In what is reported to be a first-of-its-kind ruling in Massachusetts, the Superior Court in UMNV 205-207 Newbury, LLC v. Caffe Nero Americas, Inc., No. 2084 CV01493-BLS2 (February 8, 2021), held that a restaurant tenant’s obligation to pay rent under its lease was discharged for a 3-month period under the doctrine of frustration of purpose when tenant was barred by government order concerning the COVID-19 pandemic from allowing any consumption of food or beverages within the leased premises.
The facts of Caffe Nero are straightforward. Caffe Nero entered into a 15-year lease starting June 1, 2017 for premises to be used “solely” for the operation of a Caffe Nero-themed café. Caffe Nero spent $1.3M to build out the space, opened for business in June 2018 and vacated the premises in October 2020. Caffe Nero paid no rent from April to October 2020. By order of the Governor, from March 24 through June 22, 2020, Caffe Nero was prohibited from allowing any on-premises consumption of food or beverages. Restaurants were able to resume limited indoor table service on June 22, 2020. When Caffe Nero stopped paying rent, landlord brought a summary process action for possession and rent.
Caffe Nero argued that none of the rent from April to October 2020 was due by virtue of the COVID-19 pandemic. The court, in response, held that at least for the period during which Caffe Nero was prohibited from operating within its leased premises — March 24 to June 22, 2020 — it was excused from paying rent by virtue of the legal doctrine known as frustration of purpose. The court did not rule on whether that, or any other doctrine, would relieve Caffe Nero of its obligation to pay rent when it was allowed to partially open its indoor operations.
In so ruling, the court relied upon the authority of a North Dakota case and a fairly obscure provision of the Restatement (Second) of Contracts. The court rejected specific language in the force majeure clause of the lease requiring continued rent payment even if it was “impossible” to use the space as a result of an Act of God such as a hurricane. The court drew a distinction between performance being “impossible” (rent still owed) and the purpose of the lease being “frustrated” (rent excused). Thus, if a hurricane destroys the premises, rent still must be paid but if the state orders closure of the premises, rent is excused. That seems like a difficult distinction to defend.
Moreover, the court rejected a provision of the lease that requires the payment of rent to be independent of any other covenants of the lease (rent must be paid in all events unless the lease is terminated). The court, by its own admission, substituted its perceived “business sense” of the transaction for that of the parties who entered into the lease. Like the court’s distinction between a hurricane and a state order discussed above, the court’s rejection of a negotiated provision of the lease appears to be a difficult judgment to defend.
There are some opportunities for a landlord to deal with the ruling of the Superior Court in this case (note that the Superior Court in Massachusetts is not a court of record and therefore the case is not “precedent”). Be that as it may, landlords could add “frustration of purpose” to the force majeure clause of its commercial lease form, thereby requiring rent to be paid even if there was a frustration of the purpose of the lease. Also, the court seemed to be influenced by the fact that there was only one narrowly-defined allowed use of the premises. A less limited use clause, or perhaps a conditional use clause (e.g. in the event of government ordered shutdown, the premises may be used for any commercially reasonable purpose), may have compelled a different result.
And finally, it appears that the landlord in Caffe Nero refused to engage in any negotiations with the tenant. That is usually not helpful for a landlord in subsequent litigation.