February 25, 2021 Articles

Score Another Win for the Tenants’ Bar in the Wake of COVID-19 Shutdown Orders

A Massachusetts judge rules that emergency orders frustrated the purpose of a lease for a café.

By Gina Abbadessa
The commercial tenants’ bar should be encouraged by this possible shift in jurisprudential trends.

The commercial tenants’ bar should be encouraged by this possible shift in jurisprudential trends.

Vladimir Vladimirov via GettyImages

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The recent case of UMNV 205-207 Newbury, LLC v. Caffé Nero Americas Inc., No. 2084CV01493-BLS2 (Mass. Super. Ct. 2021), provides an interesting glimpse at how courts may construe lease obligations during the COVID-19 pandemic in a more tenant-friendly fashion than some of the initial decisions that have been issued around the country would suggest. The case was before a justice of the Massachusetts Superior Court, in its Business Litigation Session, on a motion for partial summary judgment by the plaintiff UMNV 205-207 Newbury, LLC. The court ultimately denied UMNV’s motion for summary judgment and instead granted partial summary judgment for Caffé Nero Americas Inc., although Caffé Nero did not move for summary judgment—thereby reminding practitioners of the perils of moving for summary judgment, given courts’ authority under cognates of Federal Rule of Civil Procedure 56(c).

Factual Background

In June 2017, Caffé Nero entered into a 15-year lease of the premises located at 205-207 Newbury Street in Boston with the plaintiff UMNV 205-207 Newbury, LLC. The terms of the lease provide that Caffé Nero could use the leased premises solely under that name and solely as a provider of sit-down food and beverage service. Caffé Nero operated thusly until March 2020, when the COVID-19 pandemic prompted Massachusetts Governor Charles Baker to issue an order prohibiting restaurants from allowing any “on-premises consumption of food or beverages[.]” Under the order, restaurants and cafés could only provide takeout service.
 

Shortly thereafter, Caffé Nero informed UMNV that it could not pay rent while it was closed by order of the governor, and it asked for a rent waiver. Caffé Nero did not pay its April 2020 rent while it was closed. UMNV responded by refusing to waive the rent and by informing Caffé Nero that a failure to pay the April rent would result in Caffé Nero’s default under the lease. Nonetheless, Caffé Nero did not pay April 2020 rent, nor May 2020 rent. In May, UMNV again wrote to Caffé Nero ordering it to “quit and surrender the premises” because Caffé Nero had defaulted for nonpayment of rent. Caffé Nero did not quit the premises, and thereafter UMNV did not send Caffé Nero additional letters about the rent.

In June, Governor Baker issued a further order, allowing outdoor table service. Caffé Nero reopened and made sales, offering only takeout service and outdoor seating. On June 22, 2020, the governor issued an order permitting limited indoor table service, and Caffé Nero then opened for limited service inside the premises. Upon its reopening, Caffé Nero offered to pay UMNV a higher percentage of its sales in place of its usual fixed rent amount. UMNV refused the offer, and Caffé Nero continued to pay no rent.

On June 29, 2020, UMNV brought a summary process action in Boston Municipal Court to evict Caffé Nero based on its default for nonpayment of rent. Caffé Nero remained in the space until October 29, 2020, at which point it had removed its equipment and vacated. For the period between April and October 2020, Caffé Nero paid no rent despite remaining in the leased premises and, at times, being open for service.

The Superior Court’s Decision

The Massachusetts Superior Court based its analysis of whether Caffé Nero had defaulted under the parties’ lease on the contract doctrine of frustration of purpose. Pursuant to that doctrine, “a party to a lease or other contract is excused from performing its contractual obligations ‘when an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract, destroys the object or purpose of the contract, thus destroying the value of performance.’” Caffé Nero, slip op. at 5 (quoting Chase Precast Corp. v. John J. Paonessa Co., Inc., 409 Mass. 371, 374 (1991)). Frustration of purpose, as opposed to the doctrine of impossibility, does not mean that performance is impossible; it applies where the principal purpose and value of the contract have ceased to exist because of some extrinsic, unanticipated event.

Determining whether frustration of purpose has occurred typically involves questions of fact best reserved for trial. However, the court noted that here, where the material facts were not in dispute and where no rational view of the evidence would permit finding that a contractual obligation was not discharged because of frustration of purpose, the court could decide the issue at the summary judgment stage, as a matter of law. There was no dispute between the parties that the governor’s order prevented Caffé Nero from serving customers indoors between March 24, 2020 (when the initial order issued) and June 22, 2020 (when an additional order permitting limited indoor service issued). The particular terms of the lease, specifying explicitly how Caffé Nero was to use the leased premises, established the undisputed purpose of the contracting parties in reaching their agreement—for Caffé Nero to use the space to serve quality food and beverages through sit-down service for primarily on-premises consumption. Because Caffé Nero’s use of the space was so limited under the lease, the court held that Caffé Nero’s ability to operate in that fashion, for the entire duration of the lease, was a basic assumption of the contract. No evidence suggested that either party contemplated a global pandemic preventing Caffé Nero from operating, and certainly neither party caused the pandemic.

Having determined that an event occurred—an event not caused by either party and whose nonoccurrence was a basic assumption of the contract—the court went on to consider whether either party assumed the risk of such event in the lease contract. The lease contained a force majeure provision, stating, in relevant part, that neither party would be

liable for failure to perform . . . under this Lease, except for the payment of money, in the event it is prevented from so performing by . . . order or regulation of or by any governmental authority . . . or for any other cause beyond its reasonable control . . . [but] in no event shall either party be excused or delayed in payment of any money due under this Lease by reason of any of the foregoing.

The provision, as characterized by the court, contemplated excusing the parties from liability if performance was prevented, not merely if performance was frustrated. Therefore, nothing in this provision addressed frustration of purpose or prevented its application to the current factual situation, despite the force majeure provision.

A later provision did address a very narrow type of frustration of purpose—the possibility that the premises could become damaged or destroyed during the lease term. In that case, Caffé Nero would still be liable for paying rent, albeit at a reduced rate. However, that specific situation did not occur in this case, and the parties’ failure to address frustration of purpose in other contexts meant that the doctrine could be considered in other contexts. In other words, the contracting parties demonstrated an ability to contract around the common-law doctrine of frustration of purpose, allocating risk in a particular manner, under specific circumstances, i.e., substantial casualty to the leased premises, when they intended to do so. Had the parties intended to contract around frustration of purpose with respect to a pandemic, the text of the lease proves that they would have done so; however, the parties chose not to, leaving the court free to apply the common law to this uncontracted-for risk.

In addition, an “independent covenants” provision in the lease states that all the lease obligations were separate and independent and that therefore Caffé Nero must continue to pay rent in all events until the lease was terminated in its entirety. Although the provision indicates that Caffé Nero would be responsible for paying rent “in all events” and “without setoff, counterclaim, . . . deduction, reduction or defense[,]” the court explained that this provision must be understood in keeping with a fair construction of the larger contract. It would be illogical, the court reasoned, for the parties to allow Caffé Nero only a narrow use of the premises, but to nonetheless require Caffé Nero to pay rent if the only permitted use was made impossible by government orders issued beyond Caffé Nero’s control or even contemplation of circumstances that would be likely to occur. Indeed, the parties could not have intended that to be the case, as evidenced by the earlier clause allowing Caffé Nero to pay reduced rent in the event that the premises were destroyed or damaged. That is, if the parties truly intended that Caffé Nero be obligated to pay rent in any event, without exception, there would be no need for the provision dealing with damage or destruction of the premises. Reading the contract holistically in this fashion, the court held that the independent covenants provision did not establish that Caffé Nero assumed the risk of a government order preventing café operations.

The court ordered partial summary judgment for the defendant, holding that Caffé Nero’s obligation to pay rent between March 29 and June 22, 2020, was discharged under the doctrine of frustration of purpose; Caffé Nero was not in default of its lease during that period; and UMNV’s notice of lease termination provided to Caffé Nero in May 2020 was therefore ineffective. The court denied summary judgment to both parties on the issue of whether Caffé Nero was obliged to pay rent from June 22 to October 29, 2020, during which period it conducted limited indoor café service. That matter will proceed.

Possible Implications

The partial summary judgment decision relies partly on the particular facts of the case: the force majeure provision, the independent covenants provision, and the intent of the parties to the contract—as illuminated by the frustration of purpose provision explicitly addressing damage to or destruction of the leased premises. However, the decision does appear to open the door for similar arguments in other contexts. First, the court’s ruling suggests that, even when a contract contains a force majeure clause and a narrowly tailored frustration of purpose provision, a party can nonetheless successfully argue that neither party to the contract assumed the risk that the COVID-19 pandemic would occur.

Second, the court did not expressly limit application of its reasoning to retail leases. Rather, the court emphasized that the contract at issue was for a very narrow purpose (Caffé Nero’s operation of a sit-down café for on-site consumption of food and drinks), and therefore, given this highly limited permitted use, the parties could not have actually meant for Caffé Nero to be liable for rent in any and all events, including unforeseen events that would frustrate this limited permitted use of the premises. This leaves the possibility that the court’s reasoning could apply where contracts have similarly narrow purposes and a party argues that its purpose is frustrated (e.g., wedding contracts with vendors to provide service in a particular location on a particular day for a particular purpose). It seems less likely, but plausible nonetheless, that the decision could also support a similar argument where a contract’s purpose is much broader in scope (e.g., lease agreements to use “office space” generally for any business purpose), even where such a broad purpose is frustrated by unforeseen and uncontracted-for contingencies.

Caffé Nero is hardly the only retail tenant to have trouble paying rent during the COVID-19 pandemic. Following the Massachusetts Superior Court’s decision in Caffé Nero, retail tenants may be encouraged to defend their decisions not to pay rent during COVID-19-based shutdown periods in Massachusetts and in other jurisdictions. While the first-wave trend of decisions around the country was not generally as tenant-friendly, the Caffé Nero decision stands for the commonplace, practical proposition that courts are not inclined to assume that common-law doctrines do not apply, absent clear, express terms demonstrating a contrary intent. Many courts will not go out of their way to construe force majeure clauses as barring common-law affirmative defenses to contractual obligations. The commercial tenants’ bar should be encouraged by thoughtful decisions such as Caffé Nero, which may reflect a shift in jurisprudential trends in this area of the law.

Gina Abbadessa is an associate in Phillips & Angley’s real estate and land use litigation practice in Boston, Massachusetts.

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