During the COVID-19 pandemic, many retail tenants have been affected by governmental orders prohibiting or limiting their business operations. Tenants seeking rent relief under their leases have raised various defenses to their obligations to pay rent, consisting of the common law doctrines of impossibility of performance, frustration of purpose, or the application of force majeure clauses in their leases.

This month, a Superior Court judge, in the case of UMNV 205-207 Newbury, LLC v. Caffé Nero Americas, Inc., issued the first court ruling in Massachusetts addressing a tenant’s defense to the obligation to pay rent during a government-ordered shutdown. The court ruled that Caffé Nero’s obligation to pay rent was discharged under the doctrine of frustration of purpose, while the restaurant was barred from allowing customers to drink or eat inside its premises from March 24 to June 22, 2020, by the Governor’s Order prohibiting “on-premises consumption of food or beverages.”

Facts: The parties entered into a 15-year lease commencing June 1, 2017, which limited the restaurant’s use solely for “operation of a Caffé Nero themed cafe” and “for no other purpose.” When the Governor’s Order was issued in March 2020, the restaurant asked Landlord to waive all its rent while the restaurant was required to remain closed. Landlord declined the request and notified the restaurant that it would be in default of its lease if it didn’t pay its April rent within 5 days. When the rent was not paid, Landlord terminated the lease in May. The restaurant continued to occupy the premises and resumed indoor services on June 22, 2020. Landlord commenced a summary process action on June 29, but the restaurant continued its operations into October and vacated the premises on October 29, 2020. The restaurant did not pay any rent for the months of April through October and Landlord filed an action in the Superior Court for damages under the lease.

Analysis: The court focused its decision only on the rent that was due for April, May, and June, when the restaurant was prohibited from indoor seating. The judge referred to the common law doctrines of impossibility of performance and frustration of purpose, but based his ruling on the latter. While the two doctrines are used interchangeably, the best way to distinguish the two is as follows:

1. If a company reserved a group of rooms from a hotel in order to view a Super Bowl victory parade and the hotel burned down, both parties would be released from their contract based on the impossibility of performance tenet.

2. However, if the parade route were changed so that one could not view the parade from the hotel rooms, the company could terminate its contract with the hotel based on the frustration of purpose rule, because the basic reason for renting the rooms could not be realized and, while the rooms could be used, their value to the company was now worthless.

Given the fact that the restaurant’s purpose for renting the space was limited solely to the operation of a sit-down restaurant and no other use, the Governor’s Order essentially prohibited and frustrated the restaurant from using the space for its intended purpose, and thus discharged the restaurant’s obligation to pay rent during the months of April, May, and June.

Landlord argued that the lease did not excuse the restaurant from paying rent because (i) there was a force majeure clause that relieved each party from performing any obligations in the event either was prevented from doing so by any governmental authority, but the clause specifically excluded the payment of money from the relief offered by the provision and (ii) the lease stated that any rent due was an independent covenant and shall continue to be payable in all events while the lease was in effect.

The judge rejected both positions, holding that the force majeure clause does not prohibit the application of the frustration of purpose doctrine, which also overrides any specific clauses, such as the independent covenant rule, because the lease must be construed in a manner that will give it “effect as a rational business instrument . . . and carry out the intent of the parties.”

Having ruled that the restaurant was not obligated to pay rent in April, May, and June, the court concluded that the restaurant was not in default and Landlord’s termination of the lease was ineffective. This creates numerous problems with Landlord’s attempt to collect damages for the remainder of the lease term.

Conclusion: While the holding of this case is narrow and limited to the period when the restaurant could not provide any indoor seating to its customers, it suggests that the courts are willing to grant relief to tenants whose landlords refuse to defer or abate rent during the COVID-19 pandemic and its effect on the business operations of many retail tenants.