Yellowstone Proceedings and the Pandemic: Do COVID-19 Mandates Frustrate Performance?

For Lease

The legal press is rife with articles and speculation about the defenses of impossibility and/or frustration of performance to lease defaults triggered by state and local mandates prohibiting or limiting access to businesses. A decision released last week addressed that issue.

Rame, LLC leased space at 200 Park Avenue from Metropolitan Realty Mgt., Inc.

In September 2020, Metropolitan sent Rame a notice of default, alleging that it owed unpaid rent from December 1, 2017 through September 1, 2020 in the amount of $1,863,821.70, and set a deadline of on or before September 14, 2020 to cure the default. Rame sought a Yellowstone injunction tolling the time to cure.

After oral argument, a temporary restraining order was granted.

Rame contended that it was entitled to a Yellowstone injunction as it held a commercial lease and received a notice of default, the cure period set forth had not yet expired, and it was able and willing to cure its default. Rame alleged that it operated numerous restaurants at 200 Park Ave, all of which depended on in-person and indoor dining which, as of March 2020, had been prohibited and/or severely curtailed due to the COVID-19 pandemic pursuant to executive orders issued by the Governor of the State of New York. As a result, Rame’s business and profits had declined, and it had been unable to pay its rent, a circumstance which it characterized as a frustration and impossibility of performance of the lease.

Rame noted that the lease specifically contemplated a rent abatement in the event that it was unable to operate its business in the premises due to, among others, a national emergency or a governmental agency’s order or rule, and it argued that it therefore did not owe Metropolitan  the amount of rent set forth in the default notice.

Nevertheless, Rame maintained that it had the ability to cure the alleged default and/or pay subsequent amounts that become due while the action was pending, separate and apart from the amounts allegedly due and owing, as a result of the COVID-19 pandemic—which Rame did not believe it owed due to the frustration of its lease with Metropolitan.

Metropolitan denied that Rame was prohibited from operating its business as a take-out restaurant, which had been permitted for several months, or from offering outdoor dining, which had been permitted since July 2020, or limited indoor dining, which had been permitted since the end of September 2020. Nonetheless, Rame had kept its been business completely closed since March 2020. Thus, any inability on its part to conduct its business and earn money was entirely Rame’s fault.

According to Metropolitan, the lease also required that Rame pay rent without a deduction or offset for any reason. Absent a dispute that Rame owed it rent, and would continue to owe it rent, Metropolitan requested that the Yellowstone injunction, if any, be conditioned on Rame paying the amount of rent it owed into court, as well as continuing use and occupancy.

A party seeking a stay of the period within which an alleged default must be cured until the merits of the dispute are resolved in court and to avoid the forfeiture of a substantial leasehold interest, must demonstrate that it: (1) holds a commercial lease; (2) received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) requested injunctive relief prior to the termination of the lease; and (4) was prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.

And it is the movant’s burden to convince the court of the desire and ability to cure the default by any means. That the movant denies a default is not dispositive, as long as it evinces a good faith willingness to cure.

Whether Rame was entitled to an abatement of rent under the lease, i.e., whether it would ultimately prevail in proving that it owed less than Metropolitan asserted, was irrelevant to whether it was entitled to a Yellowstone injunction. Rather, the key issue was Rame’s willingness and ability to cure its default, and it had indicated both.

However, because Rame allegedly owed Metropolitan a large sum of money in back rent and continued to accrue significant monthly arrears, an undertaking was appropriate, as was its payment of use and occupancy going forward and pending the determination of the action.

Accordingly, Rame’s application for a Yellowstone injunction was granted on the condition that that it pay its current rent and other rental obligations to Metropolitan as they become due on a monthly basis, beginning on November 1, 2020, and on the additional condition that Rame post an undertaking in the sum of $1,092,156.33, representing 50 percent of the amount due as of October 1, 2020.

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