Commercial Leases and Frustrated Purposes

Commercial lease on desk with rent payment, keys, and calculator

Unlike residential tenants, most commercial tenants were not relieved of the obligation to pay rent during the pandemic. In a recent case, the tenant alleged that the purpose of the lease—to use the property to operate a gym—was frustrated by the executive order closing all gyms from March 2020 through September 2020. The tenant sought a declaration that the executive order excused its obligation to pay rent and required the landlord to return all rent paid during the closure.

Frustration of purpose may excuse performance of contractual obligations if an unforeseeable event makes it impossible to fulfill the contract’s purpose. In this case, tenant argued the purpose of the lease was to operate a gym in the landlord’s building. The executive order closing all gyms prevented tenant from operating, and therefore, frustrated the purpose of the lease. The Court of Appeals disagreed.

The lease required tenant, at its sole expense, to comply with all applicable regulations and orders applicable to the tenant’s use of the property. The court found that Governor Whitmer’s shutdown order constituted an order in effect during the lease term that regulated the tenant’s use of the property. Therefore, the lease required the tenant to comply with the order at its “sole expense.” As a result, the tenant bore the burden of any financial consequences stemming from compliance with the order, including the continued payment of rent despite loss of revenue from its customers.

Questions about your lease’s obligations? Contact us at 248.477.6300 or for help.

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