Recent U.S. Court decisions in commercial lease disputes due to COVID-19

The Gap, Inc. v. Ponte Gadea New York LLC

On March 8, 2021, a federal court in the Southern District of New York granted summary judgment for The Gap’s landlord, Ponte Gadea, holding that the pandemic does not exempt The Gap from its rent obligations.¹  The Gap argued that its store closures and decrease in foot traffic due to COVID-19 warranted release from its lease obligations based on several different theories including the lease’s casualty provision, frustration of purpose, impossibility, failure of consideration, and mutual mistake. The court rejected these arguments, reasoning that the store had maintained the ability to offer limited in-store shopping, curbside pickup, and online order fulfillment. Further, the court noted that The Gap failed to point to a covenant in the lease where the landlord made any guarantees “regarding foot traffic, or the nature or demographic characteristics of the Lexington Avenue store premises.”

Victoria’s Secret Stores, LLC et al v. Herald Square Owner LLC

Victoria’s Secret sued its landlord at its premier Manhattan’s Herald Square location to avoid paying its monthly rent of $1 million, on the ground that the pandemic and the government-mandated stay-at-home orders frustrated its purpose in leasing the space.² The retailer sought an order excusing its performance under the lease based upon the legal doctrines of frustration of purpose and impossibility of performance. On January 7, 2021, the Court granted the landlord’s motion for summary judgment on the ground that a provision in the lease specifically addressed the landlord’s inability to perform due to unforeseen circumstances by providing that in such a case, performance would not be excused. By analyzing the lease’s express provisions, the Court found that the force majeure clause ultimately displaces Victoria’s Secret’s frustration and impossibility defenses.

The Gap Inc. v. 170 Broadway Retail Owner LLC

In The Gap, Inc. v. 170 Broadway Retail Owner, LLC, Justice Debra James denied the owner’s pre-answer motion to dismiss The Gap’s causes of action relating to the impact caused by the COVID-19 pandemic.³ Justice James held that the retailer stated a valid claim under the lease’s casualty clause because the “plaintiff could not lawfully use the premises in the manner set forth in the lease” due to the government order mandating the closure of non-essential businesses. The court also held that The Gap stated viable frustration of purpose and impossibility of performance causes of action in sufficient factual detail to survive a motion to dismiss.

On June 3, 2021, however, a New York state appellate panel raised doubts regarding The Gap’s attempt to terminate its lease due to the COVID-19 pandemic. The Gap’s argument is based on the “impossibility” of performing as a quality retailer while burdened by health safeguards, such as plexiglass.⁴ While hearing an appeal from the landlord, 170 Broadway Retail Owner, the four-judge panel cast doubt on the idea that The Gap should prevail in terminating its long-term lease due to a “retail standard” clause in its contract. The retail standard clause in question provides a standard for how The Gap is supposed to operate in its store. The landlord argued that the clause is actually a landlord protection clause established so the landlord knows that the tenant is operating at that standard. The judges appeared inclined to reject The Gap’s argument that it was unable to provide the same service as stated in the clause due the impact of COVID-19, including the installation of plexiglass dividers.⁵ 

Gap, Inc. v. 44-45 Broadway Leasing Co., LLC

The landlord, 44-45 Broadway Leasing Co., attempted to terminate The Gap and Old Navy’s fifteen year leases on their flagship locations in Times Square. Both retailers failed to pay the rent due in May and June 2020. The landlord sent notices of default, stating its intent to terminate their respective leases. The retailers argued that the terminations would force them to surrender the leasing space and force them to pay accelerated rent for the remainder of the lease, equaling tens of millions of dollars. As a result, The Gap and Old Navy filed a lawsuit seeking an injunction preventing the landlord from terminating the leases (also known as a Yellowstone injunction under New York law), rescission of the leases, and a declaration that the leases were unenforceable as a result of COVID-19 related government shutdowns.⁶ 

The Gap and Old Navy argued that the leases should be terminated as a matter of law, thereby excusing them from any further obligation to pay rent, because the object and purpose of the leases had been frustrated and was impracticable due to the drastic decrease in business and commercial activity in the Times Square area resulting from the stay-at-home orders.

On July 21, 2020, Justice Debra James granted The Gap and Old Navy’s motion for a Yellowstone injunction, thereby tolling their time to cure until the Court determines whether they are in default. While the Court did not rule on Gap and Old Navy’s argument that the leases were unenforceable in light of the COVID-19 pandemic, it granted the injunction based solely on its finding that the retailers had satisfied the four requirements of a Yellowstone injunction.  As a condition for granting the injunction, however, the Court required The Gap and Old Navy to post a bond of almost $6 million, accounting for the rent from May and June 2020, with only a 10% discount, as well as pay the full amount of the July rent due.

Illinois State Court

Ponte Gadea Chicago, LLC v. Banana Republic, LLC

Ponte Gadea Chicago, the landlord, sued Banana Republic for failure to pay rent during the COVID-19 pandemic. Banana Republic asserted fifteen common law defenses, including impossibility and frustration of purpose, as well as various counterclaims for breach of contract and common law theories based on the ground that it was entitled to rent credits during the pandemic.

On March 24, 2021, the court granted the landlord’s motion to strike all affirmative defenses and counterclaims. Similar to the New York court’s ruling the Victoria’s Secret case, the Illinois state court held that the lease provided for rent abatement under certain situations, but it did not include circumstances where the store could not open for reasons other than at the fault of the landlord^.7

Next steps

The above represents our latest thinking in “real time” and will likely continue to evolve over the coming weeks and months. Our teams of lawyers across the globe are continuing to compile the latest thinking and legal guidance on the coronavirus outbreak. To track our latest updates, which will include more specific discussions of particular contractual concepts, we encourage you to check the Hogan Lovells COVID-19 Topic Center, which covers a wide variety of practice areas across the globe.

To access guidance on similar topics provided by our lawyers in the U.S., click here.

Authored by Michael Turrill