New York Court Rejects Impossibility of Performance as COVID-19 Lease Defense

This article discusses a recent New York court decision regarding a commercial tenant’s argument that the economic conditions precipitated by the COVID-19 pandemic excused the tenant’s payment of rent obligations under the impossibility of performance doctrine.

by Ashley Czechowski, Meyer Last, Janice Mac Avoy, Matthew D. Parrott, Jennifer A. Yashar
Statue of Liberty at dawn

Statue of Liberty at dawn

For the second time in just three months, a New York court has rejected a commercial tenant’s argument that the economic conditions precipitated by the COVID-19 pandemic excused the tenant’s payment of rent obligations under the impossibility of performance doctrine.

On August 3, 2020, in Backal Hospitality Group LLC v. 627 West 42nd Retail LLC (Index No. 154141/2020), the New York County Supreme Court denied a caterer tenant’s request for injunctive relief absolving it of its rent payment obligations under the subject lease and expressly rejected the tenant’s impossibility of performance argument. In 2018, the parties had entered into a lease pursuant to which the tenant provided a letter of credit. The Landlord drew down on the letter of credit after the tenant failed to pay rent. Amid the COVID-19 pandemic, the tenant commenced the action and filed an order to show cause requesting that the Court order the landlord to refund the entire value of the letter of credit, or, alternatively, to direct the landlord to post a bond in the amount of the letter of credit for the benefit of tenant pending resolution of the action. The tenant argued that a March 22, 2020 Executive Order issued by Governor Cuomo which prohibited large gatherings in New York due to the COVID-19 pandemic, rendered it impossible for the tenant to operate its business and generate the revenue required to pay rent to the landlord.

The Court rejected the tenant’s argument and denied its requests relating to the letter of credit. In doing so, the Court noted that the lease contained a clause providing that: “[i]f the fixed rent or any additional rent shall be or become uncollectable by virtue of any law, governmental order or regulation, or direction of any public officer or body, Tenant shall enter into such agreement or agreements and take such other action (without additional expense to Tenant) as Landlord may request, as may be legally permissible, to permit Landlord to collect [rent]….”] The Court reasoned that this clause demonstrated that the parties “evidently contemplated a scenario in which performance of the lease terms by plaintiffs might become prohibited by a governmental order, and agreed that, if such a situation arose, [the parties] would reach an agreement regarding the collection of rent at the conclusion of the governmental restriction.”

Notably, the Backal decision is consistent with Lantino v. Clay LLC, No. 1:18-cv-12247, 2020 WL 2239957 (S.D.N.Y. May 8, 2020), a case decided three months earlier in which a New York federal court similarly rejected a gym operator’s argument that its performance should be excused under the doctrine of impossibility due to one of the Executive Orders issued by Governor Cuomo. In Lantino, as in Backal, the tenant had argued that it should be excused of its payment obligations under the impossibility of performance doctrine because it was prohibited from operating its gym during the term of the Executive Order and was therefore unable to generate revenue required to pay the landlord during that period. The Court held that at best, the tenant had merely established financial difficulties arising out of the COVID-19 pandemic and that this did not excuse their obligation to make the required regular payments.

The lease clause that the Backal court relied on to negate the tenant’s claim of impossibility of performance has traditionally been inserted into many New York leases because of the periodic concerns that New York City might seek to impose commercial rent control laws. The existence of such a clause is not dispositive, however, and even in the absence of such a clause, courts are not likely to apply the impossibility doctrine, which is intended to excuse a party from performance under a contract only when it is truly impossible for a party to perform. Where, however, a tenant’s performance under a lease is merely made more difficult or economically unprofitable, such performance (i.e., payment of rent) will not be excused. These two cases confirm that the defense of impossibility is applied by New York courts narrowly and strictly, and limited to those instances where a tenant’s ability to perform is entirely destroyed.

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Meyer Last

Real estate partner

Meyer Last is a real estate partner at the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, resident in the New York office. Mr. Last focuses his practice on complex real estate transactions with a particular emphasis on large commercial leasing for both landlords and tenants.

Jennifer A. Yashar

Real estate partner

Jennifer A. Yashar is a real estate partner at the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, resident in the New York office. Ms. Yashar’s practice covers a broad range of commercial real estate transactions, including commercial leasing for both landlords and tenants, acquisitions, dispositions, and joint ventures.

Janice Mac Avoy

Real estate and litigation partner

Janice Mac Avoy is a real estate and litigation partner at the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, resident in the New York office. Ms. Mac Avoy concentrates her practice on complex real estate-related transactions and disputes, commercial litigation and arbitration, complex commercial landlord tenant disputes and commercial fair market rent arbitrations.

Matthew D. Parrott

Real estate and litigation partner

Matthew D. Parrott is a real estate and litigation partner at the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, resident in the New York office. Mr. Parrott concentrates his practice on complex real estate-related transactions and has extensive experience handling matters involving partnership disputes, breach of contract claims, commercial leasing disputes, construction projects, Ponzi schemes, RICO, corporate merger and acquisition transactions, and fraudulent transfer claims.

Ashley A. Czechowski

Litigation associate

Ashley A. Czechowski is a litigation associate at the law firm Fried, Frank, Harris, Shriver & Jacobson LLP, resident in the New York office. Ms. Czechowski focuses her practice on complex litigation-related matters.