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Frustration of Purpose and COVID-19

Author: Maxwell Bridge

Contributing Editor: Blaire Farine

  • Frustration of Purpose defense as applied to commercial leases.
  • Additional remedies should be considered.

As the COVID-19 (Coronavirus) pandemic has swept the globe, it has left countless businesses both small and large floundering in its wake. Local and state governments have reacted to the spread of COVID-19 in a variety of ways. Many have taken the approach of mandating all “non-essential” businesses shut their doors to the public. Unfortunately, some of these businesses will not re-open at the end of the mandated closures. During these unprecedented times, some of these reeling businesses will look to the terms of their leases in an attempt to alleviate some of the financial hardship. Many commercial leases contain a “force majeure” clause, which when invoked under the applicable circumstances, may relieve a party from either whole or partial performance under a contract. For more information about force majeure, please see the link following this article.

However, just because a contract does not contain a “force majeure” clause does not mean that a party is left in the lurch without any form of recourse. A Tenant to a commercial lease may also look beyond the express language of their lease as there are many common law contractual defense principles. These principles may be applied to provide relief to a Tenant looking to discharge obligations either in whole or in part. One of these principles is the “frustration of purpose” defense.

The Restatement (Second) of Contracts § 265, Discharge by Supervening Frustration sets forth that:

“Where, 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 the circumstances indicate the contrary.”

Under this principle, a Tenant may, if desired, terminate their lease if the current COVID-19 related mandated closures “substantially frustrate” the purpose for which the Tenant entered the lease. For example, for a salon or barbershop, the state-mandated closures substantially hinder the reason for the commercial lease, and in fact these businesses are unable to operate in any capacity.

Even though a commercial Tenant may be able to invoke “frustration of purpose” as a defense to contractual breach, is important for a Tenant to understand that under this principle the entire lease agreement would be considered discharged, leaving the Tenant without the use of the property and out any of the improvements and alternations made to the property. Additionally, any Tenant looking to enforce this principle would need to notify the landlord as per the language of the commercial lease. Whether a court would enforce the “frustration of purpose” principle wholly depends on the language of the lease and the specific circumstances underlying the invocation of the defense principle.

Regardless of whether the “frustration of purpose” defense can be applied; it should be the goal of both the Tenant and Landlord to reach a solution which provides a benefit to both parties. Among many possible solutions is short term rent reduction, and/or rent abatement. It is important to consider all potential solutions, and to maintain beneficial working relationships as we weather the storm and prepare for the clear skies ahead. These unpredictable and unprecedented times call for creative and human solutions, working with people and businesses now, will help the success of everyone in the future.

Nothing in this article is intended to be considered legal advice. Any Tenant or Landlord looking for advisement in these trying times should contact an experienced attorney who can help walk them through the complicated ins and outs of a commercial lease. Please do not hesitate to reach out to Kearney, McWilliams & Davis, PLLC with any questions.

For more information about force majeure, please click here.

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