The New York courts, which are already experiencing backlogs, expect a surge of new cases related to the effects of the current economic crisis, especially in the landlord-tenant sector, as the pandemic’s disastrous effects have weakened the ability of residential and commercial tenants to pay rent. Are there legal arguments tenants can use to try and win rent forgiveness from the courts? With current legal precedent, the chances of terminating a lease or excusing rent payment through litigation are very low. Here are the three main arguments that will be used to litigate the effects of the pandemic on the real estate sector in the coming months.
Impossibility of Performance
The argument of impossibility of performance asserts that the pandemic made it impossible for a tenant to perform their side of the contract. An example where impossibility could be used is a contract between a venue and a music festival. A law that prohibits gatherings of over 100 people makes the contract impossible to fulfill. For this argument to hold weight in New York court, the tenant must prove that the pandemic was unforeseeable – which may be difficult. Furthemore, the tenant must prove that the law prohibited the performance of the contract. There is a gray area here. Does the closing of a physical store due to an executive order count as prohibited performance, even when online business is still allowed? Lastly, tenants must prove that the pandemic itself caused the impossibility of performance.
Frustration of Purpose
An argument that is closely related to impossibility of performance, frustration of purpose is the idea that, if something arises that makes a contract (in this case, a lease) defunct for at least one of the parties, then that party does not have to fulfill its side of the contract. For this theory to work in New York law, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.” PPF Safeguard, LLC v. BCR Safeguard Holding, LLC. This means that frustration of purpose applies to situations where fulfilling the contract is technically possible, but an intervening event (i.e. the pandemic) made performance of the contract by one side have drastically different consequences from what the parties intended at the time the contract was signed. However, no previous cases address whether the frustrating event can be of temporary duration (i.e. a pandemic). This will likely be a point of contention in future litigation.
Force Majeure
Force majeure is one of the most widely discussed areas of contract law since the onset of the pandemic. A force majeure clause is a provision in a lease that excuses performance of the contract if certain events occur – usually a natural disaster. First, a lease must have a force majeure clause in order to use this argument for nonpayment of rent. Also, the court cannot overrule the contract if the clause says that a force majeure event does not excuse payment of rent. Some contracts may include a general category of force majeure events such as “causes beyond the parties control” or an “act of god”. There is substantial opportunity for interpretation with these provisions. For example, can a pandemic be considered an “Act of God” when it was the government’s pause order that caused the inability to pay rent, not the virus? Overall, the language of the contract is critical when addressing force majeure events.
Sources:
Bowman, J. et. al. (March 2020) Client Alert: An Introduction to the Doctrines of Impossibility and Frustration of Purpose from The National Law Review https://www.natlawreview.com/article/client-alert-introduction-to-doctrines-impossibility-and-frustration-purpose Accessed September 16 2020
Bowman, J. et. al. (March 2020) Client Alert: Force Majeure Clauses and COVID-19: What Hotel Owners and Operators Need to Know from The National Law Review https://www.natlawreview.com/article/client-alert-force-majeure-clauses-and-covid-19-what-hotel-owners-and-operators-need Accessed September 16 2020
Leitman Bailey, A. and Treiman, D. (September 2020) New York’s Commercial Lease Defenses to Paying Rent from Law Journal Newsletters https://www.lawjournalnewsletters.com/2020/09/01/new-yorks-commercial-lease-defenses-to-paying-rent/ Accessed September 16 2020