The COVID-19 pandemic has had far-reaching effects on both the restaurant and commercial real estate industry. With Governor Larry Hogan’s declaration of a state of emergency in March 2020 came several executive orders pertaining to bars and restaurants. Initially, bars and restaurants were forced to close but were permitted to sell food and beverages for carry-out, drive-through, or delivery if they operated in accordance with social distancing mandates. The statewide restrictions for restaurants and bars were relaxed in due time, first to allow for outdoor dining service and then to allow for certain capacity restrictions for indoor dining. In a recent opinion, the Appellate Court of Maryland sided in favor of a commercial landlord when it held that a commercial lease for a brewery/pub was not rendered “legally impossible,” and that the evidence presented in the lower court was not sufficient to establish the tenants’ affirmative defense of frustration of purposes and legal impossibility.
On September 21, 2015, David and Carolyn Marquis entered into a commercial lease with John Critzos, II, for a property located at 114 West Street in Annapolis, Maryland, for the establishment of a brewery/pub. The term of the lease was from January 1, 2016, through December 31, 2020. The Marquises operated the Chesapeake Brewing Company without difficulty until the onset of the COVID-19 pandemic. In April 2020, the Marquises requested that Mr. Critzos abate the rent considering the COVID-19 health emergency and the restrictions on the Marquises’ ability to operate their brewery/restaurant. The Marquises and Mr. Critzos attempted to negotiate but were unable to reach an agreement. The Marquises did not pay the overdue April 2020 rent and instead, provided Mr. Critzos that they wished to terminate the lease. The Marquises vacated the premises on May 3, 2020.
Mr. Critzos filed a complaint in the Circuit Court for Anne Arundel County alleging that the Marquises breached their lease and seeking damages for unpaid rent. At trial, the Marquises asserted the affirmative defenses of frustration of purposes and legal impossibility. The Marquises provided testimony that they were unable to operate their brewery/restaurant because of the COVID-19 closures, and that should excuse their nonpayment of rent. The Circuit Court issued a memorandum opinion and order, entering judgment in favor of the Marquises and holding that the COVID-19 pandemic and the restaurant shutdowns “constitute[d] unforeseen circumstances, especially at the time of the parties contracting” and that the Governor’s executive orders “had made the sole purpose of [the Marquises’] lease an illegal activity – frustrating this purpose in a legal sense.” Mr. Critzos appealed to the Appellate Court of Maryland, seeking review of the judgment in the Marquises’ favor and whether the Circuit Court properly applied the doctrines of frustration of purpose and legal impossibility.
The doctrine of frustration of purpose stands for the proposition that where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance, the contract will be discharged. In determining whether this doctrine applies, Maryland courts rely on three factors: (1) whether the intervening act was reasonably foreseeable; (2) whether the act was an exercise of sovereign power, and (3) whether the parties were instrumental in bringing about the intervening event. The doctrine of legal impossibility goes hand in hand with the frustration of purpose doctrine. If a contract is legal when made but performance under the contract is objectively impossible, the legal impossibility applies.
In the instant case, the Appellate Court of Maryland agreed with the Circuit Court to the extent that the level of disruption caused by the COVID-19 pandemic was not reasonably foreseeable. However, the Appellate Court of Maryland ultimately held that the executive orders issued by Governor Hogan at the onset of the pandemic did not render the Marquises’ performance under the terms of the commercial lease for a brewery/pub legally impossible or excused by the frustration of purpose doctrine. The subject lease did not prohibit takeout dining, and the operation of the brewery/restaurant was not impossible after the issuance of the executive orders. Though the Marquises were prohibited from serving customers inside their restaurant for three months, they were permitted to operate on a carryout basis or delivery basis. The Appellate Court of Maryland recognized that the executive orders may have limited business operations, but they did not render the sole purpose of the lease illegal: “[w]e do not intend to discount the difficulties faced by the Marquises and other restauranteurs and business owners during the unprecedented challenges of the COVID-19 pandemic and associated limitations on the operation of businesses throughout the State of Maryland.”
The economic challenges faced during the pandemic do not form the basis to establish the affirmative defenses of frustration of purpose or legal impossibility. Though many commercial tenants suffered economically during the pandemic, their contractual obligations to the landlords (at least in this case) prevailed.
Written by associate Marni E. Sperling