COVID-19 restrictions, commercial leases, and the frustration of purpose doctrine: Massachusetts at the forefront

This article, written by attorney Aaron Rosenberg, was originally published by Massachusetts Lawyers Weekly and can be found here.

In the two years since the outbreak of the COVID-19 pandemic and Governor Baker’s first related restrictions on businesses, many landlords and tenants have begun litigating the effect of such events on their commercial leases. Although similar cases are moving through the courts of other states, Massachusetts has been at the forefront of analyzing whether government restrictions relating to the pandemic form a proper basis for a tenant to invoke the frustration of purpose doctrine and avoid liability for unpaid rent and other amounts.

In particular, the Honorable Kenneth W. Salinger of the Suffolk Superior Court Business Litigation Session has analyzed this issue in two 2021 decisions, concluding in each that the tenant was not foreclosed from asserting the defense. The later of these two decisions, in Museum Properties v. Goodcheer Enterprises, LLC, 2084CV01173-BLS2, 2021 Mass. Super. LEXIS 467 (Mass. Super. May 19, 2021) (“Museum Properties”), expands upon and extends certain of Judge Salinger’s earlier rulings in UMNV 205-207 Newbury, LLC v. Caffé Nero Americas, Inc, 2084CV01493-BLS2, 2021 Mass. Super. LEXIS 12 (Mass. Super. Feb. 8, 2021) (“Caffé Nero”).

These decisions give a hint to landlords and tenants as to how the Massachusetts courts may view similar disputes and provide much-needed guidance to landlords and their counsel regarding lease language that may be needed to avoid the potentially significant impact of a tenant successfully invoking frustration of purpose to avoid its explicit lease obligations.

Initially, in Caffé Nero, Judge Salinger held that the frustration of purpose doctrine discharged Caffé Nero’s obligation to pay rent while it was barred from letting customers eat or drink inside of its premises on Newbury Street. The Court explained that the purpose of the parties’ lease, according to the permitted use provision, was to allow the tenant to operate a “Caffé Nero themed café” with dine-in service. Because Caffé Nero was unable to run such a business during Governor Baker’s mandated shutdown of in-person dining, destroying all of the value of the lease to Caffé Nero, the Court ruled that the purpose of the lease was frustrated and Caffé Nero’s duties had been discharged.

Judge Salinger held that the parties’ force majeure clause, which required the tenant to continue paying rent, covered circumstances where performance was impossible, not those where frustration of purpose applied – i.e. where all the value to the tenant had been destroyed. As a result, he awarded Caffé Nero summary judgment, sua sponte, in response to the landlord’s motion. That case reverberated throughout the Commonwealth and even the country, as landlords and tenants, and their counsel, evaluated whether these legal theories were specific to the facts of the Caffe Nero case or would apply in other scenarios. Now, they have at least a partial answer.

In May, Judge Salinger continued this line of reasoning in Museum Properties. That case involved a restaurant and nightclub on Stanhope Street in Boston. The tenant argued that the frustration of purpose doctrine applied, like in Caffé Nero, because the property could not be used in the manner the parties had intended. Judge Salinger ruled that the doctrine may apply for the same reasons it did in Caffé Nero:  while it was unlawful for the tenant to operate an in-person establishment, all value to the tenant may have been destroyed.

The Court then held that the permitted use provision in question was ambiguous as to whether the tenant could operate a restaurant or nightclub, or had to simultaneously (and consistently) operate a restaurant and nightclub. If the latter, then the purpose was frustrated until nightclubs were able to reopen; if the former, then the frustration either lasted until restaurants were able to open (which happened earlier) or never occurred if the use provision is interpreted to allow take-out or delivery services. On that basis, judgment on the pleadings was not appropriate, but the Court made clear that the tenant may well be able to rely on the frustration of purpose doctrine.

But Judge Salinger also placed particular emphasis on a separate provision in the lease that the landlord had relied on to argue that frustration of purpose should not apply. That section mandated that the tenant pay rent “without setoff, defense, counterclaim, reduction or abatement.” This extremely broad language was still not enough to displace the doctrine of frustration of purpose according to Judge Salinger. He reasoned that it would be improper to consider the “without defense” language as if it stood alone and explained that the words of a contract must be considered in the proper context and must be interpreted in a commercially reasonable manner.

Looking at the document as a whole, the Court explained that it would have made no business sense for the parties to agree to a lease that required the tenant to use the premises for a single, specific purpose, but also required the tenant to keep paying rent if it became illegal for the tenant to operate in the one permitted manner. Although the Caffé Nero decision referred to similar “without defense” language, it was more of a focus of the arguments and decision in Museum Properties and further illustrates the difficulties landlords face in arguing that lease language that does not mention frustration of purpose, destruction of value, or similar occurrences, somehow displaces the doctrine.

Although the future impact of these decisions remains to be seen, they are sure to be cited by parties and considered by judges in the many similar cases making their way through the state and federal courts in Massachusetts and beyond. Regardless, commercial landlords’ counsel would be well advised to consider adding language directly and specifically addressing frustration of purpose to their leases, even if it requires offering additional consideration to tenants.

Such proactive measures could limit future uncertainty and litigation risk, and potentially avoid the business impacts of an adverse decision like the ones faced by the landlords in Caffé Nero and Museum Properties. Explicitly addressing frustration situations may also benefit tenants because they would know what defenses would and would not be available under such circumstances and could explicitly, and proactively, negotiate the relevant terms and the associated additional consideration.