Update: New York Courts Enforce Lease Provisions and Reject COVID-19-Related Defenses

The spread of COVID-19 and the governmental restrictions that followed have caused commercial tenants significant financial strain, and some have sought to rescind their lease agreements or avoid their rent obligations under the common law doctrines of impossibility of performance and/or frustration of purpose. Earlier in the pandemic, we discussed the challenges tenants were expected to have when asserting these defenses in the face of contrary lease language.^[1] Several recent decisions demonstrate both the difficulty tenants will have overcoming contradictory lease language and the broad interpretation New York’s courts are willing to give such language.

Victoria’s Secret, LLC v. Herald Square Owner LLC

On Jan. 7, 2021, New York’s Commercial Division entered summary judgment against tenant Victoria’s Secret (VS), finding VS could not invoke the doctrines of impossibility or frustration to avoid its rental obligations or rescind the lease of its New York flagship store.^[2] The court determined that these common law doctrines were unavailable because, under the express terms of its lease agreement, VS had assumed the risk of a store closure from events other than its landlord’s failure to perform.^[3] Adopting a broad interpretation of the lease, the court rejected VS' argument that the lease provision assigning the risk of a store closure only applied to temporary closures, not “massive, government-ordered shutdown[s] of all non-essential commercial activity” in response to “a deadly virus ravaging the community.”^[4] The court held that the cause of the closure was irrelevant, and VS' agreement to continue paying rent during a store closure was dispositive.^[5]

35 E. 75th Street Corp. v. Christian Louboutin L.L.C.

Approximately one month before the VS decision, another New York court granted summary judgment to Christian Louboutin’s landlord.^[6] Louboutin, like VS, argued “the ongoing pandemic implicates” the doctrines of impossibility and frustration, “absolv[ing] defendant of its obligations under the lease.”^[7] Louboutin argued that the lease’s force majeure clause requiring it to continue paying rent despite any “restrictive governmental laws or regulations” was inapplicable because it did “not include any mention of illness, disease or epidemics — much less a global pandemic.”^[8] The court disagreed and, once again taking a broad view of the lease’s language, found Louboutin had assumed the risk of a business slowdown, “even if the precise causes ... were not specified” or even foreseeable.^[9]

BKNY1, Inc. v. 132 Capulet Holdings, LLC

In this case, tenant BKNY1 argued that it should not be required to pay rent for the two months its restaurants were forcibly shuttered by executive order, invoking the doctrines of impossibility and frustration.^[10] Rejecting this argument, the court held “the lease specifically provide[d] that plaintiff’s obligation to pay rent ‘shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under the lease ... by reason of government preemption or restrictions’ which is the case here.”^[11] It was irrelevant that the lease did not expressly contemplate the cause of the government restrictions.^[12] The court warned that it would vacate a prior injunction that had prevented the landlord from terminating the lease unless BKNY1 paid its rental arrears within 30 days.^[13]

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In all three of these recent decisions, New York courts adopted broad readings of express lease provisions to reject common law defenses and to continue enforcing tenants’ rental obligations. The courts consistently found that the tenants had assumed the risk of a government shutdown, and that the cause of such shutdown was immaterial.

^[1] _{See Kramer Levin Client Alert, “The Impact of COVID-19 on Commercial Leases” (Mar. 30, 2020); see also Kramer Levin Funds Talk, “Commercial Leases in New York: Enforcement Is on Pause, but Negotiations Should Be Ongoing” (June 1, 2020).}

^[2] _{See Victoria’s Secret, LLC v. Herald Square Owner LLC, Index No. 651833/2020, NYSCEF No. 47 (Decision & Order) (NY Sup. Ct. Jan. 7, 2021).}

^[3] _{Id. at 1.}

^[4] _{Victoria’s Secret, LLC, NYSCEF No. 31 (VS Memorandum in Opposition to SJ) at 4.}

^[5] _{See Victoria’s Secret, LLC, NYSCEF No. 47 (Decision & Order) at 1.}

^[6] _{See 35 E. 75th Street Corp. v. Christian Louboutin L.L.C., 2020 N.Y. Slip Op. 34063(U) (Trial Order) (NY Sup. Ct Dec. 9, 2020).}

^[7] _{Id. at *1.}

^[8] _{35 E. 75th Street Corp., Index No. 154883, NYSCEF No. 15 (Louboutin Memorandum in Opposition to SJ) at 12.}

_{[9] Id. at *3. (“Defendant’s performance may have been rendered financially disadvantageous by circumstances unforeseen by the parties at the time of the contract’s making. However, financial disadvantage to either of the contracting parties was not only foreseeable but was contemplated by the contract, even if the precise causes of such disadvantage were not specified.”)}

^[10] _{BKNY1, Inc. v. 132 Capulet Holdings, LLC, Index No. 508647/16, NYSCEF No. 571 at *3 (NY Sup. Ct. Sept. 25, 2020).}

^[11] _Id.

^[12] _Id.

^[13] _Id.