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Friday, March 19, 2021

The Caffé Nero Decision's Impact on Commercial Leases

When Governor Charlie Baker prohibited restaurants from letting customers eat or drink indoors and ordered the temporary closure of “non-essential” businesses via Order No. 13 on March 23, 2020, it was known that there would be extensive implications of that decision for many businesses.  Some businesses have shuttered completely while others have successfully launched profitable curbside or take out businesses.  One issue that was not addressed in March of 2020 was what are the rights and responsibilities for landlords and tenants of commercial leases.  It took nearly a year, but the first major decision surrounding the issue was made on February 8, 2021.

 

The background of the case is straightforward and not at all uncommon in Massachusetts right now.  As of March 23, 2020, Caffé Nero had a location on Boston’s Newbury Street, leasing space from a company known as UMNV 205-207 Newbury, LLC.  Caffé Nero stopped paying its rent in April 2020 and the landlord promptly issued a notice of breach and terminated the lease on May 19, 2020.  One week after Caffé Nero was finally allowed to reopen, the landlord began summary process proceedings on June 29, 2020.  In October 2020, while the case was still ongoing, Caffé Nero closed the Newbury Street location.   

 

On February 8, 2021, the Suffolk Superior Court granted partial summary judgment to Caffé Nero after its landlord sought to recover unpaid rent and other costs.  It should be noted that Caffé Nero operates multiple locations and was able to come to an agreement with all of its other landlords but this one.  The landlord forced the issue and the Court found in favor of Caffé Nero.  Specifically, the Court found that Caffé Nero was discharged of its duty to pay rent at least from March 24, 2020 through June 22, 2020 under the doctrine of frustration of purpose as it was not allowed to serve customers inside the leased premises during that time.  Under the doctrine of frustration of purpose, a party to a contract does not have to perform its obligations (such as pay rent) if some unanticipated event (such as a global pandemic and corresponding orders from the governor) destroys the value of the contract.

 

As the Court concluded that Caffé Nero did not breach its lease by not paying rent during this time, it also found that the landlord’s notice of default was in error and not effective and therefore the landlord acted improperly in May 2020 when it terminated the lease for non-payment of rent in April.

 

Caffé Nero is hardly the only Massachusetts business that did not pay its rent after Order No. 13, but it is the first major business to receive a Court ruling.  The fact that the landlord was unrelenting and not willing to compromise likely played a factor in the ruling.  The Courts right now are over a year behind in Trials and are very encouraging of parties coming to a reasonable compromise, if possible.  Here, the Court clearly did not believe the landlord was acting reasonably and set a very favorable precedent for commercial tenants in similar situations.  This decision will have far reaching implications for other similar businesses’ whose landlords have been unwilling to compromise for unpaid past rent. 

 

There are many modifications of contracts or outside agreements that can be beneficial to both the tenant and the landlord.  Especially now, it is highly recommended that both parties find a way to compromise and meet in the middle.  That being said, this decision gives substantial bargaining power to commercial tenants over commercial landlords.

 

It should be noted that the Caffé Nero decision does not likely have much implication for residential leases.  Order No. 13 prevented tenants from operating indoor restaurants and cafés (which was the sole purpose of the commercial lease).  The situation with a residential lease is not comparable, so the doctrine of frustration would not apply.  Therefore, any residential landlord who is concerned that the Caffé Nero decision will allow his or her tenants from not having to pay rent should not worry as the two situations are nearly polar opposites (Order No. 13 forced people out of indoor business and encouraged them to stay inside residential dwellings). 

 

If you have questions regarding contracts or leases or would like to discuss mediation or alternative dispute resolution, please feel free to contact the Law Offices of Samuel S. Reidy for a free consultation.


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