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Does COVID Entitle Tenants to Lease Relief?

On June 29, 2021, the Appellate Division of NY State Supreme Court issued its first major ruling on a case related to whether the pandemic and related executive orders entitled a commercial tenant to rent abatement and rescission. In summary, for this case the answer was no.

In The Gap, Inc., v. 170 Broadway Retail Owner, LLC which was initiated in July 2020, the retailer sought rent abatement, refunds, and/or total rescission of it's lease. In October 2020, the NY State Supreme Court ruled in Gap's favor, but the landlord appealed, and the Appellate Division, First Department has now overturned the earlier decision.

You can read the full text of the court's decision here, but a few key points in this case were:

  1. The pandemic and Executive Orders do not constitute a Casualty (as defined in the lease) because "[t]hat portion of the lease refers to singular incidents causing physical damage to the premises and does not contemplate loss of use due to a pandemic or resulting government lockdown" (emphasis added).

  2. The tenant was not entitled to rescission because the "doctrine of frustration of purpose does not apply as a matter of law where, as here, the tenant was not 'completely deprived of the benefit of its bargain'" (emphasis added). The doctrines of frustration of purpose and impossibility - two distinct legal principles - have been the subject of much litigation since COVID-19 started. Law firm Holland & Knight published this informative blog article on the topic in April 2021. But in the present case, the Appellate Division focused less on legal theory, and more on the practical fact that The Gap did not initiate its claim until July 2020, by which time it was actually able to open and generate some revenue at this location (albeit a significantly reduced amount), so at that point it could no longer ask for rescission.

Of course - as Holland & Knight also mention - while cases across the country are being decided in different ways, the common denominator on commercial leases tends to be a close review and reliance upon the written terms as agreed. The outcome for The Gap might have been different if the lease included terms and provisions for "governmental actions or controls", "national emergencies", or similar concepts - potentially in the force majure and/or casualty clauses.

If you are launching a new site, relocating, or considering any change to a significant lease, it pays to assemble the right advisory team with both commercial & legal experts.

At Alzette Advisors, we often spend time aligning clients (and teams of brokers & attorneys) on shared risk assessments - considering not just probability of incident versus impact/value (as is common), but we also like to consider "ease of solving" on an upfront versus post-facto basis. There is an art to "front-loading" difficult topics - particularly those that are low-probability with high-value. Get in touch with us to discuss how!

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