Covid-19 Pandemic And Related Closures Do Not Excuse Commercial Tenant’s Failure To Pay Rent
This post was primarily authored by Zachary B. Young, a “Rising Star” for four years running who was recently elevated to Partner at Patton Sullivan Brodehl LLP.
One of the questions in real estate law arising out of the pandemic is what impact the pandemic and related closure orders would have on commercial leases, and in particular a tenant’s obligation to pay rent. Many, if not most, commercial leases contain some version of a “force majeure” clause. In gist, a force majeure clause excuses a party from performing certain obligations under a lease when it cannot meet those obligations as a result of natural disaster (also referred to as “act of God”) or governmental actions.
In a case recently published by California’s First District Court of Appeal — West Pueblo Partners, LLC v. Stone Brewing Co., LLC (publication order here)– the Court ruled that a commercial tenant was not excused from paying rent as a result of the Covid-19 pandemic and related closure orders, despite those events qualifying as force majeure events.
Facts of West Pueblo Partners, LLC v. Stone Brewing Co., LLC
West Pueblo Partners (landlord) and Stone Brewing Co. (tenant) entered into an agreement in 2016 for Stone Brewing Co. to lease a building in downtown Napa, California for twenty years. Stone Brewing Co. is a large beer brewing and retail corporation that operates restaurants known as “brewpubs,” among other things. Stone Brewing Co.’s intent in renting the Napa building was to operate one of these brewpubs and did so beginning in 2018.
Beginning in early 2020, California and local governments imposed severe restrictions on Napa restaurants which caused Stone Brewing Co. to modify or cease its operations at the Napa location to varying degrees over the course of the next couple of years. As many businesses experienced, Stone Brewing Co. reported that the closures were “devastating” to its operating profits at the Napa location. The company laid off many of its employees during this time period and eventually stopped paying rent for a period of four months. When West Pueblo Partners demanded payment, Stone Brewing Co. refused, leading to West Pueblo Partners filing suit.
During this time, although Stone Brewing Co. operated at a loss at the Napa location, the company as a whole (a much larger operation) admitted that it had the ability to pay rent. Moreover, the company as a whole admitted that it actually turned a profit during two of the four months that it refused to pay rent at the Napa location.
During litigation, Stone Brewing Co. defended its refusal to pay rent by pointing to the lease’s force majeure provision, which 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, act of God, or governmental act or failure to act, [etc.] . . . 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.”
The trial court disagreed with Stone Brewing Co. and concluded that although the pandemic and related shutdowns constituted a force majeure event, Stone Brewing Co. was not excused from its rent obligations.
Stone Brewing Co. appealed.
Court of Appeal: affirmed; force majeure provision did not excuse Stone Brewing Co.’s rent payments
The Court of Appeal agreed entirely with the trial court’s conclusion, analysis, and rationale. The Covid-19 pandemic and related closures did constitute a force majeure event; however, Stone Brewing Co. was not “delayed, interrupted, or prevented” from paying rent. In fact, Stone Brewing Co. admitted that it was able and had the funds necessary to meet its rent obligations. It simply chose not to.
The Court explained that a tenant cannot be excused from meeting its rent obligations simply because profits waned, or it might be financially difficult to pay rent. In contrasting various hypotheticals and other case law, the Court explained that there may be situations where a force majeure event makes it impossible for a tenant to pay rent. For example, mail delivery may be delayed or a business may reach a point of such extreme financial difficulty that there simply are no funds whatsoever to pay rent. However, neither was the case here. Stated simply, “[g]overnmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.”
Lessons
The Covid-19 pandemic has taught many lessons. Pertinent here, it has forced attorneys and courts to shape the bounds of excused contractual obligations based on the doctrines of impossibility, impracticability, and force majeure clauses.
Commercial landlords will be pleased with the outcome of cases like West Pueblo which shift some of the financial burden in the face of natural disasters and governmental actions affecting their tenants’ businesses. Meanwhile, tenants need to understand that mere financial burden caused by force majeure events is probably insufficient to excuse their contractual obligations, including paying rent.