A recent Florida appellate court decision provides guidance for commercial tenants whose businesses have been impacted by Coronavirus. This case is notable because it potentially allows for lease termination due to frustration of purpose even though the possible frustration was foreseeable at the time the lease was executed. This case provides a good argument for commercial (and other) tenants seeking to modify or terminate their leases or obtain rent relief from their landlords due to Coronavirus.
In Loving Childcare v. Bre Mariner, 209 So.3d 622 (Fla. 5th DCA 2017), the court considered a 5-year commercial lease that by its terms limited use of the premises to a day care center. Id. at 623. The lease also contained boilerplate language requiring the tenant to comply with government codes and licensing requirements. Id. A daycare center requires government licensure, which in turn requires, among other things, adequate play space for children, subject to exceptions and variances in urban areas. Id. at 624.
The tenant was informed that it needed a signed lease to apply for licensure but told its landlord that “it was unwilling to sign the lease until it had assurances [that] it would receive [the exception for] urban [areas].” Id. The tenant apparently obtained satisfactory assurances and signed the lease. Id. Despite these assurances, the tenant was denied a permanent license but received a temporary license on the understanding that the tenant would need to obtain adequate play space. Id. The tenant opened and operated the day care center. Id. The tenant told the landlord it would vacate the premises if it could not obtain a permanent license and the tenant later vacated the premises when its temporary license expired. Id.
The appellate court reversed the summary judgment for the landlord on the issue of the tenant’s continued liability on the commercial lease. The court noted that the common thread between various contractual defenses is “foreseeability at the inception of the lease.” Id. at 625. The landlord argued that “the risk Tenant would not obtain a license was foreseen and allocated by the lease to Tenant.” Id. However, the appellate court held that:
the provisions of the lease do not explicitly allocate the risk that the Department would deny Tenant the urban designation and, consequently, a permanent license without outdoor play space. Additionally, Landlord’s affidavit in support of summary judgment did not address the intent of the parties to the lease as to the allocation of the risk. In contrast, [the tenant’s] affidavit states that Tenant was granted the urban designation by the Department before signing the lease, and Landlord was aware that Tenant was unwilling to sign the lease due to the lack of outdoor play space without assurances Tenant would receive the urban designation from the Department.
Id. at 625-626 (citation omitted). The court therefore held that there was a genuine issue of whether the risk that the tenant would be unable to obtain licensure was foreseeable. This result is surprising because the issue was specifically foreseen and discussed by the parties, and the tenant obtained assurances which later turned out to be incorrect and signed the lease without any protection against the risk that it would not obtain licensure.
The lease stipulated that the premises could only be used as a day care center. Such use was apparently not permitted by law. Although the court did not discuss this fact, the fact that the lease contemplated this specific use, and the fact that the specific use was not allowed, provided additional support for the frustration of purpose argument.
The extent of the application of this decision to commercial leases during Coronavirus is to be determined. Parties are likely to argue over whether this case provides relief only to businesses who were ordered to close by the Government (and only for those periods when they were unable to operate), or whether this argument provides relief to all businesses who were impacted by Coronavirus. A closer question is whether businesses whose operations may be limited by law (such as by seating restrictions) or who cannot operate as profitably under Coronavirus restrictions, can avail themselves of these arguments. What is clear, however, at the very least, is that businesses whose operation has been prohibited by the Government will be able to argue that their commercial leases are frustrated, particularly because Coronavirus was much less foreseeable than the licensure problems at issue in Loving Childcare.