On March 8, 2021, Gap lost another of its Covid lawsuits, Gap Inc. v. Ponte Gadea N.Y. LLC (No. 20 CV 4541-LTS-KHP), where Gap claimed no rent was owed under its lease for its Gap and Banana Republic stores located at the corner of Lexington and 59th in New York City due to the Covid pandemic.
Gap and its Banana Republic stores located at the corner of Lexington and 59th were among the hundreds of stores that Gap shuttered on March 17, 2020. Gap made the strategic decision to stop paying rent on all of its Northern American locations. Dozens of lawsuits ensued with either Gap suing its landlord to terminate leases (under a variety of theories, more on that below) or landlords suing Gap for defaults due to failure to pay rent.
On June 8, 2020, landlord had served Gap with a notice of termination, with an effective termination date of June 15, 2020 if Gap did not pay delinquent rent by such date. Despite this notice, Gap made retail sales from the Premises for curbside pickup when it was allowed to do so – however, Gap never resumed payment of rent at this location.
Although NYC regulations allowed Gap to open for business (at 50% capacity as of June 22, 2020), Gap opened some of its NYC locations but not the Gap or Banana Republic stores located at 59th & Lex. Interestingly, the lease was scheduled to expire on January 31, 2021, leading the court to ponder whether Gap was cherry-picking stores which it intended to operate after the end of the pandemic.
In these lawsuits, Gap relied on multiple rationales for its decision to stop paying rent including:
(1) Covid is a Casualty
The Covid pandemic is a “casualty event” which entitled Gap to terminate the lease in the same manner as if the premises had burned down.
· In the Ponte Gadea decision, the U.S. District Court in the Southern District of New York rejected this argument holding that Covid was not a casualty event noting that there was no “physical impact” to the premises. The court based its holding in part on the
fact that the casualty provision in the lease includes restoration obligations to the premises due to physical damage which obligations clearly do not apply during a pandemic. Specifically, the lease provided that rent abates during a casualty until landlord has substantially completed its restoration work. Obviously, there is no restoration work that Landlord can perform arising out of the pandemic.
(2) Frustration of Purpose/Impossibility
Gap argued that the lease should be deemed terminated because the purpose of the lease – as a retail store – had been frustrated due to the Covid governmental shut down orders.
· The Ponte Gadea court rejected this argument concluding that the use clause provided for retail sales and in fact, at various points, Gap had been making retail sales from the Premises, e.g., by allowing for curb side pickup. Quoting from an earlier case, the court noted that “it is not enough that the transaction will be less profitable for an affected party or even that the party will sustain a loss”.
· The court also noted that a key component of a successful frustration of purpose argument is that the event be “unforeseeable”. Yet, the lease clearly contemplated a variety of events specifically calling out “governmental preemption of priorities or other controls in connection with a national or other public emergency” and thus such events (including Covid) were foreseeable. The parties had specifically agreed in the lease regarding the allocation of risk in the event of such events and that agreement was that Gap would pay rent even if such events occurred.
(3) Mutual Mistake
Gap argued that the lease should be deemed terminated under a theory of mutual mistake claiming that Gap would never have entered into the lease if it had known that rent would be owed even if it was required to close for business due to a global pandemic. Instead, Gap argued that had Gap and landlord known about the possibility of a global pandemic, Gap would have negotiated a rent abatement provision stating that Gap would not owe rent if it could not operate its business in the premises during a pandemic.
Gap argued further that by definition a first-class retail business did not contemplate “Plexiglass barriers and face masks that current laws require.” Moreover, a former Gap employee stated that “it was never the intent of the parties that Gap would continue to pay exorbitant, Manhattan real-estate prices for a glorified storage space, or the placement of signage on the building.”
The court rejected this argument holding that: “mistaken assumptions about the future do not amount to mutual mistake warranting recission of contract.”
Adding insult to serious injury, the court concluded that because the lease was terminated effective as of June 15, 2020 that Landlord was entitled to holdover rent from June 15, 2020 through January 31, 2021.
For Further Consideration
Landlords and tenants should carefully consider the allocation of risk associated with global pandemics. Clearly such events are now foreseeable and thus the parties should consider negotiating ahead of time whether the tenant should be entitled to any abatement of rent if due to a government order it is unable to be open for business in the premises.
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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