Connecticut Supreme Court rules that a commercial tenant’s defenses of impossibility of performance and frustration of purpose due to COVID governmental shutdowns will not excuse its monetary obligations under the lease.

On May 10, 2022, the Connecticut Supreme Court released a decision which was a case of first impression on the applicability of the doctrines of impossibility of performance and frustration of purpose as a defense by a tenant to excuse its performance under a lease during COVID-19 governmental shutdowns. In this case titled AGW Sono Partners, LLC v. Downtown Soho, LLC, the Supreme Court for the first time considered how the COVID-19 public health emergency orders issued by the Governor of Connecticut affected the enforceability of a commercial lease agreement. This case involved a high end restaurant in Norwalk, Connecticut which had recently signed a ten-year lease. However, as a result of the various COVID governmental shut downs, it was not able to generate sufficient revenues and ended up being late with its rental payments. In fact, the restaurant had to completely temporarily shut down between March 11 and May 27, 2020.

The landlord responded by defaulting the tenant for nonpayment of rent, and when the tenant failed to cure its monetary default, the landlord thereafter served the tenant with a notice to quit and commenced an eviction action against the tenant. The restaurant finally ceased its operations for good and vacated the space by September 2020. The landlord then commenced a breach of lease civil action against the tenant for its monetary default. In the interim, the landlord was able to find a replacement tenant for the space in short order and signed a lease with the new tenant on November 30, 2020, which then took legal possession of the vacated space in January 2021. A brief procedural background on what transpired at the trial court level before focusing on the Supreme Court’s decision:

Trial Court Proceedings

During trial, the tenant raised various special defenses, including impossibility of performance and frustration of purpose based on the negative effects that it clearly sustained as a result of the Governor’s executive orders, which at various times closed bars and restaurants for in-person dining and also restricted restaurants to outdoor dining with a 50 percent capacity limitation.

It should be noted that although the lease did not contain a specific force majeure provision, it did contain language that the court viewed as anticipating an event like a pandemic. For example, the court noted that the lease also contained a provision requiring the tenant to comply with all state and federal laws, orders and regulations at its sole expense. At the conclusion of the trial, the court ruled in favor of the landlord and rejected the tenant’s impossibility of performance and frustration of purpose defenses. However, the lower court also limited the landlord’s monetary damages through the date that the tenant vacated the premises ($246,778.50), even though the landlord asked for additional damages reflecting the full remaining value of the payments due under the ten-year lease, less its mitigation efforts ($447,087.26). The trial court’s reasoning for limiting the landlord’s damages was because it was the landlord (rather than the tenant) that had the burden of proving that it had adequately mitigated its damages, which the court determined the landlord did not do in this instance.

The tenant appealed the court’s rejection of its special defenses and argued that the court incorrectly concluded that it has failed to establish its special defenses of impossibility and frustration of purpose by a preponderance of the evidence. The landlord in turn also cross appealed the court’s damages award and its holding assigning the landlord with the burden of proving mitigation of damages.

Appeal at the Connecticut Supreme Court

In taking the appeal, the Supreme Court had to determine three novel issues: (1) whether the executive orders imposed by the Governor rendered the tenant’s performance of the lease agreement impossible or impracticable as a matter of law; (2) whether the COVID pandemic and the governmental shutdowns frustrated the purpose of the tenant’s use clause which required the operation of a first-class restaurant and bar; and (3) whether the trial court improperly failed to award the landlord the full difference in value between the tenant’s lease and the new lease when it assigned the burden of proving mitigation of damages to the landlord rather than to the tenant as the breaching party.

Ruling on Tenant’s Special Defenses

As to the tenant’s first special defense of impossibility/impracticability of performance, the Supreme Court upheld the decision of the trial court and concluded that the doctrine of impossibility and/or impracticability did not excuse the tenant from complying with its obligations under the lease agreement. In doing so, it relied on the 1989 Dill v. Enfield Connecticut Supreme Court case which held that “only in the most exceptional circumstances have courts concluded that a duty is discharged because additional financial burdens make performance less practical than initially contemplated.” According to the decision, the “central inquiry” with regards to the impossibility/impracticability doctrine is “whether the nonoccurrence of the alleged impracticable condition was a basic assumption on which the contract was made.” Further, since the impossibility and the related impracticability doctrines are designed as devices for shifting risks, “they have no place when the contract explicitly assigns a particular risk to one party or the other.” More significantly, the courted noted that “even under the most restrictive executive orders,” the tenant’s use of the restaurant was not rendered impossible because the tenant had other options at its disposal to continue to operate – – such as curbside and/or take out services.

Although COVID restrictions had serious economic effects on the tenant’s overall operation of the restaurant, “they did not, by themselves, make the performance under the lease agreement impossible or commercially impracticable as a matter of law.” The court further observed that although the lease did not contain a specific force majeure provision, the events that brought about the COVID-19 pandemic disruptions were “not entirely unforeseeable” because a provision of the lease clearly obligated the tenant at its sole expense to comply with all governmental laws and regulations, such as the executive orders.

With regard to the tenant’s second special defense of frustration of purpose, namely, that the executive order shutdowns frustrated the tenant’s purpose (and use clause) of being able to operate a first-class restaurant, the Supreme Court also rejected that claim and affirmed the trail court’s ruling. It reasoned that in order for the tenant to prevail under this frustration of purpose defense, the tenant must establish “convincing proof of a changed situation so severe that it is not fairly regarded as being within the risks assumed under the contract.” As a result of requiring such an elevated burden, the frustration doctrine must be accorded “a narrow construction so as to preserve the certainty of contracts.”

Ruling on Landlord’s Cross Appeal

Finally, as to the landlord’s cross appeal of its damages award, the court ruled that the trial court improperly assigned the burden of proving mitigation on the landlord rather than the tenant, which was the breaching party. The court held that “when a tenant has breached a lease agreement, that tenant bears the burden of proving that the landlord failed to undertake commercially reasonable efforts to mitigate its damages.” With that holding, the Supreme Court effectively clarified how the reading of a previous 1989 Appellate Court decision in Rokalor, Inc. v. Connecticut Eating Enterprises, Inc. may have been misread for the past thirty-three years with regard to which party bears the burden of proving mitigation in a breach of lease action. In a footnote, the Supreme Court offered a remarkable correction on the record: “To the extent that the Appellate Court’s decision in Rokalor, Inc. may be read to require the nonbreaching landlord to bear the burden of proving that it did not fail to mitigate its damages, we conclude that it is not an accurate statement of law.” The court then reversed the trial court’s award of damages and remanded the case back to the lower court for it to reconsider the proper award of damages for the landlord.

Takeaways from Decision

There is no doubt that this decision was a total win for landlords on all fronts. The real issue is whether this outcome would have been different had the lease contained a force majeure provision that favored the tenant in some respects. Regardless, here are some takeaways from this decision:

• Absent a provision in the lease to the contrary, the sanctity of lease agreements fairly bargained for will be upheld by the Connecticut courts notwithstanding a calamity like COVID-19.
• With regards to asserting the impossibility and impracticability doctrines, if the provision in a lease not only anticipated an occurrence, but also assigned a particular risk to one party, then the occurrence of an event like COVID will not negate or wipe out the assumption of that risk.
• Frustration of purpose as a defense will be narrowly construed in order to preserve the sanctity of the underlying lease agreement. That doctrine will not be allowed to undo a clear and unambiguous provision in the lease.
• This decision did not change the long-standing Connecticut principle that the landlord is obligated to mitigate its damages in the event that the lease has been terminated. However, what has now been clarified by this decision is that the burden of proving that the landlord did not take reasonable efforts to mitigate solely rests with the breaching tenant and not the landlord.
• Landlords should resist the temptation of drafting use clauses that are too narrow or restrictive because in this case, even under the most restrictive executive orders, the tenant still had the option under the lease of utilizing curb side and/or take out services, and therefore was not totally restricted to operating only as “a sit down restaurant and for no other purpose.” (This was how the court distinguished this case from the recent Massachusetts decision in UMNV 205-207 Newbury, LLC v. Caffe Nero Americas, Inc. in which the tenant prevailed on a frustration of purpose defense).
• This case further affirmed the long-standing principle in Connecticut regarding the appropriate formula for calculating the landlord’s damages in the event of a tenant’s breach and also after a replacement tenant takes over the vacated space: damages should be assessed as the full amount of the contract less the amount that the landlord was able to mitigate with the new tenant.

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