Although COVID-19 emerged in the United States for the first time in March 2020 and hit the first of many "peaks" almost exactly four years ago, the effects of the pandemic are still being felt today in courtrooms across California. This year, the statute of limitations will expire for most landlords whose commercial tenants breached their lease agreements by failing to pay rent during the pandemic. Now that the clock is running out on COVID-era contract disputes, it is appropriate to discuss how the disputes panned out.
On March 19, 2020, California Gov. Gavin Newsom issued a stay-at-home order.1 Soon after, counties across California began issuing similar orders (such as the Los Angeles County Safer At Home For Control of COVID-19 Order2), all of which restricted the daily activities of citizens and businesses to some degree. As a result, Californians were largely confined to their homes, and many "non-essential" businesses were forced to temporarily shut down. As the incidence of COVID-19 ebbed and flowed, so too did regulation, and businesses adapted by modifying their services to include options like outdoor dining, drive-in comedy, and parking lot exercise classes. However, even with those adaptations, many businesses suffered significant losses in revenue and failed to pay their rent. Commercial landlords across the state (many of whom had their own obligations and expenses, including mortgage payments) filed lawsuits against their tenants for breach.
One such dispute, involving an LA Fitness gym in Poway, California, yielded a seminal and instructive appellate decision.3 In that case, the landlord sued tenant Fitness International, LLC ("Fitness"), asserting a breach of contract claim for Fitness's nonpayment of rent under the parties' lease. LA Fitness asserted 37 defenses including impossibility, impracticability, frustration of purpose, and force majeure. However, the trial court rejected Fitness's defenses and granted summary judgment in favor of the landlord.
On appeal, the Fourth District Court of Appeal affirmed the trial court's ruling, finding that, "The pandemic did not prevent Fitness from performing its contractual obligation to pay rent,"4 and neither force majeure nor the doctrines of impossibility, impracticability, or frustration of purpose were valid defenses to Fitness's nonpayment.
In making its determination, the court first held that impossibility, a doctrine that excuses a party's breach when a contractual obligation has become impossible, illegal, or impracticable, is not a defense when a party's obligation is solely to pay the agreed compensation.5 Fitness attempted to argue that its nonpayment was excused because the government's shutdown orders made it impossible to operate the gym. But, the court pointed out, Fitness's contractual obligation was to pay rent, not to operate a specific business, and the government's COVID-19-related orders did not make it illegal to pay rent. In fact, one such order explicitly stated that tenants were not relieved of the obligation to pay rent.6
Based on the same reasoning, the court also rejected Fitness's impracticability defense, which excuses breach when a party's performance has been rendered impracticable because of extreme and unreasonable difficulty, expense, injury, or loss.7
As for Fitness's frustration of purpose defense, the court found that the doctrine, which excuses contractual obligations when a party's performance remains possible but an unforeseen event has totally destroyed the value of the contract, did not apply because the temporary closure of Fitness's gyms did not amount to the kind of complete frustration that gives rise to a valid defense.8 The court highlighted that the premises had been utilized by Fitness for over 19 years before the pandemic struck, and therefore the value of the lease as a whole had not been totally destroyed by a few months of closure.9 The court further declared, "Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation."10
Finally, the court held that Fitness's force majeure argument, which can excuse a breach if a party is unable to meet its obligations due to a factor outside its control (such as a restrictive law, labor dispute, or act of God) did not apply because the parties' lease included a force majeure provision that explicitly excluded "failures to perform . . . which can be cured by the payment of money" from its definition of "force majeure events."11 The court found that Fitness's nonpayment of rent was a straightforward instance of a failure that could be cured by the payment of money.
Shortly after the ruling in SVAP III, the First District Court of Appeal appeared to leave open one avenue for tenant relief in similar future circumstances. In that case, the landlord brought a claim for breach of contract against Stone Brewing Company, a large beer brewing and retail corporation and "brewpub" in Napa, California, after it failed to pay rent in the months following the government's COVID-19 orders. 12
For Stone Brewing, its impossibility and impracticability arguments failed because it admitted that it never lost the financial ability to pay rent. Specifically, Stone Brewing admitted in discovery that although the "brewpub" component of its business was operating at a loss, it still had the financial resources to pay rent to its landlord for the months it was operating at restricted capacity.13 This concession weakened Stone Brewing's defenses by effectively proving that paying rent never became excessively and unreasonably costly, and the primary issue on appeal was whether Stone's force majeure provision, which did not exclude failures curable by the payment of money, excused its nonpayment.
Stone Brewing's force majeure provision stated, "If either Party is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire . . . or any cause outside the reasonable control of that Party, then the time for performance of the affected obligations of the Party shall be extended."14 Interpreting this provision strictly, the court held that when a commercial tenant's contractual obligation is to pay rent, it must prove the pandemic delayed, interrupted, or prevented its payment of rent in order to be excused.15 Stone Brewing, however, failed to prove that critical element of causation. The mere fact that Stone Brewing was generating less revenue did not render its performance impossible or impracticable, and the force majeure event therefore did not impair its ability to pay rent.16 Because Stone Brewing maintained the ability to pay rent, and simply chose not to, there was no evidence that the force majeure event prevented it from fulfilling its contractual obligations.17 Following this reasoning, it appears that if a tenant can offer uncontroverted evidence that the pandemic and related government orders made paying rent impossible or impracticable, then certain force majeure provisions may excuse nonpayment.18
Following SVAP III, California's appellate and trial courts have consistently granted landlords' motions for summary judgment for breach of contract claims when commercial tenants failed to pay rent and sought to leverage COVID-19 restrictions in their defenses.19 In these cases, which often mirrored SVAP III, courts codified three general principles for COVID-19 commercial lease disputes:
- The government's shutdown orders did not made it impossible or impracticable for tenants to fulfill their obligation to pay rent.
- Temporary closures did not constitute a frustration of purpose sufficient to excuse nonpayment when the value of the lease as a whole had not been completely destroyed.
- Force majeure provisions are lease-specific and will be strictly applied according to their terms.
In short, after four years of litigation, the legal landscape concerning COVID-19 nonpayment of rent appears to have settled, and California courts have consistently ruled in favor of landlords. However, in light of the aforementioned principles developed in response to the COVID-19 pandemic, both landlords and tenants should pay particular attention to the force majeure language in any new, renewed, or renegotiated leases to give themselves the best protection under similar circumstances in the future.
Summer Associate Lisa Younes provided invaluable assistance in preparing this client alert.
Footnotes
1 https://www.gov.ca.gov/wp-content/uploads/2020/03/3.19.20-attested-EO-N-33-20-COVID-19-HEALTH-ORDER.pdf
2 https://covid19.lacounty.gov/wp-content/uploads/HOO_Safer-at-Home-Order-for-Control-of-COVID_04102020.pdf
3 SVAP III Poway Crossings, LLC v. Fitness Int'l, LLC ("SVAP III"), 87 Cal. App. 5th 882 (2023).
4 Id. at 894.
5 Id. at 893.
6 Id.
7 Id.
8 Id. at 895.
9 Id.
10 Id.
11 Id. at 893.
12 West Pueblo Partners, LLC v. Stone Brewing Co., LLC, 90 Cal. App. 5th 1179, 1183 (2023).
13 Id. at 1184.
14 Id. at 1182.
15 See Id. at 1184.
16 Id. at 1188.
17 Id. at 1190.
18 See Id.
19 See e.g. KB Salt Lake III, LLC v. Fitness Int'l, LLC, 95 Cal. App. 5th 1032 (2023); Gateway Pointe, LLC v. Fitness Intern., LLC, No. 22STCV26260, 2024 WL 1289639 (Cal.Super. Feb. 06, 2024); De Pacific 233, LLC v. Boesch, Jr., No. 22SMCV00438, 2023 WL 9002635 (Cal.Super. June 29, 2023); 7906 Santa Monica, LLC v. Lagree Underground, Inc., No. 21STCV11626, 2023 WL 9510612 (Cal.Super. May 01, 2023); West Casitas, LLC v. Swing House Stages, Inc., No. 21STCV37974, 2023 WL 9422308 (Cal.Super. Dec. 05, 2023); Fitness Intern., LLC v. Palo Woods LLC, No. 21LBCV00083, 2023 WL 7036652 (Cal.Super. Aug. 15, 2023); American Commercial Equities Two, LLC v. Reed Capital Group, LLC, No. 23SMCV00505, 2024 WL 752762 (Cal.Super. Jan. 19, 2024).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.