Commercial Tenants: Frustration May Help With Rent
When businesses are ordered to close or limit operations, or when being open is worthless, rent payments under leases may be excused.
Commercial tenants across the country have rent payments coming due for space they cannot use due to the COVID-19 pandemic and the related social distancing and “shelter-in-place” directives. This is particularly true for retail stores and restaurants. But there may be hope.
When it comes to avoiding contract obligations during the pandemic, everyone is talking about force majeure clauses and the doctrine of impossibility. But these principles may not be helpful for commercial tenants trying to avoid rent payments during the COVID-19 shutdown. This is because the obligation to pay rent may be carved out of force majeure clauses, and courts either have not addressed the issue or seem to carve out payment obligations from the other performance obligations excused under the doctrine of impossibility. Thus, a tenant may not have to comply with the “continuous operation” lease provision, but, from the landlord’s perspective, the rent is still due.
There is something, however, that may be helpful for commercial tenants trying to temporarily avoid their rent payments... the doctrine of “frustration.”
“Frustration” is often conflated with the doctrine of impossibility by parties, attorneys, legal commentators, and even courts. But frustration is not impossibility. In short, impossibility protects a party to a contract that cannot perform obligations under a contract for reasons outside that party’s control. In this context, performance is sometimes distinguished from a party’s obligation to pay rent. For example, if your landlord is required to make improvements to the premises but a natural disaster prevents the landlord from being capable of making those repairs, the landlord may be excused from its repair obligations. However, the doctrine of impossibility will likely not excuse the tenant from making rent payments during a pandemic, because it may not be “impossible” for the tenant to pay as a result of the pandemic.
On the other hand, if the purpose of a lease has been “frustrated” and the tenant is not at fault, the commercial tenant may be excused from making some or all of its rent payments until the frustration is relieved. Early cases applying this doctrine addressed how illnesses impacted payment obligations. For example, one of the early cases of frustration involved someone that rented an apartment for the purpose of seeing the coronation procession of King Edward VII, but before the procession occurred, the King got appendicitis. After the landlord sued the would-be tenant for nonpayment, the court ruled the would-be tenant was excused from his duty to pay because the purpose of his contract was frustrated. Applying this principle to today’s world, if, for example, a commercial tenant operating a retail store or restaurant in leased space cannot use its leased premises for the purpose listed in the use provision of the lease due to “shelter-in-place” or shutdown directives, the purpose of the lease may be considered frustrated and the tenant excused from paying rent until the frustration is relieved.
Courts in Georgia have rarely even referenced the frustration defense -- much less thoroughly analyzed it. Nevertheless, the doctrine of frustration may be helpful to commercial tenants needing a temporary break on their rent obligations. At the very least, it may give tenants a foothold to negotiate an agreement with their landlords that will help both landlords and tenants weather this pandemic.
If your business has been forced to close its retail location or having the location open is futile, consult with an attorney in your jurisdiction to see if the doctrine of frustration, a lease provision, or some other legal principle will help you reduce or avoid some of your rent payments during the COVID-19 pandemic. Also, businesses and their legal counsel should look closely at the provisions of their affected leases and the recent legislative actions of the federal, state, and local governments for other potential avenues of relief.
* * * * * * * * *
Disclaimer: This post is for general information purposes only and is not intended to be and should not be taken as legal advice.