Upper East Side Gallery Sues Landlord, Claiming It Lawfully Terminated Lease After COVID-19 Forced Closure
05/27/2020Since the outbreak of COVID-19 and the ensuing restrictions on businesses, there has been much discussion about whether, when, and how commercial tenants can break their leases or be relieved from rent-payment obligations when they are unable to conduct business on leased premises. Last week, a Manhattan art gallery sued its landlord for declaring a default under the lease when the gallery failed to make its April rent payment, arguing that the lease was lawfully terminated on April 1 in light of the executive orders that restrict the operation of New York’s non-essential businesses.
In the new lawsuit brought by Upper East Side gallery Venus Over Manhattan, the gallery claims that the Executive Orders issued by Governor Cuomo resulted in the mandatory closure of the gallery’s business, and frustrated the entire purpose of its lease agreement, which was to operate an art gallery on the premises. Venus Over Manhattan entered a lease for its gallery space on December 23, 2011, and the lease was set to expire on October 21, 2022. To date, the gallery claims it has paid nearly $7 million in rent and a $365,000 security deposit. The terms of the lease allow the gallery to use the premises for, among other things, “[t]he display and retail sale of fine art,” which the gallery argues necessarily contemplates the gathering of crowds to view the exhibitions. However, under the current Executive Orders in place, the gallery cannot be open to the public, and has been closed since March 1. On March 25, the gallery informed its landlord that it would vacate the space; in response, the landlord declared a default under the lease and seized the gallery’s security deposit.
In its complaint, the gallery asks the court for a declaration that the gallery lawfully terminated the lease as of April 1 under the frustration of purpose doctrine. In the alternative, the gallery asks the court for rescission of the contract, based on the fact that performance under the contract has been made impossible by intervening governmental activities. Moreover, because an unnamed guarantor apparently guaranteed the gallery’s performance under the lease, the complaint also asks the court to declare that the guarantor’s obligations are likewise extinguished. The gallery additionally seeks the return of its security deposit. See Venus Over Manhattan Art LLC v. 980 Madison Owner LLC, S.D.N.Y. Docket No. 1:20-cv-03838-NRB.
New York’s pandemic-related restrictions have resulted in the temporary closure of many galleries, forcing dealers and gallerists to question the practicability of continuing to rent a physical space in a time of massive uncertainty about the trajectory of the virus and corresponding uncertainty about the future of the economy and the art market. (See our previous post about how the art market is being affected by COVID-19, and our recent article about gallery rights and obligations, for more on some of those issues.) Some small galleries contemplated a “rent strike” in March if the government did not impose a rent freeze for struggling businesses. Other tenants have sought to latch onto the elusive “force majeure” clause that appears in some rental agreements; such language tends to cover situations involving “Acts of God” or “natural disasters,” but may not protect tenants when an inability to pay rent is due to financial hardship and not true impossibility. Now, Venus Over Manhattan’s case is poised to explore the contours of contract-law concepts such as “frustration of purpose” or “impracticability”; these longstanding common law defenses can, when properly applied, discharge the parties’ obligation to perform under a contract, including a lease. But as with so many aspects of this unprecedented pandemic, we are in uncharted territory, and courts and litigants will have only limited guidance from older case law to provide insight into whether and how these defenses should apply in our current crisis. No appearance has yet been entered by counsel for the defendant, but we will continue to update here as the case progresses.
Art Law Blog