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Office Tenants Can Learn Lease Lessons From Trial Court Retail Rulings

July 26, 2021, 8:00 AM

More than a year since the start of the pandemic, litigation involving commercial leases has been increasingly active, particularly in the retail space. Given a lack of meaningful guidance from appellate courts in many jurisdictions, however, trial court decisions at various procedural junctures in retail cases offer the most valuable lessons on how other commercial tenants may effectively enforce their rights to rent relief.

Some lessons for office tenants based on those decisions are detailed below.

Lesson #1

You Must Read Your Lease

After reviewing (literally) thousands of leases in connection with the pandemic, we have seen a wide variety of lease language among even the most standard of lease provisions. The language of the lease is critical, and it is important to read through your lease, not just assume what it says.

The pandemic-related commercial lease decisions being issued serve to reinforce this point: It is the language of the lease that controls, and that language varies widely across commercial leases.

It may sound basic, but it is important to remember to read your lease. Tenants may not realize what lease provisions may be relevant under the circumstances to afford them different remedies.

Lesson #2

Prepare for Landlords’ Mistaken Argument that Force Majeure Forecloses Relief

Many landlords have invoked force majeure in defense against commercial tenants’ claims for rent relief and other remedies. Their argument is that, because the force majeure provision in some leases excuses failure to perform lease obligations, except tenant’s rent obligations, under these circumstances, tenants cannot state a claim for any rent relief.

Such argument is, at best, mistaken and, at worst, misleading, because even when a force majeure provision excludes rent obligations from its scope, it cannot be read to invalidate other express lease provisions that provide for rent relief or other remedies.

Put differently, a force majeure provision often provides only that the tenant may not cite the provision itself as a basis to avoid rent, but that is not the case in instances where the tenant seeks remedies based on other express lease provisions or independent legal doctrines. See, for example, UMNV 205-207 Newbury LLC v. Caffe Nero Ams. Inc. (“the force majeure provision addresses the risk that performance may become impossible, but does not address the distinct risk that the performance could still be possible even while main purpose of the Lease is frustrated by events not in the parties’ control”).

Thus, tenants should make clear the specific lease provisions or independent legal doctrines that afford them a basis to seek the requested relief.

Lesson #3

A Force Majeure Provision May Provide for Rent Abatement Where Not Expressly Excluded

The force majeure provisions in many office leases can be invoked for the benefits of either the landlord or the tenant. In such instances where the force majeure provision does not exclude rent obligations, tenants may be able to invoke the force majeure provision as a basis to abate rent.

Indeed, in instances where rent obligations are not expressly excluded from the scope of the force majeure provision, some courts have granted tenants rent relief. See, for example In re Hitz Rest. Grp. (allowing an abatement of rent because Covid-19 orders “unquestionably ‘hindered’ [the tenant]’s ability to perform”); In re Cinemex USA Real Estate Holdings Inc. (rent obligations excused where force majeure provision extended the time for performance).

Tenants should carefully review their lease to assess their rights and potential entitlement to rent relief under their own force majeure provision, and consider negotiating necessary revisions to these provisions in future leases.

Lesson #4

Common Law Contract Defenses May Be Available to Commercial Tenants

While courts in some jurisdictions have been reluctant to apply traditional common-law defenses—such as frustration of purpose, impossibility, or impracticability—to the pandemic, such arguments are not necessarily foreclosed. The decisions that have rejected application of these doctrines are fact-specific and based on either the particular lease language or particular facts at issue in that case. Meanwhile other courts have recognized these doctrines’ application in the context of the pandemic.

For example, a federal court has recently granted summary judgment in the tenant’s favor where it found that “[t]he purpose of the lease, the retail sale of bedding products, was substantially frustrated during the shutdown.” Bay City Realty LLC v. Mattress Firm Inc. The court recognized that the frustration-of-purpose doctrine may apply even in situations involving temporary frustration.

The extent to which the pandemic and ensuing government restrictions have frustrated the purpose of a lease, or made its performance impossible or impracticable, may differ based on the lease language and the facts and circumstances of the tenant. When invoking these common-law doctrines, office tenants should be mindful of developing case law and how their specific facts and circumstances support these defenses.

Office tenants can learn a lot from the case law being developed by their retail cousins. Although each lease is different, and the facts and circumstances of each tenant may vary, office tenants are well advised to learn from both the successes and failures of retail tenants as they seek to enforce and protect their own rights.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Allyson McKinstry is a partner in Crowell & Moring’s New York office, where she focuses on a broad spectrum of complex commercial, consumer, and retail litigation, including defending class actions and multi-district litigation.

Ryan Merker is an associate in the San Francisco office of Crowell & Moring. His nationwide practice focuses on a variety of complex litigation matters in state and federal courts.

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