A/R Retail LLC v. Hugo Boss Retail, Inc.

• Citation: 72 Misc.3d 627,149 N.Y.S.3d 808
• Decision Date: 19 May 2021
• Docket Number: 158385/2020
• Parties: A/R RETAIL LLC, Plaintiff, v. HUGO BOSS RETAIL, INC., Defendant.
• Court: United States State Supreme Court (New York)

72 Misc.3d 627
149 N.Y.S.3d 808

A/R RETAIL LLC, Plaintiff,
v.
HUGO BOSS RETAIL, INC., Defendant.

158385/2020

Supreme Court, New York County, New York.

Decided on May 19, 2021

149 N.Y.S.3d 813

Counsel for Tenant (Defendant in Action 1 / Plaintiff in Action 2): William H. Mack, Benjamin S. Noren, DAVIDOFF HUTCHER & CITRON LLP, 605 Third Avenue — 34th Floor, New York, New York 10158

Counsel for Landlord (Plaintiff in Action 1 / Defendant in Action 2): Howard W. Kingsley, ROSENBERG & ESTIS, P.C., 733 Third Avenue, New York, New York 10017

Joel M. Cohen, J.

This case involves a long-term commercial lease under which Defendant Hugo Boss Retail, Inc. ("Hugo Boss" or "Tenant") operates a retail store at The Shops at Columbus Circle in Manhattan. The central question is whether the adverse financial impact of the COVID-19 pandemic on Tenant's business, including government orders restricting consumer access to the retail store, should relieve Tenant of the obligations under its Lease with Plaintiff A/R Retail LLC ("Landlord"). Similar disputes between commercial tenants and landlords have flooded New York state and federal courts over the last year.

Both parties assert claims for relief. Landlord seeks to recover from Tenant millions of dollars in past-due rent under the Lease and recovery of its attorneys' fees for bringing this action. For its part, Tenant seeks: (i) rescission or reformation of the Lease due to "frustration of purpose" or "impossibility of performance;" (ii) termination of the Lease because the pandemic constitutes a "casualty" that has "rendered [the Premises] wholly or substantially untenantable;" (iii) abatement of rent because the pandemic constitutes a "hazard;" and (iv) recovery of "overpaid" rent "for the period of time that [Tenant] was unable to operate a retail store at the Premises as originally contemplated by the Lease."¹

Landlord moves for summary judgment on all claims asserted by and against it, other than Tenant's claim to recover for alleged pre-pandemic overcharges. Tenant opposes on the ground that its pandemic-related claims and defenses raise fact issues that cannot be resolved at this early

149 N.Y.S.3d 814

stage. For the reasons set forth below, Landlord's motion is granted.

The pandemic undoubtedly has taken a significant toll on Tenant's business. But unlike the permanence of Tenant's proposed remedies of rescission and reformation, government restrictions relating to the pandemic have evolved and eased considerably over time. And as will be shown below, the parties provided in the Lease for certain accommodations in the event performance of their respective obligations was impacted by government restrictions, but did not provide for termination of the Lease or abatement of rent under those circumstances. A harsh result, to be sure, but so in its own way would be mass rescission of commercial leases, assigning all risk of the pandemic to property owners who face their own unrelenting expenses and economic burdens. In any event, this is a contract case and the Court is guided principally by the terms of the Lease to which these sophisticated commercial entities agreed.

BACKGROUND

The Pandemic Disrupts Store Operations

A/R Retail, LLC is the landlord of the luxury indoor shopping center (or indoor mall) known as The Shops at Columbus Circle, located at 10 Columbus Circle in New York City (the "Shops") (Landlord's Rule 19-a stmt. of undisputed material facts ["SUMF"] ¶1 [NYSCEF 36]). Hugo Boss is a fashion brand that sells men's and women's high-end apparel, shoes and accessories (Affidavit of Stephan Born ["Born Aff."] ¶4 [NYSCEF 30]).

Since 2012, Hugo Boss has leased a two-floor retail store (the "Store") in the Shops (Affidavit of Meredith B. Keeler ["Keeler Aff."] ¶3), under the terms of a 13-year lease (the "Lease") (SUMF ¶3; see NYSCEF 17 [Lease]). The Store is one of the largest retail stores in the Shops, consisting of almost 15,000 square feet (SUMF ¶4). According to Tenant's CEO and President, Stephan Born, "Hugo Boss' purpose in entering into the Lease was to provide Hugo Boss with a highly visible and trafficked retail location in Columbus Circle, and specifically within the iconic Time Warner Center, that would cater to luxury and premium market customers, and that Hugo Boss could fully utilize to sell products and services under the brand ‘HUGO BOSS’ for the entire term of the Lease" (Born Aff. ¶5; see Lease § 1.1 [g] ["Tenant shall operate the Premises as a first-class, high-quality store...."]). For this right, Tenant was paying $692,026.07 per month for rent (SUMF ¶33; NYSCEF 1 ¶2 [Tenant's compl. in Action 2]).

On March 7, 2020, as the COVID-19 pandemic swept through New York, Governor Cuomo signed Executive Order ("EO") 202, "declar[ing] a State disaster emergency for the entire State of New York" that remained "in effect until September 7, 2020" (id. ¶22). That began a series of Executive Orders which, as relevant here, mandated commercial and retail closures. EO 202.4, issued on March 16, ordered closure of schools throughout the State and excused non-essential State employees from coming to work (id. ¶23), followed by EO 202.5, issued on March 18, which ordered that "all indoor common portions of retail shopping malls ... shall close and cease access to the public" (id. ¶25).

Landlord closed the Shops — including the Store — on March 17, 2020 at 5:00 p.m. (id. ¶24). At that point, even Tenant's employees were barred from accessing the Premises, unless they followed specific

149 N.Y.S.3d 815

guidelines and received permission from Landlord (Born Aff. ¶9). Landlord also restricted deliveries to the Premises during this time (id. ; see Born Aff. Ex. 2 [NYSCEF 32]).

Tenant paid the rent and additional rent due under the Lease for the month of April 2020, in the total amount of $692,026.07, except for $373.89 (SUMF ¶26). Landlord contends that "[s]uch payment was without any reservation of rights by Tenant" (id. ¶27). As Tenant points out, however, it expressly "reserve[d] all rights" relating to the rent in a letter written to Landlord on March 18, 2020, the day after the Shops closed (the "March Letter") (Born Aff. Ex. 3 [NYSCEF 33]). In the March Letter, Tenant signaled its expectation that "Rent will be fully abated for the duration of the mall closure period," while "reserv[ing] all rights and remedies available under the Lease" to postpone or abate rental payments as a result of the closure (id. ). Also in the Letter, Tenant previewed that it "may deem such cessation or diminution of operation as an event of casualty or force majeure which may excuse Tenant from performance under the Lease due to impossibility of performance, commercial impracticability or frustration of the purpose of the Lease" (id. ).

The next month, Tenant wrote another letter to Landlord, dated April 21, 2020 (the "April Letter"), which alluded to "Landlord's recent position that ... Tenant is not entitled to any abatements during the current pandemic" (Born Aff. Ex. 4 [NYSCEF 34]). Tenant warned that if the parties were "unable to reach a mutually agreeable resolution," Tenant "will need to move forward with more drastic steps that will include either a termination of its Lease ... or a more formal restructuring process" (id. ). The Letter outlined Tenant's view that section 15.2 of the Lease "affords [it] the right to terminate the Lease," so that "[i]f HUGO BOSS proceeds with exercising this right it could close its store without penalty" (id. ).²

On September 9, 2020, the Shops reopened to the general public (SUMF ¶31). Since then, the Store has continued to remain open for business (id. ¶32). Business, however, has not been the same. State guidelines limited occupancy in the Store to 50% of the maximum allowable amount, including customers and employees (Born Aff. ¶10).³ And Landlord decreased the Operating Hours of the Shopping Center by 20%, from 50 hours of weekly operation to 40 hours per week (id. ). Mr. Born calculates "[t]he effect has been a decline in traffic of 83% and a decrease in year-over-year sales of 76%" (id. ). In any event, Tenant continues to operate the Store (SUMF ¶32; Keeler Aff. ¶32), although it has not paid monthly rent in full since May 2020 (SUMF ¶33).⁴

Relevant Lease Provisions

Five Lease provisions are particularly relevant to this dispute. First, section

149 N.Y.S.3d 816

26.15 [a] of the Lease states, in pertinent part, that "[a]ll Rent payable to Landlord under the provisions of this Lease shall be paid to Landlord ... without deduction, set-off or counter claim whatsoever, except as expressly provided herein."

Second, section 15.1 [d] expressly provides that a rent abatement or reduction may be available to Tenant under certain circumstances:

If the Premises are completely or partially destroyed or so damaged by fire or other hazard that the Premises cannot be reasonably used by Tenant or can only be partially used by Tenant and this Lease is not terminated as provided in this Article XV, then rent shall be abated (in the case of substantial damages) or reduced proportionately (in the case of partial damage)...