In light of the COVID-19 crisis, landlords and tenants should consider adding language in lease firms addressing their rights if another pandemic occurs.

Because of self-isolation and government restrictions triggered by the coronavirus pandemic, many commercial tenants, especially retailers and restaurants, cannot operate profitably. Lease defaults are inevitable unless landlords make concessions. 

Landlords, of course, face their own challenges. They remain responsible for debt service, real estate taxes and operating costs. Mike Margolis, an attorney who represents a nationwide retailer, understands this tension. 

“Most landlords are willing to defer rent, but not abate it, while most non-essential retailers will have extreme operating losses during this period unless they fall under a stimulus program or can obtain loan forgiveness,” Margolis said. 

Commercial leases usually include “force majeure” clauses that excuse parties from performing non-monetary obligations during national disasters or civil unrest. But force majeure clauses generally offer no relief from tenant rent obligations. Nevertheless, the somewhat obscure legal doctrine known as frustration of purpose, may be available to distressed tenants who cannot get accommodations from their landlords. 

Just What Is It? 

The frustration of purpose defense, and its close relative the impossibility defense, originated over 100 years ago in England. In the 1863 English case Taylor v. Caldwell, concert promoters leased a music hall that accidentally burned down before the scheduled events. The promoters sued the music hall owners for breach of contract. The hall owners argued that they should be excused from their obligations, because it was impossible to make the destroyed music hall available. The court agreed with the hall owners, and ruled against the promoters. 

The frustration of purpose defense is similar to the impossibility defense, but it does not require that performance of the contract be impossible. It originated in the 1903 English case Krell v. Henry, also known as the “coronation case.” In Krell, the defendant rented a flat along the procession route for King Edward VII’s coronation, agreeing to pay 25 pounds in advance and 50 pounds later.  The coronation was postponed because of the king’s illness, rendering the contract valueless to the defendant. The flat owner sued the defendant for the unpaid 50 pounds. The English appeals court ruled in favor of the defendant, noting that the postponement defeated the purpose of the contract and relieved the defendant of his obligation. 

Like many English legal doctrines, the frustration of purpose defense crossed the Atlantic to North America, but it is rarely successful in Massachusetts. For example, in Baetjer v. New England Alcohol Co., an Everett distiller agreed to purchase shipments of molasses from a Puerto Rican supplier in 1942, when the United States was engaged in World War II. After the distiller accepted delivery in Puerto Rico, an enemy submarine sank the merchant ship carrying the molasses. The distiller withheld payment for the shipment. The Massachusetts Supreme Judicial Court refused to apply the frustration of purpose doctrine to excuse the distiller from paying for the lost shipment, because the submarine attack was predictable during wartime. 

A Question of Knowable Risks 

When courts weigh the merits of the frustration of purpose defense, they consider whether supervening circumstances that frustrated a party’s purpose were unforeseeable, or instead were known risks assumed by the party. The SJC adopted this approach in its 1991 decision of Chase Precast Corp. v. John J. Paonessa Co.

“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.” 

Christopher Vaccaro

In lease disputes, tenants who invoke the frustration of purpose defense rarely prevail. However, a 2000 decision of the Massachusetts Appellate Division of the District Court offers a glimmer of hope to tenants. In Saab v. Norton Family, Inc., the Lowell building commissioner closed a tenant’s restaurant because the building had structural problems. The tenant’s lease prohibited the tenant from making structural changes to the building. The landlord sued the tenant for unpaid rent, but without success. The appellate division ruled that the frustration of purpose defense excused the tenant from paying rent under the circumstances. 

The coronavirus crisis was not foreseeable. Yet it is unknown how courts will view the frustration of purpose defense if invoked by tenants who cannot pay rent because of the crisis. Margolis warns that “if certain tenants cannot push the needle to have landlords share some burden, the frustration of purpose defense will be tested.” Going forward, landlords and tenants should add language to their lease forms, addressing what happens if another pandemic occurs. 

Christopher R. Vaccaro, Esq. is a partner at Dalton & Finegold, L.L.P. in Andover.  His email address is cvaccaro@dfllp.com.