Rental Abatements of Commercial Leases during New York Coronavirus Lockdown based on the Legal Doctrine of Commercial Frustration/Frustration of Purpose

New York Commercial Tenants, because of New York State mandatory business shutdown rules were, in many cases, locked out or otherwise not able to completely utilize their rental properties for a period of time because of these government lockdowns. Many NY commercial tenants are filing to New York court to receive temporary rental abatements for the period of time these tenants were unable to utilize their rented properties. Other tenants are claiming that their leases are terminated.

This law firm was approached by both landlords and tenants facing these realities, thus, we have decided to write a brief article on this issue to assist our clients in deciding how to defend and/or pursue an action. For another article on frustration of purpose in contracts in New York see: Tools to Avoid Contracts in New York: The BREXIT FALLOUT

New York Jurisprudence on Commercial Frustration and Rental Abatements Rights

New York case law on the issue of whether landlords must grant rental abatements for periods of time that a tenant is unable to utilize a commercial rental property because of a government mandate is not settled in New York. We are of the opinion, because of the current makeup of the New York courts, that tenants have a high chance to getting to a trial on the merits. The main arguments that shall be posed by tenants shall relate to:

Frustration of Purpose (Temporal vs. Total Frustration of Purpose);
Impossibility; and/or
Force Majeure

This post shall, solely, deal with the issue of Frustration of Purpose in New York. We shall be writing additional articles on Impossibility, Force Majeure and other issues over the next week.

Temporal Frustration of Purpose in New York

In our research, no New York court has, since WWII, dealt with the issue of a Temporal Frustration of Purpose (also know as, Temporal Commercial Frustration). The major New York case law on this issue considered matters related to a frustration of purpose that proved to find a contract, in of itself, substantially frustrated in its entirety.

NY Frustration of Purpose, in short, is:

“Under contract law, an excuse that can be used by a buyer (tenant) for non-performance of contractual duties when a later and unforeseen event impedes the buyer’s purpose for entering into the contract, and the seller (landlord) at the time of entering the contract, knew of the buyer’s purpose.
Legal Information Institute, Cornell Law School

New York courts have defined Frustration of Purpose to consist of three elements:

Subtantial Frustration;
non-occurrence of the frustrating event is a basic assumption on which the contract was made; and
the frustrating event is unforeseeable.

We are of the opinion, that Element No. 2 and No. 3 (however arguments do exist) shall not be the major obstacle for the tenant, however, the issue of Substantial Frustration may be an obstacle, since New York has narrowly construed the term “substantial frustration” to mean that: “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, 85 A.D.3d 506, 508, 924 N.Y.S.2d 391, 394 (2011).

The major issue when this matter is applied to temporary government mandated shutdowns, is that no cases we found considered a situation where the tenant wishes to continue the lease after the “frustrated purpose” ceases to exist. Thus, it can be argued that the “frustrated purpose” is not “completely the basis of the contract.” However, this argument holds less weight in the context of contracts to rent a wedding hall, hotel, conference center, pop-up store or other short-term rentals that are substantially performed during the period of the shutdown.

Remedy for Proving a Frustration of Purpose Defense

If one prevails in a Frustration of Purpose defense, in this situation, the duties of the tenant to pay rent would be discharged. However, courts may grant quantum meruit claims of the landlord, thus, offsetting the loss to the landlord. We shall write an article, also, on the potential quantum meruit claims.

We shall be updating readers on this issue when more is known. Please check back. If you are in need of a consultation with an attorney, please schedule a call with Sean Hayes at: Schedule Call.