Pandemic Does Not Excuse Commercial Tenant's Obligations Under Lease

On May 19, 2021, Justice Cohen of the New York County Commercial Division issued a decision in Hugo Boss Retail, Inc. v. A/R Retail, LLC, 2021 NY Slip Op. 50458(U), holding that the Covid-19 pandemic did not excuse a commercial tenant's obligations under its lease, explaining:

A number of New York courts assessing commercial lease disputes amidst the COVID-19 pandemic have held that the temporary and evolving restrictions on a commercial tenant's business wrought by the public health emergency do not warrant rescission or other relief based on frustration of purpose.

The Southern District of New York reached a similar conclusion in Gap Inc. v Ponte Gadea New York LLC, 20 CV 4541-LTS-KHP, 2021 WL 861121, at *8 [SD NY Mar. 8, 2021]. The court found that the tenant in that case did not show that the purpose of the lease ("operation of a 'first-class retail business'") was so completely frustrated by the COVD-19 pandemic that the transaction makes little sense. Significantly, Gap was able to operate its stores, albeit in a limited capacity, during the pandemic. In those circumstances, the court concluded that while undeniably unfortunate, the COVID-19 pandemic has not amounted to a frustration of the Lease's purpose of Gap operating a retail business at the Premises.

The same is true here. Tenant's core argument is that the pandemic-related restrictions on its use of the leased premises has entirely frustrated the express purpose of the Lease. However, the facts, which are largely undisputed, do not support that conclusion. The pandemic triggered several months of shutdown followed by an evolving set of capacity restrictions that have reduced (but not eliminated) Tenant's ability to generate revenue from its retail operation. While there are no guarantees, the path forward appears to be toward further relaxation or elimination of capacity restrictions. Moreover, as Tenant acknowledged in the April Letter, the Store generated financial losses even before the pandemic, and Tenant's senior executive stated that part of the Store's purpose was to promote visibility, which is not frustrated by the dissipating capacity restrictions.

In sum, although the adverse economic effects of the pandemic undoubtedly are real and significant, they do not rise to the level of triggering an extra-contractual common law right to rescind a 13-year lease.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.