For the last year, commercial tenants—including some big-name tenants like Hugo Boss, Christian Louboutin and Gap—have been arguing that their rent obligations should be eliminated or reduced during the pandemic under the frustration-of-purpose doctrine. While most courts have rejected these arguments, some recent decisions have come out in tenants’ favor on this point. Some have applauded these latter decisions as providing much needed rent relief to struggling tenants, but these decisions and the use of the frustration-of-purpose doctrine to absolve commercial tenants of their obligation to pay rent could signal headwinds for the New York commercial real-estate market—and the economy more generally.
How does the frustration-of-purpose doctrine apply to commercial leases in the COVID-19 era? The argument is simple. The frustration-of-purpose doctrine excuses a party’s contractual performance when the underlying purpose of the contract is frustrated and the frustrated purpose is “‘so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.’” Jack Kelly Partners v. Zegelstein, 140 A.D.3d 79, 85 (1st Dep’t 2016) (citation omitted). So, as commercial tenants claim, when the government prohibits a tenant from using its space or limits the ways in which it may use that space (including through capacity limitations), the “purpose” of the lease—to use the space in the way contemplated by the lease and as desired by the tenant—is frustrated. In other words, the lease would have “made little sense” if the tenant could not meaningfully use the space it was leasing.