COVID-19, Casualty Loss Clauses, and the Frustration of Purpose Doctrine

• Posted on: Jul 11 2022

By: Jeffrey M. Haber 

It has been more than two years since the start of the global pandemic. In the early days of the pandemic, 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.

Among the measures implemented were government-mandated closures. For retailers this meant the loss of business. With business shutdown, or substantially curtailed, many retailers stopped paying rent on their leases. 

As conditions eased, landlords sought their unpaid rent and have been largely successful in doing so. Indeed, as one lower court observed, “[a] steady drumbeat of New York cases have rejected … [tenants’] defenses to claims for unpaid rent, despite government restrictions that temporarily limited, or even outlawed, commercial tenants’ businesses.”¹ This Blog previously examined three such cases (here, here and here).

Today, we examine Arista Dev., LLC v Clearmind Holdings, LLC, 2022 N.Y. Slip Op. 04451 (4th Dept. July 8, 2022) (here), another case in the line of cases rejecting a tenant’s defenses for unpaid rent resulting from the temporary shutdown of operations due to the Covid-19 pandemic.

[Ed. Note: the background facts come from the parties’ briefing on appeal.]

Beginning in 2013, plaintiff leased commercial space to defendant, who operated a low priced electronics store under the business name “Dirt Cheap TV”. The original lease was modified by a Lease Modification Agreement in June 2019 (LMA” and together with the original lease, the “Lease”). The LMA extended the term of the original lease and revised the rate of monthly rent.

With the onset of the pandemic, defendant ceased paying rent in March 2020. Defendant advised plaintiff that it was closing its doors due to the health crisis. Defendant explained that the government-mandated shutdown rendered the space unusable for the purposes set forth in the Lease.

Plaintiff demanded that defendant continue to pay its rent. Defendant declined and vacated the space on or about June 12, 2020. Defendant later discontinued operating its business.

Plaintiff commenced the action, alleging breach of the Lease and sought recovery of the unpaid rent. Defendant denied the allegations and asserted a counterclaim alleging that plaintiff was required to return a portion of the rent paid during March 2020 – i.e., the period during which it was unable to operate. Defendant based its answer and counterclaim on the COVID-19 pandemic, the executive orders issued by then-Governor Cuomo that shut down the State, and the casualty clause in the Lease.

Under the casualty clause, following notice “of fire or other casualty in the Rented Space”, defendant was excused from paying rent if the space was “unusable”. If, however, defendant used part of the space, it was required to “pay Rent pro rata for the usable part”.

Following joinder of issue, plaintiff moved for summary judgment. In pertinent part, plaintiff argued that the COVID-19 pandemic, the legislative and executive order(s), and/or casualty clause in the Lease did not excuse or eliminate defendant’s duty to pay rent. Plaintiff argued that the Lease applied to physical events, losses or casualties, e.g., fire, flood, etc., and that the COVID-19 pandemic and/or any executive orders did not excuse defendant’s obligation to pay rent.

Defendant opposed the motion, and filed its own motion for summary judgment, arguing that the temporary shutdown caused by the pandemic and the casualty clause in the Lease excused its payment obligations. Defendant also claimed that a portion of its March 2020 rent payment should be refunded.

The motion court denied plaintiff’s motion and denied defendant’s cross-motion. Plaintiff appealed. The Appellate Division, Fourth Department reversed the denial of plaintiff’s motion for summary judgment.

The Court held that the motion court incorrectly determined “that there [were] triable issues of fact [concerning] whether defendant’s nonpayment of rent during the COVID-19 pandemic was permissible pursuant to the casualty clause of the lease”.² The Court found that “plaintiff established as a matter of law that defendant was not entitled to a rent abatement under [the casualty clause] of the [L]ease”.³ “‘That [section] of the lease”, said the Court, “refers to singular incidents causing physical damage to the premises and does not contemplate loss of use due to a pandemic or resulting government lockdown.’”⁴ The Court explained that “the text and structure of that section—which refers in several instances to a ‘fire or other casualty’ causing ‘damage’ occurring ‘in’ or ‘to’ the ‘[r]ental [s]pace,’ … and which describes in detail the ‘repair’ obligations of the parties in the event such damage occurs—‘leave no doubt that “casualty” refers to singular incidents, like fire, which have a physical impact in or to the premises[,] and does not encompass a pandemic, occurring over a period of time, outside the property, or the government lockdowns resulting from it.’”⁵ 

In reaching the foregoing conclusion, the Court applied well-settled principles of contract interpretation:

“Interpreting a contract ‘is the process of determining from the words and other objective manifestations of the parties what must be done or forborne by the respective parties in order to conform to the terms of their agreements’” (Tomhannock, LLC v Roustabout Resources, LLC, 33 NY3d 1080, 1082 [2019], quoting 11 Richard A. Lord, Williston on Contracts § 30:1 [4th ed May 2019 update]). “‘The best evidence of what parties to a written agreement intend is what they say in their writing’” (id., quoting Slamow v Del Col, 79 NY2d 1016, 1018 [1992]). “Under long-standing rules of contract interpretation, ‘[w]here the terms of a contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving a practical interpretation to the language employed and reading the contract as a whole’” (id., quoting Ellington v EMI Music, Inc., 24 NY3d 239, 244 [2014]). Stated differently, a contract “must be read as a whole in order to determine its purpose and intent, and . . . single clauses cannot be construed by taking them out of their context and giving them an interpretation apart from the contract of which they are a part” (Eighth Ave. Coach Corp. v City of New York, 286 NY 84, 88 [1941]). “Words considered in isolation may have many and diverse meanings. In a written document the word obtains its meaning from the sentence, the sentence from the paragraph, and the latter from the whole document, all based upon the situation and circumstances existing at its creation” (id. at 89). “‘The words and phrases used by the parties must, as in all cases involving contract interpretation, be given their plain meaning’” (Ellington, 24 NY3d at 244).⁶

Defendant also claimed that, even if its nonpayment of rent was not permitted under the casualty clause of the Lease, the motion court did not err in denying that part of plaintiff’s motion seeking summary judgment on the breach of contract cause of action because there were questions of fact with respect to the defenses of frustration of purpose and unclean hands.⁷ The Court rejected defendant’s argument.

“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.”⁸ “[C]ontrary to defendant’s contention,” concluded the Court, “the temporary pandemic-related governmental restrictions on defendant’s business operations were insufficient to invoke the defense.”⁹ The Court reasoned that the “[t]he doctrine of frustration of purpose does not apply as a matter of law where, as here, the tenant was not ‘completely deprived of the benefit of its bargain’”.¹⁰

Regarding defendant’s unclean hands defense, the Court held that “there [was] nothing immoral or unconscionable about plaintiff’s decision to seek the unpaid rent that defendant was contractually obligated to pay”.¹¹ “The doctrine of unclean hands applies when the complaining party shows that the offending party is guilty of immoral, unconscionable conduct and even then only when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct.”¹²

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. Durst Pyramid LLC v. Silver Cinemas Acquisition Co., 2022 N.Y. Slip Op. 31958 (Sup. Ct., N.Y. County June 21, 2022).
2. Slip Op. at *1.
3. Id.
4. Id. (quoting, Gap, Inc. v. 170 Broadway Retail Owner, LLC, 195 A.D.3d 575, 577 (1st Dept. 2021)).
5. Id. (quoting, Gap Inc. v. Ponte Gadea NY LLC, 524 F. Supp. 3d 224, 232 (S.D.N.Y. 2021), and citing, Gap, 195 AD3d at 577, and A/R Retail LLC v. Hugo Boss Retail, Inc., 72 Misc. 3d 627, 638-639 (Sup. Ct., N.Y. County 2021)).
6. Id. at *1-*2.
7. Id. at *2.
8. Id. (quoting, Warner v. Kaplan, 71 A.D.3d 1, 6 (1st Dept. 2009), lv. denied, 14 N.Y.3d 706 (2010) (internal quotation marks omitted)).
9. Id. at *2-*3.
10. Id. at *3 (quoting, Gap, 195 A.D.3d at 577).
11. Id. (quoting, Bank of Smithtown v. 264 W. 124 LLC, 105 A.D.3d 468, 469 (1st Dept. 2013)).
12. Id. (quoting, National Distillers & Chem. Corp. v. Seyopp Corp., 17 N.Y.2d 12, 15-16 (1966), quoting, Weiss v. Mayflower Doughnut Corp., 1 N.Y.2d 310, 316 (1956) (internal quotation marks omitted)).