New Massachusetts COVID-19 Case May Have Relegated Caffé Nero to a Historic Footnote

When COVID-19 shut down the world, tenants struggled to pay rent and attempted to invoke force majeure clauses in their leases, as well as equitable doctrines such as impossibility, commercial impracticability, and frustration of purpose. Landlords prevailed for the most part, as force majeure provisions typically do not excuse performance obligations for the payment of money, and equitable doctrines typically were either trumped by force majeure provisions or did not apply because the triggering events were not unforeseeable or did not foreclose or substantially frustrate tenants from using their spaces. However, there were some cases that favored the tenant, typically involving non-retail spaces, such as movie theaters or dining establishments, that could not operate without being open, or cases where the tenant was in bankruptcy and the court afforded equitable relief.

One case that provided hope for tenants was a 2021 Massachusetts Superior Court case, Umnv 205-207 Newbury, LLC v. Caffé Nero America, Inc., commonly referred to as the Caffé Nero case. That case excused a tenant from having to pay rent as a result of the pandemic because the purpose of the lease was frustrated and frustration of purpose was not covered by the lease’s force majeure provision. Although there are certain facts that made Caffé Nero unique, it nonetheless offered a path for relief for more than two years.

In 2023, however, the Massachusetts Appeals Court— higher court to the Superior Court—decided Inland Commercial Real Estate Services, LLC v. ASA EWC, LLC, rejecting the Caffé Nero logic and finding a tenant breached the lease by failing to pay rent during the closure period and was not excused under frustration of purpose arguments similar to those raised in Caffé Nero. In fact, the Massachusetts Appeals Court dismissed Caffé Nero’s applicability in a one-sentence footnote: “EWC heavily relies on a Superior Court judge’s contrary decision in . . . Caffé Nero . . ., but that decision is not binding precedent.”

This article explores the Inland case and examines its impact on the relief tenants might obtain under equitable doctrines in future pandemic or truly extraordinary lifetime events.

The Caffé Nero Case

Landlord leased retail space to Caffé Nero. A condition in the lease was that Caffé Nero could only use the premises to operate a “Caffé Nero themed café” and for no other purpose.  Due to the pandemic, in March 2020, the Massachusetts Governor barred restaurants from allowing on-premises consumption of food and beverages, whether indoor or outdoor. Caffé Nero, therefore, temporarily closed its Newbury Street café and stopped paying rent. Landlord responded by terminating the lease and bringing a summary eviction action. Caffé Nero vacated the premises in late October 2020. Landlord asserted claims for unpaid, rent, interest, and administrative expenses for the months that Caffé Nero continued to occupy the premises, liquidated damages for the rest of the 15-year lease, and attorney fees and expenses.

The court denied the landlord’s motion for partial summary judgment, instead granting partial summary judgment in Caffé Nero’s favor without Caffé Nero even filing a summary judgment motion. The court found that neither the force majeure nor independent covenant provisions of the lease barred Caffé Nero’s frustration of purpose defense when Caffé Nero was barred from letting customers eat or drink inside the premises. The court determined that “Caffé Nero did not breach the lease by not paying rent . . . , [Landlord’s] notice of default was in error and not effective, and [Landlord] acted improperly in May when it terminated the lease for nonpayment of rent in April.” The court, however, ruled that the question of unpaid rent from the end of June until when Caffé Nero vacated the premises in October could not be ruled on in summary judgment because it turns on, in part, whether Caffé Nero was wrongfully evicted and has a complete defense to the rent claim.

Several noteworthy aspects of this case make it stand out from other cases, including the following:

1. The lease provided that Caffé Nero could only use the premises as a Caffé Nero-themed café. And Caffé Nero was further required to operate the café “in a manner consistent with other Caffé Nero locations in the Greater Boston area” to serve food and beverages “of first-class quality,” and could only offer take-out sales from “its regular sit-down restaurant menu.”
2. The court found that Caffé Nero’s use of the premises was frustrated, stating: “Since the Lease limited the permissible use of the leased space to a single purpose, it cannot be disputed that Caffé Nero’s continued ability to operate a café at the leased premises, and the absence of government orders barring all restaurants from serving customers inside, was a basic assumption underlying the Lease.”
3. Notably, the court stated that if the landlord “had allowed Caffé Nero to use the leased premises for other purposes not barred by government order, then the fact that Caffé Nero’s intended use was frustrated might not have discharged its obligation to pay rent.”
4. The court found that the force majeure provision addressed the risk that performance may become impossible but did “not address the distinct risk that the performance could still be possible even while the main purpose of the Lease is frustrated by events not in the parties’ control.”

The Inland Commercial Case and Others Reject Caffé Nero

The landlord entered into a lease with ASA EWC (EWC) for the operation of a “European Wax Center.” On March 23, 2020, the Massachusetts Governor issued an order closing the physical workplaces of all nonessential businesses, but on June 19, 2020, the governor issued an order allowing businesses like the tenant’s to reopen. EWC resumed its in-person operations in July 2020, but did not make any rent payments from March through September 2020. The landlord issued a notice to quit if no payment was made, and EWC made only one payment, which was for September 2020. The landlord then sent another notice terminating EWC’s tenancy, but EWC remained at the premises without paying rent through the trial in September 2021.

Unlike the trial court in Caffé Nero, the Massachusetts Appeals Court found that the temporary shutdown was not a valid frustration of purpose defense, stating that “[i]n the context of the COVID-19 pandemic, the vast majority of courts to have considered frustration of purpose have declined to apply the doctrine to temporary business closures caused by government orders.” As mentioned earlier, the appeals court disposed of the “contrary” Caffé Nero decision by simply noting in a footnote that it was “not binding precedent.”

The court found that in the factual circumstances of the Inland case, EWC failed to show the temporary closure “substantially frustrated the principal purpose of the lease” for three reasons: (1) EWC was already over three years into the 10-year lease; (2) EWC was forced to close its in-person operations for three months, a relatively short time compared to the over-all lease term; and (3) EWC remained in possession of the premises and had the ability to sell some goods.  The Court concluded that “[b]ecause the closure was temporary and occurred well into the lease term, and EWC was able to resume operations soon after, EWC has not established that the purpose of the lease was so frustrated that the transaction between the parties ‘make[s] little sense.’”

The Inland decision is in keeping with earlier warning signs that already spelled Caffé Nero’s doom. On December 15, 2022, the Massachusetts Land Court, in BP Prucenter Acquisition LLC v. Saks Fifth Avenue, LLC, 30 LCR 750 (Mass. Land Ct. 2022), found that the retailer Saks Fifth Avenue was able to invoke the lease’s force majeure provision to excuse the retailer from the termination of its lease for nonpayment during the months of the pandemic when state pandemic orders required it to close the store. In addressing whether the impossibility and frustration of purpose could apply, however, the court stated that “there is significant support for the proposition that those common law defenses are not available when the parties have included a force majeure clause in their contract, thereby anticipating the otherwise unanticipated.” BP Prucenter noted Caffé Nero in a footnote, stating that “this court parts company with the [Caffé Nero decision], in which it was stated that ‘the force majeure provision addresses the risk that performance may become impossible, but does not address the distinct risk that the performance could still be possible even while the main purpose of the Lease is frustrated by events not in the parties’ control’ (emphasis in original).” The land court concluded: “The issue has not been addressed by the Supreme Judicial Court, but this court anticipates that, if and when it does, the Supreme Judicial Court will follow what appears to be the majority view.”

Conclusion

The Inland decision appears to have shut the door to tenants’ potential relief under Caffé Nero’s interpretation of the frustration of purpose doctrine. While it remains that unique cases can yield unique results, such as when a lease has a narrow or sole use provision that restricts the tenant’s ability to operate its business at the premises (i.e., restaurants with narrow sit-down requirement or movie theaters that are required to show first-run films), Inland has made clear that, for the vast majority of cases, the frustration of purpose defense is difficult to prevail on in these temporary shutdown circumstances and could be barred if a force majeure provision is in play.