In Re: NTS W. USA Corp.

Background

NTS W. USA Corp., doing business as Desigual, appealed a Bankruptcy Court final judgment in its dispute with 605 Fifth Property Owner, LLC, the landlord. The dispute concerned a three-year commercial lease dated January 17, 2020, for retail space at 605 Fifth Avenue in New York. The lease required the ground floor to be used for retail sales and display of apparel and related goods.

The lease addressed events outside the landlord’s control, including natural occurrences, government-imposed controls or guidelines, and other conditions beyond the landlord’s reasonable control. It stated that such events would not entitle the tenant to damages or relieve the tenant of the obligation to pay sums due. The lease also required business-interruption insurance. Although certain force-majeure provisions could excuse specified obligations, the opinion found that the lease did not release NTS from paying base rent.

In March 2020, New York restricted nonessential retail businesses and construction because of the COVID-19 pandemic. NTS said the restrictions prevented it from opening and operating its planned store. Construction restrictions were lifted on June 8, 2020, and retail businesses were permitted to reopen on June 22, although other restrictions remained. NTS refused to pay rent, and the landlord threatened to draw on NTS’s letter of credit securing the landlord’s position.

Proceedings in the Bankruptcy Court

NTS filed a bankruptcy petition under subchapter V of chapter 11 on July 22, 2020, and filed an adversary complaint against the landlord the next day. The Bankruptcy Court temporarily barred the landlord from drawing on the letter of credit. After a hearing, it preliminarily enjoined the landlord from drawing on the letter of credit through August 14, 2020, but found no likelihood that NTS would succeed on its claims that the lease should be canceled or rent should be reduced because of impossibility of performance or frustration of purpose.

The Bankruptcy Court also determined that the 68-day suspension of nonessential construction qualified under the lease for an extension of the period during which NTS was not required to pay base rent. The parties then stipulated to a final judgment. That judgment dismissed NTS’s claims against the landlord and allowed the limited injunction against drawing on the letter of credit to expire on August 14, 2020.

Appeal and Waiver Argument

The landlord argued that NTS waived its right to appeal by agreeing to entry of the final judgment without expressly reserving appellate rights. The District Court rejected that argument. It concluded that NTS had agreed to the form of the judgment to expedite an appeal, rather than consenting to the judgment’s substantive result or abandoning its position.

Frustration of Purpose

Frustration of purpose is a narrow contract doctrine that may excuse contractual duties when an extraordinary and unforeseeable event makes the agreement essentially worthless to one party. The court held that the doctrine did not apply here for two independent reasons.

First, the lease expressly allocated the relevant risks. Section 5.05 covered natural occurrences, government controls or guidelines, and other conditions beyond the landlord’s reasonable control. The court concluded that the COVID-19 pandemic fell within the provision’s reference to natural occurrences and that the shutdown orders were government-imposed controls or conditions beyond the landlord’s reasonable control. The lease specifically stated that such events would not relieve NTS of its obligation to pay amounts due.

Second, the record did not show that the pandemic completely destroyed the lease’s fundamental purpose or made the lease economically worthless. The restrictions caused several months of shutdown and reduced NTS’s ability to generate retail revenue, but construction and retail sales were permitted to continue with restrictions by the time of the bankruptcy proceedings. Reduced profitability, economic loss, or a decline in tourist traffic was not enough to establish frustration of purpose. The court also declined to treat NTS’s subjective expectation of a heavily trafficked luxury-shopping location as a term of the lease because the lease did not promise that condition or make rent dependent on it.

Impossibility of Performance

Impossibility of performance is an affirmative defense that may excuse a contractual obligation only when an unforeseen event makes performance objectively impossible and the parties could not have guarded against that event in the contract. Financial difficulty, economic hardship, insolvency, or bankruptcy alone does not establish impossibility.

The court held that the lease’s express provisions defeated NTS’s impossibility defense. The sophisticated commercial parties had addressed natural occurrences, government controls, and other conditions beyond the landlord’s control, and had agreed that those events would not relieve NTS of its obligation to pay sums due. The court also noted that operations were no longer prohibited when NTS filed its complaint in July 2020. Because neither frustration of purpose nor impossibility applied, a remand to determine a reduced rental rate would serve no purpose.

Disposition

The District Court affirmed the Bankruptcy Court’s Final Judgment. The Clerk was directed to close the case.