When Governor Cuomo ordered most businesses to stop serving the public during the COVID-19 pandemic, some could not generate the income needed to pay rent. Some have argued that the impossibility of earning profits to pay rents should constitute a defense to the contractual obligation to pay rent. Two courts in New York have now rejected that argument, including the federal Southern District and a state supreme court.
In Backal Hospitality Group LLC v. 627 West 42nd Retail LLC (N.Y. Sup. Ct. 2020), the court noted that a lease term provided that if “the fixed rent [shall] become uncollectable by virtue of any law, governmental order or regulation, or direction of any public officer or body, Tenant shall enter into such agreement … as Landlord may request,…to permit Landlord to collect [rent].” Because this clause provided for negotiated settlement if a government order made rent “uncollectable,” the parties had bargained for a resolution other than just letting the tenant off the hook.
In Lantino v. Clay LLC , 2020 WL 2239957 (S.D.N.Y. 2020), the court rejected a gym owner’s argument to be relieved from rent payments because of the state shutdown order. The court held that New York law recognizes the impossibility defense only when impossible is rendered physically impossible and does not apply when “impossibility or difficulty of performance is occasioned only by financial difficulty or economic harship.”
In contrast, the U.S. Bankruptcy Court reduced rent by 75 percent pursuant to a force majeur clause in the lease. In re Hitz Restaurant Group, 616 B.R. 374, 68 Bankr. Ct. Dec. 221 (Bankr. N.D. Ill. 2020). The lease had seemingly contradictory clauses. On one hand, it “excused” the tenant from rent payments if “any of its obligations are prevented or delayed, retarded or hindered by…laws, governmental action or inaction, orders of government.” That ws the basis for the court’s ruling that the tenant was relieved of most but not of its rent obligation. On the other hand, the lease also provided that “lack of money shall not be grounds for Force Majeure.” This latter provision could have brought this lease within the contours of the decisions in the New York court described above, and another judge might have given this clause priority over the earlier one.