THIS UPDATE WAS PREPARED WITH THE ASSISTANCE OF CO-AUTHOR SAM LOGTERMAN, INCOMING ASSOCIATE
The struggles of commercial tenants due to the COVID-19 pandemic are as widespread as they will be long-lasting. From closures to strict regulations that have greatly disrupted normal operations, businesses are facing continuing pressures to keep their operations running smoothly, if at all. A recent study by the Federal Reserve estimated that COVID-19 may have shuttered as many as 200,000 businesses between March 2020 and February 2021.[1] Those that have survived are not out of the woods yet, with normal obligations like rent causing mounting troubles as revenues fail to increase. Thanks to a recent decision by the Minnesota Court of Appeals, business evictions may soon be on the rise.
While the federal government and many states enacted various forms of eviction moratoriums and allocated COVID-19 recovery funds towards rent relief for residential tenants, the same assistance has not necessarily been provided to their commercial counterparts. And on September 27, the Minnesota Court of Appeals issued an opinion in SVAP III Riverdale Commons LLC v. Coon Rapids Gym, LLC, A20-1593, No. 02-CV-20-3652 (Minn. Ct. App. Sep. 27, 2021) that clarifies which defenses commercial tenants can and can’t use when faced with eviction as a result of ongoing COVID-19 related business interruptions. The Court of Appeals held that a business who cannot pay rent may not rely on the defenses of impossibility and frustration of purpose to avoid a commercial eviction action based on non-payment of rent during the COVID-19 pandemic. The result is that while commercial tenants may potentially invoke COVID-19 related disruptions to avoid paying past-due rent, commercial landlords will not be prevented from evicting non-paying tenants.
A party may normally use an impossibility defense when an intervening factor causes unreasonable difficulty – i.e. makes it impossible – for a party to perform its obligations under a contract. Similarly, frustration of purpose occurs when an intervening factor prevents the existence of a fact that the parties relied on when entering into the contract in the first place. Both these defenses were at issue in the Coon Rapids Gym case.
In that case, Coon Rapids Gym operated a fitness gym location within the Riverdale Commons shopping mall in Coon Rapids, Minnesota. Shortly after the COVID-19 pandemic began, however, Minnesota Governor Tim Walz issued a peacetime emergency order which forced all gyms throughout the State of Minnesota to shut down their operations and close their doors. The Coon Rapids Gym location was closed to customers for two months before being allowed to re-open with mandatory limited capacity. With zero revenue for two months and hamstrung operations since, Coon Rapids Gym began to fall behind on their rent payments under their lease. After four months of non-payment, Riverdale Commons informed Coon Rapids Gym that they were in default and that the lease would be terminated if the overdue rent wasn’t tendered within 30 days. Coon Rapids Gym failed to tender the overdue rent, and Riverdale Commons brought an eviction action to regain control of the premises.
In the trial court, Coon Rapids Gym argued the defenses of impossibility and frustration of purpose based on the theory that the COVID-19 pandemic and the emergency orders by Governor Walz, which closed gyms and prevented the business from having customers, prevented the purpose of the lease at Riverdale Commons and precluded Coon Rapids Gym from being able to pay rent. The trial court excluded the Gym’s defenses and the Gym appealed.
The Court of Appeals agreed with the trial court in rejecting Coon Rapids Gym’s impossibility and frustration of purpose defenses. The Court of Appeals stressed that Minnesota eviction statutes only provide one affirmative defense to an eviction action based on non-payment of rent: that the eviction was retaliatory in response to the tenant enforcing their rights under the lease. The Court of Appeals further reasons that if parties in eviction actions were allowed to use impossibility and frustration of purpose as affirmative defenses, judicial economy would be threatened and eviction proceedings would greatly expand in scope and time.[2] However, in making its ruling the court did posit that the defenses of impossibility and frustration of purpose, and breach of contract may be more well-suited to the types of proceedings that follow evictions, such as an action to recover unpaid rent. Thus, while the defenses of impossibility and frustration of purpose may not be able to prevent eviction, they may help business-owners avoid further negative consequences following the eviction itself.
The Coon Rapids Gym decision changes the litigation landscape for commercial landlords and tenants. Any commercial tenant who has been falling behind on rental payments and was hoping for solace based on hardships from COVID-19 business disruptions will not find refuge in the defenses of impossibility and frustration of purpose, but commercial landlords will enjoy some flexibility in choosing whether to maintain non-paying businesses as tenants. As a result, it is important for commercial landlords and commercial tenants alike to take proactive actions, such as renegotiating payment provisions or talking to a lawyer about the potential for eviction when tenants are unable to make their rental payments.
[1] https://www.businessinsider.com/small-business-closures-pandemic-less-expected-past-year-fed-survey-2021-4
Report: https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf
[2] Coon Rapids Gym also asserted a defense based on Breach of Contract, which was similarly rejected for the same reason.
