AGW Sono Partners, LLC v. Downtown Soho, LLC
N/A (2022)
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Rule of Law:
Economic hardship or reduced profitability, even due to unforeseen circumstances like a pandemic and government restrictions, generally does not excuse a commercial tenant from lease obligations under the doctrines of impossibility or frustration of purpose, especially when the contract allocates risk or allows for alternative (even if less profitable) performance. When a commercial lease is breached, the breaching lessee bears the burden of proving that the lessor failed to undertake commercially reasonable efforts to mitigate damages.
Facts:
- In December 2018, TR Sono Partners, LLC entered into a 10-year lease agreement with Downtown Soho, LLC to use premises at 99 Washington Street in South Norwalk for the operation of a restaurant and bar, and Edin Ahmetaj personally guaranteed Downtown Soho, LLC’s obligations.
- The lease agreement required Downtown Soho, LLC to use the premises only for a restaurant and bar and to comply with all applicable laws and regulations.
- In December 2019, AGW Sono Partners, LLC purchased the premises from TR Sono Partners, LLC and was assigned all rights and obligations under the lease and guarantee agreements.
- Downtown Soho, LLC defaulted on lease payments in January and February 2020 but cured those defaults within weeks.
- Downtown Soho, LLC defaulted a third time on its March 2020 rental obligations and did not cure it.
- On March 10, 2020, Governor Lamont declared civil preparedness and public health emergencies due to COVID-19 and subsequently issued executive orders closing restaurants and bars to in-person business from March 16 through May 20, 2020, then restricting them to outdoor dining and on-premises alcohol consumption through June 16, 2020, and later allowing indoor dining at 50% capacity.
- Downtown Soho, LLC’s restaurant was completely closed from March 11 to May 27, 2020, then reopened for outdoor dining and limited indoor dining, but it operated at a loss.
- Downtown Soho, LLC made no rental payments after February 2020 and vacated the premises by September 11, 2020, in response to a notice to quit.
- AGW Sono Partners, LLC immediately marketed the premises and signed a new 10-year lease with Sono Boil, Inc. on November 30, 2020, for a lower monthly rent and granted Sono Boil, Inc. a concession of six months’ free rent.
Procedural Posture:
- AGW Sono Partners, LLC brought an action against Downtown Soho, LLC and Edin Ahmetaj in the Superior Court in the judicial district of Stamford-Norwalk, Housing Session at Norwalk, alleging breach of a lease agreement, unjust enrichment, and breach of guarantee.
- The defendants raised various special defenses, including the doctrines of impossibility of performance and frustration of purpose.
- After a one-day trial, the trial court found for AGW Sono Partners, LLC on all three counts and rejected the defendants’ special defenses, awarding $200,308.76 in damages.
- Downtown Soho, LLC and Edin Ahmetaj (defendants/appellants) appealed, and AGW Sono Partners, LLC (plaintiff/cross-appellant) cross-appealed, from the judgment of the trial court to the Appellate Court.
- The Connecticut Supreme Court transferred the appeal and cross-appeal to itself pursuant to General Statutes § 51-199 (c) and Practice Book § 65-1.
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Issue:
Does the COVID-19 pandemic and associated governmental executive orders, which significantly impacted a restaurant's profitability and operations, excuse a commercial tenant from its lease obligations under the doctrines of impossibility or frustration of purpose? If a commercial lease is breached, does the nonbreaching lessor bear the burden of proving it mitigated damages, or does the breaching lessee bear the burden of proving the lessor failed to mitigate?
Opinions:
Majority - Robinson, C. J.
No, the COVID-19 pandemic and associated governmental executive orders did not excuse Downtown Soho, LLC from its lease obligations under the doctrines of impossibility or frustration of purpose. Yes, the breaching lessee (Downtown Soho, LLC and Ahmetaj) bears the burden of proving the lessor (AGW Sono Partners, LLC) failed to mitigate damages. The court affirmed that only in exceptional circumstances will a contractual duty be discharged because additional financial burdens make performance less practical than initially contemplated. The impossibility doctrine does not apply when the contract explicitly assigns a particular risk to one party, and a party making an unqualified promise to perform assumes the obligation even if a foreseeable event makes performance impracticable. In this case, the executive orders did not render restaurant operation factually impossible because takeout and curbside services were still permitted, and the lease agreement did not prohibit such services or require a profitable restaurant. The severe economic consequences for the restaurant raised the cost of performance, but did not make it impossible. Furthermore, the lease language itself, particularly § 4 (d) requiring the tenant to comply with all governmental laws and regulations, and § 25 addressing “unavoidable delay” for the landlord, suggested that crisis situations were not entirely unforeseeable and allocated the risk to Downtown Soho, LLC. Regarding the frustration of purpose doctrine, the court emphasized its narrow construction and that it requires convincing proof of a changed situation so severe that it is not fairly regarded as being within the risks assumed under the contract, and renders the contract 'valueless'. The court found that the purpose of the lease agreement was not utterly defeated by the pandemic restrictions, as the lease did not limit the premises to a specific type of dining (e.g., exclusively indoor), and alternative services like takeout and outdoor dining were available and utilized. The lease terms did not, by themselves, render the agreement valueless in light of the executive orders. The court distinguished cases where the lease had a more restrictive 'exclusive purpose' clause. On the cross-appeal concerning damages, the court concluded that the trial court improperly assigned the plaintiff, as the nonbreaching party, the burden of proving that it had mitigated its damages. Consistent with well-established principles of damages law in both tort and contract contexts, the breaching party bears the burden of proving that the nonbreaching party failed to undertake commercially reasonable efforts to mitigate damages. By speculating about the plaintiff's negotiations with the new tenant and reducing the damages award due to a lack of detailed evidence from the plaintiff, the trial court effectively relieved the defendants of their proper burden of proof. Thus, a new hearing on damages is required.
Analysis:
This case provides crucial guidance on the applicability of impossibility and frustration of purpose doctrines in the context of commercial leases facing widespread economic disruption from unforeseen events like a pandemic. It reinforces the high bar for excusing contractual performance based solely on economic impracticability, particularly when a contract contains risk-allocating provisions or allows for alternative (even if less profitable) forms of performance. Furthermore, the decision clarifies a significant point of first impression in Connecticut law by explicitly placing the burden of proving failure to mitigate damages on the breaching commercial lessee, aligning it with broader contract and tort principles. This ruling has substantial implications for future commercial lease disputes arising from governmental actions or other force majeure-like events, providing greater certainty for landlords regarding their recovery of damages.
