COVID-19 tested legal theories and complexities that were previously known, but hardly ever applied in reality. One perfect example of such a complexity is within contract law, specifically the Force Majeure clause often found in commercial lease agreements. Commercial tenants are all too familiar with the Force Majeure clause in their leases as it can provide a defense for tenants in the event they could not effectively perform, the duties under the lease, such as paying rent. Prior to COVID-19, when an attorney disused “Force Majeure” the typical example to come to mind was an act of God, war, or some cataclysmic natural event for which neither party could have anticipated or prevented. However, since COVID-19, some tenants have attempted to assert Force Majeure as a defense to their inability to pay rent. One would think then that tenants could claim COVID-19 as a defense to paying rent however some courts in California disagreed.
In the matter of West Pueblo Partners, LLC v. Stone Brewing Co. (2023) 90 Cal.App.5th 1179, commercial tenant, Stone Brewing Co. (“Stone”) began leasing a commercial property located in downtown Napa in January 2018 from landlords, West Pueblo Partners, LLC (“West Pueblo”). Stone was a large beer brewing and retail corporation with brewpubs throughout the area. The lease agreement between the parties included a Force Majeure clause which stated:
“FORCE MAJEURE. 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, act of God, governmental act or failure to act, labor dispute, unavailability of materials 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 for a period equivalent to the period of such delay, interruption or prevention.”
Once the COVID-19 pandemic emerged in the United States in early 2020, the state and local governments imposed restrictions on restaurants and businesses. From March 2020 to May 2020, Stone could not offer any on-premises dining. From July 2020 to September 2020, it could not offer indoor dining. From September 2020 to October 2020, it could only offer 25% capacity for indoor dining. Capacity was briefly expanded to 50% until mid-November before indoor dining was prohibited until mid December and all on-premises dining was banned until late January 2021. Those restrictions were slightly lifted to only prohibit indoor dining until March 2021.
Stone withheld rent payments for the months of December 2020, January 2021, February 2021, and March 2021 citing the Force Majeure clause in their lease. Their basis for which was the “devastating” affect the restrictions had on its operating profits; laying off a vast majority of their staff in order to minimize financial losses; and operating the business on a skeleton crew only. West Pueblo initiated an unlawful detainer action on April 6, 2021.
Both parties filed summary judgment motions against the either. West Pueblo argued that Stone’s force majeure defense failed as a matter of law because the government’s restrictions did not “delay, interrupt, or prevent” Stone from paying its rent. Stone conceded this fact in discovery responses that it had the ability to pay rent. The trial court granted West Pueblo’s summary judgment motion and entered judgment against Stone. Stone appealed and the Court of Appeals affirmed the trial court’s decision.
The Court of Appeals held there was no argument that COVID-19 was a “Force Majeure event,” however the question remained whether Stone’s performance of its obligation to pay rent was “delayed, interrupted, or prevented” as a result of COVID-19 and the resulting restrictions. Stone admitted in discovery that although the brewpub operated at a loss, it was able to and had the financial resources to pay rent to West Pueblo for the subject months, and further admitted to generating a profit in January and February 2021. The Court relied on a 1960 Court of Appeal decision, Butler v. Nepple (1960) 54 Cal.2d 589, 599 which held, where a contract contains a force majeure provision, the “mere increased in expense does not excuse the performance unless there exists ‘extreme and unreasonable difficulty, expense, injury, or loss involved.’” In order for the Force Majeure clause to apply, the Court held, Stone’s ability to pay rent must have been “delayed, interrupted, or prevented by COVID-19 because timely performance would have been either impossible or was made impracticable due to extreme and unreasonable difficulty.” Here, per Stone’s admission, there was no such impossibility or impracticability, thus the Force Majeure clause was not a defense to its failure to perform its obligation to pay rent.
A Fourth District Court of Appeal decision, SVAP III Poway Crossings, LLC v. Fitness International, LLC (2023) 87 Cal.App.5th 882, came to a similar holding. In SVAP, the fitness center tenant was unable to operate intermittently due to the COVID-19 closures and argued, in response to its landlord’s summary judgment motion, that the Force Majeure provision in its lease temporarily excused its obligation to pay rent. However, the Court of Appeal affirmed the trial court’s judgment in favor of the landlord holding that there was no evidence that the “pandemic and resulting government orders hindered Fitness’s ability to pay rent.” It further held that “Nothing about the pandemic or resulting closures orders has made Fitness’s performance of its obligations to SVAP – paying rent – impossible.”
Based on these two Court of Appeal decisions, it is evident that although COVID-19 would undoubtedly qualify as a Force Majeure event, the application of the Force Majeure clause turns on whether the event affected the tenant’s ability to perform under the lease – i.e. paying rent – to the point that it was completely unable to pay rent, not simply chose not to.