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Commercial Tenant Excused from Paying Rent During Government-Mandated Shutdown

Commercial Tenant Excused from Paying Rent During Government-Mandated Shutdown by Christopher K. Sweeney

A Massachusetts Superior Court judge recently ruled that the doctrine of frustration of purpose excused Caffè Nero, a high-end coffee shop, from paying rent while its business was shuttered by government mandate. Although the decision is being touted as a major victory for a food-services industry that has been hammered by the COVID-19 pandemic, the decision’s narrow reasoning may cabin its value to future litigants.

Here are the facts.

Caffè Nero leased space from UMNV 205-207 Newbury, LLC to operate “a Caffè Nero themed café” on Newbury Street in Boston “and for no other purpose.” The lease contemplated that Caffè Nero would operate primarily as a sit-down restaurant, rather than a to-go coffee shop like Duncan Donuts. Specifically, the lease restricted Caffè Nero’s takeout offerings to food and beverage items on its “regular sit-down restaurant menu.”

In March 2020, Governor Baker issued an order in response to the COVID-19 pandemic prohibiting restaurants from allowing any “on-premises consumption of food or beverages.” This order remained in effect until June 22, 2020.

In response, Caffè Nero closed its restaurant and advised UMNV that it would be unable to pay rent until the shutdown-order was lifted. UMNV responded that it expected Caffè Nero to continue paying rent. After Caffè Nero paid no rent for the months of April and May, UMNV sent Caffè Nero a notice of termination, initiated summary process eviction proceedings in the Boston Municipal Court, and filed a separate action in Suffolk Superior Court seeking unpaid rent, liquidated damages, attorneys’ fees, and other damages.

UMNV then moved for summary judgment on its damages claim, arguing that nothing in Caffè Nero’s lease excused it from paying rent because of a public health crisis. The court denied UMNV’s motion and instead entered partial summary judgment in favor of Caffè Nero.

Rather than focusing on the terms of the lease, the court based its decision on the common-law doctrine of frustration of purpose. Under this doctrine, the parties to a contract are excused from their obligations when an unexpected event substantially frustrates the “main object or purpose of the contract.” Because the main object of Caffè Nero’s lease was to provide sit-down dining services, the court concluded that the Governor’s shutdown order substantially frustrated the lease’s purpose. Accordingly, the court held that Caffè Nero was excused from paying rent during the period it was prohibited from allowing on-site dining.

So, what does this ruling mean for other commercial tenants struggling to pay rent because of COVID-related challenges? It depends. On one hand, the court’s reasoning can be narrowly construed to apply only when a tenant’s lease prohibits any alternate use of the premises. If, for instance, the lease had allowed Caffè Nero to offer a limited takeout menu, the court may have decided the case differently. On the other hand, the court’s decision provides tenants with an extra defense to avoid a default or to leverage rent-related concessions. Struggling tenants should carefully consider whether the pandemic, or any other unexpected event, has frustrated the main purpose of their leases.

As for commercial landlords, the Caffè Nero decision reinforces the importance of careful drafting. Because the doctrine of frustration of purpose only applies to unanticipated events, commercial landlords can limit the doctrine’s application by broadly allocating risk to their tenants. Landlords therefore would be wise to add public-health-related shutdowns to the list of unusual events for which their tenants must bear the risk.

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