albeit with the mask requirements reimposed during the winter months.

Based upon the foregoing, plaintiffs concluded that the purpose for leasing the space with defendant had concluded. Consequently, plaintiffs paid a portion of their April and May rent but refused to make further payments.

On June 16, 2020, defendant served plaintiffs with default notices for May and June rent. In response, plaintiffs filed the action, seeking injunctive and declaratory relief. 

The complaint alleged that the pandemic and the government-mandated shutdown had frustrated the leases’ purpose, had resulted in a failure of consideration, and had rendered performance illegal, impossible, and impracticable. Plaintiffs sought, among other things, alternative forms of declaratory relief, including a declaration that the leases terminated by operation of law, or that the obligation to pay rent and expenses was abated. The complaint also sought an injunction to prevent defendant from invoking the termination provisions of the leases. 

On January 1, 2021, defendant moved for summary judgment on plaintiffs’ claims and for partial summary judgment on a counterclaim for unpaid rent. Defendant argued, among other things, that lease provisions requiring plaintiffs to pay rent without any offset or abatement precluded plaintiffs from raising common-law defenses, such as frustration. Defendant also claimed that plaintiffs’ “continuing use of the Premises and the signs attached thereto” meant that the purpose of the leases was not frustrated, and that plaintiffs had “knowingly and willingly” accepted the risk of “changing market conditions.” 

Plaintiffs argued that the pandemic and the government measures taken to contain it had frustrated the purpose of the parties’ agreement. 

The motion court granted defendant’s motion. Plaintiffs appealed. The Appellate Division, First Department affirmed. 

The Court held that “[p]laintiffs’ reliance on the doctrine of frustration of purpose [was] unavailing, as they were not ‘completely deprived’ from using the premises as intended under their lease agreements.”⁹ In so holding, the Court noted that “[p]laintiffs … were allowed to provide curbside and in-store pickup on June 8, 2020, and to reopen at half capacity, with masking and social distancing, on June 22, 2020.”¹⁰ Moreover, said the Court, plaintiffs “were allowed to reopen fully from June 2021, albeit with the mask requirements reimposed during the winter months.”¹¹ Thus, concluded the Court, “[c]ontrary to plaintiffs’ contention, ‘frustration of purpose [was] not implicated by [the] temporary governmental restrictions on in-person operations.’”¹²

The Court also held that plaintiffs failed to satisfy the doctrine of impossibility. The Court noted that in a prior appeal, it had “already rejected plaintiff Gap’s contention that [the Governor’s executive order] ‘rendered it objectively impossible to perform its operations as a retail store’”.¹³  The Court further noted that plaintiffs filed their complaint after reopening was allowed.¹⁴ 

In addition, said the Court, “even if the reopening restrictions made plaintiffs’ ability to provide a flagship store experience more difficult, the pandemic did not render their performance impossible.”¹⁵ The Court explained that the means of performance under the leases were not objectively impossible because “‘the leased premises were not destroyed’”.¹⁶

Takeaway

As readers know, many states imposed emergency measures to address the health crisis – measures that had the effect of reducing business operations or shutting down the business. New York was no different. As we noted in our prior articles, businesses have been impacted by the pandemic, and will be impacted by the pandemic for years to come. From a legal perspective, there are many issues to consider. Among them is the performance of a contract, such as a lease. In The Gap, the courts ruled that the pandemic did not frustrate the purpose of the parties’ lease agreement, nor did it make performance thereunder impossible. To be sure, the pandemic negatively affected The Gap’s business, but to the courts, it did not completely thwart the very reason for the lease.

Jeffrey M. Haber 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.

Footnotes

1. Jack Kelly Partners LLC v. Zegelstein, 140 A.D.3d 79, 85 (1st Dept. 2016), lv. dismissed, 28 N.Y.3d 1103 (2016).
2. Warner v. Kaplan, 71 A.D.3d 1, 6 (1st Dept. 2009) (internal quotation marks omitted), lv. denied, 14 N.Y.3d 706 (2010).
3. Rockland Dev. Assoc. v. Richlou Auto Body, Inc., 173 A.D.2d 690, 691 (1991).
4. Benderson Dev. Co. v. Commenco Corp., 44 A.D.2d 889 (4th Dept. 1974), aff’d, 37 N.Y.2d 728 (1975).
5. Jack Kelly Partners, 140 A.D.3d at 85.
6. Warner, 71 A.D.3d at 6 (internal quotation marks omitted).
7. Id. at 5.
8. Id.
9. Slip Op. at *1.
10. Id.
11. Id.
12. Id. (quoting, U.S.A., Inc. v. 693 Fifth Owner LLC, 203 A.D.3d 480, 480 (1st Dept. 2022)).
13. Id. (quoting, Gap, Inc. v. 170 Broadway Retail Owner, LLC, 195 A.D.3d 575, 577 (1st Dept. 2021)).
14. Id.
15. Id.
16. Id. (quoting, Valentino U.S.A., Inc. v 693 Fifth Owner LLC, 203 A.D.3d 480, 480 (1st Dept. 2022) (citing, 558 Seventh Ave. Corp. v. Times Sq. Photo Inc., 194 A.D.3d 561, 562 (1st Dept. 2021), appeal dismissed, 37 N.Y.3d 1040 (2021)).