As New York City struggles to adjust to life after the onset of COVID-19, both landlords and tenants are left to put their lives back together again. We don’t know whether the way people did business will ever return to the way it was before COVID-19, and we don’t know the speed of the recovery. Since the terms of commercial leases are generally much longer than those of residential leases, this ambiguity will likely lead to the testing of the enforceability of commercial leases in New York Courts.
Two common contract defenses are likely to be re-examined by New York Courts: The Doctrine of Impossibility and the Doctrine of Frustration of Purpose.
The Doctrine of Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract, or the means of performance, makes performance objectively impossible. The impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.
The Doctrine of Frustration of Purpose is similar to the Doctrine of Impossibility. It applies when the basis of the contract, as both parties understood it, is so frustrated that the transaction makes little sense. The Doctrine of Frustration of Purpose applies when a change of circumstances makes one party’s performance virtually worthless to the other, frustrating its purpose in making the contract.
It should be understood that generally each of these doctrines is limited in its application. The authority available at this time in how the Courts apply each of the doctrines usually involves facts that occurred prior to the onset of COVID-19. After March 2020, we are in uncharted territory in terms of the application of either doctrine. We are likely to see numerous challenges to the enforceability of commercial leases based on either doctrine in the upcoming months.
What happens if New York Courts find that one of the doctrines applies to a commercial lease? It is likely that the Courts will excuse performance under the contract for at least as long as the disabling condition persists or existed.
The temporary nature of COVID-19 closures and the length of the term of commercial leases create an open-ended question. However, parties should understand that the Courts are not without power to find an equitable result. If the contracts are discharged, in the interest of justice the Courts are permitted to grant relief so that the parties make restitution for the benefits conferred on them. Courts may also grant relief to the theory of Quantum Meruit.
Parties to leases, and their representatives, should watch these developments closely as we recover from COVID-19.
Jordi Fernandez Law, P.C.
420 Lexington Avenue, Suite 2920
New York, NY 10170