A Superior Court judge ruled June 7 that the owners of a restaurant in Ridgewood could proceed with litigation against their landlords, who they sued on grounds that they shouldn’t have to pay rent for the months of business they lost during the COVID-19 pandemic. How the case shakes out could have far-reaching effects on the rights of restaurant operators affected by the state’s COVID-19 restrictions, the plaintiff’s attorney said.
Owners of The Office of Ridgewood LLC stopped paying rent for their restaurant, located at 32-34 Chestnut St in the Bergen County town, due to the pandemic last April. Under Gov. Phil Murphy’s pandemic executive orders, their restaurant couldn’t do what its lease specified it existed for—to serve patrons indoors.
Restaurants nationwide faced financial challenges without the ability to serve indoors, or at a severely limited capacity.
While aid was available to them through the Paycheck Protection Program, administered by the U.S. Small Business Administration along with various grant programs, the relief funds did not save everyone. The National Restaurant Association reported in December that 17% of restaurants closed permanently or long-term due to the pandemic.
According to ProPublica’s Tracking PPP website, which lists every company approved for a federal loan under the Paycheck Protection Program, The Office was approved for a PPP loan of $178,760 by the U.S. Small Business Administration on April 28, 2020.
While it was approved for aid, most of that would have gone toward payroll – the purpose of the program. “[Whether] they did or didn’t, the issue in the case was whether or not under the executive order there was any legal obligation to pay rent,” said Bob Kasolas, a partner at Brach Eichler, who represents The Office. “The EO basically shut down all the restaurants in the state, and even when it got alleviated, it was at 25% [capacity] with six-foot distancing. You’re not operating a business like that.
“The legal issue in the case was whether the issuance of the executive order shutting down indoor dining in New Jersey would create a legal situation where the tenant offering an indoor dining establishment is obligated to pay the landlord rent,” he said.
The three separate legal doctrines that judge Avis Bishop-Thompson said come up in this case are frustration of purpose, impossibility of performance and impracticality of performance. The three “don’t come up that often,” Kasolas said.
Frustration of purpose occurs when an unforeseen event undermines a party’s main goal for entering into a contract in such a way that the performance of the contract becomes far removed from what was originally contemplated by the parties.
Impossibility is an excuse for the nonperformance of duties under a contract, based on a change in circumstances that makes performance impossible; and while impracticality is similar, the main difference between the two is that while impossibility excuses performance where a contractual duty cannot physically be performed, impracticability excuses performance where it’s still physically possible but extremely burdensome for the party whose duty it is.
Uscher, Quiat, Uscher & Russo PC Partner Joseph Russo, the attorney for the landlords, wrote in court pleadings that the plaintiffs’ complaint was nothing more than “’smoke and mirrors’ based on mere assumptions that Governor Murphy’s Executive Orders somehow put landlords in a position of breaching their commercial leases” and called the plaintiffs’ position “galling and disingenuous.”
“How can the plaintiff allege, in good faith, that the lease cannot be performed when, in fact, the plaintiff continues to operate its restaurant on the leased premises?” Russo wrote. “If the lease cannot be performed as alleged by the Plaintiff, then the Plaintiff should get out! Instead, the plaintiff chooses to abuse Governor Murphy’s Executive Orders by creating specious arguments so plaintiff can continue to operate its restaurant while paying no rent… .”
In an earlier brief, Russo wrote that the court “must recognize that the secondary purpose of plaintiffs’ complaint is to establish a precedent for restaurant owners in New Jersey” and that “to allow restaurant owners to skip paying rent because the purpose of the lease is frustrated by Governor Murphy’s Executive Orders would be a terrible precedent because it would result in substantial financial harm to landlords who have done nothing wrong.”
Russo did not return a request for further comment on the case.
Widespread issue
The Office wasn’t alone in its rental challenges. Across the river, data from a NYC Hospitality Alliance survey in February revealed 92% of more than 400 respondents couldn’t afford to pay rent in December, and that the number had increased throughout the pandemic. Eighty percent of New York City restaurants couldn’t make rent in June, 83% in July, and 88% by October.
Of those surveyed, 40% of tenants’ landlords reduced rent due to the pandemic, 36% deferred rent, and 14% of businesses were able to renegotiate leases.
Similar cases to The Office have cropped up elsewhere in the country to varying results.
In one case, celebrity chef Bobby Flay stopped paying rent to 1140 Broadway LLC, the landlord of his restaurant consulting business Bold Food LLC in February 2020 and vacated the premises on June 30. He had worked in the space rent-free for several months, but argued that because the business couldn’t operate due to the pandemic, his default was ”excusable.” The judge ruled in favor of the landlord.
In Flay’s case, though, Bold Food was a consulting space and not a restaurant using the space to execute restaurant duties; that is, feed people. In a case from Boston, UMNV 205-207 Newbury, LLC v. Caffé Nero Americas Inc., Caffé Nero stopped paying rent during the pandemic. A condition of the lease was that Caffé Nero could use the leased premises only to operate a “Caffé Nero themed café” and not for any other purpose. UMNV 205-207 moved for summary judgment; but in February, the court denied the motion and granted Caffè Nero summary judgment by stating that the tenant’s payment obligation was cleared under frustration of purpose.
While denying a motion to dismiss is common, how The Office case is decided could also affect how customers can bring business interruption claims against their insurance company, according to a Brach Eichler Partner Charles Gormally.
He echoed Kasolas on the potential effects on restaurants and their landlords moving forward. “I think it’s going to give restaurant tenants a lot more legal ammunition to negotiate favorable contracts with their landlord regarding what portion of rent should be paid starting from March to last month. I don’t think there’s going to be any doubt about that,” Gormally said. “Any landlord thinking they’re going to get every penny on the dollar during the executive order period is being unreasonable, but also kind of fooling themselves.”
Discovery is set to end Nov. 16. Kasolas said he doesn’t expect the case to be heard until late 2022.
