Tenants Strike Back: Doctrines of Frustration of Purpose and Impossibility of Performance

June 11, 2020

Update (Oct. 9, 2020): Since our original alert, 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. Please see our update.

As the COVID-19 pandemic continues to evolve, so do landlord-tenant responses to mandatory closures. Two cases filed recently in New York by prominent tenants illustrate the parallel evolution of claims by tenants and landlords.

On June 8, 2020, plaintiffs Victoria’s Secret Stores, LLC, as tenant, and L Brands Inc., as guarantor, filed a complaint against Herald Square Owner LLC seeking to rescind the lease of its flagship retail lingerie store located at 2 Herald Square in New York City on the basis of frustration of purpose and impossibility of performance. In the suit filed with the Supreme Court of New York, the plaintiffs seek a declaration that the lease is unenforceable due to the COVID-19 pandemic and related executive orders of New York Gov. Andrew Cuomo.

In the first cause of action, the complaint focuses on the complete frustration of the “primary purpose” of the lease, that of operating a flagship retail store in “one of the most highly trafficked locations” in the “heart of New York City.” The complaint stresses the importance of the location (and the corresponding monthly rent of almost $1 million), the significant impact of COVID-19 on New York City and the unpredictability of retail operations ever returning to normal in its wake. In support of the plaintiffs’ claims, the complaint states: “Under New York law, frustration of purpose applies to a situation where an unforeseen event has occurred which, in context of the entire transaction, destroys the underlying reasons for performing such contract, thus operating to discharge a party’s duties of performance.” Accordingly, the plaintiffs claim that the COVID-19 pandemic and its impacts were unforeseeable and destroyed the underlying purpose for which the parties entered into the lease, which should be declared rescinded and its rescission would consequently extinguish the related guaranty by L Brands.

In its second cause of action, with respect to impossibility of performance, the plaintiffs claim that performance by both parties (i.e., the landlord tendering the premises for use as a retail store and tenant using the premises for such purpose) was rendered impossible by the COVID-19 pandemic and the “New York State on PAUSE” executive order. As a “non-essential” business under the executive order, Victoria’s Secret’s Herald Square location was legally required to close and reduce its workforce to zero, thus resulting in the impossibility of performance under the lease.

Additional causes of action in the complaint include reformation of the lease (to eliminate the obligation to pay rent and to provide for the automatic termination of the lease once Victoria’s Secret was prohibited from using the premises for its retail operations as an alternative to rescission) and breach of contract. The complaint also alleges that “[u]nder principles of good conscience” and based on unjust enrichment, the landlord should not be entitled to retain rent and other amounts “overpaid” as rent during the period of time that Victoria’s Secret was unable to operate the premises as a retail store.

In a companion case also filed on June 8, 2020, with the Supreme Court of New York, plaintiff Bath & Body Works, LLC seeks to rescind its lease for its retail store at 304 Park Avenue South in New York City on the same grounds. The complaint in this case includes an additional cause of action seeking a declaratory judgment that Bath & Body Works is entitled to an abatement of rent under the casualty provisions of the lease on the basis of COVID-19 constituting a casualty that has rendered the premises unusable.

The defendants’ answer on these cases and the outcome will be watched closely by landlords and tenants not only in New York, but across the country, as similar situations play out for retail locations.