The court rejected two key defenses raised by the landlord.
On February 8, 2021, the Business Litigation Session of the Massachusetts Superior Court held that the doctrine of frustration of purpose excused a commercial food service tenant from paying rent for a four-month period during which indoor dining was prohibited. The decision comes from an influential court in Massachusetts and therefore could affect the outcome of other cases in which tenants seek concessions related to COVID-19 restrictions. However, some of the facts of the case are unique and the reasoning of the decision will not apply in all circumstances.
The lease at issue provided that the tenant, Caffè Nero, could use the premises “solely” to operate a “Caffè Nero themed café… and for no other purpose.” The lease provided that Caffè Nero could offer takeout options only “from its regular sit-down menu.” On March 24, 2020, in response to the COVID-19 pandemic, the governor of Massachusetts issued an executive order banning restaurants from allowing “on-premises consumption of food or beverages,” but permitted takeout or delivery business to continue. That order continued until June 22, 2020, when Massachusetts permitted restaurants to reopen their doors for limited indoor service.
The Business Litigation Session ruled that the legal doctrine of frustration of purpose excused Caffè Nero’s obligations to pay rent from March 24 through June 22. The court ruled that a basic assumption underlying the lease―that Caffè Nero would be permitted to allow customers to consume food and beverages on-site―was frustrated and therefore excused Caffè Nero’s performance.
The court rejected two key defenses raised by the landlord. First, the court rejected the landlord’s arguments that the force majeure provision allocated the risk to Caffè Nero because the force majeure provision did not apply to situations where performance was possible, but the main purpose of the lease had been frustrated by events beyond a party’s control. Second, the court rejected the landlord’s argument that the independent covenants provision required continued payment because the frustration of the lease’s purpose was not a breach by the landlord.
Commercial landlords in Massachusetts should be aware of this decision because the Business Litigation Session of the Superior Court is influential. Commercial tenants seeking concessions may point to this decision as a model for similar rent abatements as a result of COVID-19 restrictions. However, the scope of the effect of this case may be limited for a few reasons.
First, the decision turned significantly on the particular language of the lease at issue. The lease provided that the tenant could operate a Caffè Nero themed café “and for no other purpose,” and limited the tenant’s takeout business to only options “from its regular sit-down menu.” Therefore, when Massachusetts banned sit-down dining, the restrictions of the lease could be read to prohibit Caffè Nero from operating at all. That particular restrictive language will not be present in all commercial leases. Further, the force majeure language of this lease would not apply in cases with different force majeure language.
Second, it appears from the decision that the landlord and Caffè Nero never agreed to any form of rent concession or other amendment since the March 24, 2020, shutdown order. By contrast, many commercial landlords have already agreed to abatements or other concessions, leading to amended leases. A lease amendment entered into after COVID-19 could have significantly impacted the court’s analysis and led to a different outcome. Therefore, commercial landlords and tenants considering the potential effect of this decision should review the language of any amendments they have already negotiated (or are presently negotiating) to confirm how they address the period of the shutdown.
Third, this decision only applies to a limited time during which Massachusetts legally prohibited in-person dining. Notably, the court’s reasoning only applies to the specific shutdown order that impacted Caffè Nero and is not based on broader market forces brought on by the pandemic. Therefore, the reasoning may not apply to other types of businesses or other time periods.
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