John Critzos, II v. David Marquis, et al.
No. 293, Sept. Term 2022
Appellate Court of Maryland
January 3, 2023
Berger, J.
Circuit Court for Anne Arundel County Case No. C-02-CV-20-1265. Opinion filed on January 3, 2023, by Berger, J. Kehoe, Berger, Arthur, JJ. * Ripken, J., did not participate in the Court’s decision to designate this opinion for publication pursuant to Md. Rule 8-605.1.
The principle underlying the frustration of purpose doctrine is that where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance, the contract will be discharged. There are three factors that courts should consider when determining whether the frustration of purpose doctrine applies: (1) whethеr the intervening act was reasonably foreseeable; (2) whether the act was an exercise of sovereign power; and (3) whether the parties were instrumental in bringing about the intervening event. The Appellate Court of Maryland reasoned that the level of disruption caused by the COVID-19 pandemic was not reasonably foreseeable. The Court further observed that it was not disputed by the parties that the COVID-19 related executive orders restricting business operations were an exercise of sovereign power and that the parties were not instrumental in bringing about the COVID-19 pandemic and associated shutdowns. Therefore, the determination of whether performance under a commercial lease was excused by the frustration of purpose doctrine turned on the determination of whether performance was rendered legally impossible.
LEGAL IMPOSSIBILITY - COMMERCIAL LEASE - COVID-19 PANDEMIC - EXECUTIVE ORDERS LIMITING BUSINESS OPERATIONS - BREACH OF LEASE - TENANTS’ FAILURE TO PERFORM
The determination of whether performance under a commercial lease was rendered legally impossible by the COVID-19 emergency and associated shutdowns businesses is necessarily fact specific and dependent upon expressly what is permitted by the terms of the lease. When a commercial lease did not limit thе tenants to operating an indoor, in-person restaurant and brewery, nor did the lease prohibit carry-out or delivery service, the lease was not rendered legally impossible. The Governor’s executive orders limited the tenants’ business operations, but they did not render the sole purpose of the lease illegal. Economic challenges do not themselves establish the affirmative defenses of frustration of purpose or legal impossibility. Because the COVID-19 pandemic restrictions did not order a complete shutdown of the tenants’ business, the evidence presented to the cirсuit court was insufficient to establish the affirmative defenses of frustration of purpose and legal impossibility.
Filed: January 3, 2023
* At the November 8, 2022 general election, the voters of Maryland ratified a constitutional amendment changing the name of the Court of Special Appeals of Maryland to the Appellate Court of Maryland. The name change took effect on December 14, 2022.
FACTS AND PROCEEDINGS
The facts underlying this appeal are largely not in dispute. On September 21, 2015, the parties signed a lease for a property located at 114 West Street in Annapolis, Maryland for the establishment of a “brewery/pub.” The lease was for the period of January 1, 2016 through December 31, 2020. The Marquises operated a restаurant/pub known as Chesapeake Brewing Company without substantial difficulties until the arrival of the COVID-19 pandemic.
On March 5, 2020, as COVID-19 began to spread throughout the United States, Governor Larry Hogan declared a “State of Emergency and Existence of Catastrophic
In April 2020, the Marquises asked Critzos to abate the April rent in light of the COVID-19 health emergency and the Marquises’ inability to operate the brewery and restaurant as usual. Critzos and the Marquises attempted to negotiate but were unable to reach an agreement. Critzos’s property manager set a deadline for the Marquises to pay the overdue April rent. The Marquises did not pay the rent and, instead, they provided written notice to Critzos on April 23, 2020 that they wished to terminate the lease. The circuit court found that the Marquises were unable to pay the rent, crediting Carolyn Marquis’s testimony that they had no source of income other than revenue from the brewery and David Marquis’s military pension. On May 3, 2020, the Marquises vacated the premises and returned the keys to Critzos.
The case came before the circuit court for a bench trial on July 28, 2021. At trial, Critzos presented evidence establishing the existence of a contract, breach of said contract, and damages. The Marquises presented the affirmative defenses of frustration of purpose and legal impossibility. The court heard testimony from the parties. The Marquises testified that thеy were unable to operate their restaurant and brewery in light of the COVID-19 related closures. The Marquises argued that their inability to operate their restaurant should excuse their nonpayment of rent to Critzos.
On the day of trial, Critzos presented the court with a bench memorandum citing various out-of-state cases. At the Marquises’ request, the circuit court granted the Marquises thirty days to file a response to Critzos’s bench memorandum. Critzos was provided time to respond to any response filed by the Marquises.
On September 20, 2021, the circuit court issued a memorandum opinion and order entering judgment in favor of the Mаrquises. The court found that “the COVID-19 pandemic itself and the ensuing statewide shutdown of all restaurants and similar establishments constitute[d] unforeseen circumstances, especially at the time of the parties contracting.” The circuit court further found that the Governor’s “executive orders, by undisputed testimony of the [Marquises], had made the sole purpose of their lease an illegal
Critzos filed a motion for reconsideration on September 29, 2021, as well as a supplement to the motion for reconsideration on October 18, 2021. A hearing was held on the motion on February 28, 2022, after which the circuit court issued an amended opinion on April 7, 2022. The amended opinion reiterated the court’s earlier ruling and included additional reasoning. The circuit court discussed, inter alia, its findings regarding steps taken by the Mаrquises to try to stay in business and emphasized the information known to the Marquises at the time they provided notice seeking termination of the lease. The circuit court also issued a separate order denying the motion for reconsideration.
This appeal followed. Additional facts shall be set forth as necessitated by our discussion of the issues on appeal.
STANDARD OF REVIEW
On appeal, Critzos asks us to review (1) the sufficiency of the evidence to support a judgment in the Marquises’ favor; and (2) whether the circuit court correctly applied the related doctrines of frustration of purposе and legal impossibility to this case. Appellate review of a bench trial is governed by
When an action has been tried without a jury, the appellate court will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence
unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witness.
The clearly erroneous standard does not apply, however, when we are reviewing the circuit court’s legal conclusions. Turner v. Bouchard, 202 Md. App. 428, 442 (2011). We “accord no deference” to the circuit court’s legal conclusions but instead our review is for legal correctness. Id. (quoting Cattail Assocs. v. Sass, 170 Md. App. 474, 486 (2006)). When evaluating whether a circuit court’s decision was legally correct, “we give no deference to the trial court findings and review the decision under a de novo standard of review.” Lamson v. Montgomery County, 460 Md. 349, 360 (2018).
DISCUSSION
The narrow issue before us in this appeal is whether the Marquises presented sufficient evidence to establish the affirmative defenses of frustration of purpose and legal impossibility. “The principle underlying the frustration of purpose doctrine ‘is that where the purpose of a contract is completely frustrated and renderеd impossible of performance by a supervening event or circumstance, the contract will be discharged.’” Panitz v. Panitz, 144 Md. App. 627, 639 (2002) (quoting Harford Cnty. v. Town of Bel Air, 348 Md. 363, 384 (1998) (quoting Montauk Corp. v. Seeds, 215 Md. 491, 499 (1958))). In Montauk, the Supreme Court of Maryland (at the time named the Court of Appeals of Maryland)2
The doctrine of frustration of purpose was first recognized in the early twentieth century in the English case of Krell v. Henry, 2 K.B. 740 (C.A. 1903). Henry had entered into a contract with Krell to rent Krell’s apartment during the daytime hours of June 26 and 27, 1902 to observe the coronation procession of King Edward VII. Id. After King Edward fell ill, the coronation was postponed, and Henry refused to pay for the rental. Krell sued, and the court was tasked with determining whether Henry was obligated to pay the rent despite the fact that the coronation did not take place as planned. Id. The court held that Henry’s performance under the contract was excused, holding that the “coronation procession was the foundation of this contract” and that “the object of the contract was frustrated by the non-happening of the coronation and its procession on the days proclaimed.” Id. at 751, 754. The court reached a contrary conclusion, however, in the case of Herne Bay Steam Boat Co. v. Hutton, 2 K.B. 683 (1903), holding that a renter who contracted to hire a steamship “for the purpose of viewing the naval review and for a day’s cruise round the fleet” was not excused from payment following the cancellation of the coronation because the “voyage was not limited to the naval review, but also extend[ed] to a cruise round the fleet.”
The circuit court found that the parties to the lease at issue in this case could not have reasonably contemplated a pandemic resulting in a government closure of all businesses. Critzos argues that the potential of a global infectious disease event was known in 2015 at the time the lease was made, and, therefore, the circuit court erred in determining that the COVID-19 related executive orders were not reasonably foreseeable. Critzos points to the 1918 Spаnish Flu pandemic as well as more recent epidemic/pandemic events
Indeed, the Supreme Court of Maryland has described “the COVID-19 pandemic” as “the worst public health crisis in a century . . . that suddenly and pervasively altered life worldwide” beginning in early 2020. Murphy v. Liberty Mut. Ins. Co., 478 Md. 333, 351 (2022). As is well known to nearly “[e]veryone above a very young age,” the COVID-19 “pandemic upended the patterns, rituals, and timelines of daily life - how one worked, shopped, played, and prayed; where one went; when and how one met with others; who was present for births, deaths, and the major life events in between.” Id. at 351-52. Although Critzos is correct that the general risk of global infectious disease outbreaks was well known at the time the parties entered into the lease, we agree with the circuit court that the level of disruption caused by the COVID-19 pandemic was not reasonably foreseeable. Furthermore, the remaining two Montauk factors -- that the COVID-19 related executive orders restricting business operations were an exercisе of sovereign power, and that the parties were not instrumental in bringing about the COVID-19 pandemic -- are not disputed in this appeal.
We turn, therefore, to whether the executive orders issued at the onset of the COVID-19 public health emergency rendered the Marquises’ performance under the terms of the commercial lease for a brewery/pub legally impossible or excused by the frustration of purpose doctrine. As the circuit court observed, as of the time this matter was before the circuit court in September 2021, the parties agreed “that they had found no reported
Other courts have reached differing conclusions as to the applicability of the frustration of purpose/legal impossibility defense in this context. In the recent case of Firestone Fin., LLC v. WA Gym Naperville N., LLC, No. 21 C 1183, 2022 WL 4094161, at *7 (N.D. Ill. Sept. 7, 2022), appeal filed, No. 22-2783 (October 6, 2022), the United States District Court for the Northern District of Illinois found that a frustration of purpose defense failed as a matter of law in the context of whether commercial tenant gyms wеre excused from paying rent to their commercial landlord during COVID-19 related shutdowns.4 The court found that the defendant gyms had “not alleged that they were completely prohibited from running their business after their payments became due.” Id. at *6. The court further noted that “on and after the end of the deferral period on August 25, 2020, [the d]efendants could have opened . . . their doors to members at fifty-percent capacity and subject to social-distancing and masking requirements.” Id. The court
A Massachusetts trial court, however, found that executive orders closing Massachusetts businesses frustrated the purpose of a commercial lease when a lease specifically limited the use of the premises “solely” for “the operation of a Caffé Nero themed café under Tenant’s Trade Name and for no other purpose” and when the lease required the tenant to operate the café “in a manner consistent with other Caffé Nero locations in the Greater Boston area” and to serve food and beverages “of first-class quality.” UMNV 205-207 Newbury LLC v. Caffé Nero Americas, Inc., No. 2084CV01493-BLS2, 2021 WL 714016 (Mass. Super. Ct. Feb. 8, 2021), at *2. Pursuant to the lease, the café could offer take-out sales only “from its regular sit-down restaurant menu.” Id.
When determining whether the frustration of purpose doctrine applied, the court emphasized “that Caffé Nero could use the leased premises only to operate a café with a sit-down restaurant menu ‘and for no other purpose.’” Id. at *5. The court found that “[t]he entire purpose of the [l]ease was” for the café to use the leased space “to serve high quality coffee, other drinks, and food to customers who could sit and cоnsume them on the premises.” Id. Notably, however, the Massachusetts court found that the tenant’s rent was
The Supreme Court of Connecticut recently addressed a somewhat similar lease scenario in the case of AGW Sono Partners, LLC v. Downtown Soho, LLC, 343 Conn. 309, 273 A.3d 186 (2022). Prior to the COVID-19 pandemic, the lessee defendants operated a fine-dining restaurant (the “bistro”) on the leased premises. 273 A.3d at 192. As in Maryland, Connecticut Governor Ned Lamont issued executive orders thаt affected the operation of bars and restaurants, closing all bars and restaurants for in-person dining on March 16, 2020. Id. Outdoor dining and on premises alcohol consumption was permitted beginning on May 20, 2020, and indoor dining resumed at fifty percent capacity on June 16, 2020. Id. at 192-93. The bistro was completely closed between March 11 and May 27, 2020, and “[a]lthough the lease agreement did not prohibit takeout or delivery dining or restrict the restaurant’s operation to dine in business only, [the restaurateur] testified that it was not profitable when the bistro attempted to do so.” Id. at 193. The tenants did not make any rental payments aftеr March 2020, and the bistro ultimately vacated the premises by September 11, 2020. Id. at 194. The landlord subsequently filed an action seeking money damages for breach of the lease. Id.
The Connecticut Supreme Court determined that “the doctrine of impossibility or impracticability did not excuse the defendants from their obligations to the plaintiff under the lease agreement.” Id. at 200. The Court emphasized that “most significant[ly], as the trial court found, even under the most restrictive executive orders, use of the premises for
was not frustrated by the pandemic restrictions imposed by the executive orders, even those that barred indoor dining entirely. The language of the lease agreement was not limited to a certain type of dining and -- in contrast to the more restrictive language contained in the sister state cases on which the defendants rely -- did not preclude the takeout and subsequent outdoor dining that the defendants sought to provide.
What we glean from the above-cited out-оf-state cases is that the focus necessarily must be upon what is expressly permitted by the terms of the lease. The lease at issue in this case provided that the Marquises “shall use the Leased Premises for Brewery/Pub only, and for related activities but for no other purposes unless written consent is provided by the Landlord.” (Emphasis in original.) Notably, the lease did not prohibit takeout dining -- a factor that other courts have considered important in assessing frustration of purpose and legal impossibility claims. In our view, this case presents a situation substantially more akin to the bistro in AGW Sono Partners, LLC and the gyms in Firestone Fin., LLC than to the café in UMNV 205-207 Newbury LLC.6
The circuit court reasoned that the operation of the brewery/restaurant by the Marquises would have been similarly criminal after the issuance of the Governor’s executive orders. We disagree. The whiskey distiller in Wischhusen was completely prohibited from working in the role for which he had been hired. In contrast, the Marquises were prohibited from serving customers indoors in their restaurаnt for almost three months, but they were permitted to operate on a carry-out basis or delivery basis throughout the pandemic, and the restaurant was permitted to operate at fifty percent capacity beginning in June of 2020. The restriction in Wischhusen served to prohibit the whiskey distiller from performing any and all of the services required under his employment contract, while the executive orders at issue in this case presented far narrower restrictions. The circuit court found that the Governor’s executive orders “made the sole purpose of the[] lease an illegal
When determining that the Marquises’ decision to vacate the property and seek the termination of the lease was reasonable, the circuit court focused upon the thirty-day period set forth in the lease for a decision as to termination following a fire or other casualty causing damage to the leased premises. The circuit court observed that the lease provides that if the premises were destroyed by fire or other casualty, the landlord was required to determine whether to repair the premises, or, within thirty calendar days, give notice to the tenant “that it has elected not to reconstruct or repair the [l]eased [p]remises, and the [l]ease and tenancy created hereby shall cease as of the date of the occurrence” of the fire or other casualty. The court looked to this thirty-day period when assessing whether a reasonable person would have “act[ed] as the [Marquises] did” after the issuance of the Governor’s first COVID-19-related executive orders prohibiting in-person dining. We fail to see how the thirty-day period specified in the lease during which the landlord could elect to terminate the lease after a fire or other casualty somehow gives rise to an option for the tenant to terminate the lease under entirely different circumstances that did not render the premises entirely unusable.
Nor do we consider it particularly significant that the lease did not contain a force majeure clause. Perhaps a force majeure clause would have more clearly delineated the
We do not intend to discount the difficulties faced by the Marquises and other restaurateurs and business owners during the unprecedented challenges of the COVID-19 pandemic and associated limitations on the operation of businesses throughout the State of Maryland. It is beyond dispute that the pandemic challenged the Marquises’ ability to operate a financially viable business. Economic challenges, however, do not themselves establish the affirmative defenses of frustration of purpose or legal impossibility. Throughout the entirety of the relevant time period, carry-out and delivery service continued to be permitted throughout the State of Maryland. Furthermore, the tenancy continued through the end of 2020, and in-person dining resumed -- albeit at a limited capacity -- in June. The COVID-19 pandemic restrictions did not order a complete shutdown of the Marquises’ business. We, therefore, hold that the evidence presented to the circuit court was insufficient to establish the affirmative defenses of frustration of purpose and legal impossibility.
JUDGMENT OF THE CIRCUIT COURT FOR ANNE ARUNDEL COUNTY REVERSED. CASE REMANDED TO THE CIRCUIT COURT FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS OPINION. COSTS TO BE PAID BY APPELLEES.
Berger, J.