In contrast to the recent Gap case involving their NYC 59th & Lex store, NYC location, a Massachusetts court ruled on February 8, 2021, for the tenant. In that case, UMNV 205-207 Newbury, LLC v. Caffé Nero Americas Inc. (2084CV01493-BLS2), the landlord issued a termination notice to Café Nero after it ceased paying rent when it was required to close due to the pandemic with landlord claiming that the lease therefore terminated.
Massachusetts allowed restaurants to offer take-out service starting on June 8, 2020, and Caffé Nero reopened for take-out service on that date. Once Massachusetts allowed limited in-restaurant dining on June 22, 2020, Caffé Nero began to offer in-restaurant dining in the Premises. After re-opening, Caffé Nero attempted to negotiate with landlord for some relief on its rental obligations and offered to pay a percentage of its gross sales in lieu of base rent. Landlord rejected this offer so Caffé Nero did not resume payment of any rent. Landlord brought an unlawful detainer action to have Caffé Nero evicted.
Realizing that landlord was not going to negotiate, Caffé Nero decided to close the premises and remove its furniture, fixture and equipment (including walk-in refrigerators) and finally vacated on October 29, 2020.
Like Gap, Caffé Nero argued that the lease should be deemed terminated because of frustration of purpose and the Massachusetts court (in contrast to the Ponte Gadea court) agreed.
Frustration of Purpose/Impossibility
The Massachusetts court noted that frustration of purpose will “discharge an obligation to pay rent where a government order or regulation bars certain conduct or economic activity, it thereby substantially frustrates the principal purpose of the contract and the non-occurrence of such an order or regulation was a basic assumption underlying the contract.”
Caffé Nero’s use clause was exceedingly narrow: “only to operate a café with a sit-down restaurant menu and for no other purpose”. Because due to government orders, Caffé Nero could not use the premises for the permitted use, the court concluded that the purpose of the lease was frustrated and thus, Caffé Nero: (i) did not owe rent during the period from March 22, 2020 (the date of the original shut down order) through June 22, 2020 (the date tenant was able to offer in-restaurant dining), and (ii) was never in default and thus landlord’s termination notice was not valid. In addition, the court concluded that the tenant might have a complete defense against the landlord for remaining rent obligations due under the lease pursuant to a theory of wrongful eviction.
For Further Consideration
The holding in the Caffé Nero case flies in the face of traditional negotiating strategies of use clauses. Traditionally, tenants want a use clause that is as broad as possible (in part in order to allow for the evolution of their original concept as well as to maintain flexibility in assigning the lease). Landlords, on the other hand, want the narrowest possible use clause (in part, in order to preserve the tenant mix in a shopping center). The holding, in this case, reverses that traditional understanding as Caffé Nero benefited from a very narrowly drawn use clause.
I am an attorney, but unless I am already your attorney, then I am not your attorney and this update does not create an attorney-client relationship. I am licensed to practice law in California and Nevada and have based the information presented on US laws. This blog post is legal information and should not be seen as legal advice. You should consult with an attorney before you rely on this information. Woodsum Law Offices provides guidance to landlords and tenants in navigating the effects of the COVID-19 global pandemic on commercial leases.
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