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Shub & Associates

Landlords May Find Themselves In “Frustrating” Circumstances

Attorneys nationwide are curiously anticipating the myriad of inevitable legal claims that will be brought in connection to COVID-19 and the resulting shutdowns and restrictions. Two seldom-used legal doctrines may be of particular importance when bringing such claims.

The first of these doctrines, the contractual defense of impossibility, may be utilized when an unforeseeable event, which occurred despite no fault or wrongdoing by a party to the contract, results in the performance of the contract being “impossible.” Alternatively, if the acts, mechanisms, processes, or costs required to perform would now be significantly more difficult or expensive, this defense remains potentially applicable.

The second doctrine, frustration of purpose, is a companion to the impossibility doctrine and may be used when unforeseen events prevent the performance of a contract from being useful or providing value to the party bringing the claim. In the legal treatise, The Restatement (Second) of Contracts, Section 265, it states:

“The frustration must be so severe that it is not fairly to be regarded within the risks that he assumed under the contract.”

Section 265 further states that:

“[w]here, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.” The Restatement commentary further explains that Section 265 requires that (1) the purpose that is frustrated was a “principal purpose” in making the contract, such that without it the transaction “would make little sense”; (2) the frustration is substantial; and (3) the non-occurrence of the frustrating event was a basic assumption on which the contract was made. Restatement (Second) of Contracts § 265, cmt. a.

An example of a circumstance in which the frustration of purpose doctrine may be applicable is an event that was intended to host 2,500 attendees now being reduced to 50 attendees pursuant to applicable COVID-19 restrictions. Although the event can still take place, the purpose and intent of the event has been severely frustrated due to only 50 attendees being eligible.

One of the first reported court rulings in connection to the frustration of purpose doctrine during the COVID-19 era came from the Massachusetts Superior Court which addressed whether this doctrine should be applied to entities failing to pay rent during the mandatory COVID-19 shutdowns. In UMNV 205-207 Newbury LLC (UrbanMeritage) v. Caffe Nero Americas, Inc., Suffolk Superior Court CA 2084CV01493-BLS2, Caffe Nero, a company with more than 1,000 coffee shops worldwide, requested a rent-reduction in connection to its $13,000 a month location on Newbury Street in Boston’s Back Bay. The landlord, UrbanMeritage, rejected the request, and eventually filed a lawsuit against Caffe Nero seeking upwards of $300,000 in back rent, damages and legal fees.

Despite not paying rent for approximately six months, the court accepted Caffe Nero’s frustration of purpose argument, thereby skirting the lease’s force majeure and independent covenant provisions, denying UrbanMeritage’s motion for summary judgment, and granting Caffe Nero’s motion for summary judgment by ruling that Caffe Nero’s obligation to pay rent was discharged under the frustration of purpose doctrine, as Caffe Nero did not breach the lease and UrbanMeritage’s termination of the lease for non-payment of the April rent was improper. Of note, apparently, Caffe Nero was able to reach agreements with every Landlord except UrbanMeritage.

This unexpected ruling should be beneficial for cafes, restaurants and other tenants who have been similarly affected by the COVID-19 shutdown and restrictions, and who may have a lesser ability to pay the entirety of their rents during the struggles levied by the pandemic upon big and small business alike.