Among the problems resulting from COVID-19, is the pandemic’s effect on business. Numerous businesses were forced to close due to lock downs and supply chain issues. The economic slowdowns and business closures caused by the pandemic has generated much litigation; a great deal of which has occurred in the landlord/tenant arena. [This BLOG has addressed landlord/tenant COVID-19 related litigation [here], [here], [here], [here], [here] and [here].] As discussed in this BLOG’s prior articles, commercial tenants have generally been unsuccessful in defending rent arrears and eviction cases by relying on, inter alia, the doctrines of frustration of purpose and impossibility of performance.
A landlord makes it prima facie case for rent arrears by “submit[ing] the original lease … and a detailed rent statement documenting defendant’s outstanding rent….” Dee Cee Assoc. LLC v. 44 Beehan Corp., 148 A.D.3d 636, 640 – 41 (1st Dep’t 2017); see also Kate Spade & Co., LLC v. G-CNY Group LLC, 63 Misc. 3d 1205(A) at *3 (Civil Ct., City of New York 2019).
Many tenants have interposed defenses such as “frustration of purpose” and “impossibility” in response to rent arrears suits in the COVID era. The Appellate Division, First Department, has described frustration of purpose as follows:
For a party to a contract to invoke frustration of purpose as a defense for nonperformance, 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. The doctrine applies when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.
PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (1st Dep’t 2011) (citations and internal quotation marks omitted); see also Schmaltz Brewing Co., LLC v. Dog Cart Mgt LLC, 202 A.D.3d 1349, 1352 (3rd Dep’t 2022).
Impossibility “is an affirmative defense under New York law against liability for nonperformance of a contractual obligation. Siemens Energy, Inc. v. Petroleos De Venezuela, S.A., 82 F.4th 144, 154 (2nd Cir. 2023) (applying New York law). The Appellate Division, First Department, has explained the defense of impossibility as follows:
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. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract. The excuse of impossibility is generally “limited to the destruction of the means of performance by an act of God, vis major, or by law.
Kolodin v. Valenti, 115 A.D.3d 197, 200 (1st Dep’t 2014) (citations, internal quotation marks and brackets omitted); see also Siemens, supra, at 153 – 54.
Durst Pyramid LLC v. Silver Cinemas Acquisition Co., decided by the First Department on December 7, 2023, addressed these issues. [Eds. Note: some of the facts herein were obtained from the underlying court file available on the NYSCEF system.] The motion court, in its decision and order, recognized that the action “is a dispute, one of many in New York courts, between a commercial tenant and its former landlord about whether the tenant may be relieved of its obligation to pay rent due to disruptions caused by the COVID-19 pandemic.” The defendant/tenant is a movie theatre operator that, in 2016, entered into a twenty-year lease with the plaintiff/landlord. The premises, located in Manhattan, were to be used as a movie theatre. The tenant was behind in rent prior to the pandemic and stopped paying rent once movie theatres were ordered to be shut down in March 2020. In August 2020, the tenant surrendered to the landlord physical possession of the premises. Later that year, the landlord commenced an action against, inter alia, the tenant to collect rent arrears and other charges. The landlord moved for summary judgment on, inter alia, its claim for rent arrears.
As to the landlord’s evidentiary showing on its arrears claim, the motion court stated:
Landlord is entitled to summary judgment against Tenant on its First Cause of Action for breach of contract, based on unpaid Rent Arrears under the Lease from January 1, 2020, through September 11, 2020, in the amount of $1,082,317.00. Landlord’s evidentiary submission shows: (i) the existence of a valid, binding Lease; (ii) the Lease provisions required Tenant to pay rent and additional charges without offset, reduction, counterclaim and/or deduction; (iii) Tenant’s undisputed failure to pay rent due and owing; and (iv) Landlord’s calculation of the Rent Arrears in the amount of $1,082,317.00. That evidence establishes a prima facie case for entitlement to summary judgment (Thor Gallery at S. Dekalb, LLC v Reliance Mediaworks (USA) Inc., 143 AD3d 498, 498 [1st Dept 2016]). [Record citations, internal quotation marks and parentheticals omitted; hyperlink added.]
The motion court held that plaintiff/landlord satisfied its burden on its arrears claim and summarily rejected defendant/tenant’s frustration of purpose and impossibility defenses, noting that a “steady drumbeat of New York cases have rejected those doctrines as defenses to claims for unpaid rent, despite government restrictions that temporarily limited, or even outlawed, commercial tenants’ businesses.” (Citations omitted.) The motion court recognized that temporary closures in the face of a long-term lease does not “give rise to a viable frustration defense.”
As to its affirmance of the motion court’s grant of summary judgment to the landlord and its dismissal of the tenant’s frustration and impossibility affirmative defenses, the First Department stated:
The landlord established its entitlement to summary judgment on its cause of action for rent arrears by submitting documentary evidence establishing the existence of a valid lease signed by defendant tenant Silver Cinemas Acquisition and a guaranty signed by defendant guarantor Silver Holdco, Inc., and by submitting affidavits along with invoices and ledgers showing that neither the tenant nor the guarantor paid rent from January 1, 2020 through September 11, 2020. This evidence was sufficient to establish a cause of action for rent arrears.
Supreme Court also properly dismissed defendants’ affirmative defenses of frustration of purpose, impossibility, and failure of consideration because under the terms of the force majeure provision of the lease, the temporary disruption that the COVID-19 pandemic caused to the tenant’s business was foreseeable and was not serious enough for unilateral rescission of a 20-year lease.
