During the COVID emergency of 2020, many commercial borrowers and commercial tenants suffered loss of revenues and fell into arrears on their scheduled mortgage or rent payments. Business revenues fell either because the businesses were required to be closed by government order or regulation, or because of declines in patronage generally. Once the courts reopened, lenders and landlords attempting to collect these arrears had to deal with the defenses that COVID had made it impossible or impracticable for borrowers or tenants to comply with their mortgage and lease obligations, and thus excused non-performance.
At the time, there was a dearth of case law in Pennsylvania considering these defenses in a context similar to a COVID emergency. The little law that did exist suggested that neither the general economic downturn caused by COVID nor governmentally required closures of businesses triggered the defenses of impossibility or impracticability.
We discussed that issue in a blog we wrote in May, 2021, and concluded that just because a company was required by the government to shut its doors for a period of time or lost revenues due to decreased patronage due to the COVID emergency, would not excuse failure to pay rent or a mortgage.
We are pleased to report that the Superior Court has recently addressed that issue. 9795 Perry Highway Management, LLC v. Bernard, 2022 PA. Super. 52, 273 A.3d 1098 (2022) arose in the context of a confessed judgment on a lease when the tenant failed to make its rent payment. The tenant moved to open the judgment, asserting that it had a meritorious defense to the landlord’s claim because Covid and its accompanying moratorium made it impossible or impracticable for it to perform, and frustrated the purpose of the lease. The court of common pleas in Allegheny County overruled these purported defenses and refused to open the judgment. An appeal was taken to the Superior Court.
The Superior Court affirmed, rejecting these defenses. As to frustration of purpose, the court, quoted from Step Plan Services v. Koresko, 12 A3d. 401, 413 (PA. Super. 2010), to define the three elements of frustration of purpose, namely (1) “The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense”; (2) “the frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract”; and (3) “[T]he non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.” The failure to meet a party’s wholly subjective expectations will not void a contract on the basis of frustration. Finally, the concept of frustration is applied only sparingly, citing Dorn v. Stanhope Steel, Inc., 368 PA. Super 557, 534 A.2d 798 (1987). A party’s financial inability to perform its obligations never gives rise to a claim of impossibility, Luber v. Luber, 418 PA. Super. 542, 614 A.2d 771 (1992); Felix v. Guiseppe Kitchens & Baths, Inc., 848 A.2d 943 (Pa. Super. 2004).
The court held that the temporary closure of the leased building due to forces neither party could control was a foreseeable event which the parties could have provided for, and therefore the lower court’s conclusion that the doctrines of frustration of purpose, impossibility and impracticability did not constitute meritorious defenses was neither an abuse of discretion nor manifest error.
The lease in Perry Highway did not contain a force majeure clause. The tenant may have been able to protect itself if it had negotiated to include one. On the other hand, landlords and lenders will need to be sure that the obligation to pay rent or loan payments is absolute and not to be excused by external events.
Please call on us if we can assist you in collecting unpaid rents or other commercial debts. We can also review your lease or mortgage to optimize the language to bolster your protection.