A recent decision by a New York state Supreme Court Justice could have a significant impact on businesses struggling to pay rent because of the COVID-19 pandemic.
In a decision released March 9, Justice Daniel J. Doyle ruled that Flour City Bagels, located at 1601 Penfield Road, Penfield, New York, must pay back rent to the landlord despite the slowdown caused by the pandemic.
Flour City’s lawyer, Ryan Cummings, argued that the “frustration of purpose” legal doctrine applied in the case because the pandemic made it impossible to operate the business successfully, which should excuse the business from the lease.
“The very purpose of the lease was frustrated by the pandemic and associated governmental orders that limited the workforce, prohibited in-person dining, and rendered continued operations impractical,” Cummings wrote in court papers.
But Doyle ruled that the pandemic’s impact on the five-year lease was very limited and not sufficient to trigger the “frustration of purpose” legal doctrine.
Richard N. Franco, an associate at Davidson Fink LLP, who represents the property owner, Penfield TK, said this is the first decision on this issue in upstate New York.
“Until the Appellate Division addreses it, this is all we have to go on,” Franco said.
“This is a favorable decision for our client because it says to the tenant, we understand that you’re having a tough time here, but you still owe the money under the lease and what you’ve suffered through is not enough to cancel or terminate the lease,” Franco said.
Cummings did not immediately respond to a request for comment on the decision.
Doyle granted Penfield TK’s motion for summary judgment on the back rent, but denied a motion seeking attorney’s fees.
Flour City Bagels’ current five-year lease started in 2018. Monthly rent is $6,319. The tenant failed to make rent payments in April and June 2020 and made reduced payments of $2,392 in May 2020, $4,517 in July 2020, and $5,417 in August 2020. Flour City Bagels resumed full monthly payments in September 2020, according to the decision.
Doyle noted that Gov. Andrew Cuomo’s relevant executive order only limited in-person dining, but did not entirely shut down the business and Flour City doesn’t claim they closed completely.
“Thus, it cannot establish that a curtailment of its business by government regulation for three months frustrated the purpose of the contract,” Doyle wrote.
Even if the business was completely shut down for three months out of a five-year lease, that would not be enough to establish frustration of purpose, Doyle wrote.
Doyle ruled that Penfield TK is entitled to back rent and late charges totaling $19,636.32.
Penfield TK also sought legal fees of $5,111, but Doyle denied that request because the rental contract did not explicitly call for those to be awarded if there was litigation. But Doyle did award the plaintiff court fees of $476.50.
Franco also is handling another similar pending case before Justice William K. Taylor in which Penfield TK is seeking back rent from another tenant at a different property. Franco said he sent Taylor a copy of Doyle’s decision in the Flour City case.
The Flour City Bagels case begins to establish the guidelines on the issue for landlords and tenants.
“They’re going to want to know, can I recover rent on this, and what does the other side have to show in order to apply that frustration doctrine,” Franco said.
“Undoubtedly I think there’s obviously a point where, if you were shut down enough and prevented from doing business enough, you may be able to get out of paying,” Franco said.