The global COVID-19 pandemic has resulted in severe restrictions on any activity that involves contact with others, causing profound knock-on effects on day-to-day life. For many, the most immediate effect will be on their relationship with their landlord or tenant, whether commercial or residential. Some will struggle to pay rent, and many will need far more access to utilities and spaces than usual while they quarantine. Although real estate (whether residential or commercial) is subject to certain special rules, the bottom line is that a lease is like any other contract.

This means that the terms of your lease will determine your rights and obligations during this state of emergency, and the options you may have to alter or change them. The same legal principles apply even where your use of real estate is governed by some other contract, such as a membership or license agreement for those who use shared office spaces, or a proprietary lease agreement for those who reside in co-operatives.)

We have already provided guidance on the impact of force majeure clauses, which provide a general defense to non-performance due to an unforeseen event. When the terms of the lease do not contain such a provision, the contract is to be carried out by both parties to the greatest extent possible. New York common law, however, also recognizes the limitations of what is possible, as a result, parties who cannot meet their contractual obligations due to COVID-19 may have another option to relieve them from their contractual obligations. In particular, the common law doctrine of impossibility of performance excuses a party from their obligations under a contract where an unanticipated event, which could not have been foreseen, renders performance of the contract objectively impossible. Similarly, the related doctrine of frustration of purpose excuses performance where the essential purpose of the contract is frustrated by the unanticipated event.

For example, if you occupy a commercial office space under a membership or license agreement and the legal restrictions imposed by the state or federal government related to COVID-19 make it legally impossible for you to utilize the space, then failure to pay rent under the contract may be excusable. On March 20, 2020, Governor Andrew Cuomo issued Executive Order 202.8 (“EO 202.8”) which, building on the prior Executive Orders, required that all non-essential businesses or entities in New York State reduce their in-person workforce at work locations by 100%. On April 7, 2020, the restriction on non-essential business was extended to April 29, 2020. On April 16, 2020, Governor Cuomo announced the extension of the stay-at-home order until May 15, 2020.  Whether or not a business can rely on the impossibility or frustration of purpose defense depends largely on whether the business falls within the list of business providing essential vs. non-essential services.

A word of caution, however: the courts set an extremely high bar for “impossibility” and “frustration of purpose” defenses – events merely making it more difficult or expensive to carry out one’s obligations under a contract will not suffice. The subject matter of the contract must be completely and entirely frustrated, or performance must be objectively impossible to avail of these defenses.

RICHTER RESTREPO PLLC will continue to monitor this emergency and will provide updates on the legal consequences and effects of the crisis. To anyone who is concerned about the effects of the current state of emergency on their landlord/tenant relationship, we strongly recommend that they review the terms of their lease to determine their rights and obligations. Beyond this, it is advisable to maintain a dialogue with your landlord/tenant to ensure that both parties comply with their obligations to the best of their abilities or, at least, that any impossibility of meeting obligations is discussed in advance to allow negotiation of alternatives or workarounds. We wish everyone good health and safety during this difficult time.

Resources

-“Guidance on Executive Order 202.6 Guidance For Determining Whether A Business Enterprise Is Subject To A Workforce Reduction Under Recent Executive Orders.” https://esd.ny.gov/guidance-executive-order-2026
-“Amid Ongoing COVID-19 Pandemic, Governor Cuomo Announces 'NYS on PAUSE' Extended until May 15." https://www.governor.ny.gov/news/amid-ongoing-covid-19-pandemic-governor-cuomo-announces-nys-pause-extended-until-may-15 

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Published: 04/17/2020