In February, the Business Section of the Massachusetts Superior Court ruled that a restaurant that was closed due to Governor Baker’s order barring restaurants from allowing on-premises consumption of food or drinks did not have to pay rent during the period of forced closure. UMNV 205-207 Newbury, LLC v Caffe Nero Americas Inc. In this case, the landlord had terminated the lease, sought eviction and damages for the time before and after the lease was terminated plus attorneys’ fee. The Court ruled that the notice of default was in error and ineffective and that the lease was improperly terminated.
As each case is decided on its unique facts, it is important to point out the distinguishing facts of this case. The lease provided that the space could only be used for a restaurant in the Caffe Nero business model, which was primarily limited to inside service. The tenant did not pay rent during the forced closure but offered to pay reduced rent when it was allowed to resume some inside dining in June. Having determined that the landlord would not negotiate, the tenant walked away from its $3,000,000 investment. The lease did have “force majeure” and “independent covenants” clauses. The lease did not discuss or allocate the risk of a pandemic to either party.
The Court based its decision on the “frustration of purpose” doctrine under which “a party to a lease or other contract is excused from performing its contractual obligations …when an event neither anticipated nor caused by either party, the risk of which was not allocated by the contracts, destroys the object or purpose of the contract, thus destroying the value of performance”. The Court went on to say that “(F)rustration will similarly discharge an obligation to pay rent where a government order or regulation bars certain conduct or economic activity, it thereby substantially frustrates the principal purpose of the contract, and the non-occurrence of such an order or regulation was a basic assumption underlying the contract.”
The Court was basing its decision on prior Massachusetts cases that were analogous but did not deal with this pandemic.
The Court summarized by stating: “Whether 'frustration of purpose' excuses a party from continuing to perform contractual obligations turns on (i) what was the main purpose of the contract, (ii) has some event caused a change in circumstances such that continued performance can no longer achieve that purpose, and the value to the party of continuing to perform has been destroyed, (iii) was the non-occurrence of that event a basic assumption of the contract, and (iv) did the contract allocate the risk of that event to the party seeking to be excused from performance?”
Applying these principals to the facts of this case, the Court ruled that the lease provided that the tenant could only operate an inside dining restaurant on the premises and that the Governor’s order prevented the tenant from doing just that. Further, there was no evidence that the parties considered a pandemic in negotiating the lease and did not allocate the risk of loss to the tenant. The Court noted in particular that had the lease not limited the use of the premises to this single use, its ruling could have been different.
Very important to lawyers is the fact that the Court discussed and distinguished the independent covenants and force majeure provisions of the lease and ruled that neither prevented a ruling that “frustration of purpose” required negating the tenant’s duty to pay rent.
What does all this mean for landlords and tenants in Massachusetts? First, it is important to understand that this decision is not controlling law in Massachusetts because it was not issued by an appellate court. But the Business Section of the Superior Court is very prestigious and will be given great weight by other judges deciding similar issues. Second, the Court did absolutely nothing to reduce the impact of its decision on the landlord who still had to pay its mortgage, taxes and other overhead without the benefit of the rent it contracted to receive. Third, this case presents a unique factual situation which can be distinguished from other situations in many instances. For example, many commercial leases do not limit the use of the space to one use only. Many say “any other legal purpose” or use other language that would give the tenant the ability to use the space in other ways. Including such language may have enabled the Court to reach a different conclusion. Fourth, by implication the Court was adversely impressed that the landlord would not negotiate with the tenant to share the burden of the Governor’s order. Fifth, other judges may not be inclined to dismiss the force majeure clause in a lease, if there is one.
This case is likely just the tip of the iceberg that commercial landlords will face in the coming months and years. Many landlords will be facing suits identical or similar to this one. And there will be additional and even greater challenges caused by the pandemic because many tenants are talking about downsizing or leaving their leased spaces entirely. Rents will likely reduce but mortgages will not automatically change with the value of the rent roll or vacancies.
In our over 100 years of combined legal service, we have guided many Landlords and tenants through more than a few difficult real estate cycles. If we may assist you during this challenging cycle, please do not hesitate to call on us.