Delshah 60 Ninth, LLC v. Free People of PA LLC

Background

Delshah 60 Ninth, LLC and Free People of PA LLC disputed Free People’s obligation to pay rent during the first months of the COVID-19 pandemic. Both parties moved for summary judgment, which asks the court to rule without a trial when the material facts are not genuinely disputed. Magistrate Judge Sarah L. Cave recommended granting Delshah’s motion in part and denying it in part, and denying Free People’s motion. Free People objected to most of the recommendation.

Breach-of-contract claim and rent defenses

Judge Furman adopted the recommendation that Delshah was entitled to summary judgment on its breach-of-contract claim. Free People undisputedly failed to make timely rent payments after March 2020. Free People argued that government orders limiting in-person work and customer capacity created a lease-defined “taking,” which would have reduced rent proportionally.

The court rejected that argument. The lease permitted general retail use, along with office and storage use, and Free People was not deprived of all use or occupancy of the premises. Free People stored merchandise there, received online orders, later used the space to fulfill those orders, and offered curbside pickup outside the premises. Because there was no lease-defined taking, Free People remained obligated to pay rent. The court expressly stated that it did not need to decide whether the lease’s taking provision should be analyzed under constitutional takings law.

The court also rejected Free People’s defenses based on frustration of purpose and impossibility. The pandemic and government restrictions made performance more burdensome and the business less profitable, but did not make Free People wholly unable to operate from the premises. The court likewise rejected Free People’s argument that its rent obligation was excused because contractual conditions had not been met.

Free People’s counterclaims

Free People asserted counterclaims alleging that Delshah breached the lease by demanding rent when none was due, misapplying a partial rent payment, and terminating the lease. The court agreed that these claims failed because Free People had not given Delshah the notice and opportunity to cure required by the lease. The court also held that the counterclaims failed on their merits: rent remained due, Delshah could demand it and terminate the lease after Free People’s failure to pay, and Delshah properly applied the partial payment because Free People gave no instructions about how it should be credited.

The court rejected Free People’s unjust-enrichment counterclaim as duplicative of the written lease. The claim concerned two rent payments Free People made after leaving the premises and after Delshah terminated the lease. The lease allowed Delshah to treat post-termination payments as rent and to recover unpaid post-termination rent. The court also noted that Free People did not object to dismissal of its separate “money had and received” claim and that the two claims had substantially similar elements.

Remaining defenses and counterclaims

Judge Furman addressed defenses and counterclaims that the recommendation had not resolved. He concluded that Free People could not offset damages based on rent payments because there was no taking; could not claim that operating a retail store became illegal; and could not pursue counterclaims based on no rent owed, frustration of purpose, or impossibility. Delshah’s defenses based on estoppel, waiver, voluntary payment, discharge for value, and notice were deemed moot. Other defenses that Free People had not addressed in response to Delshah’s request for dismissal—including failure to mitigate, reformation, force majeure, and certain damages defenses—were deemed abandoned.

The court rejected the defenses of failure of consideration, mistake, and unconscionability. Free People continued to receive the leased premises, so the contract’s purpose was not defeated. A mistaken prediction about the future could not support mutual mistake, and unilateral mistake required fraud, which Free People did not allege. Unconscionability also did not apply because both parties were sophisticated and Free People made no specific showing that the lease terms were procedurally or substantively unconscionable when agreed upon.

Disposition

The court adopted the Report and Recommendation in substantial part and modified it in part by dismissing Free People’s remaining affirmative defenses and counterclaims. Delshah’s motion for summary judgment was granted on the breach-of-contract claims and on all of Free People’s affirmative defenses. Free People’s cross-motion for summary judgment was denied. The matter was referred to Magistrate Judge Cave for an inquest on damages, including attorneys’ fees and costs.