March 30, 2021

March Decisions Bring Mixed Results for Parties to New York COVID-19 Commercial Lease Disputes

Holland & Knight Retail and Commercial Development and Leasing Blog
Jessica Ragosta Early | Benjamin R. Wilson | Madelaine J. Harrington
Retail and Commercial Development and Leasing Blog

Two recent cases from New York state court came out on opposite ends of the landlord-tenant and landlord-guarantor divides over COVID-19-related commercial lease disputes. On the pro-landlord end of the spectrum, in Mept 757 Third Ave. LLC v. Grant, No. 653267/2020 (N.Y. Sup. Ct. Mar. 1, 2021), a judge in New York County kicked off the month by concluding that the pandemic's existence and economic fallout did not frustrate the purpose of the tenant's lease for commercial office space, such that the guarantor was liable for its rent arrears. In reaching that conclusion, the court relied primarily on the fact that the tenant's business was still able to operate (albeit less profitably) and there was no government order requiring offices to close. The court went on to conclude that the guarantor was liable for the rent arrears despite a New York City Administrative Code provision relieving certain guarantors of liability for defaults caused by COVID-19 because the tenant was not covered by any qualifying COVID-19 government order and had a history of pre-pandemic defaults.

Two weeks later, at the other end of the spectrum, a judge in Kings County issued an order in 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, No. 510160/2020 (Mar. 15, 2021) siding with the tenant and guarantor. The court concluded that the tenant's performance of its rent obligations was objectively impossible, and thus excused under the doctrine of impossibility, during the period of time when it was forced to close by a pandemic-related government order. The court further held that the landlord's attempt to enforce a guarantee that it knew or reasonably should have known was not enforceable under the Administrative Code constituted "commercial tenant harassment."

Summaries of the cases follow.

Mept 757 Third Ave. LLC v. Grant

On March 1, 2021, the Hon. Arlene P. Bluth, New York Supreme Court, New York County rejected a frustration-of-purpose defense involving a guarantee of a lease for two floors of a commercial office building. Mept 757 Third Ave. LLC (Mept) brought an action against Hayim Grant, the guarantor of Mept's tenant, following the tenant's default on its lease for nonpayment of rent. A prior action between Mept and the tenant was settled in July 2019, whereby the tenant agreed to pay the then-existing rent arrears, totaling nearly $368,000 over an 11-month period. In its action against Grant, Mept claimed that the tenant defaulted on these payments and incurred additional rent arrears, such that the tenant owed more than the $500,000 upper limit of the guarantee.

In response, Grant argued that the "ongoing pandemic . . . limited the number of persons permitted to be in the premises . . . and this [had] frustrated the purpose of the lease." Specifically, he claimed that the tenant's business model was to license the leased office space to third parties. Grant claimed that because the tenant could not find as many customers due to COVID-19 restrictions on the number of people allowed in offices, the tenant's revenue was reduced, along with its ability to pay rent. In response, Mept presented evidence that the building had remained open and the floors in question had been used throughout the pandemic.

The court rejected Grant's frustration-of-purpose defense and entered summary judgment in favor of Mept. In particular, the court noted that "a reduction in potential revenue is not the same as completely frustrating the purpose of the contract." The court justified its decision by explaining that "[s]ometimes, outside factors reduce the profitability of businesses . . . [b]ut that does not mean that defendant can raise an issue of fact to simply rip up the contract."

The court went on to reject Grant's argument that it could not be held liable as guarantor for the tenant's rent arrears because of Administrative Code § 22-1005. That section applies to personal guarantees for payment of rent or other fees or charges for real property located within New York City. Such guarantees are unenforceable under § 22-1005 if: 1) during the pandemic the tenant was subject to a government order prohibiting on-premises food or beverage service, limiting in-person shopping in nonessential retail establishments, or requiring closure to members of the public; and 2) the default or event causing the guarantor to be liable occurred between March 7, 2020, and March 31, 2021. The court found that the tenant did not satisfy either criteria because it did not fall into any of the specified government orders and the tenant had a pre-pandemic history of not paying rent.

267 Development, LLC v. Brooklyn Babies and Toddlers, LLC

A different result in another landlord-tenant-guarantor dispute was reached two weeks later. On March 15, 2021, the Hon. Loren Baily-Schiffman, New York Supreme Court, Kings County held that a commercial tenant's rent obligations were excused under the impossibility doctrine and the landlord's attempt to hold the guarantor liable for that tenant's rent payments constituted "commercial tenant harassment" under the New York City Administrative Code. The tenant, Brooklyn Babies and Toddlers, LLC (BB), was required by government order to close its business during the pandemic. The landlord, 267 Development, LLC (267 Development), brought an action for unpaid rent against BB and an individual who personally guaranteed BB's payments under the lease.

The court rejected BB's argument that its performance was excused by force majeure because the lease lacked a force majeure provision, and the court did not reach a frustration of purpose analysis. Instead, it held that BB's performance was excused by the doctrine of impossibility. Under New York law, it is a defense to breach of contract if the subject matter of the contract or the means of performance have been "destroyed," such that performance is "objectively impossible." It is not sufficient if an event has only made performance prohibitively expensive or impractical. And the triggering event must have been unanticipated and unforeseeable.

The court concluded that the government shutdown order rendered BB's performance objectively impossible while that order was in effect. The court further held that "[t]he government shutdown was unforeseeable and could not have been built into the contract." Accordingly, the court denied 267 Development's motion for summary judgment and held that all of its causes of action against BB were barred by the doctrine of impossibility.

The court went on to strike all of 267 Development's causes of action against the guarantor because there was no underlying default for which the guarantor could be held liable. In addition, the court granted summary judgment in favor of the guarantor on her counterclaim alleging that, in advancing claims against the guarantor, 267 Development had engaged in "commercial tenant harassment." Under § 22-902(a) (11) (14) of the New York City Administrative Code, a landlord can be held liable for "commercial tenant harassment" if the landlord attempts to enforce a personal liability guarantee that it knows or reasonably should know is not enforceable pursuant to § 22-1005. The court agreed that 267 Development should have known that the two claims asserted against the guarantor were barred by § 22-1005.

Conclusion

These cases impact a variety of entities, including landlords, tenants, guarantors, lenders and others, and demonstrate that outcomes depend upon several factors, including pre-pandemic payment history, specific contractual terms, accessibility to the leased spaced and broader building access, the impacts of the pandemic and government orders expressly prohibiting or limiting the operation of a tenant's underlying business. Holland & Knight is able to advise all such entities on the implication of these cases and other questions concerning pandemic-related contractual rights and obligations. For additional questions, please contact the authors, who monitor daily the evolving state of the law throughout the United States.

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