By Lewis A. Lindenberg
The real estate industry in New York City is embracing a “new normal” since the COVID-19 pandemic changed the landscape of the real estate market.
It’s been three years since the landscaped shifted. At the onset of the COVID-19 pandemic, former Governor Andrew M. Cuomo issued a series of emergency executive orders, two of which provided for: (1) employees of non-essential businesses to begin to work remotely, and (2) a moratorium against owners bringing lawful Court eviction proceedings. (The orders did not waive or abate rent owed by tenants.) The consequence of the moratorium was that owners could not seek evictions of tenants for failure to pay rent.
The longstanding effects of the executive orders was, at least at that time, uncertain. Many commercial owners sought to assist their commercial tenants by providing either deferred repayment of rent arrears or voluntarily abating a portion of the rent arrears. Additionally, the Federal government provided emergency financial relief funds (the Paycheck Protection Program) for businesses, which effectively afforded cash infusions to tenants to remain in business during the pandemic.
Notwithstanding such financial relief, many tenants took the position that they were not required to pay rent during–and even after–the period covered by the emergency orders. This resulted in tenants asserting a myriad of defenses, including the doctrines of force majeure, frustration of purpose, and impossibility of performance– defenses not regularly asserted in almost 100 years.
With a few exceptions, Courts generally rejected the application of these defenses to waive or abate tenants’ rental obligations.
The law is clear that the doctrines of frustration of purpose and impossibility of performance will not replace the unambiguous language of commercial leases requiring tenants to pay rent even if a force majeure event were to occur, as evidenced by the following holdings in recent Court decisions:
“[T]hese doctrines are not implicated by temporary governmental restrictions on in-person operations, as the parties’ respective duties were to pay rent in exchange for occupying the leased premises and plaintiff acknowledged that it was open for curbside retail services as of June 4, 2020 and services by appointment as of June 22, 2020.” Valentino U.S. A., Inc. v. 693 Fifth Owner LLC, 203 A.D. 3d 480 (1st Dep’t 2022);
“The doctrine of frustration of purpose does not apply as a matter of law where, the tenant was not ‘completely deprived of the benefit of its bargain.’ ” The Gap, Inc. v 170 Broadway Retail Owners, LLC, 195 A. D. 3d 575 (1st Dep’t 2021);
“Contrary to defendant’s argument, (the frustration of purpose) doctrine has no applicability here. This is not a case where the retail space defendant leased no longer exists, nor is it even prohibited from selling its product. Instead, defendant’s business model of attracting street traffic is no longer profitable because there are dramatically fewer people walking around due to the Pandemic.” 35 East 75th Street Corp. v. Christian Louboutin, 2020 N.Y. Misc. LEXIS 10423 at *5 (Sup Ct. N.Y. Co. Dec 9, 2020);
Where do we stand today? The moratorium prohibiting eviction proceedings has been lifted and summary proceeding in the Civil Court are currently ongoing. The process is slower than before the pandemic and, hopefully, things will begin to move more quickly. The Supreme Court continues to remain an option to seek rent as monetary damages against tenants and guarantors.
Notwithstanding, owners legal rights to pursue unpaid rent in Court remain strong—tenant retention is, in itself, a very important business consideration because of uncertain market conditions, including the reality of a remote workforce and a shift in consumer behavior.
In my discussions with owners of commercial office space, and professionals, there are a host of factors contributing to market conditions which will impact on trends for the foreseeable future.
Many businesses have closed their doors permanently and finding replacement tenants remains a challenge. Moreover, tenants who are still leasing demand smaller spaces with more flexible lease terms, at a lower dollar figure per square foot and more construction concessions. Owners are meeting certain challenges on renting office space by attempting to add amenities to their buildings to try to differentiate themselves from the competition. Generally, owners have to be innovative in order to be competitive in the current market.
Suffice it to say that the pandemic has brought tremendous challenges to office and retail leasing. But New York City has endured many severe past challenges, and the fundamentals of what the City has to offer as the financial capital of the world are second to none, and will afford opportunities for the leasing environment to correct itself and come out stronger at the end.
(Lewis A. Lindenberg is a partner in the Firm’s Litigation Department concentrating in commercial lease litigation, and can be reached at 212-867-4466 ext. 335 (firstname.lastname@example.org)).