February 23, 2021

Massachusetts Court: Café's Rent Excused by COVID Orders That Frustrated Lease's Sole Purpose

Holland & Knight Alert
Jessica Ragosta Early | Brett D. Carroll

Highlights

  • In its Business Litigation Session, the Massachusetts Superior Court granted partial summary judgment in favor of a commercial tenant café, holding that its payment obligations were discharged for the period of time when on-premises consumption of food and beverages was prohibited due to Gov. Charlie Baker's COVID-19 orders.
  • Relying on an express lease provision limiting the tenant's use of the premises to the operation of a café, and interpreting the lease as not allocating "the risk of a global viral pandemic coming to Massachusetts and leading to a government order shutting down the entire restaurant industry," the court held that the tenant's performance was excused by the common-law defense of frustration of purpose.
  • The court further held that frustration of purpose discharged the tenant's payment obligations even though such obligations were not excused under the lease's force majeure provision because that provision addressed only impossibility, not frustration, based on the court's interpretation.

The COVID-19 pandemic has strained commercial landlord-tenant relationships across the United States. As the courts wade their way through the backlog of lawsuits filed in 2020, there are a growing number of decisions interpreting commercial leases and applying common-law defenses in light of state and local COVID-19 orders and their resulting impact on commercial leases. These decisions have come out different ways — depending on each jurisdiction's law and the facts of each case — but collectively, they provide increasing color to help commercial landlords and tenants navigate through current pandemic-related disputes, and they may equally dictate how commercial leases are negotiated in the future. One such case was issued recently in Massachusetts.

On Feb. 8, 2021, in the matter of UMNV 2-05-207 Newbury, LLC v. Caffé Nero Americas, Inc. (2084CV01493-BLS2), the Massachusetts Superior Court Business Litigation Session concluded that a commercial tenant in Boston was excused from its rent obligations under the doctrine of frustration of purpose as result of Massachusetts Gov. Charlie Baker's pandemic orders issued in late March 2020. Although determining that it was not impossible for the tenant to perform, the court held that the essential purpose of the commercial lease was frustrated because of government shutdown orders. As such, the court held that the landlord's default notice was ineffective and the tenant was not in default during the period of complete shutdown.

Background

Pursuant to the express terms of its 15-year lease entered into in 2017, Caffé Nero was allowed only to operate a café in the leased premises and could not use the premises for any other purpose. However, because of the governor's pandemic orders issued on March 24, 2020, which prohibited on-premises consumption of food or beverages, Caffé Nero ceased its operations, temporarily closed and stopped making rent payments.

During the summer, restrictions were slowly lifted, allowing activities such as outdoor seating and, eventually, indoor seating. However, the parties were not able to reach an agreement regarding a rent reduction. On May 19, 2020, the landlord sent a notice to terminate and ordered Caffé Nero to "quit and surrender the Premises" as a result of its failure to pay April and May rent. The landlord subsequently filed a summary process action. With no resolution reached, Caffé Nero vacated the premises in late October 2020.

Court Decision

In its complaint, the landlord sought back rent, liquidated damages, accelerated rent for the term of the lease, attorneys' fees, interest and costs. The court denied the landlord's motion for summary judgment and, instead, granted partial summary judgment in favor of Caffé Nero, finding that it was excused from paying rent during the period when in-person dining was prohibited because the sole purpose of its lease was frustrated by the governor's orders.

The doctrine of frustration of purpose provides that, "[w]here, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate the contrary." Id. (quoting Restatement (Second) of Contracts Section 265 (1981)). Because the "Governor's COVID-19 orders barred Caffé Nerro from allowing customers to consume food or drink inside the leased premises" for, at least, a portion of the time at issue, the court concluded that the principal purpose of the lease, as expressly negotiated by the parties, was substantially frustrated. The court also held that there were no "circumstances" or "language" to require the café to perform during the shutdown. To this end, the court held that there was no evidence to suggest that the parties contemplated "the risk of a global viral pandemic coming to Massachusetts and leading to a government order shutting down the entire restaurant industry ... ." Further, the court was not persuaded by the landlord's reliance on the force majeure and independent covenants provisions in the lease to argue that the tenant's obligation to pay rent remained regardless of any reason or circumstance. Concerning the force majeure provision, the court concluded that it addressed only impossibility, not frustration of purpose.

The court acknowledged that its decision is fact-specific, concluding that "[t]his is the rare case in which the summary judgment record establishes that performance under a contract was excused for frustration of purpose ... ." The court also noted that its decision did not address whether the café defaulted under the lease and therefore owed damages to the landlord for failing to pay rent once the governor's orders were eased from late June 2020 forward.

Conclusion

This case could impact a variety of entities, including landlords, tenants, operators and lenders. Holland & Knight is able to advise all such entities on the implication of this case and related pandemic-related contractual rights and obligation questions. For additional questions, please contact the authors, who have been monitoring the evolving state of the law throughout the United States.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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