Article contributed by John B. Horgan, Ellenoff Grossman & Schole LLP
Restaurants have suffered tremendously from the COVID-19 pandemic, as public health regulations intended to combat the virus and slow its spread have drastically undercut the economics of restaurant dining.
As a result, many restaurants have either closed or entered into revised lease terms with their landlords to secure lower monthly rent obligations. Other restaurants have decided simply not to pay rent. That latter path is dangerous, because, as a recent decision from the Supreme Court of the State of New York, Monroe County clarifies, COVID-19 related regulations and restrictions are not necessarily a defense to a restaurant’s obligation to pay rent pursuant to its lease, nor do they create a right to terminate the lease before its contractual expiration.
In that case, University Square San Antonio, TX., LLC v. Mega Furniture Dezavala, LLC and Mega Furniture & Accessories, LLC (Monroe County Index No. E2020003170, October 20, 2020), the Court considered an “impossibility and frustration of purpose” defense from a tenant which had defaulted on its rent obligation, and claimed entitlement to termination of the lease, based upon the COVID-19 Pandemic and associated state and local executive orders in Texas. Specifically, on March 31, 2020, the tenant claimed that the aforementioned COVID-19 regulations made it impossible for it to operate its business, and thus to pay its rent. The tenant then unilaterally declared the lease terminated, vacated the premises, and surrendered the keys to its landlord.
The landlord sued its tenant, seeking all then-unpaid rent and all rent due during the remainder of the lease; the landlord pointed to language in the lease which mandated that the tenant’s obligation to pay rent survived despite “restrictive governmental laws or regulation”. The court specifically found that business interruption/disruption caused by COVID-19 and its associated public health regulations did not relieve the tenant of its obligation to pay rent or create an option whereby the tenant could terminate the lease. The court also rejected certain of the tenant’s arguments which touched upon the force majeure doctrine – effectively that it was excused from compliance with the lease due to the effects of forces outside its control (in this case, COVID-19 and public health regulations to combat it). The court awarded the landlord damages in the amount of $4,034,476.78, plus attorneys’ fees and costs.
New York law does not assume that a party’s obligations under a contract are excused on the basis of force majeure unless so stated in the contract’s terms; even then, contractual force majeure clauses must be narrowly construed. Even with respect to the slightly broader doctrines of impossibility of performance and frustration of purpose, restaurants should know that these doctrines require that contract performance be rendered “impossible” by unforeseeable events. New York courts specifically have held that such unforeseeable events do not include sudden economic downturns or changes to local zoning laws, which are analogous to the state and local public health regulations in Texas that Mega Furniture claimed made it impossible to operate its business (and thus excused its obligation to pay its rent). Litigants are also unlikely to succeed in arguing that, while technically possible, unforeseen and unforeseeable events have destroyed the underlying business purpose of a contract; New York courts are clear that changing economics, even when sudden and unforeseen, do not “frustrate the purpose” of commercial leases.
Any restaurant facing the decision of whether to pay rent that may no longer be affordable must scrutinize the terms of its lease: does the lease and/or any applicable rider(s) thereto contain a clause excusing the payment of rent due to force majeure? If so, how is force majeure defined – specifically, does the definition include “pandemics” or “public safety emergencies”? If the lease and/or rider does not include force majeure provisions, does it otherwise excuse the non-performance of contractual obligations in the event of an emergency? If so, how is that emergency defined? Does the lease and/or rider otherwise apportion to the landlord the risk of adverse laws or regulations?
Restaurants should keep in mind that, even if their leases contain the foregoing provisions, absent express language to the contrary, courts will often construe these provisions as excusing non-performance only during the emergency; in other words, if the obligation to pay rent is excused, it will likely be excused only while the emergency is ongoing (whether unpaid rent during the emergency would need to be repaid after the emergency ends usually will be determined by the specific lease terms).
Because the law assumes that parties to a commercial lease are sufficiently sophisticated that the lease language reflects the parties’ specific agreement terms, courts will enforce lease terms strictly. An unexpected change in business circumstances does not automatically alter lease terms to the tenant’s specific advantage: the long term security of a fixed rent over time is a benefit of both the restaurant and its landlord, which will be enforced by the courts. Forewarned is forearmed.
John B. Horgan is a partner at Ellenoff Grossman & Schole LLP, where he practices commercial litigation. He represents clients before state and federal trial and appellate courts, as well as AAA, JAMS, private arbitration panels, and the SEC. Mr. Horgan has extensive experience representing restaurants in complex litigations, and can be reached at jhorgan@egsllp.com or via phone at 212-370-1300.
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