COVID-19 and Frustration of Purpose: US Court Excuses Rent Payment

In an important recent opinion, Massachusetts Superior Court Judge Kenneth Salinger ruled that a retail tenant (operating a café/coffee establishment) was excused from paying rent while indoor dining was paused under a statewide executive order to halt the spread of COVID-19. To our knowledge, this is the first case since the commencement of the COVID-19 crisis where a court excused the payment of rent due to the doctrine of Frustration of Purpose (defined below).

I.  Case Summary

The landlord, UMNV 205-207 Newbury LLC (“UMNV”), and its tenant, Caffé Nero America's Inc. (“Caffé Nero”), had entered into a lease for a retail space in Boston. The lease specified that Caffé Nero could use the premises solely for "the operation of a Caffé Nero-themed café,” only offering takeout sales from "its regular sit-down restaurant menu." On March 24, 2020, a statewide executive order stopped on-premises dining in response to COVID-19 (the “Shutdown”). Shortly thereafter, Caffé Nero wrote to UMNV that it could not pay rent while it was forced to close under the Shutdown and, after failed negotiations between the parties, eventually vacated and relinquished possession of the premises. UMNV then pursued a claim for damages from Caffé Nero for the recovery of rent during the Shutdown.

Instead of granting summary judgement to UMNV, Judge Salinger granted partial summary judgment to Caffé Nero, concluding that Caffé Nero's obligation to pay rent during the Shutdown was discharged by the doctrine of frustration of purpose (“Frustration of Purpose”). Frustration of Purpose provides that "[w]here, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate the contrary." (For a more detailed discussion of the Frustration of Purpose doctrine, please see the Mayer Brown Legal Update “Coronavirus COVID-19: Construction, Frustration, Force Majeure - What Does Contract Law Say?”) Judge Salinger concluded that the purpose of the lease was entirely frustrated during the Shutdown since Caffé Nero was not able operate the café per the terms of the lease. Judge Salinger supported his ruling by highlighting that the premises could be used as a café and for no other purpose, and, therefore, the value of the lease had been destroyed by the Shutdown.   

Additionally, in reaching his ruling, Judge Salinger determined that the force majeure clause in the lease did not apply to the Frustration of Purpose doctrine. The force majeure clause stated that:

Neither the Landlord nor the Tenant shall be liable for failure to perform any obligation under this Lease, except for the payment of money, in the event it is prevented from so performing by ... order or regulation of or by any governmental authority ... or for any other cause beyond its reasonable control, but financial inability shall never be deemed to be a cause beyond a party's reasonable control ... and in no event shall either party be excused or delayed in the payment of any money due under this Lease by reason of any of the foregoing.

Judge Salinger concluded the force majeure clause did not apply to the Frustration of Purpose doctrine because the clause did not address the risk that the performance could still be possible even while the main purpose of the Lease was frustrated by events not in the parties' control. Judge Salinger further supported his ruling by highlighting additional clauses in the lease that did address the Frustration of Purpose doctrine, such as damage to or destruction of the premises interfering with Caffé Nero's ability to operate its business. Judge Salinger determined it was clear from the lease as a whole that the parties had addressed the Frustration of Purpose doctrine in certain circumstances but failed to address it in the force majeure clause.

II.  Takeaway

This is an important case because, to our knowledge, this is the first case since the beginning of the COVID-19 pandemic where a court concluded that the Frustration of Purpose defense excused rent payments. At this time, it is unclear whether the court’s ruling will be appealed and whether or not other courts will follow Judge Salinger’s lead in applying the doctrine of Frustration of Purpose in other somewhat similar circumstances. However, as in every court case, the specific facts and actual lease language will guide a court as to whether or not the Frustration of Purpose defense will apply.