NYC Commercial Lease Litigation, COVID-19 and the Frustration of Purpose Doctrine

Under New York contract law, the frustration of purpose doctrine is a legal principle that, under certain rare circumstances, allows one party to evade its obligations under a contract. The Frustration of Purpose doctrine only applies if “circumstances” have changed so that one party’s performance is virtually worthless, thereby frustrating the purpose of making the contract. The doctrine generally originated from an old English case called Krell v. Henry, 2 KB 740 (Eng. 1903). In that case, one party executed a lease for an apartment along the route of a coronation procession for the newly-crowned British King. However, the procession was canceled because the King became ill. The English court then allowed the tenant to rescind the lease — thus avoiding paying the rent — based on the frustration of purpose doctrine.

But, as applied in New York, the doctrine is VERY narrowly applied. Essentially, there are four requirements:

  • There must be COMPLETE frustration of the purpose for at least one party to the contract — partial frustration is insufficient
  • The circumstances that led to the frustration must not have come about due to any action of the party seeking rescission of the contract.
  • The circumstances must have been wholly unforeseen and
  • The circumstances must be extreme, nearly calamitous

If litigated here in New York under current law, Krell v. Henry would have had a different result. After all, the tenant could still use the apartment for other purposes. Frustration would likely have been deemed only partial.

Commercial landlords in New York are fully aware of the Frustration of Purpose doctrine. Consequently, lawyers representing commercial landlords use the commercial lease to “attack” the third requirement listed above. The legal rule is that if the parties were aware of the potential calamity that eventually occurred at the time of contracting and didn’t address that catastrophic event in the lease/contract, then courts will not allow rescission based on the Frustration of Purpose doctrine. Basically, the courts view that the parties are free to protect themselves against calamities that they foresee. If parties fail to protect themselves, the courts will not intervene.

Force Majeure

Thus, commercial landlords insist that their leases contain a long list of the tenant’s duties and obligations under various possible calamitous eventualities. These are usually contained in what is called the force majeure provision. Suppose the calamity that has supposedly caused frustration of purpose is listed in the force majeure provisions. In that case, New York courts will deem the calamity to have been “foreseen” at the time of contracting. As such, the frustration of purpose doctrine will not apply.

This happened in the recent case of Gap Inc. v Ponte Gadea New York LLC, Case No. 20 CV 4541 (US District Court, S.D. New York, March 8, 2021). In that case, the tenant claimed that the COVID-19 pandemic lockdowns and restrictions on business operations frustrated the purpose of the commercial lease. The tenant sought to be excused from its lease payments. However, the force majeure event clause included “governmental preemption of priorities or other controls in connection with a national or another public emergency.” Because of this, the court held that the parties had foreseen the possibility of business interruptions due to something like a pandemic. As such, the court ruled — on summary judgment — that no rescission of the lease was warranted based on the frustration of purpose doctrine.