Category: Insights

SZS congratulates our partner Bart Eagle on being appointed a member of the New York City Bar Association delegation to the New York State Bar Association House of Delegates

Mediators and parties grapple with when a mediator should take on evaluation in the mediation process.  Bart Eagle addresses this in his recent article.

BIG DATA ― For Good or Evil …

What is commonly now called “Big Data” is central to American commerce as well as the day-to-day lives of Americans.  Big Data is very often discussed in terms of individual privacy issues.  Increasingly, however, it has become apparent that analysis of data collected by large companies from many consumers can serve many good purposes such as enhancing individual safety.  The Firm has taken on a matter with implications for when a large company has an obligation to use that data for good purposes.

Significantly, while the emergence of Big Data in daily life is relatively new, long-established principles of tort law are well-stated to address these new scenarios and impose a duty of care.  Where there is Big Data aggregation in commerce, those who collect it for gain also have a duty to deploy it to protect customers against foreseeable harms.   Put differently, a business analyzing and exploiting consumer data for profit may be able to deploy its analytics tools to achieve protections or other benefits for those same consumers with minimal effort ― and under traditional tort law analysis, in some scenarios, it has a duty to do so.

The litigation is unusual for the Firm’s commercial litigation practice — a wrongful death case involving the murder of an Uber driver while on the job ― but the issues have broad implications.  A brief we recently filed opposing a motion to dismiss provides an introduction to those issues at pp. 1-5 and 19-32 here …

I am pleased to be presenting for the CPA Academy, on May 26, 2021 at 11:00AM, with Mark DiMichael, a forensic accountant and partner at the accounting firm, Citrin Cooperman, a program entitled “Litigation Support Services Performed by Forensic Accountants.”

Please visit this link for more information about the program:

Two Critical Factors Are Emerging in Apparently Conflicting New York Decisions on Commercial Tenants’ Lease Liability During the COVID Pandemic:  The Importance of Specific Lease Terms and the Importance of Tenants’ Alternate or Partial Use of Space During Government Restrictions

From the Desk of Cassandra Porsch …

The litigation between commercial tenants and landlords over tenant obligations to pay rent during COVID shutdowns and restrictions continues unabated.  Three recent decisions involving retail commercial tenants add to the landscape of case law illuminating the rights and obligations of the parties in the COVID pandemic context.  An emerging trend may be gleaned from the three cases discussed here:  (i) tenant claims for relief may have traction if they are not burdened by a specific adverse lease clause and are seeking relief for a period when they were totally deprived of the use of their space; while (ii) various specific lease clauses protecting the landlord in situations generally like this pandemic or partial use of leased premises may be an obstacle for tenants with that problematic baggage.

In one recent case, the Kings County Supreme Court found that a Brooklyn baby shop was excused from paying its rent arrears due to the doctrine of impossibility of performance.  In 267 Development LLC v. Brooklyn Babies and Toddlers, LLC, et al., No. 510160/2020 (Sup. Ct. Kings Co.), the Court found that the government shut down of non-essential businesses rendered the lease objectively impossible ― the subject of the lease was “destroyed.”  The Court analogized the situation to an impossibility of performance case arising out of the September 11, 2001 terror attacks, where a travel contract was deemed to be rendered impossible due to travel shutdowns.

Notably, unlike the facts in the two other cases discussed here, there was no mention of any sort of ongoing partial use of the leased premises such as curbside pick-up or shopping by appointment.  Accordingly, it may have been easier for the Court to find that the subject matter of the lease agreement was “destroyed,” one of the elements in conducting an impossibility of performance analysis, than it would be where some use persisted.

This case represents a significant win and an expansion of the tenant arsenal in this sphere of litigation.

In The Gap, Inc. v. Ponte Gadea New York LLC, 20-cv-4541 (S.D.N.Y.), the Gap and its landlord cross-moved for summary judgment against one another, with the Gap trying to vitiate its lease and the landlord trying to enforce it.  The Gap had operated a Gap and Banana Republic store on the corner of 59^th and Lexington Avenue for many years.  The Gap argued that the pandemic had deprived it of the benefit of the bargain to which it was entitled under the lease: a location in the center of a heavily foot-trafficked business district just above the intersection of several subway lines.  With the pandemic, shut down orders, and then only a small fraction of Manhattan office workers and tourists returning once restrictions were relaxed, Gap argued that the lease should be deemed terminated as of March 2020 when the government first shut down non-essential businesses.  During the state’s phased re-opening, the Gap did not re-open those two stores to shopping, despite re-opening other nearby stores.

The Gap tried several approaches to abandon its lease, none of which were successful with the Court.  First, the Gap argued that the pandemic constituted a “casualty,” which would mitigate its lease obligations while the landlord was required to remediate the casualty conditions.  The Court rejected this argument because the relevant term of the lease was titled “Fire or other casualty,” and the section “described in detail restoration obligations in the event of a casualty, making it clear that it referred to singular incidents having a physical impact on the premises, such as a fire.”  The Court noted that there was no way the landlord could do “restoration work that would eliminate the pandemic of alter government restrictions on operations.”

The Gap also argued that it should be excused from its lease obligations under the now-familiar doctrines of frustration of purpose and impossibility of performance.  The Court rejected the frustration of purpose argument because it required that the purpose of the lease be “completely” frustrated, not simply that the transaction was not as profitable for the affected party or even that the party would sustain a loss.  The Court also noted that, contrary to the Gap’s arguments that it could no longer use its premises during the shut down and then restricted reopening, it did use the stores to offer curbside pick up as well as for online order fulfillment.

Similarly, the Court denied relief on the doctrine of impossibility of performance on which 267 Development was decided for a tenant.  The Court held that this doctrine requires a lack of foreseeability of the circumstances causing the impossibility.  The Court then noted that lease contained a force majeure provision which specifically foresaw and allocated the risk that government measures taken in conjunction with a public emergency could affect performance.  Finally, the Court found that the Gap was not entitled to lease rescission for failure of consideration, remarking that the retailer did continue to receive value under the lease — space to house its merchandise and process online fulfillment and in-store pickup — so it could not be said that it was receiving no value for its rent.

On the luxury end of the retail spectrum, Valentino made similar arguments in a complaint seeking declaratory relief in an attempt to be released from the terms of its lease for a prime location on 5^th Avenue, for which it was paying approximately $19 million per year in rent.  In Valentino USA Inc. v. 693 Fifth Owner LLC, No. 652605/2020 (Sup Ct. N.Y. Co.), Valentino sought relief from its lease on familiar grounds of impossibility of performance, frustration of purpose and failure of consideration.  In a short decision, the Court dismissed the complaint based upon documentary evidence and failure to state a claim.

This Court found that the specific language of the lease between the parties foreclosed Valentino’s arguments because it contained a provision specifically stating that cataclysmic events or restrictive governmental laws or regulations would not excuse the payment of rent.  Perhaps recognizing the limitations of its more traditional arguments in light of this very restrictive lease provision, Valentino also tried a more novel argument of constructive eviction.

The doctrine of constructive eviction excuses a tenant from its lease where the landlord has caused a disturbance rendering the premises uninhabitable and unsuitable for the purposes for which they were leased.  Here, the Court found this doctrine inapplicable because there was no wrongful act by the landlord (as opposed to a pandemic and government restrictions) depriving Valentino of the beneficial enjoyment or actual possession of the premises.  Further, a tenant arguing constructive eviction must plead that they actually vacated the premises.  While Valentino ultimately did vacate, the Court noted that it continued to operate by curbside retail and by appointment for several months beforehand.

These two cases indicate that both the Gap and Valentino may have been disadvantaged in their arguments due to restrictive lease terms, and were also hamstrung in attempting to seek total rent relief when they did utilize the premises in at least some manner.

Overall, it appears that the ability of a commercial tenant to obtain rent relief for COVID-related shutdowns or restrictions may come down to the presence or absence of (i) a specific lease term that at least comes close to speaking directly to the pandemic scenario and (ii) the tenant’s ability to use the leased premises in any way during the relevant time periods.  Tenants seeking rent relief should consult with an experienced commercial litigator to evaluate their circumstances.

From the Desk of Dan Brooks ―

The Second Circuit’s recent Andy Warhol fair use decision attempts to clarify its Cariou standard, which remains conclusory and continues not to offer meaningful guidance or predictability. Continue reading “When It Comes to Transformative Art, the Second Circuit Knows It When It Sees It”

From the Desk of Rick Scarola ―

Three new issues for pandemic-driven commercial lease litigation …

Commercial landlord-tenant relationships have potential to produce a tsunami of litigation over impacts of the novel coronavirus:  conflicts as to whether and how a tenant’s lease obligation to pay rent or even continue a lease are affected by the pandemic and the resulting government-mandated restrictions.  The settings vary widely, from commercial business offices to retail businesses to restaurants, but many articles point out that there is an array of common law principles that may govern in all of these controversies.  Frustration of purpose and impossibility are perhaps most commonly mentioned (along with contractual force majeure clauses found in some leases ― a subject itself fraught with much confusion and to be saved for a different writing).

These contract law principles have a long history, but no history of application in circumstances like these.  The pandemic presents novel facts for analysis of commercial lease rights/duties.  We see some new ways of looking at these issues as they are revisited in the age of COVID-19 as well as some additional legal principles that have not yet entered the dialogue in the commercial lease disputes percolating in the courts.

Here are three issues/arguments that we see being overlooked, each of which may substantially strengthen commercial tenants’ arguments that they should not be required to pay rent when they have not been allowed use of their offices, retail space or restaurant space.

1. Whose Burden Is It, Anyway? The first issue implicates how specific lease provisions will be construed and also suggests a tenant defense of illegality (another common law principle that may be invoked in these disputes).  Bottom line ― restrictions on the use of leased spaces appear to make it just as illegal for landlords to provide them as it is for tenants to use them.

As background, a premise that has worked into the dialogue is that government-mandated closures of offices and retailers and restaurants are restrictions on the tenant, leaving the tenant to scramble for a way to argue that this burden on the tenant can warrant mandatory relief from rent or a lease as a whole.  In fact, however, the dialogue overlooks that the restrictions of government mandates generally apply to both tenants and landlords equally.  If a tenant may not operate a business under a restriction (a prime example being those restrictions imposed in New York by the Governor’s Executive Orders), a landlord seems by plain language of the mandates to be just as barred from allowing a tenant to use space the landlord leases as the tenant is barred from using its space.  Put differently, if a tenant openly and notoriously violates a restriction in a space where use and access are controlled by the landlord, the landlord would also be in violation of the mandate for allowing this to happen.  The tenant-side dialogue often omits this and accepts the landlord-side view that the burden is upon the tenant only and is just a matter of economic hardship for the tenant (the risk of which the tenant ostensibly assumed under the lease).

Seen as a burden on landlords with at least equal force ― with the restrictions barring landlords from making leased space available to their tenants for their intended use ― lease provisions ranging from those governing quiet enjoyment to general use and occupancy rights to casualty issues (as one New York State court recently held) will be construed more favorably for tenants.

As well, seen in this light, the common law doctrine of illegality may be construed to afford relief for tenants if the landlord’s making the space available for use as well as its use by a tenant are both unlawful under a government mandate.

These considerations change the dialogue from one in which affected tenants are seen as the only affected party, facing an economic hardship, and seeking relief from a landlord-bystander that has no duty, fault or role whatsoever.

Argument that the restrictions affect both landlords and tenants equally and that landlords are not simply above the fray may give tenants a powerful arrow in the legal quiver as courts come to grips with the many cases that will address the effect on commercial leases of the unprecedented shutdowns of New York City office buildings and retail and restaurant spaces.

2. You saw what coming? The second issue is the “foreseeability” ― or the unforeseeability ― of what has actually happened in terms of the commercial space shutdowns.  Foreseeability (or its absence) is an element of invoking many lease protections and also an element of some of tenant-side legal defenses such as frustration of purpose.  Bottom line ― while viruses and even serious pandemics have been foreseeable, the unprecedented shutdowns of commercial business have not been foreseeable.

The blogosphere writing on this issue has generally focused on whether a virus-like pandemic was, as such, foreseeable.  Minds might differ on that question ― and do.  A landlord might argue that the Hong Kong Flu of the late 1960s was relatively recent and a serious pandemic and that the more recent Swine Flu, while ultimately not so far-reaching in consequences, was not stale news when most current commercial leases were signed.

BUT ― whether one might have seen a virus-like pandemic coming seems not to be the correct question for “foreseeability” analysis.

While it is debatable whether this pandemic was foreseeable at all, even assuming that it was, the correct question is the foreseeability of the consequences of this particular serious pandemic.   More specifically, the correct questions are, for an example, whether a three-plus month complete prohibition on the use of commercial office space throughout New York City could have been foreseen and whether a total disruption (if not closure) of retail and restaurant business could have been foreseen.

What has occurred by reason of these restrictions has left some segments of communities and industries in a dystopian state.  The government response, while needed, is indeed unprecedented and many would say truthfully was unforeseeable when their commercial leases were signed.  Some argue that the government’s lack of preparation for the pandemic, and the consequences making many things worse than they might have been, was also unforeseeable.

Restrictions like those experienced since March 2020 ― never seen before for any reason (in earlier serious pandemics or otherwise) ― put the question of foreseeability in a whole new context not being considered in cases we have seen.  As one insurance company put it in a recent filing, arguing (to avoid a coverage claim) that what has occurred was not foreseeable:  “The idea that the policy could have been intentionally ‘designed’ many years ago to account for an unprecedented and unexpected global pandemic strains credulity.”  It strains credulity just as much that commercial tenants could have foreseen being displaced from their restaurants, stores and offices for business-killing periods of time.

3. Well, that All Seems Unconscionable. The third issue not being discussed is New York’s statutory prohibition against unconscionable provisions in leases (including commercial leases).  New York’s Real Property Law §235-C provides that a lease, or any part of one, that was unconscionable “at the time it was made” may not be enforced in whole or part.  This statute is often overlooked even by commercial real estate specialists, but it applies with full force to commercial leases.

The nuances of how this statute may be applied are beyond the scope of this short piece.  The statute may not turn out to be a tenant-side panacea in this emerging sphere of litigation.  It is limited, for example, by the phrase unconscionable “at the time it was made” ― a phrase with little discussion in caselaw and leaving enormous room for able lawyers on both sides of the issue to argue its meaning into the ground.  The statute has also been held to have a “procedural” as well as a “substantive” unconscionability requirement, requiring that the tenant invoking can establish that there was some unconscionability in the making of the bargain.  Again, this is an issue that may be argued into the ground by able lawyers.

The caselaw guidance, however, while limited, gives a lot of hope to tenants that judges sympathetic to the tenant-side plight will take to this argument.  For one thing, the issue will be examined on a “sliding scale,” such that with greater substantive unconscionability, less procedural unconscionability is required.  And no doubt all but the largest commercial tenants (those with gorilla-in-the-room bargaining power) have unconscionability tales to tell ― such as facing demands for onerous lease terms when time constraints on a prospective move to a new space approached (a timeframe impossible to manage, complicated by a landlord’s presentation of a lease exceeding 100 pages of dense material).  The unconscionability hurdle is not so much of a stress.

Indeed, initial draft leases typically come from the landlord’s very skilled long-standing counsel, have been long-in-the-creation and are well-honed to be replete with landlord-favoring terms at every paragraph.  In the typical scenario, most terms are not ever subject to meaningful negotiation or even meaningful review.  And unsurprisingly, the terms applicable to remote disasters and possible future dystopian circumstances receive no attention at all as a tenant’s very limited negotiating time and capital is deployed instead to the few most immediate, high visibility and high stakes principal deal terms.

While this unconscionability statute has barely been tested in the courts, lease terms ― perhaps especially those written in more general or even obtuse language, and not specifically describing the current world state ― may, if a landlord argues such terms place all risks of the current world nightmare on the tenant while insulating the landlord completely from all harm (except for the nuisance of having to seize tenant security and chase tenant lease guarantors), become unconscionability’s virtual poster child.

As noted above, there is a fiction that has found its way into the dialogue which many commercial landlords cling to ― all is fine at their end, any problems are tenant problems and all rent must be paid (or else) ― such a limitation or landlord-protection provision may not fare well under the microscope of the unconscionability analysis.

From the Desk of Cassandra Porsch ―

The dam has begun to show cracks in the insurance industry’s adamant position that general business interruption coverage does not cover losses due to the pandemic.  How much water will seep through the cracks? Continue reading “Cracks in the Dam? COVID-19 Business Interruption Insurance Coverage Litigation Update”