Client Alert: Misleading Reporting on Commercial Lease / Frustration of Purpose Issues

Client Alert: Misleading Reporting on Commercial Lease / Frustration of Purpose Issues

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August 10, 2020 –  By Larry Hutcher and William Mack.

Last week, The Real Deal published a piece entitled “Win for Moinian is bright spot for commercial landlords.” The article purported to report on a case captioned Backal Hospitality Group LLC v. 627 West 42nd Retail LLC, No. 154141/2020. Unfortunately, the author inaccurately and misleadingly asserted that “a state judge ruled the tenant is still on the hook for future rent,” suggesting a final ruling in a case where the complaint has yet to even be filed. Because this reporting has created confusion among some of our clients and among commercial tenants generally, we write to correct the record and present an accurate account of the Backal Hospitality decision.

Backal Hospitality is not a ruling on the merits, and makes no findings as to assertions of frustration of purpose and/or impossibility of performance. Instead, it is a provisional ruling on an injunction seeking the return of a security deposit. Nothing more.

In Backal Hospitality, the Tenant, a caterer, had leased an “event space” where large private parties could be hosted. Following Governor Cuomo’s March 22 executive order banning gatherings due to the COVID-19 national health emergency, the tenant was prohibited from operating in the space. As such, the Tenant ceased paying rent and allegedly spoke with the landlord, with the parties agreeing that the lease would be terminated. The Landlord denies such an agreement, and asserts that the lease can only be modified in writing. The Landlord then drew down on the Tenant’s letter of credit (“LOC”) to satisfy alleged arears through June 2020.

In June, the Tenant commenced an action by summons with notice seeking, among other things, a declaration that the lease has been “terminated.” Importantly, no complaint has been filed to date, and thus a complete accounting of the tenant’s allegations has not been stated.

Nevertheless, after commencing the action, the Tenant immediately filed an application for an injunction seeking the refund of the entire value of the LOC (approximately $500,000). Justice Kathryn Freed denied the tenant’s application, but made no findings as to “future rent” and no rulings on the tenant’s yet-to-be-asserted causes of action, as misleadingly reported in The Real Deal.

Justice Freed denied the injunction because, she found, the Tenant had not demonstrated the required “likelihood of success on the merits.” The centerpiece of the Tenant’s argument is that an oral agreement terminated the lease. However, Justice Freed was not persuaded because the lease requires modifications to be written, and “plaintiffs have produced no such writing.”

The Court also wrote, in dicta, that the tenant had not demonstrated the required “irreparable harm” absent an injunction. The Tenant asserted that it would be harmed without access to the funds securing the letter of credit, since those funds were “earmarked for refunds to [its] clients and far exceed any colorable damages that [landlord] could claim it is owed.” The Court rejected this claim as “conclusory insofar as plaintiff submit[ted] no proof whatsoever of the amounts owed to their clients.”

In sum, Backal Hospitality makes no findings on the merits of the Tenant’s claims, nor does it consider the frustration/impossibility arguments that many tenants have now asserted. Last week’s decision simply denied the tenant’s request for an immediate refund of the LOC proceeds, and focused on the apparent lack of a written modification of the lease. The Backal Tenant must serve its Complaint by August 24, at which time the legal theories will be cast more clearly, and the case can commence to be litigated on the merits. Accordingly, we remain optimistic regarding the rescission claims that we have advanced on behalf of our clients. If you have any questions, please contact DHC’s Commercial Litigation Partner William Mack at [email protected]