Michigan Tenant's Successful Use of Frustration of Purpose Doctrine to Avoid Paying Rent to Landlord During the Pandemic

On April 7, 2021, in United States District Court for the Eastern District of Michigan lawsuit Bay City Reality, LLC v. Mattress Firm, Inc., 20-CV-11498, Mattress Firm, Inc., a commercial tenant (“Tenant”), successfully relied on the common law defense of Frustration of Purpose to defeat Bay City Realty, LLC’s (“Landlord”) breach of contract lawsuit after Tenant admittedly refused to pay monthly base rent to Landlord for April and May 2020 while Tenant could not open to the public due to Governor Whitmer’s prior Executive Orders.

Facts of the Case

Landlord/Tenant entered into a commercial lease in September 2013 that extended through February 2024. Tenant was required to make monthly $10,550 base rent payments to Landlord plus additional rent payments for Tenant’s proportionate share of common area maintenance expenses (“CAM”). As a result of the COVID-19 pandemic, Tenant refused to pay Landlord in April and May 2020; however, Tenant (strategically/in good faith) paid CAM to Landlord during this time period. After the first missed payment of monthly base rent, Landlord filed a breach of contract lawsuit against Tenant for non-payment of rent, which was subsequently removed by Tenant to Federal Court pursuant to diversity jurisdiction. In June 2020, Tenant started to pay monthly base rent to Landlord once Governor Whitmer’s prior Executive Orders were lifted.

Competing Motions for Summary Judgment

Both Landlord/Tenant filed competing Motions for Summary Judgment. Landlord argued that the Force Majeure provision in the Lease was clear/did not eliminate or pause any of Tenant’s monetary obligations to Landlord under the Lease, including the payment of monthly base rent. Landlord further supported its position citing to the Lease which required Tenant to pay all rent “without any setoffs or deductions whatsoever, except to the extent otherwise expressly provided herein.” Specifically regarding Tenant’s Frustration of Purpose defense, Landlord argued that Tenant’s “purpose” was not frustrated as Tenant could still use the Leased Premises for other purposes apart from sales to public, such as storage and office use.

Tenant’s core defense to support its non-payment of rent was that the primary purpose of the Lease was temporarily frustrated due to Governor Whitmer’s Emergency Orders, and further, that its reliance on the common law defense of Frustration of Purpose was not barred by the Lease. Tenant argued that the purpose of the Lease was for Tenant to continuously operate a retail store and showroom as evidenced by the Use Clause in the Lease with the Tenant being in Default if Tenant closed for more than ten days during the Lease Term. Tenant cited to/relied on several cases from outside Michigan in support of its argument. Tenant did not rely on the Force Majeure provision of the Lease knowing that it supported the Landlord’s position.

The Court’s Ruling

In a detailed opinion, the Court granted Tenant’s Motion for Summary Judgment dismissing the lawsuit and denied Landlord’s Motion for Summary Judgment. The Court began its analysis by acknowledging the effect of COVID-19 and the subsequent Emergency Orders from Governor Whitmer that followed.

The Court next addressed the threshold question of whether Tenant was permitted to advance common law defenses to Landlord’s breach of contract claim. The Court held even though Tenant agreed to pay rent to Landlord “without any setoffs or deductions whatsoever, except to the extent otherwise expressly provided” in the Lease that such a contractual clause, without expressly stating so, does not defeat the common law.

The Court then addressed whether Governor Whitmer’s Emergency Orders frustrated the purpose of the Lease so severely “that it is not fairly to be regarded as within the risks that [Tenant] assumed under the contract.” The Court held that the purpose of the Lease was frustrated as both Tenant’s primary use (public retails sales) and secondary use (office use and storage incidental to the retail sales) by Governor Whitmer’s Emergency Orders. The Court reasoned that its holding (that the purpose of the Lease was frustrated) aligned with frequently cited Michigan decisions on frustration of purpose, Liggett Restaurant Group, Inc. v. City of Pontiac, 676 N.W.2d 633 (2003) and Molnar v. Molnar, 313 N.W. 2d 171 (Mich. Ct. App. 1981) adding that that COVID-19 and the resulting Emergency Orders were unforeseeable events not caused by Tenant.

Impact of this Decision          

While this decision is concerning for Michigan Landlords, it has limited future applicability since it relates only to the timeframe when Michigan (and most of the USA) were essentially shut down and, except for businesses providing essential services, Tenants could not operate in April and May 2020. The fact that Tenant resumed paying monthly base rent to Landlord in June 2020 and presumably remained current thereafter provided Tenant with a good faith argument to support its interim position asking for the Court to forgive two months of unpaid base monthly rent. It is unknown if the Court would have reached the same conclusion if the Lease contained an express waiver of common law defenses (or even if such a provision would be considered enforceable under Michigan law) or if the Lease expressly allocated the risk of unforeseen circumstances to Tenant. Next, since the Court heavily relied on Governor Whitmer’s Executive Orders in issuing its opinion and since these Orders were subsequently repealed, an argument can be made that these circumstances are unlikely to reoccur in the future. Even though this case has limited applicability to today’s Tenants making Covid related arguments to avoid paying rent to their Landlords, Landlord should be aware of this Opinion to make educated/informed decisions if they encounter similar issues/defenses in the future. Lastly, a Frustration of Purpose defense remains an uphill struggle for any Tenant to prove based on Michigan case law, but this fact-specific, pro-tenant ruling undeniably provides an opening for a Tenant with the financial ability to litigate the same.

           

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