COVID-19 has caused many restaurants in the City of New York to close or greatly limit their service, preventing them from paying some or any of the rent to their landlords. In a case involving a restaurant on the upper east side of manhattan, a Judge denied summmary judgment to a landlord based on the terms of the lease which called for “in-person n dining” and the tenant’s claims of the landlord’s harrassment over the use of the side walk for customers who refused to eat inside.
On June 28, 2021, in 21 East 62nd Street Realty Corp. LLC v. Enterprise Restaurant LLC d/b/a Amaranth, Index No. 653426/2020 (N.Y. County June 28, 2021) , Judge Lois Nock, addressed the issues of non-payment of rent of Amaranth, a well-known restaurant on the Upper East Side of Manhattan . The landlord sought $428,820.27 in unpaid rent from the restaurant. The restaurant was closed for approximately three months because of the Executive Order issued by Governor Cuomo. The restaurant opened on June 22, 2020 with expanded outdoor seating as then allowed under the Executive Order and in September 2020, the restaurant opened for indoor service at twenty-five percent capacity. However, the owner said that: “None of our customers are willing to sit inside” and “[O]verall, we can, at best, seat sixty (60) customers on a good day.” When the restaurant was closed and then opened with limited capacity, it sometimes did not pay rent or made only partial payments of the rent.
Following the 2020 closure of the restaurant, the tenant began negotiations regarding a possible compromise of the lease with the landlord. The tenant claims that the landlord threatened the restaurant with a combination of “trouble” and legal actions. “It then constantly disputed defendant’s use of the sidewalk, requesting the removing of tables, thus further limiting its business operation and indirectly preventing it from meeting its contractual obligations under the lease agreement.”
The tenant answered the complaint of the landlord seeking rent and alleged a number of the Affirmative Defenses – including defenses under the lease and the riders to the lease, frustration of purpose, impossibility of performance and bad faith by the landlord under the lease.
The restaurant’s answer also asserted a counter-claim seeking a declaratory judgment that it was “entitled to a rent abatement, so long as the Executive Order prohibits substantially the use of the premises for the purposes set forth in the lease,” and a counter-claim commercial tenant harassment pursuant to New York City Administrative Code (“NYC Admin. Code”) §22-902.
The restaurant did not contest the existence or validity of the lease or its non-payment of the precise sums prescribed in the lease. Rather, the restaurant invoked “the doctrine of impossibility of performance and/or frustration of purpose” and also alleges bad faith on the plaintiff’s landlord’s part.
The restaurant further argued that: “The circumstances of the COVID-19 pandemic and related Executive Orders that place restrictions on restaurant, so greatly burdened its ability to function as to constitute a cognizable ‘impossibility’ of performance of the lease’s tenant-payment obligations.”
The court examined the lease of the restaurant and pointed out that under the section “Permitted Uses,” the lease expressly provided that the:
“Tenant shall use the devised premises solely as a full-service quality, tablecloth restaurant, serving food and beverages…and for no other purpose.”
In addition to the terms of the lease, the restaurant owner pointed out that:
“The nature and preparation of our food requires that it be catered in the restaurant. Our customers would not enjoy or even consider take-out.”
In examining the language of the lease and the tenant’s description of its business, the court stated:
“This limitation language shows that the purpose of the lease was for premises to be dedicated in use as a restaurant with in-person dining, which defendant was not permitted to do indoors for at least a period of three months…”
The court also noted that as time progressed, the defendant re-opened to outdoor seating pursuant to the Executive Order, but:
“In attempting to fulfill the lease’s purposes as a ‘full-service’ quality, table cloth restaurant,’ in that fashion. However, defendant attests that plaintiff interrupted that attempt.”
Based on the foregoing, the court held that the restaurant
“…was subject to the seating, occupancy, or on-premises service limitations in the subject Executive Orders, which plaintiff does not dispute, defendant has demonstrated that as a commercial tenant, ‘impacted by COVID-19,’ as defined in the regulation. Additionally, the e-mail communication between the parties, where plaintiff indicated its desire to discuss ‘tenant’s unauthorized use of the sidewalk in general, but specifically in front of the Hermes Building, which is adjacent to your Premises,’ and similar text messages from plaintiff… demonstrate that there was a dispute between the parties regarding the use of the sidewalk and for the purpose of outdoor dining and raised genuine issues of fact regarding whether, and to what extent, plaintiff restricted defendant’s use of the sidewalk for outdoor dining, the justification for same and the impact these actions may have had on defendant’s ability to comply with the lease terms and upon assessment of such fact, whether the actions constituted or did not constitute commercial tenant harassment under NYC Admin. Code §22-902.”
In denying summary judgment to the landlord for the rent, the court distinguished the case of 55 Seventh Av. Corp. v. Times Square Photo, Inc. [194 A.D.3d 561 (1st Dept. May 20, 2021)]. The court noted that the opinion rejected the affirmative defense of impossibility of performance and frustration of purpose in connection with the pandemic but distinguished that case where the court pointed out that the defendant-tenant “eventually re-opened for curbside service and they were able to gain access during the premises during the period of non-payment.” Thus, although the pandemic has been disruptive for many businesses, the purpose of the lease in this case was not frustrated and defendants’ performance was not rendered impossible by its reduced revenues.”
The holding in 21 East 62nd Street Realty Corp. LLC v. Enterprise Restaurant LLC d/b/a Amaranth, Index No. 653426/2020 (N.Y. County June 28, 2021) show is that, while many restaurants and businesses were severely affected by the pandemic, to be able to defeat a landlord’s motion for summary judgment for rent, the tenant must show impossibility of performance under the specific terms of the lease and the nature and operation of the business. The decision is also noteworthy because, while there have been many disputes between tenants and their landlord, particularly over non-payment of rent, disputes as to the use of the sidewalk may be grounds for defense of “commercial tenant harassment.” One of the key provisions in that statute is: “Using force against or making express or implied threats that force will be used against a commercial tenant…” and, “engaging in any other repeated or enduring acts or omissions which substantially interfere with the operation of a commercial tenant’s business” and “threatening a commercial tenant based on … (ii) the commercial tenant’s status as a person impacted by COVID-19…”
Tenants should not take this decision as allowing them not to pay their rent, but simply to look at the lease and the circumstances and see if they have an argument as to impossibility of performance. Landlords need to think about it when they threaten a tenant over use of the sidewalks and also when they do things which prevent the tenant from operating in a manner that allows the tenant to pay the rent.