Inland Commercial Real Estate Services, LLC v. ASA EWC, LLC, 213 N.E.3d 604 (2023).

The Massachusetts Appeals Court recently issued a decision addressing the applicability of the “frustration of purpose” defense in the commercial lease context. 

In September 2016, landlord Inland Commercial Real Estate Services, LLC (“Inland”) entered into a commercial lease with tenant ASA EWC, LLC (“EWC”) for the operation of a European Wax Center at Inland’s shopping center in Shrewsbury, Massachusetts. In March 2020, Governor Charlie Baker issued a series of executive orders requiring all non-essential businesses, including EWC’s wax center, to shut down in-person business operations due to the COVID-19 pandemic. Governor Baker permitted non-essential businesses to resume in-person operations in June 2020, and EWC resumed its operations in late July 2020. From March through September 2020, EWC did not pay rent to Inland.

On September 1, 2020, Inland sent EWC a Notice to Quit, demanding the payment of $55,531.66 in outstanding rent, which included rent payments due for the three months during which EWC was required to shut down under the COVID-19 orders. In March 2021, Inland terminated EWC’s tenancy for nonpayment of rent and initiated a summary process action to recover possession and and damages. Trial was held in September 2021, during which EWC invoked the “frustration of purpose” defense unsuccessfully. Inland was awarded possession and $86,841.64 in damages. EWC appealed, arguing that the damages award should be reduced because the COVID-19 shutdown orders frustrated the purposes of the lease and discharged EWC’s obligation to pay rent during the months it was forced to shut-down its operations.

The Appeals Court held that the shutdown orders did not give rise to a frustration of purpose defense to EWC or excuse it from paying its rent obligations under the lease. The Appeals Court explained that the frustration of purpose defense excuses performance under a contract “[w]here . . . a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made . . .  unless the contract provides otherwise.” The purpose frustrated “must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.” The Appeals Court noted that the vast majority of courts considering the frustration of purpose defense in the context of the COVID-19 pandemic declined to apply it to temporary business closures caused by the shutdown order. “In reaching that result, courts have looked to the duration of the closure, the length of the lease, how far into the lease term the closure occurred, and whether the tenant could have reopened its business once the COVID-19 restrictions were lifted.” 

The Appeals Court determined that EWC has not shown that the temporary closure substantially frustrated the principal purpose of the lease. The mandatory closure was only for three months and occurred three years into a ten-year lease term. In addition, EWC had the ability to sell some of its goods during the shutdown period and was able to fully re-open soon thereafter. The Appeals Court also noted that even if EWC could show that the purpose of the lease was temporarily frustrated, the temporary frustration would have merely suspended and not fully discharged EWC’s rent obligations during the period it was forced to shut-down its operations.

Inland makes clear that temporary government closure of commercial operations is not likely to give rise to a frustration of purpose defense and discharge a tenant’s obligation to pay rent.