June 30, 2023
On June 30, 2023, the Massachusetts Appeals Court issued a decision rejecting a commercial tenant’s claim that it should not be liable for rent that it failed to pay during the period of time it was shutdown as a result of the COVID-19 pandemic.
In Inland Commercial Real Estates Servs., LLC v. ASA EWC, LLC, the plaintiff-landlord and defendant-tenant entered into a ten year lease in September 2016. In March 2020, as a result of the COVID-19 pandemic, then-Governor Charlie Baker issued COVID-19 Order No. 13, which ordered the shutdown of all nonessential business, including the defendant. The defendant complied with the shutdown orders, and remained closed until June 22, 2020. From March 2020 to September 2020, the defendant failed to pay rent and other charges due to the plaintiff. Ultimately, the plaintiff terminated the defendant’s tenancy for nonpayment of rent, including charges that accrued during the period the defendant was shutdown as a result of the shutdown order.
On appeal, the defendant asserted that the COVID-19 shutdown orders frustrated the purpose of the lease with the plaintiff, thereby discharging its obligations for rent and other charges due to the plaintiff for the period it was shutdown.
In its decision, the Appeals Court analyzed the defense of frustration of purpose, holding that it is a limited defense that excuses performance under a contract only where unforeseen events substantially frustrate a party’s principal purpose without fault, based on the assumption that the event would not occur. Further, the frustrated purpose must be integral to the contract. In reviewing recent cases, the Appeals Court found that courts through the country have generally declined to apply the doctrine of frustration of purpose to temporary business closures caused by government shutdown orders during the COVID-19 pandemic. In doing so, those courts reviewed a number of factors, including the duration of the closure, the lease term, the timing of the closure within the lease, the possibility of reopening once restrictions were lifted, and whether the tenant remained in possession during the closure. In the instant case, the Appeals Court held that the defendant had failed to demonstrate the temporary shutdown caused by the COVID-19 pandemic substantially frustrated the principal purpose of the lease with the plaintiff.
Specifically, the Appeals Court noted that the defendant had already been in possession of the premises for over three years under the ten-year lease, while the shutdown orders lasted only three months, Additionally, during the period it was shut down and thereafter, the defendant retained possession of the premises, and continued some business activities. The Appeals Court also rejected the defendant’s claim of “temporary” frustration of purpose, and noted that, even if a temporary frustration of purpose exists, it would have only suspended – and not discharged – its obligations to the plaintiff.
For more information, please contact:
Zachary J. Gregoricus at 617.457.4154 or zgregoricus@murthalaw.com
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