Late Thursday, the Palm Restaurant sued the Nashville Hilton, arguing it should not have to pay full rent during the pandemic and especially not for time periods when the Hilton hotel itself wasn’t open.
It’s an interesting argument, about issues that will be litigated throughout the country over the next few years.
Generally, in Nashville (and everywhere else), closures related to COVID-19 haven’t given tenants much factual or legal basis for avoid rent payments. That’s because most commercial leases–more than anything–make payment of rent such a supreme duty under the lease that anything short of total physical destruction of the premises doesn’t excuse payment.
The Palm’s Lease at the Hilton is no different.
The Complaint alleges that “[t]he Lease provides for a rent abatement in the event that the Premises is damaged as a result of casualty,” citing Section 23.1 of the Lease. Specifically, that provision requires that the Property “be damaged by fire or other casualty” and has the typical murky text that you’d expect in a landlord-drafted lease that assumes the premises were physically damaged.
(Side note: The Lease also has a “Force Majeure” provision that is so iron-clad that The Palm doesn’t even cite it in the Complaint.)
As in so many of these cases, the million dollar question is: Does the COVID-19 virus cause “physical damage”?
The Palm takes a novel approach, in part, arguing that the Hilton’s voluntary shut-down caused the losses at the restaurant, since The Palms’ decision to initially lease the space was so heavily dependent on the existence of a thriving Hilton hotel.
“Pursuant to the Lease, the Hilton was and is required to operate a first-class business hotel…[and] provide the Palm with access to Common Areas…” As part of the Lease, the Palm’s dependence on the Hilton is evidenced by the facts that: Palm allowed Hilton guests to charge meals to their rooms; the Hilton heavily advertised the Palm in the hotel and in the rooms; and the Palm agreed to identify the Hilton in its own marketing.
Then, COVID hit. On March 12, the SEC tournament was shut down. On March 20, Metro shut down in-person dining. On March 22, the State of Tennessee took similar action. In response, on March 22, the Palm closed to in-house dining.
But, the lawsuit alleges, “[a]t no point in time since March 1, 2020 has the Hilton been forced to cease operations due to a state or local governmental order. … Despite the fact that it was under no obligation to do so, the Hilton shut down on March 24, 2020. …Upon information and belief, despite its management company having cash on hand necessary to support ongoing operations, the Hilton remained closed during April, May, and part of June.”
The Palm re-opened to 50% capacity on May 11 (as allowed by local and state law), but the Hilton didn’t re-open until June 8, 2020. The Palm argues that it was denied the benefit of foot traffic from the Hilton, marketing and promotional benefits, and access to Common Areas.
When the lawsuit was filed, the Palm had not paid rent for April, May, June, or July 2020 (including CAM charges for space at the Hilton). The Hilton has refused to discount any of that rent, despite the Palm’s requests for a discount.
This lawsuit asks the Davidson Chancery County Chancery Court to provide “declaratory relief” and declare that The Palm is not in default and is not required to pay April, May, June, and July 2020 rent (as well as get back some of the rent paid in March).
This case raises nearly all of the issues the commercial landlord-tenant bar will be fighting in the near future. Plus, this one has the added awkwardness of two inter-dependent, adjacent businesses being involved in direct litigation.
This may be the first notable COVID-related landlord tenant lawsuit filed in Nashville, and it’ll be one to watch over the next few weeks, months, and, gulp, year.
TL;DR: The lawsuit asks whether the Hilton’s decision to shut its own operations down creates a factual or legal defense to some or all of the amounts due from The Palm under the Lease.
Creditors Rights 101 