COMMERCIAL LANDLORDS – COVID-19: Force Majeure Clauses in Contracts – NY Court Decision
COVID-19: Force Majeure Clauses in Contracts – NY Court Decision
We previously noted that most commercial leases contain Force Majeure clauses, that is, a provision in the lease that allows the tenant or landlord to be released from performance if there is an act of god or some other natural event that makes it impossible for that party to perform the terms of the lease. Across the country The Gap, Inc. and its sister companies, Old Navy and Banana Republic, have picked and chosen courts where they thought they would get a favorable ruling, claiming as a commercial lease tenant that it should not have to pay rent during the pandemic shut-downs.
A Court in the Southern District of New York soundly rejected The Gap’s attempt to use the pandemic as a basis to avoid its lease obligations. Here are the pertinent facts:
As was the case in other locations across the country, in April 2020 The Gap stopped making rent payments to its landlords, including the New York City Gap store and the Banana Republic store at 59th Street and Lexington Avenue. The lease, which appeared to be one that was a lease that The Gap demands be used across the country in order to have favorable terms as a tenant, began in 2005 and was to go through January 2021.
This NYC Gap store initially closed with the government shut-down orders, but then began to fulfill pickup and online orders. It never reopened the store before the end of the lease for business reasons, supporting the observation that The Gap picked which case to bring to trial based on there having limited ongoing business risk under this lease if it lost the case, but huge up-side to waive at other U.S. landlords if it won the case. But, the NY court rejected The Gap’s arguments and granted judgment in favor of the landlord, mostly based on language of the force majeure clause in the lease.
Force Majeure Argument Rejected
Please recall our prior discussion of Force Majeure Clauses. The Gap’s lease defined a “Force Majeure Event” to be “a strike or other labor trouble, fire or other casualty, governmental preemption of priorities or other controls in connection with a national or other public emergency or shortages of fuel, supplies, or labor resulting therefrom, or any other cause beyond Tenant’s reasonable control.” There was nothing about the Force Majeure Event excusing payment of rent as the lease only discussed a “Force Majeure Event” in the context of a default, excusing a default if it “cannot be remedied by reasonable diligence during such period of thirty (30) days (including by reason of the occurrence of a Force Majeure Event).” The default clause excluded monetary defaults from a Force Majeure Event. So, the court held that a Force Majeure Event did not apply to rent payments. The Court rejected The Gap’s other arguments too.
Casualty Argument Rejected
The Gap argued that due to the shut-down orders, the entire property was not usable and lease provisions for rent abatement should relieve it of rent payment obligations. But again, the Court found that the pandemic did not fit within the definition of casualty noted under the lease as it is usually related to a fire or other damage or destruction of the leased building. And, contrary to other usual casualty events, the NYC landlord could not “remedy” this pandemic.
Frustration of Purpose Argument Rejected
Next, The Gap argued that under a frustration of purpose doctrine, it should be excused from performance because the pandemic was a “wholly unforeseeable event (that) renders the contract valueless to one party.” But here too, the Court ruled that the pandemic did not make the lease valueless, as evidenced by The Gap’s use for curbside pickup and internet sales.
Impossibility or Impracticability Argument Rejected
Grasping for any argument that would make headway, The Gap also argued that the pandemic made it impossible or impracticable to perform under the lease. But NY law says that impossibility or impracticability can be used as defense “only when performance is rendered objectively impossible by an unanticipated event that could not have been foreseen or guarded against in the contract.” But because the Force Majeure lease provisions anticipated the possibility of a pandemic when describing a ‘national emergency,’ it was not unforeseeable. Further, performance was not impossible as The Gap did operate under a limited basis, during the pandemic.
Failure of Consideration
The Gap then argued that it did not receive any benefit from the lease during the pandemic, posing a “failure of consideration” as an excuse for performance. Again, the Court noted that The Gap has use of the leased space during the pandemic.
The Court also gave no credence to The Gap’s last argument contending that (in its own lease form) there was a mutual mistake as both The Gap and the landlord failed to foresee and address the possibility of a pandemic. But, as is the case in many other states, NY law says that a mutual mistake excuse only applies if “the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement” and that mutual mistake does not apply when one party does not correctly predict future events.
Notably, there are prevailing party attorneys fees clauses in The Gap’s typical lease. So now, The Gap has the privilege of having to pay the past due rent and other sums due under the lease, including the landlord’s attorneys fees.
As we noted before, Epps & Coulson, LLP will be closely monitoring these issues and new cases as the courts catch up with the fallout from COVID-19.
For more information feel free to contact Dawn: email@example.com.
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