Holding: The doctrine of frustration of purpose/legal impossibility did not excuse the non-payment of rent by a restaurant tenant during the pandemic, because the terms of the lease were not sufficiently limited to prevent the restaurant from operating as a take-out/delivery service while a ban on in-person restaurant services was in effect by Executive Order.
Opinion by: Judge Stuart R. Berger
Facts:
David and Carolyn Marquis (“Marquises”) signed a lease with landlord John Critzos, II (Critzos), on September 21, 2015 for a property addressed 114 West Street in Annapolis, MD. The property, with the moniker Chesapeake Brewing Company, was used as a pub/brewery. The lease term ran from January 1, 2016 to December 31, 2020.
In March of 2020, with the onset of the COVID-19 Pandemic, Governor Larry Hogan declared a “State of Emergency and Existence of Catastrophic Health Emergency” which established restrictions for businesses, specifically limiting restaurant hours of operation, dining services provided, and maximum capacity of patrons for in-person services.
In April 2020, the Marquises had difficulty in making their rental payments under the Lease due to the COVID-19 pandemic, which caused the Marquises to ultimately request to terminate their lease with Critzos. The Marquises exited the property at the beginning of May 2020. As a result, Critzos filed a complaint in the Circuit Court of Anne Arundel County on May 27, 2020, claiming that the Marquises breached their lease. Following a bench trial, the Circuit court entered an order in favor of the Marquises based on the affirmative defenses of frustration of purpose and legal impossibility. Critzos appealed.
Analysis:
The tenants had the burden to demonstrate the defense of frustration of purpose as to their commercial lease with Critzos. Three factors are considered in evaluating this defense: “(1) whether the intervening act was reasonably foreseeable; (2) whether the act was an exercise of sovereign power; and (3) whether the parties were instrumental in bringing about the intervening event.” (citing Montauk Corp. v. Seeds, 215 Md. at 499 (1958)). The doctrine of legal impossibility is a defense to performance of a contract “‘if a contract is legal when made, and no fault on the part of the promisor exists, the promisor has no liability for failing to perform the promised act after the law itself subsequently forbids or prevents the performance of the promise.’” (citing Harford County v. Town of Bel Air, 348 Md. 363, 384-385 (1998)). However, for a party to prevail on this defense, performance of the contract must be objectively impossible, not merely more difficult at the time of making the promise.
Critzos argued that “the potential of a global infectious disease event was known in 2015 at the time the lease was made, and, therefore, the circuit court erred in determining that the COVID-19 related executive orders were not reasonably foreseeable”, mentioning other known potential “pandemic/epidemic” viruses including: “avian flu, swine flu, and SARS”. The Court, however, concluded that the havoc caused by the COVID-19 pandemic could not have been reasonably anticipated.
The Court then turned to the issue of whether the doctrine of legal impossibility should excuse the Marquises to perform under their particular lease with Critzos. As there were insufficient cases in Maryland that evaluated either defense, cases from other states were reviewed by the court. The Court discussed an Illinois case, Firestone Fin., LLC v. WA Gym Naperville N., LLC, No. 21 C 1183, 2022 WL 4094161, (N.D. Ill. Sept. 7, 2022), appeal filed, No. 22-2783 (October 6, 2022), in which COVID-19 pandemic restrictions and shutdowns did not prevent operations of the tenant gym and therefore did not contribute to frustration of purpose or legal impossibility; the tenant was still responsible for payment to their landlord as operations, although altered due to executive orders, could continue.
The Court also discussed a Massachusetts case, UMNV 205-207 Newbury LLC v. Caffé Nero Americas, Inc., No. 2084CV01493-BLS2, 2021 WL 714016 (Mass. Super. Ct. Feb. 8, 2021), which shed light on a restrictive lease that limited the tenant to only operate as brewery/pub. The passage of the executive order by the Massachusetts Governor, therefore, created a valid defense of the frustration of purpose/legal impossibility. The lease for the cafe in the case, Caffé Nero, indicated “that Caffé Nero could use the leased premises only to operate a café with a sit-down restaurant menu ‘and for no other purpose.'” Id. at 5; executive orders, therefore, made the business inoperable.
The Court also discussed a Connecticut case, AGW Sono Partners, LLC v. Downtown Soho, LLC, 343 Conn. 309, 273 A.3d 186 (2022), involving another restaurant facing financial difficulties due to the COVID-19 pandemic. The business failed to provide rental payments due to the business’ loss of profits. Unlike the Marquises, the tenant attempted to continue business, and the “[the restaurateur] testified that it was not profitable when the bistro attempted to do so.” Id. at 193. Although unprofitable, the tenant was still responsible for missed payments and breach of the lease.
Based on its review of the above case law, the Court reasoned that whether the defense of impossibility/frustration of purpose applies will depend on what is expressly permitted by the terms of the lease. In the aforementioned cases, restaurants or businesses that were able to continue to operate in a different manner were still liable for unpaid rent. Changed or diminished operations due to executive restrictions did not render the facility completely inoperable or incapable of income, even if profits were diminished.
The Court examined the terms of the instant lease with Critzos and found that the lease did not prohibit the Marquises from providing takeout dining. As a result, the Court concluded that the defense of frustration of purpose/legal impossibility did not excuse the Marquises from paying the rent. Judgement of the circuit court for Anne Arundel County was reversed.
Opinion HERE | MSBA Business Law Section Blog HERE
Alexis is a Registered Nurse working in Baltimore City. She is currently a Paralegal Certificate student and hopes to continue on to law school.
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