September 3, 2020
A recent New York Supreme Court decision is a warning to New York City commercial tenants that the recent COVID-19-related shutdown has not created a blanket exemption from their lease obligations.
In Blackal Hospitality Group LLC, Canvas Events LLC, and Arthur Backal v 627 West 42nd Retail LLC, the tenant argued that the parties had come to an oral agreement to terminate the lease, or alternatively that even if no such agreement existed, Governor Cuomo’s March 22, 2020 Executive Order prevented the tenant from using its event space as originally contemplated and therefore the lease was void; and because it eventually returned the keys to the owner, it no longer owed $10 million in future rent and should have the $500,000 Letter of Credit the landlord was holding as security returned.
On the first point, the Court rejected tenant’s arguments that the lease had been terminated, instead finding that the tenant could not provide any written agreement to terminate as required by the parties’ lease and as a matter of law. In the Order, Judge Freed writes that
The lease clearly provided that ‘[n]o agreement to accept a surrender of all or any part of the [premises] shall be valid unless in writing and signed by [landlord].’ Since plaintiffs have produced no such writing, their contention that they legally surrendered the premises is without merit. Additionally, plaintiffs’ argument that [landlord] assented to Canvas’ surrender of the premises by accepting the return of the keys is belied by the provision of the lease providing that “[t]he delivery. of keys to an employee of [landlord] or of its agent shall not operate as a termination of this [l]ease or a surrender of the [premises].”
Similarly, the Court rejected the tenant’s arguments that the March 22, 2020 Executive Order voided the lease. The Court noted that the specific terms of the lease “contemplated a scenario in which performance of the lease terms by plaintiff might become prohibited by a governmental order” and that “…plaintiffs nevertheless attempted to unilaterally terminate the lease in a manner violative of the terms thereof”.
Accordingly, the Court held tenant’s argument of “impossibility/frustration of purpose” was found to be without merit and tenant was still liable to pay its arrears, as well as other amounts due under the lease for the balance of the lease term. As such, tenant’s request for a preliminary injunction to prevent further draw downs on the Letter of Credit was denied.
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