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Court Rejects Commercial Tenant’s Argument for Relief From Rent Due to “Temporary Frustration of Purpose” During Pandemic | Money and Dirt

California real estate and deed of trust disputes | courtroom war stories and lessons learned

Court Rejects Commercial Tenant’s Argument for Relief From Rent Due to “Temporary Frustration of Purpose” During Pandemic

Earlier this year, Money and Dirt covered a then recent case, West Pueblo Partners, LLC v. Stone Brewing Co., LLC, which was one of the first California cases dealing with the aftermath of the Covid-19 pandemic and the legal issues arising therefrom between commercial landlords and tenants.  In the first of what’s becoming a pattern of pro-landlord cases, the court in West Pueblo Partners, LLC, held that the commercial tenant was not excused from paying rent as a result of the pandemic and related closure orders, despite those events qualifying as force majeure events under the lease at issue (i.e. natural disasters or “acts of God”).

In a recent follow-up case called Fitness International, LLC v. KB Salt Lake III, LLC, which cites to and builds upon West Pueblo Partners, LLC, the court grappled with a new, creative argument from a tenant seeking relief from unpaid rent obligations during the pandemic.  The tenant argued in favor of expanding the long-standing “frustration of purpose” doctrine to include “temporary frustration of purpose,” such that a tenant could be excused from paying rent under a lease during a temporary time period where the property could not be used for its intended purpose.  Ultimately, the Court agreed with the landlord and held the tenant was not excused from paying rent during the pandemic, even for a temporary time period.

Facts of Fitness International, LLC v. KB Salt Lake III, LLC

Fitness International, LLC (tenant) operated an indoor gym and fitness center in Los Angeles in 2016 when it entered into an amended lease with KB Salt Lake III, LLC (landlord).  The amended lease required Fitness International to renovate the premises, which would necessitate closing the gym while still requiring Fitness International to pay rent during the renovation process.  Construction began in November 2019 and was expected to be completed in August 2020; however, in March 2020 the government ordered indoor gyms to close due to the pandemic (but allowed commercial construction to continue).

Once the government shut-down orders were passed, Fitness International stopped construction and stopped paying rent, but remained in possession of the property.  After giving the proper notice, KB Salt filed an unlawful detainer action due to Fitness International’s failure to pay rent.

At the trial court level, Fitness International argued that it was excused from paying rent under the doctrines of impossibility and frustration of purpose because the pandemic and related closure orders constituted force majeure events under the lease (similar to the arguments raised in West Pueblo Partners).  However, the trial court disagreed and granted summary judgment in KB Salt’s favor.

Fitness International appealed.

Court of Appeal: affirmed; Fitness International Not Excused From Paying Rent

On appeal, the appellate court agreed with the trial court’s conclusions.

Citing to the West Pueblo case, the Court explained that the doctrine of impossibility offered no relief because the pandemic did not make it impossible for the tenant to pay rent.  The fact that Fitness International may have been operating at a loss or may have been financially burdened did not create an impossibility.  Instead, there was evidence that Fitness International had the ability to pay.  It simply chose not to.

Next, addressing the frustration of purpose doctrine, the Court acknowledged that the doctrine could excuse contractual obligations where performance remains entirely possible if the “whole value of the performance to one of the parties at least, and the basic reason recognized as such by both parties, for entering into the contract has been destroyed by a supervening and unforeseen event.”

The Court explained that the frustration of purpose doctrine offered no relief to Fitness International because there was no indication that the pandemic closure orders had destroyed the whole value of the lease as to Fitness International.  Moreover, Fitness International never surrendered the premises, which is a requirement for relief from rent obligations.

Fitness International’s last argument was that even if the whole value of the lease had not been destroyed, the Court should recognize “temporary” frustration of purpose and provide relief for rent obligations during the limited time period that the closure orders prevented the gym from opening.  The Court rejected this argument for at least two reasons.  First, the Court explained that California law has never recognized the idea of temporary frustration of purpose and some cases have suggested it does not exist.  Second, even if temporary frustration of purpose existed as a defense, here Fitness International could not show there was even a temporary frustration of purpose because the lease required Fitness International to complete the renovation project before it could reopen and Fitness International chose not to continue construction during the pandemic even though it had the opportunity to do so.

Lessons

The initial commercial landlord-tenant case law arising out of the pandemic seems to favor landlords.  Cases like West Pueblo and Fitness International shift some of the financial burden of natural disasters and governmental actions affecting the tenants’ businesses.  Meanwhile, the combination of these two cases teaches tenants that the financial burden caused by force majeure events like the pandemic are likely insufficient to excuse tenants from their contractual obligations, including paying rent.  These cases acknowledge limited scenarios where a tenant might be excused from paying rent, such as a situation where the financial burden of a force majeure event is such that a tenant simply has no funds to pay rent; however, those scenarios are limited and appear to be more the exception than the rule.