Hunton Retail Law Resource

Commercial tenants who are unable to pay their rent as a result of COVID-19 shutdown and capacity-limit orders have, thus far, found little relief from courts, who have by and large rejected their common law defenses seeking a discharge of lease obligations. One recent Massachusetts case, however, sides with a commercial tenant, albeit under narrow circumstances, approving of the often-unsuccessful “frustration of purpose” defense.

In UMNV 205-207 Newbury, LLC v. Caffé Nero Americas Inc., pending in Massachusetts Superior Court, the defendant tenant Caffé Nero could not make its rent payments after Massachusetts Governor Charlie Baker barred all restaurants in Massachusetts from allowing on-premises dining. In a lawsuit for damages filed by landlord UMNV, Caffé Nero argued that its rental payment obligations should be discharged under the “frustration of purpose” doctrine, which excuses a party from performing contractual obligations when an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract, destroys the purpose of the contract, thereby destroying the value of the performance.

Finding in favor of Caffé Nero, the Court focused on specific restrictive language in the lease that narrowed and defined the “purpose” of the contract, namely that Caffé Nero: (1) was permitted to use the leased premises “solely” for the operation of a Caffé Nero-themed cafe and for “no other purpose;” (2) was required to operate its café in order to serve food and beverages “in a manner consistent with other Caffé Nero locations in the Greater Boston area,” which meant “serv[ing] great coffee and food that customers could enjoy and linger over in a comfortable indoor space,” and (3) could only offer take-out sales “from its regular sit-down restaurant menu.” Given this specific and restrictive language, the Court discharged Caffé Nero’s rental payment obligations under the “frustration of purpose” doctrine for the period of time the Governor barred restaurants from allowing indoor dining. The Court reasoned that the lease was clear, in that Caffé Nero was allowed to use the leased premises “solely” to serve food and beverages from a sit-down restaurant menu that its customers could enjoy and linger over in an “indoor” space, and for “no other purpose.” This purpose was frustrated when the Governor barred Caffé Nero from allowing indoor dining.

Although decided on a narrow set of circumstances, commercial landlords and tenants alike, and their counsel, should review their leases for similar language restricting the “purpose” of the lease that may open the door for reliance on the “frustration of purpose” doctrine.