FRUSTRATION OF PURPOSE IS AN ISSUE OF FACT IN PLENARY ACTION FOR RENT

C&B Realty #3 LLC v. Sunstar Salon Svcs., Date filed: 2021-05-18, Court: Supreme Court, Nassau, Judge: Justice James McCormack, Case Number: 613285/2020"

"Plaintiff, C&B Realty #3, LLC (C&B) moves this court for an order, pursuant to CPLR §3212, for summary judgment on the issue of liability, and dismissing Defendants’ affirmative defenses and counterclaim. Defendants, Sunstar Services, Inc. d/b/a Cactus Salon (Sunstar) and Joseph Secreti (Secreti), oppose the motion. C&B commenced this matter, sounding in breach of a contract, by summons and complaint dated September November 18, 2020. Issue was joined by service of an answer with a counterclaim dated December 30, 2020.

The facts of this matter are largely undisputed. Sunstar is a hair salon. By lease dated March 27, 2019, Sunset leased commercial space from C&B. The term of the lease was five years, commencing on April 15, 2019, though the first rent payment was due on June 14, 2019. Secreti, as officer and general manger of Sunstar, guaranteed the lease. Sunstar paid the rent as per the terms of the lease until March, 2020 when, as a result of the Covid-19 pandemic, Governor Cuomo issued executive Order 202.7 which closed down certain “non-essential” businesses, such as hair salons. Sunstar remained closed until June, 2020, when Sunstar was allowed to re-open at 50 percent capacity. According to Sunstar, the extra cleaning protocols imposed upon the business in order to re-open caused significant extra expenses, such that being open at 50 percent capacity did not mean earning 50 percent of what it earned prior to the shutdown. After re-opening, Sunstar did make some partial payments, but admittedly did not pay according to the terms of the lease. Sunstar now moves for summary judgment on liability regarding the lease and the guarantee, as well as dismissing Defendants’ affirmative defenses and counterclaim. The counterclaim seeks a declaration that Defendants are not responsible for the unpaid rent due to the Executive Order.

It is well settled that in a motion for summary judgment the moving party bears the burden of making a prima facie showing that he or she is entitled to summary judgment as a matter of law, submitting sufficient evidence to demonstrate the absence of a material issue of fact (see Sillman v. Twentieth Century Fox Film Corp., 3 NY2d 395 [1957]; Friends of Animals, Inc. v. Associates Fur Mfrs., 46 NY2d 1065 [1979]; Zuckerman v. City of New York, 49 NY2d 5557 [1980]; Alvarez V. Prospect Hospital, 68 NY2d 320 [1986]).

The failure to make such a showing requires denial of the motion, regardless of the sufficiency of the opposing papers (see Winegard v. New York University Medical Center, 64 NY2d 851 [1985]). Once this showing has been made, however, the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action (see Zuckerman v. City of New York, 49 NY2d 5557 [1980], supra).

A cause of action for breach of contract requires showing that a contract existed, that the plaintiff performed under the contract, that the defendant did not perform under the contract and the failure to perform resulted in damages. (Palmetto Partners, L.P. v. AJW Qualified Partners, LLC, 83 AD3d 804 [2d Dept. 2011]).

Liability

The elements of the breach of contract have, admittedly, been met. The parties entered into a lease and a guarantee, C&B delivered possession of the premises to Sunstar, and Sunstar failed to pay under the terms of the agreement. Therefore C&B has established entitlement to summary judgment as a matter of law on liability. The burden shifts to Defendants to raise an issue of fact requiring a trial of the action.

Defendants’ first argument is that C&B’s papers are legally insufficient. The court disagrees. The affidavit of Fred Colin, Manager of C&B indicates his “Personal knowledge” of the facts of the case, and the court finds he offered a proper foundation for a ledger which details the missing rent payments.

Defendants next argue the doctrine of impossibility of performance absolves them from having to pay rent while the salon was closed, and absolved them from paying full rent when the salon was only able to operate at 50 percent capacity. Impossibility excuses a party from performing under a contract when the subject matter of the contract or the means of performance are destroyed, rendering performance objectively impossible. (Berman v. TRG Warterfront Lender, LLC 181 AD3d 783 [2d Dept 2020]). Where the impossibility is caused by governmental action, the action must have been unforeseeable. (A&S Transp. Co. V. County of Nassau, 154 Ad2d456 [2d Dept 1989]).

Due to the newness of the particular issues raised in this case- inability to meet rent obligations due to the pandemic- there is scant law on the topic. The most relevant case this court could find was CAB Bedford LLC v. Equinox Bedford Ave., Inc., 2020 WL 7629593. In CAB, a commercial landlord sued its tenant, a gym, for breach of lease. The gym argued, inter alia, that Covid-19 rendered it impossible for them to pay their rent since gyms were shut down. The Hon. Arlene P. Bluth of New York County Supreme disagreed:

The Court finds that this doctrine has no applicability here and does not raise an issue of fact. Defendants ran an “upscale gym” for many years prior to the Covid-19 pandemic and, after some painful months, are now permitted to operate (although at a limited capacity). The subject matter of the lease was not destroyed. At best, it was temporarily hindered. That there are more hurdles to running the business is not a basis to invoke the impossibility doctrine. Id at 5.

Judge Bluth further raised concerns about the specter of inconsistent rulings if each court were to decide this issue on a case-by-case basis. In Judge Bluth’s opinion, the other branches of government must step in to resolve the problems created by the shutdown.

Justice Bluth reached a similar decision in 35 East 75th Street Corp. v. Christian Louboutin L.L.C., 2020 WL 7315470: “The subject matter of the contract — the physical location of the retail store — is still intact. And defendant is permitted to sell its products. The issue is that it cannot sell enough to pay the rent. That does not implicate the impossibility doctrine.” Judge Bluth quotes from Gen. Elec. Co. v. Metals Resources Group, Ltd., 293 AD2d 417, 418 [1st Dept 2002]: “Defendant’s performance may have been rendered financially disadvantageous by circumstances unforeseen by the parties at the time of the contract’s making. However, financial disadvantage to either of the contracting parties was not only foreseeable but was contemplated by the contract, even if the precise causes of such disadvantage were not specified. In any event, it is not a basis for reliance upon the impossibility of performance doctrine.”1

This gist of these decisions, and the line of argument relied upon by C&B, is that the subject of the lease was the space rented, not the business operated in the space. The pandemic and the Executive Order impacted what the tenant chose to do with the space, not the tenant’s obligation to pay rent for the space. This court might, in general, agree with that analysis, but the matter herein is somewhat different. The lease in this matter contains the following provision: “Subject to the limitations herein set forth, the Demised Premises shall be used solely as a first class, high quality hair salon and for no other use or purposes whatsoever (“Permitted Use”)…”. In other words, Defendants did not just rent the space, but they rented the space with the requirement they only run a hair salon out of it. From March until June, 2020, it was impossible for Defendants to operate their salon, which was the only use allowed in the rented space. The analysis changes once Defendants were allowed to operate at 50 percent capacity. It was no longer impossible, but extremely difficult. The impossibility of performance doctrine does not apply to “extremely difficult”. Therefore, this court will grant the motion for summary judgment on liability except for the months of March, April, May and June, 2020, where an issue of fact exists as to whether the impossibility of performance doctrine released Defendants from their obligations under the lease for those months.

Defendants also allege that C&B violated the implied convenant of good faith and fair dealing. The court rejects this argument. This is this court’s first Covid-19-related matter regarding a lease, though it certainly will not be its last. There are grounds to sympathize with both sides. The tenant was unable to run its business for a period of time, and then was unable to run it at full capacity. When Defendants entered into the lease, it is safe to assume they expected to be able to run the business at full capacity for the life of the lease, which would allow for payment of the full rent. On the other hand, eviction moratoria essentially forced many landlords to allow tenants to stay in their rented spaces for free. While one can assume that landlords are in a better position to absorb a financial hit, not every landlord is wealthy and most landlords also faced trying times during the pandemic. Their businesses also suffered significant losses because rent was not coming in and they were constrained from taking any action as a result, yet they still had their own expenses to meet. In this matter, the tenant seems to be of the opinion that the landlord was under an obligation to shoulder not only its own loss, but some of the tenant’s losses as well. The tenant believes it was the landlord’s obligation to re-write the lease, and that the landlord was not just unreasonable but was legally wrong to refuse. Defendant offer no authority supporting this position.

This motion solely deals with liability, and the court does not know how much in damages there will be, if anything. But this court is certain that landlords and tenants, along with virtually every other segment of society, suffered as a result of the pandemic, the shutdowns and the government-imposed limitations.

Affirmative Defenses

C&B also moves to dismiss the six affirmative defenses and the counterclaim. The six affirmative defenses are 1) Lack of personal jurisdiction, 2) Plaintiff’s failure to perform under the contract, 3) Impossibility of performance, 4) Breach of the convenant of good faith and fair dealing, and unclean hands, 5) Equitable estoppel and 6) Lack of legal capacity to sue. The Second, Fifth, and Sixth Affirmative Defenses will be dismissed. They merely state conclusions of law without any factual support, rendering them defective. (Moran Enterprises, Inc. v. Hurst, 96 A.D.3d 914 [2nd Dept. 2012]). The First Affirmative Defense is dismissed as waived. Defendants had 60 days from the filing of their answer to make a motion on that basis, and failed to do so. (CPLR §3211(e), U.S. Bank National Association v. Donovan, 189 Ad3d 918 [2d Dept 2020]). The Fourth Affirmative Defense, alleging violation of the implied convenant of good faith and fair dealing, as well as unclean hands, is dismissed as merely stating a conclusion of law without a factual basis. (Moran Enterprises, Inc. v. Hurst, supra.). While Defendants attempted to justify the breach of the implied covenant of good faith and fair dealing in their opposition papers, as discussed, supra, they failed to do so. The motion to dismiss the Third Affirmative Defense will be granted in part and denied in part. It will be denied as to March, April, May and June of 2020, and will be granted in all other respects.

Finally, the counterclaim seeks a declaration that (a) Defendants are not liable for rent during the period of time they were unable to operate or were limited in their operations, (b) that they are entitled to re-write the lease to reflect their current circumstances and (c) for other amendments as this court deems appropriate.

For the reasons discussed, supra, the court finds C&B has established entitlement to summary judgment as a matter of law. It is undisputed that Defendants breached the terms of the contract and guarantee. However, unlike in their opposition to the motion, or in their affirmative defenses, Defendants raise the doctrine of frustration of purpose as part of their counterclaim. The frustration of purpose doctrine relieves a party of its obligations under a contract when the frustrated purpose was so integral to the contract that, without it, the contract would not have made sense. (PPF Safeguard, LLC v. BCR Safeguard Holdings, LLC 85 AD3d 506 [1st Dept 2011]). The change in circumstances has to make one party’s performance essentially worthless to the other party, frustrating the purpose of entering into the contract. Id. The frustrating event must have been so unforeseen that its non-occurrence was a given in the contract. (Fifth Ave. Of Long Is. Realty Assoc. v. KMO-361 Reatly Assoc., 211 AD2d 695 [2d Dept 1995]).

Like the impossibility of performance doctrine, the court finds that the frustration of purpose doctrine also raises an issue of fact for the months of March, April, May and June, 2020. Giving possession of the premises to Defendants for the purpose of operating hair salon was integral to the contract to the point where, if Defendants knew they would be unable to operate the hair salon, there would have been no reason to rent the space. The pandemic made C&B giving possession of the premises to Defendants for those months worthless since they could not operate the salon. And it is fair to say that a pandemic was unforeseen at the time the lease was executed.

Also like impossibility of performance, however, the frustration of purpose doctrine does not apply after June, 2020 when the salon as able to operate at 50 percent capacity. While it may have been a struggle, giving possession of the premises to Defendants for the purposes of operating at 50 percent does not render the giving of possession worthless.

Finally, C&B is entitled to counsel fees under the contract. However, the issue of counsel fees will be referred to trial as the amount cannot be determined until the remaining underlying issues are resolved.

Accordingly, it is hereby

ORDERED, that C&B’s motion for summary judgment on liability is GRANTED in part and DENIED in part. It is DENIED as to months of March, April, May and June, 2020, and is GRANTED in all other respects as to the lease and the guarantee; and it is further

ORDERED that C&B’s motion to dismiss the affirmative defenses is GRANTED in part and DENIED in part. It is DENIED as to the Third Affirmative Defense in reference to March, April, May and June 2020 and it is GRANTED in all other respects; and it is further

ORDERED, that C&B’s motion to dismiss the counterclaim is GRANTED in part and DENIED in part. It is DENIED as to the impossibility of performance and frustration of purpose doctrines as related to March, April, May and June, of 2020, and is GRANTED in all other respects.

This foregoing constitutes the Decision and Order of the Court.

Any relief not specifically granted is denied. The court has considered the remaining arguments of the parties and finds them to be without merit.

Dated: May 18, 2021

Footnotes

1. C&B cites to these cases in its memorandum of law, as well as some others, but the other cases address the "frustration of purpose" doctrine which is related to, but not the same as, impossibility of performance."