Commercial Tenants May Be Excused for Non-payment of Rent Due to Covid-19 Related Government Shutdowns

A Massachusetts trial Court recently issued a favorable decision for commercial tenants suffering from the effects of the Covid-19 pandemic.  The Court applied a legal doctrine called “frustration of purpose” to excuse the tenant’s non-payment of rent during the state-mandated shutdowns in the Spring and Summer of 2020.

The case arose from a dispute between a commercial landlord (UMNV) and its tenant, Caffé Nero. The lease was signed in 2017.  Caffé Nero then spent a year and considerable money building out the space for its intended purpose of serving customers with food and beverage service on premises, which was specified as the sole use of the space in the lease.

However, the Covid-19 pandemic struck, and on March 24, 2020 Caffé Nero was barred by order of Massachusetts Governor Baker from providing on-premises food and beverage services. Caffé Nero thereafter withheld rent on the basis that it could not use the space as it was intended or permitted under the lease.  When the government-imposed shutdown continued for multiple months, the landlord brought an eviction action and sought payment of back rent.

In its defense, Caffé Nero asserted that it was excused from paying rent based on the legal doctrine of “frustration of purpose.” It contended that the purpose of its lease with UMNV (to use the premises for food and beverage services) was “frustrated” due to a force outside of the parties’ control (i.e., a government shutdown order due to a pandemic).

Typically, in a dispute between a tenant and landlord, Courts strictly follow the lease terms in order to resolve the dispute. However, in this case, unusual circumstances that the world did not contemplate, namely a global pandemic, caused a shutdown of the tenant’s business. This contingency was not specifically addressed in the lease. As stated by Judge Kenneth Salinger, “there is no evidence that the risk of a global viral pandemic coming to Massachusetts and leading to a government order shutting down the entire restaurant industry was something the parties contemplated when they entered into the Lease.”  As such, the Court looked to the legal doctrine of “frustration of purpose” to resolve the dispute.

The Court took a commonsense approach in its analysis: “It would have made no business sense for the parties to enter into a lease providing that Caffé Nero may only use the leased premises for one narrow purpose, but must keep paying rent even if the only permissible use is no longer allowed or possible.”

Ultimately, the Court ruled that the lease terms did not preclude the applicability of the doctrine of frustration of purpose, and it found that Caffé Nero’s use of its leased space was “frustrated” by the government shutdown order.  It ruled that Caffé Nero was excused from its obligation to pay rent for the shutdown period (March 24 to June 22, 2020). (The Court’s decision is subject to a potential appeal.)

The potential legal and pragmatic impacts of this case are profound and extremely broad, as it opens the door to many other similarly situated businesses in Massachusetts to assert the same rationale based on similar lease provisions to excuse non-payment of rent during the period of a state-mandated shutdown order.

Commercial landlords will view this outcome as unfair because it fails to account for landlords’ obligations to pay the mortgage, taxes and other operating costs whether or not its tenant withholds rent. In the long term, lease modifications will likely be made to specifically address these issues. For example, we expect commercial landlords to include provisions in leases that do not excuse tenants for non-payment due to government-imposed shutdown orders, pandemics, and the like. Landlords will substantially tighten up these provisions, leaving tenants less wiggle room to make arguments like those advanced successfully by Caffé Nero.

What does this case mean for you?

Well, you should examine your lease for references to:

  • What the intended use of the premises is defined as;
  • A “force majeure” clause,[1] which discusses the parties obligations related to extraordinary events (i.e. war); and
  • Other provisions that dictate when payment may be excused.

The language in your lease related to these topics will indicate what your rights are, and if the Contract is silent or vague, then the legal doctrine of frustration of purpose may be applicable to you.

This article is the first in a three-part series discussing various decisions affecting commercial real estate related to the COVID-19 pandemic. The information provided does not, and is not intended to, constitute legal advice; instead, all information and content are for general informational purposes only. If you have any questions, please contact the author, Eric Asquith, or the Donovan Hatem attorney that handles your matters.

[1] A “force majeure” clause in a lease is triggered when exceptional and/or unforeseen circumstances deemed beyond the control of the landlord and tenant prevent performance under the lease. The Court in the Caffé Nero case distinguished the “force majeure” provision by stating it “addresses the risk that performance may become impossible, but does not address the distinct risk that the performance could still be possible even while the main purpose of the Lease is frustrated by events, not in the parties’ control.”

Related Attorneys: Jon Cowen, Stephen Willig