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

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.

Decision Will Affect Mass. Property Liens
By Christopher R. Vaccaro
Special to Banker & Tradesman

Last month, the U.S. Supreme Court ruled in Tyler v. Hennepin County, Minnesota that a Minnesota county acted improperly when it seized a one-bed­room condominium for delinquent property taxes, sold the condo­minium for more than the amount owed, and then refused to remit the surplus to the elderly owner. The ruling is likely to af­fect the enforcement of property tax liens in Massachusetts.

Geraldine Tyler lived alone in her Min­neapolis condominium. In 2010, her family persuaded her to move into a senior com­munity where she would be safer, but they neglected to keep her safe from the Hen­nepin County tax collector. Real estate taxes on her condominium went unpaid.

Under Minnesota law, after property taxes become one year delinquent, they accrue costly interest and penalties, and the county obtains a judgment transferring limited title to the state. If the taxpayer fails to redeem the property by paying the delinquent taxes, interest, and penalties within three years, the state secures abso­lute title to the property. The state may keep the property for public use or sell it to a private party. Surplus proceeds from private sales belong to the county, to be shared with the town and school district. Taxpayers have no right to surpluses.

By 2015, unpaid taxes on Tyler’s condo­minium exceeded $2,000 and had accrued $13,000 in interest and penalties. The county seized the condominium, sold it for $40,000, and kept the $25,000 surplus rep­resenting the value of Tyler’s equity.

Tyler challenged the county’s retention of the surplus in federal court, claiming that the county violated the Fifth Amend­ment of the U.S. Constitution, which pro­hibits governmental takings of private property without just compensation, and the Eighth Amendment of the Constitu­tion, which prohibits governments from imposing excessive fines. The district court dismissed her suit, and the appeals court upheld the dismissal. The Supreme Court agreed to hear Tyler’s case.

Citing the Magna Carta and the Fifth Amendment of the Constitution, the Su­preme Court’s nine justices unanimously agreed that the county’s retention of the $25,000 surplus violated Tyler’s Fifth Amendment rights. Two justices went fur­ther in a concurring opinion, labeling the county’s action as an imposition of an ex­cessive fine in violation of the Eighth Amendment. The other justices declined to rule on the Eighth Amendment issue, believing that the Fifth Amendment gave Tyler sufficient grounds to prevail.

Parallels to Bay State Foreclosure Rules

Massachusetts’s tax foreclosure proce­dure is similar to Minnesota’s. The Massa­chusetts statute provides that if delinquent real estate taxes are not paid within 14 days after the municipality’s demand, the tax collector may proceed to take the land for the municipality. Delinquent taxes ini­tially accrue interest at 14 percent per year. If the taxes are not paid within 14 days after the collector notifies the tax­payer of its intention to do so, the collec­tor may take the property and record a no­tice at the local registry of deeds.

After the taking, the interest rate on the delinquent taxes jumps to 16 percent per year. The collector does not need a court order to effect the taking. After the taking, taxpayers have a right to redeem the prop­erty by paying the taxes and interest, and taxpayers usually continue to possess the property, until their right of redemption is foreclosed.

To foreclose the taxpayer’s right of re­demption, the municipality must file a foreclosure action in Land Court. The tax­payer’s right of redemption continues until the Land Court enters a final foreclosure judgment. If the taxpayer fails to redeem before the judgment, the municipality gains full value of the real estate, and the taxpayer retains nothing and forfeits the value of its equity. The statute lets taxpay­ers petition the Land Court to vacate the foreclosure judgment for up to one year after its entry, but judges have discretion to grant or deny such petitions.

The situation in Massachusetts is exac­erbated when municipalities deal with pri­vate investors such as Tallage LLC, which uses subsidiaries to acquire tax titles and then foreclose on taxpayers’ rights of re­demption. Registry of Deeds and Land Court records reveal that Tallage routinely purchases tax titles, secures foreclosure judgments from the Land Court, and sells the foreclosed properties in private sales for more than the amount of the delin­quent taxes. The Tyler decision may end this questionable practice, which some have called “equity theft.”

In light of the Supreme Court’s Tyler de­cision, Massachusetts’s tax lien foreclo­sure procedures are difficult to defend. If the Massachusetts legislature does not change them, state or federal courts prob­ably will.

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

Property Owners Subject to Septic Upgrades
By Christopher R. Vaccaro
Special to Banker & Tradesman

Changes are com­ing to regulations affecting waste­water management on Cape Cod and south­eastern Massachusetts, but the scope of these changes and their po­tential impact on prop­erty owners are still taking shape.

The Massachusetts Department of Envi­ronmental Protection is responsible for reg­ulating private on-site sewage disposal sys­tems, commonly known as septic systems. For decades, DEP has regulated septic sys­tems through Title 5 of the State Environ­mental Code. Conventional septic systems collect wastewater in watertight septic tanks where solids, grease, and fats are sep­arated from liquids, and partial treatment of solid waste occurs. Liquids are then distrib­uted over subsurface leaching fields, where microbial action removes some pollutants before the liquids seep into the soil and groundwater.

Nitrogen, usually in the form of ammo­nia, is a major pollutant found in wastewa­ter. Septic systems are designed to use bac­teria to convert nitrogen compounds into harmless nitrogen gas, a relatively inert molecule that is the primary component of the earth’s atmosphere. However, conven­tional septic systems only reduce nitrogen pollution by an unimpressive 5 to 10 per­cent. The untreated pollutants seep into the groundwater, and often into nearby wet­lands. The results of incomplete pollutant reduction are notable on Cape Cod, where water quality in many harbors, estuaries and marshes is already significantly de­graded, and getting worse.

To address this problem, DEP seeks to enhance pollution prevention standards on septic systems serving Cape Cod and south­eastern Massachusetts, by amending Title 5 and adding new watershed permit regula­tions. DEP’s initiative would identify water­sheds vulnerable to nitrogen pollution, and designate them as “nitrogen sensitive areas”

(NSAs). DEP has not completed its designa­tion of NSAs, but towns on Cape Cod from Bourne to Orleans would certainly have NSAs, and much of Martha’s Vineyard, Nan­tucket and the western shore of Buzzards Bay would likely be included. DEP’s pro­posed amendment to Title 5 would require all septic systems located in NSAs, includ­ing existing systems, to be upgraded to em­ploy “best-available nitrogen-reducing tech­nology” within five years.

However, if a community obtains, or files a notice of intent for, a “watershed permit” from DEP, the community’s property own­ers would be exempt from the upgrade re­quirement.

Expensive New Technology Required

DEP’s website offers helpful information on different kinds of septic systems that use the best available nitrogen-reducing technol­ogy, or BAT, for short. BAT systems can re­duce nitrogen pollutants by over 70 percent, a significant improvement over the lacklus­ter performance of conventional systems.

But BAT systems are expensive, and may cost over $35,000 each. If thousands of property owners are required to install BAT systems, the overall financial burden would be exorbitant. Whether there are enough qualified professionals available to com­plete thousands of upgrades within five years is questionable. The upgrade mandate would also likely have an adverse effect on construction and housing costs on Cape Cod. State government would probably have to create new funding sources and loan programs for property owners to pay for upgrades.

DEP is sensitive to these concerns. The proposed regulations would offer communi­ties a way to shift the upgrade requirement from individual property owners to the community in general, using watershed per­mit regulations. Under DEPs proposed reg­ulations, communities could seek a 20-year permit to implement long-term wastewater planning for entire watersheds. This would give communities time to develop innova­tive approaches to better wastewater man­agement, including possible expansions of public sewer systems. Individual property owners would not be required to upgrade their septic systems during the 20-year pe­riod that the watershed permit is in effect.

Communities seeking watershed permits would be expected to commit to wastewa­ter management plans demonstrating that at least 75 percent of the necessary pollutant reduction levels would be achieved within 20 years. Those communities would have to provide annual progress reports to DEP, and implement adaptive management pro­grams to produce the necessary reductions. If a community fails to satisfy the require­ments of its watershed permit, DEP could terminate or revoke the permit and reim­pose the Title 5 upgrade requirement on in­dividual property owners. DEP’s initiative is clearly intended to encourage communities to take a holistic and proactive approach to wastewater treatment in NSAs, so individ­ual property owners are not saddled with upgrade costs.

DEP held public meetings last year and in January seeking comments on its proposed regulations. While many participants at those meetings expressed concerns about upgrade costs, many others supported DEP’s efforts to improve water quality on Cape Cod. The time for comments is now over, and Cape communities will soon learn what will be expected of them to achieve that goal.

Download the article as seen in  Banker & Tradesman on March 27, 2023. Learn more about Christopher R. Vaccaro.