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Perseverance Pays Off in Fitchburg for Nonprofit Developer

Neglected Real Estate Repurposed for Artist Community
By Christopher R. Vaccaro
Special to Banker & Tradesman

The new Fitchburg Arts Community demonstrates a potential playbook for successful financing of housing through public subsidies in Massachusetts’ Gateway Cities.

In the 19th century, Fitchburg was a mill town where facto­ries along the Nashua River manufactured textiles and paper prod­ucts. Many of the fac­tories are gone now, but today’s Fitchburg is home to impressive Victorian architecture, an MBTA commuter rail station, Fitchburg State University and the Fitchburg Art Mu­seum.

The new Fitchburg Arts Community demonstrates a potential playbook for successful financing of housing through public subsidies in Massachusetts’ Gateway Cities.

The art museum is a valuable cultural asset to northern Worcester County, with over 7,000 pieces, including 19th century American art, African art and photography. Thanks to the vision and perseverance of key members of Fitchburg’s nonprofit and creative communities, the museum will soon share its neighborhood with the Fitch­burg Arts Community (FAC), a housing de­velopment offering 68 affordable apart­ments for artists and other creative individuals. It is expected to open early next year.

The FAC’s developer, NewVue Communi­ties, is a Fitchburg-based nonprofit commu­nity development corporation that pro­motes housing and small business growth in north central Massachusetts. The FAC is the brainchild of NewVue’s executive director Marc Dohan and the art museum’s director Nick Capasso, who envisioned converting nearby abandoned historic school buildings and a stable into artist housing.

Eastern Bank Reinvests in a Gateway City

The $45 million project broke ground last fall, after securing traditional bank con­struction financing, support from MassDe­velopment’s Transformative Development Initiative (TDI) program for Gateway Cities, and low-income housing and historic reha­bilitation tax credits.

NewVue acquired the FAC’s site from the city of Fitchburg and a private owner sev­eral years ago for a modest price. Last year, NewVue transferred the site to an affiliated for-profit limited liability company. Eastern Bank committed $26 million in construction financing. Commitments like that explain how Eastern Bank earned an “outstanding” rating from the Massachusetts Division of Banks under the Community Reinvestment Act.

The TDI program and tax credits at­tracted additional project financing. The commonwealth of Massachusetts arranged for $7.2 million of syndicated financing from several governmental and quasi-gov­ernmental agencies. NewVue obtained a $3.9 million state Low-Income Housing Tax Credit loan and a $7.4 million state historic tax credit loan, and also invested $4.1 mil­lion from a MassDevelopment Brownfields Grant, another grant from the Fitchburg Re­development Authority, and its own capital campaign.

The tax credits are the most complicated aspect of the FAC project. Investors relying on them should seek expert tax advice be­fore proceeding. The federal Low-Income Housing Tax Credit (LIHTC) program offers tax credits to investors who provide fund­ing for affordable housing developments. The state Executive Office of Housing and Livable Communities manages this program in Massachusetts, in addition to a separate but similar state tax credit program.

According to the commonwealth’s web­site, eligible investors can qualify for tax credits of up to 9 percent. But available tax credits are limited. The maximum tax credit award is generally $1 million per project, but EOHLC may award up to $1.3 million in credits for larger scale projects considered more transformative for the surrounding neighborhood.

The historic rehabilitation tax credit can offset up to 20 percent of a developer’s ex­penditures to rehabilitate an historic build­ing. Qualifying projects must be certified by the Massachusetts Historical Commission. The credit is earned when the completed project is placed in service. However, the commonwealth cannot authorize more than $55 million towards this tax credit annually, so investors must go through an approval process to qualify. The program is sched­uled to expire in 2027.

A Spread of Incomes

To ensure that the FAC’s apartments in Fitchburg remain affordable in perpetuity, the project is subject to an affordable hous­ing restriction, limiting rents and requiring that tenants’ income not exceed certain thresholds. Under this restriction, 21 apart­ments are now set aside for tenants earning up to 110 percent of area median income (AMI) but that percentage may change, 31 apartments for tenants earning up to 60 per­cent of AMI, two apartments for tenants earning up to 50 percent of AMI and 14 apartments for tenants earning up to 30 per­cent of AMI. NewVue is responsible for en­suring that only tenants within those in­come limits reside at the project. These restrictions are necessary for investors in the FAC to qualify for low-income housing tax credits.

New Vue’s Marc Dohan of NewVue said the project “is a great win for Fitchburg and the region. It creates desperately needed housing, and preserves three historic build­ings by putting them on the National Regis­ter of Historic Places, all while taking ad­vantage of Fitchburg’s diversity, history, walkability and strong cultural institutions. It will bring dozens of creative artists and entrepreneurs to our region.”

Dohan’s efforts might have a positive im­pact beyond developing affordable apart­ments in Fitchburg, if Massachusetts com­munity development corporations can follow his playbook in other Gateway Cit­ies.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

The Transit Zoning Rules that Matter

EOHLC Guidelines offer a Roadmap to Compliance
By Christopher R. Vaccaro
Special to Banker & Tradesman

Massachusetts communities with rapid transit service have until Dec. 31 to enact zoning complying with the MBTA Communities act encouraging multifamily development.

A 2021 amendment to the Massachu­setts Zoning Act requires “MBTA com­munities” to establish zoning districts that facilitate multifamily housing development.

The amendment de­fines MBTA communities, in effect, as cities and towns that have commuter rail, subway, ferry or bus stations, or are adjacent to cit­ies and towns having those services. There are 177 MBTA communities in eastern Mas­sachusetts. Boston is excluded because its zoning code is authorized under a separate enabling act.

MBTA communities must create at least one zoning district “of reasonable size” where multifamily housing is “permitted as of right.” Districts must be located within a half-mile of transit stations and allow a min­imum gross density of 15 dwelling units per acre. The amendment has ambiguities. For example, what is a zoning district “of rea­sonable size,” and what does it mean for a project to be “permitted as of right”? Where are MBTA communities without public tran­sit stations expected to locate multifamily housing districts? When must MBTA com­munities comply with the statute?

The Executive Office of Housing and Liv­able Communities (EOHLC) promulgated guidelines last August addressing these is­sues. EOHLC is a cabinet-level secretariat created in 2023 to improve housing options in Massachusetts. Its guidelines recognize four classes of MBTA communities: rapid transit communities, commuter rail commu­nities, adjacent communities (cities and larger towns without nearby transit sta­tions) and adjacent small towns. Different requirements apply to each class.

A Direct Path to Approval

For multifamily housing to be allowed “as of right,” zoning districts must permit multifamily housing construction without variances, special permits or similar discre­tionary zoning relief. But communities can condition permitting on site plan reviews, if the review process does not impose unrea­sonable delays or conditions. Communities can also place limited affordable unit re­quirements on projects.

The guidelines regarding the “reasonable size” of multifamily districts are compli­cated. “Reasonableness” depends on both the acreage of the district and the district’s “multifamily unit capacity,” which is the po­tential number of multifamily housing units that are developable as of right in the dis­trict. For communities other than adjacent small towns, reasonably sized districts gen­erally must have at least 50 acres or 1.5 per­cent of the developable land in the MBTA community, whichever is less. There is no minimum area for adjacent small towns. Communities lacking transit stations should locate their districts near access to transit stations, or near downtown areas.

When determining the reasonable multi­family unit capacity for individual commu­nities, EOHLC assigns a percentage to the community, depending on its class. The per­centage is 25 percent for rapid transit com­munities, 15 percent for commuter rail com­munities, 10 percent for adjacent communities and 5 percent for adjacent small towns. EOHLC then calculates the minimum multifamily housing for each community based on whichever is greater: the number of housing units in the MBTA community, times the applicable percent­age; or the minimum land area for the multi­family district, times 15 units per acre.

However, minimum multifamily unit ca­pacity cannot exceed 25 percent of total housing in each community. The guidelines make special allowances for mixed-use de­velopment zoning districts. EOHLC has es­tablished minimum multifamily unit capaci­ties for every MBTA community, which is available online on the agency’s website.

State Grants Contingent on Compliance

EOHLC will issue determinations of com­pliance to communities that satisfy its guide­lines. These will be important to communi­ties seeking various forms of state funding and discretionary grants. MBTA communi­ties should also consider the statement is­sued last spring by the Massachusetts attor­ney general, warning that noncompliant communities risk liability under federal and state fair housing laws. EOHLC’s guidelines do not require communities to produce housing units, or meet a housing production target, to comply with the guidelines. Com­munities only need to show that their zoning allows multifamily housing as of right and that sufficient units can be added, even if such addition is unlikely.

EOHLC anticipates that all MBTA com­munities will adopt conforming zoning amendments and seek EOHLC determina­tions of compliance in the near future. The deadline for communities to submit applica­tions to EOHLC for determinations of com­pliance is Dec. 31 of this year for rapid tran­sit communities, Dec. 31, 2024 for commuter rail and adjacent communities and Dec. 31, 2025 for adjacent small towns.

Arlington, Brookline and Lexington are among several municipalities that recently changed their zoning laws to comply with the guidelines. Other MBTA communities are expected to follow over the next several months, creating opportunities for develop­ers to increase multifamily housing inven­tory in Massachusetts. The question re­mains as to how developers will finance projects, in a lending climate with high in­terest rates and reluctant bankers.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Rent Acceleration Clauses Alive and Well After SJC Decision

Court Backs Acceleration Clauses
By Christopher R. Vaccaro
Special to Banker & Tradesman

Rent acceleration clauses allow landlords to demand that evicted tenants immediately pay as liquidated damages all remaining unpaid rent through the end of the lease term.

The Massachusetts Supreme Judicial Court overruled the Appeals Court in Cummings Properties, LLC v. Hines last Sep­tember, and upheld the validity of a rent accel­eration clause in a com­mercial lease.

Rent acceleration clauses allow landlords to demand that evicted tenants immediately pay as liquidated damages all remaining un­paid rent through the end of the lease term, even if the lease term expires years after the tenant’s default. The defaulting tenant’s lia­bility is not offset by the rental value of the vacated premises or by rents paid by re­placement tenants.

Many landlords refrain from adding these clauses in their leases, and sophisticated tenants generally refuse to accept them. However, Cummings Properties, which often rents to smaller tenants, includes rent acceleration clauses in its standard lease form. Cummings is not shy about enforcing the clause against defaulting tenants, as Darryl Hines recently learned.

Hines founded Massachusetts Consta­ble’s Office Inc. (MCO), a civil process ser­vice firm that earned a reputation for using questionable tactics to serve process and make arrests. In 2016, MCO secured a con­tract with the Massachusetts Department of Revenue, and signed a five-year lease with Cummings for space in Woburn. Hines per­sonally guarantied the lease, which in­cluded a rent acceleration clause.

Less than a month into the lease, the De­partment of Revenue suspended its contract with MCO, and MCO defaulted on the lease. Cummings evicted MCO, and a year later signed a four-year lease with a new tenant for the space formerly occupied by MCO.

$69K Judgement

Despite securing the replacement tenant, Cummings sued Hines under the lease guar­anty for the entire accelerated rent through the end of the five-year term of MCO’s ter­minated lease. A Superior Court judge up­held the rent acceleration clause, and found that Hines had sufficient sophistication to understand the consequences of his per­sonal guaranty. It entered judgment against Hines for $69,000, the balance of the accel­erated rent owed after deducting prior pay­ments made by MCO.

The Appeals Court reversed that judgment. It noted that rent acceleration clauses may be enforceable as liquidated damages provisions if they are not punitive. In the case of Cum­mings’s lease, the acceleration clause al­lowed Cummings to evict the tenant, relet the premises to a new tenant, collect rent from that tenant, and still claim accelerated rent from MCO without deducting rent received from the new tenant. The Appeals Court ruled that the clause bore no reasonable rela­tionship to Cummings’s expected damages, rendering it an unenforceable penalty.

The Supreme Judicial Court granted Cummings’s application for further appel­late review. The SJC first considered whether the rent acceleration clause was enforceable as a liquidated damages clause. The SJC noted that liquidated damages clauses are generally enforceable, if they are not so disproportionate to anticipated damages that they constitute a penalty.

When Massachusetts courts consider whether to enforce liquidated damages clauses, they analyze the circumstances at the time the contract was entered into, with­out considering other circumstances that may arise later by the time of the breach.

Court’s ‘Single Look’ Approach

Under this “single look” approach, rent acceleration clauses are enforceable if the actual damages from a breach were difficult to ascertain when the lease was signed, and the accelerated rent is a “reasonable fore­cast” of damages expected to result from a breach. Courts are not required to consider rents that landlords might collect from re­placement tenants after breaches occur.

The SJC noted that Hines had the burden of proving facts that would render the clause unenforceable, and that he failed to meet that burden. According to the SJC, Hines did not present evidence supporting his claim that Cummings’s anticipated damages upon de­fault were ascertainable when Hines signed his guaranty. Hines also failed to show that the rent acceleration clause was an unrea­sonable forecast of the damages that Cum­mings might sustain if MCO breached the lease. The SJC found that the rent accelera­tion clause was not an unenforceable penalty.

The SJC also rejected Hines’s argument that he should be relieved from the burdens of the rent acceleration clause because he was not a sophisticated party. The SJC noted that Hines’s level of sophistication was a question of fact, not law, which the superior court properly determined based on Hines’s business experience. Therefore, the rent acceleration clause was enforce­able against Hines. The SJC affirmed the su­perior court’s $69,000 judgment against him.

The SJC’s decision may encourage other commercial landlords to add rent accelera­tion clauses to their leases. Tenants should be on the lookout for these clauses, and should be wary about entering into leases with landlords who utilize them.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Antique Maps Guide Court’s Judgement in Graves Ledge Case

Lighthouse Property Tax fight Settled Against Hull
By Christopher R. Vaccaro
Special to Banker & Tradesman

Graves Light marks the outer edge of the Boston Harbor Islands and a huge, semi-submerged ledge. But a dispute involving a property tax bill ignited a question: What town is it in?

Graves Ledge is a 10-acre rock formation at the edge of Boston Har­bor, miles from the mainland. A lighthouse there has guided ships entering Boston Har­bor since 1905. The United States owned and operated Graves Ledge and the lighthouse until it sold them to David Waller in 2013 for almost $1 mil­lion.

Waller acquired ownership of Graves Ledge and the lighthouse through a limited liability company, and recorded a deed with the Suffolk County Registry of Deeds. The deed describes Graves Ledge as “the outermost island in the Boston Harbor Na­tional Recreation Area, in Suffolk County, Massachusetts Bay.” The U.S. Coast Guard reserved the right to operate navigational aids on Graves Ledge, and the deed re­quires the new owner to preserve historic buildings. Waller is currently renovating the lighthouse and related structures.

After the purchase, Waller received a real estate tax bill from the Town of Hull, located in Plymouth County. Waller con­tested Hull’s jurisdiction in the land court. The court offered the municipalities of Boston, Winthrop and Nahant opportuni­ties to assert jurisdiction over Graves Ledge, but they hastily renounced any claim to it, probably hoping to avoid re­sponsibility for providing municipal ser­vices to the remote ledge. Last month, after a trial involving scores of documents and expert testimony from surveyors, the court ruled that Graves Ledge lies outside of Hull’s municipal boundaries.

Early Colonial Records Consulted

The land court’s decision relied on his­torical records for the Boston Harbor Is­lands and Hull. In 1641, the Massachusetts  Bay Colony established a fishing commu­nity known as “Nantascot” on the penin­sula and neighboring islands today known as Hull. The town was originally part of Suffolk County. Colonial records show that the Brewster Islands, a small archipelago north of Hull’s peninsula, had been awarded to Hull by 1662. Seventeenth cen­tury maps of Boston Harbor show the Brewster Islands as enclosed shapes, and Graves Ledge as a series of x’s northeast of the Brewster Islands.

Hull was annexed to Plymouth County in 1803. Decades later, the Massachusetts leg­islature created a commission to determine the seaward boundaries of coastal munici­palities. The commission issued a report in 1884 setting the marine boundaries of towns in Norfolk and Plymouth Counties, and showed Graves Ledge and the Brews­ter Islands outside of Hull’s boundaries.

What Counts as an Island?

In 1892, the Massachusetts Supreme Ju­dicial Court considered Hull’s marine boundary and the 1884 report in Russ v. Boston, where the city of Boston attempted to assess taxes on one of the Brewster Is­lands. The SJC ruled that although the re­port concluded that the island was located north of Hull’s marine boundary, the island itself remained part of Hull because of the seventeenth century colonial grant.

During the 20th century, numerous maps and documents were produced by private parties and government agencies regarding coastal municipalities near Boston Harbor. Many of these showed Graves Ledge within Plymouth County, but some showed it in Suffolk County. Because of these inconsis­tencies, the court focused on the seven­teenth century colonial grants involving the Brewster Islands.

The court observed that colonial maps and later maps labeled Graves Ledge sepa­rately from the Brewster Islands, and that no documents from colonial times in­cluded Graves Ledge in the Brewster Is­lands. The court cited Hull’s own records, which only mentioned four islands among the Brewster Islands, none of which was Graves Ledge. These records also de­scribed a “meadow” located on the north­ernmost Brewster Island. There are no meadows on rocky and barren Graves Ledge, which lies well north of the vege­tated Brewster Islands.

The court noted that Graves Ledge ap­parently was not considered an island dur­ing colonial times. Early maps do not label Graves Ledge as an island, and show it as a series of X’s, while showing the Brewster Islands as enclosed shapes designated as islands. The court also discussed Graves Ledge’s remoteness from the Brewster Is­lands, its uninhabitability before the light­house was built, and its location beyond the traditional outer boundary of Boston Harber running between Nahant and the Hull peninsula. Given these findings, the court ruled that Graves Ledge was outside of Hull’s corporate boundaries.

As to Boston, Winthrop and Nahant re­nouncing claims to Graves Ledge, the court speculated on whether it is possible for land within the boundaries of Massachu­setts to be outside the boundaries of all cit­ies and towns. The court declined to an­swer that question, because its rejection of Hull’s claim to Graves Ledge disposed of the case at hand. If the question arises later, the city of Boston may end up as a re­luctant party to its resolution.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Legal Liability When an Algorithm Screens Tenants

District Court Allows Discrimination Suit to Proceed
By Christopher R. Vaccaro
Special to Banker & Tradesman

Landlords of apartment buildings in Malden and Canton hired a Texas company to screen tenant applications automatically, prompting a pair of rejected tenants to file a court challenge.

Last month the U.S. District Court of Massachusetts fired a warning shot to­ward tenant-screening firms, in Louis v. Saf­eRent Solutions LLC.

Mary Louis and Mon­ica Douglas are self-de­scribed Black women. They both hold Sec­tion 8 housing vouchers guaranteeing most of their rent payments. Louis applied to Metropolitan Management Group LLC for an apartment at Granada Highlands in Mal­den. Douglas applied to a different prop­erty manager for an apartment at Millside at Heritage Park in Canton. Their applica­tions were forwarded to SafeRent Solu­tions LLC, a Texas-based firm offering ten­ant-screening services to landlords and real estate professionals nationwide.

SafeRent applies a proprietary algorithm to rental applications, using credit histo­ries, bankruptcy records, past due ac­counts, payment performance and eviction histories. The algorithm generates a “Saf­eRent Score” that is intended to assess the likelihood of an applicant’s lease default. The SafeRent Score disregards the benefits of tenant housing vouchers.

Metropolitan rejected Louis’s applica­tion based on her SafeRent Score. Louis challenged the rejection, offering employ­ment and landlord references, but without success. Douglas’s application was initially rejected because her SafeRent Score re­flected credit history and landlord-tenant problems, but it was later accepted after she appealed with assistance from a hous­ing advocacy group.

Louis and Douglas filed a putative class action lawsuit in federal court against Saf­eRent and Metropolitan for violations of federal and state antidiscrimination laws. They alleged that SafeRent’s algorithm gen­erated lower scores for Blacks, Hispanics and voucher-holders, who often have less income and poorer credit histories, result­ing in denials of rental housing applica­tions based on race and use of vouchers. They also sued SafeRent for unfair and de­ceptive practices in violation of Massachu­setts General Laws Chapter 93A. Commu­nity Action Agency of Somerville Inc. (CAA), which provides housing services to underprivileged individuals, joined the suit as a plaintiff.

SafeRent and Metropolitan moved to dis­miss the lawsuit, arguing that Louis and CAA lacked standing, and that the plain­tiffs failed to state actionable claims against them. Defendants often file  mo­tions to dismiss early in litigation, but the tactic rarely succeeds, because judges hearing those motions must assume, for purposes of the motion, that the plaintiffs’ factual allegations – but not legal conclu­sions – are true.

Court Finds Disparate Impacts

Federal and state laws prohibit discrimi­nation in the sale and rental of housing be­cause of race, color, religion, sex, familial status, and national origin. Massachusetts law also prohibits discrimination against voucher holders. The court easily found that Louis had standing to file suit, because she alleged that the defendants’ actions caused her application to be wrongfully de­nied, requiring her to accept costlier but less desirable housing in a neighborhood with a higher crime rate. The case for CAA’s standing was trickier because CAA itself was not denied housing by the defen­dants. Nonetheless, the court ruled that CAA had standing because SafeRent’s prac­tices, if found to illegally discriminate, im­paired CAA’s efforts to fulfill its mission of locating housing for its clients.

SafeRent also argued that antidiscrimi­nation laws do not apply to it in this case, because SafeRent is not a landlord and it does not ultimately decide whether to ac­cept or deny rental housing applications. The court disagreed, noting that SafeRent’s screening service influences housing deci­sions and, according to the plaintiffs’ com­plaint, causes prohibited discrimination.

The court next discussed disparate im­pact claims under anti-discrimination laws. Such claims are actionable under federal and Massachusetts law, when directed at practices that have disproportionately ad­verse effects on protected classes, without legitimate rationales. The court summa­rized the plaintiffs’ allegations that SafeR­ent’s reliance on credit history is misplaced, has a disparate negative impact on Blacks, Hispanics and voucher-holders, and limits their housing opportunities. The court ruled that these allegations were sufficient for the plaintiffs to proceed with their hous­ing discrimination claims against the defen­dants. However, the court dismissed the plaintiffs’ Chapter 93A claims, ruling that their allegations did not suggest that SafeR­ent’s conduct was egregious enough to sup­port a claim under that statute.

The court denied the defendants’ mo­tions to dismiss the housing discrimination claims, but there is no certainty that judg­ment will someday be entered against Saf­eRent and Metropolitan. There remains much work to do. The plaintiffs must prove that SafeRent’s algorithm employs data with little relevance to whether applicants are worthy tenants, causing impermissible discriminatory impacts. SafeRent and Met­ropolitan will strive to prove that SafeR­ent’s algorithm reliably and fairly predicts whether applicants are likely to default, without significant adverse impacts on pro­tected minorities.

While the parties gather data for their experts, SafeRent might want to revisit its methodology.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Court Rules COVID Shutdown Doesn’t Cancel Rent

Shrewsbury Tenant Argued “Frustration of Purpose” Doctrine
By Christopher R. Vaccaro
Special to Banker & Tradesman

As the effects of the COVID pandemic wane, courts continue to review lawsuits prompted by business shutdowns and whether they excuse tenants from lease obligations.

Many disrup­tions from the COVID pan­demic are now behind us, but litigation related to those disruptions continues to work its way through Massachu­setts courts.

Last month, the Appeals Court decided Inland Commercial Real Estate Services, LLC v. ASA EWC, LLC, involving a commer­cial tenant’s failure to pay rent. The tenant signed a 10-year lease in 2016, to operate a “European Wax Center” in Shrewsbury. Three years later, in March 2020, Gov. Char­lie Baker issued COVID-19 Order No. 13, re­quiring non-essential businesses, including the wax center, to close. The tenant com­plied with the order and did not reopen until July 2020, after the governor issued a new order ending the shutdown.

After the tenant failed to pay rent and water charges for March through Septem­ber 2020, the landlord sent it a notice to quit, claiming over $55,000 in delinquent rent, some of which accrued during the three-month shutdown period. The tenant made a partial payment, but did not bring the rent current. The landlord terminated the lease and filed suit in superior court to evict the tenant.

In contesting the eviction, the tenant ar­gued that it should not have to pay rent for the three-month period when the COVID shutdown order prohibited it from doing business. The tenant supported this argu­ment with the often-invoked, but rarely suc­cessful, frustration of purpose doctrine.

The Supreme Judicial Court summarized the frustration of purpose doctrine in a 1991 decision, as follows: “Where, after a con­tract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occur­rence of which was a basic assumption on which the contract was made, his remaining duties to render performance are dis­charged, unless the language or the circum­stances indicate the contrary.” When con­sidering this defense, courts look at whether unforeseen circumstances effec­tively negated the value of the contract to the party who invoked the defense.

Unforeseen Circumstances Can Negate Contracts

In the case of the Shrewsbury wax cen­ter, the Superior Court judge rejected the tenant’s frustration of purpose defense, and entered judgment awarding the landlord possession of the leased premises and $86,841 in damages. The tenant appealed, and the Appeals Court offered a useful anal­ysis of the doctrine, before affirming the Su­perior Court’s judgment.

The Appeals Court noted that the frustra­tion of purpose doctrine excuses a party from performing its contractual obligations “where unanticipated supervening events require it.” For the doctrine to apply, the purpose that is frustrated must be so intrin­sic to the reason for the contract, that the contract makes little sense without it. Courts are generally reluctant to apply the doctrine, preferring instead to preserve the certainty of contracts.

The Appeals Court also noted that most courts decline to apply the doctrine to tem­porary business closures caused by govern­ment shutdown orders. When evaluating frustration of purpose defenses in govern­ment shutdown cases, courts consider the duration of the forced closures, the length of the lease term, how far into the lease term the closure occurred, whether tenants could reopen after restrictions were lifted, whether tenants remained in possession of the prem­ises during the shutdown and whether ten­ants could use their premises for purposes not barred by the shutdown order.

Temporary Shutdown Not a Dealbreaker

Taking these factors into account, the Ap­peals Court found the tenant’s frustration of purpose argument unpersuasive. It noted that the tenant did not show that its tempo­rary closure substantially frustrated the pur­pose of the lease. The tenant was already three years into its lease when the shutdown occurred, the three-month shutdown was relatively short compared to the 10-year lease term, the tenant remained in posses­sion of the premises during the shutdown and could sell goods from the premises, and the tenant was able to resume its business after the shutdown was lifted.

The Appeals Court also rejected the ten­ant’s argument that a temporary frustration of purpose should excuse the tenant from paying rent during the shutdown period. The court found that the doctrine provides relief to parties who see the anticipated benefits of their bargains destroyed by un­foreseen events, not merely interrupted on a temporary basis.

The Appeals Court went on to state that even if the doctrine were available on a temporary basis, the tenant’s obligation to pay rent during the shutdown period would only be suspended, not discharged alto­gether. The court affirmed the Superior Court’s judgment.

This decision shows that the tenants who invoke the frustration of purpose doctrine to avoid rent payments will most likely be frustrated by unfavorable court rulings.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.