The Pandemic Effect On Leases – A Lesson From The US

by | Apr 29, 2021 | Corporate & Business

A recent case in the US dealt with matters which are currently hot topics in Australia – namely the rights of tenants who are suffering under the COVID-19 pandemic.

Valentino U.S.A., Inc. v. 693 Fifth Owner LLC – Background

Italian fashion brand Valentino and its American branch issued proceedings seeking to avoid its rent obligations (of $18.97million!) on the basis that the COVID-19 shutdowns and prohibitions on ‘non-essential’ business operations meant that the “social and economic landscapes have been radically altered in a way that has drastically, if not irreparably, hindered Valentino’s ability to conduct high-end retail business”.

Valentino brought eight causes of action against the landlord under the doctrines of frustration of purpose and impossibility including termination of the lease, rent abatement and rescission of the lease.

Decision

The Southern District of New York dismissed all claims made by Valentino.  Importantly, the court said that, as is typical of lease relationships, Valentino takes on the risk of its inability to operate the business and financial loss does not equal frustration or impossibility.  We think that the reasoning and result of this court would be similarly applied in Australia and tenants normally take on the risk of interruptions to the business unless the cause is generated by the landlord.

In this case, the lease went even further and contained the following clause which is the reverse of a “force majeure” clause:

In the face of cataclysmic events such as “failure of power, restrictive governmental laws or regulations, riots, insurrection, war, acts of terrorism, acts of God, floods, hurricanes, windstorms, fire or other casualty, condemnation or other reason of a similar or dissimilar nature…nothing contained in this Section shall operate to excuse Tenant from the prompt payment of Rent or any other payments or charges required by the terms of this Lease.”

Despite the fact this clause didn’t specifically mention pandemics, the court held that the drafting of the provision was broad enough to include such events. A force majeure clause normally excuses a party from performance whilst a preventing event is occurring but this seems to have obliged the tenant to perform irrespective of such matters.

Constructive eviction

A very interesting further claim was made by Valentino that it was constructively evicted – where a landlord does not physically or legally evict a tenant however takes actions, or fails to take action that interferes with a tenant’s use of the property.  In this matter Valentino alleged that by failing to take ‘reasonable and necessary precautions and/or measures in the light of the COVID-10 pandemic’, it failed to provide Valentino with safe occupation and operations of the premises.

The court also dismissed this claim as Valentino had failed to prove that it had moved out of the premises or that the landlord substantially interfered with its occupation and operations.

Lessons

Whilst a US decision, there are many transferable learnings for Australian business owners and landlords.  Ultimately, it seems that the doctrine of frustration is unlikely to assist a tenant in these situations unless the lease is written in a way where the tenant is expressly relieved of obligations in circumstances that would include such events.

How can Nevett Ford assist you?

As discussed, this case was decided in New York however as it has been shown over the last 12 months, the stance is the same here in Australia.  If you have any concerns regarding a force majeure clause in a lease or in regard to constructive eviction, please contact our Corporate Lawyers in Melbourne on 03 9614 7111 or email at melbourne@nevettford.com.au.