October 9, 2020
This summer, McGuireWoods reported on two cases filed on June 8, 2020, with the Supreme Court of New York by plaintiffs Victoria’s Secret Stores LLC (VS) and Bath & Body Works LLC, in which the plaintiffs, as tenants, sought to rescind their respective retail leases on the basis of frustration of purpose and impossibility of performance. Since that time, the filings continued to fly as defendant landlord Herald Square Owner LLC responded to the VS complaint with its answer, affirmative defenses and counterclaims, triggering further filings by VS, a reply memorandum from Herald Square and a shopping spree by one of defendant’s attorneys.
Herald Square’s answer included counterclaims for breach of the VS lease and guaranty (claiming tenant liability of a minimum of $25 million) and a motion for pre-discovery summary judgment. The answer denied each of the six causes of action in the complaint, stating that frustration of purpose and impossibility hinge on the “unforeseeability” of the event in question. According to Herald Square, the event in question was that VS might be unable to occupy or operate at the premises, and that risk was not only foreseeable but specifically allocated to the tenant by the terms of the lease.
The filing repeatedly referred to VS as a “sophisticated” party and discussed the lack of a force majeure clause and the provisions in the heavily negotiated, 100-plus-page lease that abated rent only in the event that the tenant was unable to operate as a result of a landlord failure to provide required services. The Herald Square response stated that “where the risk was ‘foreseeable,’ claims of ‘frustration of purpose’ and ‘impossibility’ fail. And when, as here, the parties’ contract explicitly contemplated the risk in question, that risk was perforce ‘foreseen’ by the parties, and their contractual allocation of that risk must be respected as matter of freedom to contract.” The memorandum further addressed the additional causes of action, noting that reformation is available only where there is a scrivener’s error or a mutual mistake of fact (not present in this instance) and that the breach and unjust enrichment claims lacked merit as the landlord had the right to terminate the lease and to retain the rent paid by VS.
VS filed its own 29-page memorandum of law and an affirmation in opposition to the defendant’s request for summary judgment. Interestingly, the memorandum begins with the following statement: “At the outset, we recognize this motion’s significance. This Court will likely be the first to rule on the novel issues presented, and its ruling will have sweeping consequences reaching beyond this action to the many other suits mirroring the allegations of the Complaint.” It goes on to state that the fact that the lease does not address this situation is exactly the fact that proves that it was unforeseeable. The memorandum describes the COVID-19 pandemic as an “unthinkable” event that “shatters the very core of the commercial deal.”
VS claims that, at a minimum, it is entitled to its day in court and that the threshold for summary judgment has not been met because there are material issues of fact to determine. Similar to its position in the original complaint, VS focused on the dramatic and unprecedented nature of the pandemic and the unforeseeability of the harm, in addition to the event. It called the defendant’s assertion that it is not impossible for VS to pay rent a “crude analysis” that “entirely misses the point.” It also took a stab at one of the defendant’s attorneys by quoting from a May 2020 article he wrote on the topic of frustration and foreseeable changes in circumstances.
In August 2020, Herald Square filed a reply memorandum of law in further support of its original filing for summary judgment, stating that there are no issues of fact to determine, only the legal “foreseeability” issue. The defendant states that it is not whether the pandemic was foreseeable that is in question, only the harm that was done (i.e., the closure of the store “for any reason”) that was foreseeable. The defendant stressed that the lease did contemplate a store closure and allocated the risk of such event to the tenant, unless the cause was the landlord’s failure to provide services.
The defendant further cited specific lease provisions addressing (a) the tenant’s agreement to pay rent “without set-off, offset, abatement…”; (b) “unavoidable delays” that would excuse landlord performance, including delays resulting from “governmental preemption in connection with a national emergency”; and (c) the tenant’s absolute obligation to pay rent in connection with the “mortgageability of Landlord’s ownership interest.” The memorandum reiterated the degree of the tenant’s “sophistication” and the fact that the tenant could have negotiated the lease to address this situation but failed to do so and stated that the court should not rewrite the lease in a way more favorable to the tenant. Herald Square repeated its prior position on the issues of reformation, default and unjust enrichment.
Regarding the shopping spree, the defendant’s reply was accompanied by an affidavit of the attorney quoted in VS’ July 29 memo of law, Howard Koh. In the affidavit, Koh called out VS for a “lame attempt to play gotcha” in citing his prior article and related the story of his shopping spree in support of the defendant’s assertion that VS could in fact open its Herald Square store because it has opened another VS location in Manhattan. The affidavit included photographic evidence of the closed VS store and receipts for beard oil, socks and a waterproof earbud case purchased from nearby retailers and VS’ “Seduction” fragrance purchased at the other VS location.
To be continued….
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.