06/03/2020
Can Tenants Rightfully Terminate a Lease in Connection with the COVID-19 Pandemic?
This viral pandemic has created many unprecedented circumstances. When it comes to owners and tenants, the biggest question we keep hearing is whether a tenant has the legal right to terminate a lease based on the detrimental effects caused by or in connection with COVID-19.
Although there is no legal ‘right’ to cancel a lease based on COVID-19 conditions, a tenant does have a few options. Most residential leases do not have a “force majeure” provision, unfortunately – but when such clause exists in a contract, it can be invoked during a pandemic.
Without this clause, tenants can attempt to claim “Impossibility” and “Frustration of Purpose.”
A tenant in New York State, either residential or commercial, can argue an “Impossibility” defense: the performance of the contract is rendered objectively impossible by an event that is truly unforeseen and could not have been guarded against in the contract. The tenant would be required to show complete inability to perform or extreme impracticability of performance. For instance, with COVID-19, tenants can argue that the virus caused shelter-in-place orders and their place of work or business was shuttered to stop the spread of the disease, therefore making performance impossible.
Another avenue for mitigating one’s obligations under a lease is subleasing. Many leases provide that a tenant can sublease with permission (not to be unreasonably withheld). Many a landlord would rather bring in another tenant, then lose rent altogether. It should be noted that the original tenant remains “liable” in the event that the subtenant fails to pay rent. So, a tenant’s obligation continues and the lease is not cancelled if the premises is sublet.
Commercial tenants might find “Frustration of Purpose” a more useful route; “Frustration of Purpose” describes a circumstance in which performance remains possible but the expected value of the leasehold has been destroyed by an event. A commercial tenant could argue that the purpose of the lease is frustrated in that while the tenant technically could perform, the virus has destroyed the value of the leasehold.
In response to this argument, the landlord may counter the “Frustration of Purpose” claim and state that the lease still has value for both parties, and that the leaser’s principal purpose is not substantially frustrated. These defenses have been applied sparingly; the courts will perform a factual analysis and refer to the language of the contract to prove whether or not performance is truly impossible or has been compromised, and whether or not the value of the premises has been destroyed.
Such claims, under the cloud of a pandemic, have not yet been made. This means that right now, no one knows what will happen in court. If a tenant vacates, owners cannot sue in Housing Court and may only resort to Civil or Supreme Court. If tenants are people who have not been left unemployed, owners have a greater chance of collecting on their damages. As of the date of this posting, there is a moratorium on new cases. When the courts are back up and fully functioning, and if the owner does sue, the owner’s damages may be limited by recent regulation, which places the onus upon the owner a duty to mitigate his damages.
As we navigate these unchartered territories, the goal of both tenant and owner should be to consider all potential solutions that provide benefit to both parties and keep in mind the unknown risks of litigating in court.
