Is there a right to terminate a lease based on COVID-19?

Is there a right to terminate a lease early based on COVID-19?

Almost daily my team and I receive calls from Owners and Tenants regarding their lease rights post COVID.

There is no ‘right’ to cancel a lease based on COVID-19 conditions. Most residential leases do not have a force majeure provision. With that assumption, a Tenant is left with the option to attempt to claim “Impossibility” and “Frustration of Purpose”. Both defenses are legal doctrines that can be applied by a court under certain circumstances when there is no force majeure clause in the lease. New York State provides for a defense of Impossibility in certain situations where the performance of the contract is rendered objectively impossible by an event that is truly unforeseen and could not have been guarded against in the contract.  Impossibility requires a showing of the complete inability to perform or extreme impracticability of performance while Frustration of Purpose is where performance remains possible but the expected value of the leasehold has been destroyed by an event.

With COVID-19 tenants will likely argue that the force majeure condition of the virus was completely unforeseen by the parties which has caused shelter in place orders and other effects which have made performance by the tenant impossible.   In the alternative, tenants could argue that the purpose of the lease is frustrated in that while the tenant technically could perform, the virus has destroyed the value of the leasehold. In Contrast the landlord will likely counter that the lease still has value and the purpose of the lease is not frustrated.  It should be pointed out that these defenses were previously applied sparingly and the courts will perform a factual analysis to ascertain whether or not performance is truly impossible or whether or not the value to the premises has been destroyed.

We are in unchartered waters and no one knows what will happen in court.  If a tenant vacates, owners cannot sue in housing court and may only resort to Civil or Supreme Court. If the tenants are people of means, then the   owners have a greater chance to collect on their damages. Currently, there is a moratorium on new cases.  When the courts reopen and if the owner does sue, the Owners damages may be limited by recent regulation under the HSTPA, which places upon the owner a duty to mitigate its damages but the requirements to so comply are not clearly defined in the legislation. As the owner may not simply “do nothing and sue the tenant for the full balance of the lease” this will likely lead to many challenges which will likely be exacerbated post-COVID-19. This is yet another grey area that has resulted from the HSTPA which created uncertainty in terms of litigation and may invite the opportunity for Tenants to take advantage of the already lengthy court process.

In light of the forgoing challenges that a landlord may face when seeking to enforce a lease, we recommend working out a resolution. Understanding the unknown risks of an unfavorable Court determination or being stuck in costly and protracted litigation may help Owners make better informed decisions.