Is a merchant's obligation to pay rent accrued during the heart of the pandemic excused because of COVID-related government edicts and shelter-in-place orders?
In a victory for landlords, courts rule in favor of SVAP III Poway Crossings, LLC when a fitness center claimed that they could not perform their contractual duty to pay rent.
We recognize the hardship of cash-strapped businesses struggling to get cash flowing again. Despite this adversity, there is a sacrosanct obligation to pay rent.
The public policy during the pandemic policy was, of course, to stabilize residential housing and so we saw a dizzying array of eviction moratoria and tenant protections put in place during the health crisis, some of them remaining to this day. Alameda County stands out like a sore thumb.
Commercial tenants played second fiddle.
Considered to be savvier and more sophisticated than tenants in rental housing, businesses were afforded fewer safeguards. Make no mistake, there were some sad casualties as businesses shuttered.
Does anyone recall the viral, gut-wrenching video of a restaurant owner's outrage over losing everything when she was not allowed to operate her bar and grill because of LA County's dining ban? As the owner of what she calls the "Cheers of the Sherman Oaks neighborhood" for over ten years, Angela Marsden vented over her business being forced to stop serving customers.
After investing $80K in building an outdoor patio to comply with COVID-19 rules, she was still unable to use it even as a nearby movie shoot set up an outdoor dining area just a few feet from the patio.
It's hard not to have empathy for merchants like Andrea who have hemorrhaged money and have attempted to rebuild their business from the ground up. The hardships of employees do not escape us, either.
Yet the pandemic has not discriminated against tenants or landlords and so we should all be keenly aware of the hardships of commercial property owners who are owed hundreds of thousands of dollars in rent.
We understand that commercial tenants have fallen on tough times during the height of a public health crisis and government orders to shut down, but is this a free pass to stop paying rent? In SVAP III Poway Crossings, LLC v. Fitness International, LLC, the courts have said no.
While every case is different, a recent decision by California's Fourth Appellate District is instructive. Leases cannot be breached and rent debt washed away because of a public health crisis that has impacted everyone - landlords are not tasked with shouldering the burden.
Although courts have conceded that emergency orders were "restrictive" and placed an enormous burden on businesses, court decisions have emphatically stated that the terms of the contract must be fulfilled.
That is, the landlord agrees to provide the tenant the right to occupy the premises for a certain time, and in return, the tenant, among other obligations, agrees to pay rent. Paying rent is a sacrosanct duty of the renter, tough times or not.
A key point: The purpose of the contract was not for the premises to be used for a particular use.
The crux of the parties’ dispute was whether the tenant’s obligation to pay rent during the government-imposed closure period was excused. According to the tenant, its inability to use the premises as a full-service health club and fitness facility meant it was not required to pay rent during the closure periods.
The Court found the tenant’s defense of impossibility to perform its contractual obligation unpersuasive, explaining that the tenant’s obligation under the lease was to pay rent, not to operate a fitness facility. Furthermore, the government closure orders did not make it illegal for the tenant to pay rent.
In response to one of the defendant's arguments, nothing about the pandemic or resulting closure orders would make payment of rent impossible.
The tenant also tried to escape the obligation to pay rent under the doctrine of frustration of purpose, a doctrine that excuses contractual obligations where performance remains entirely possible, but the whole value of the performance for entering into the contract has been destroyed by a supervening and unforeseen event.
The court explained that even if it were to assume that the primary purpose of the lease had been to operate a health club and fitness facility, the government closure orders were only temporary and therefore did not destroy the value of the lease especially since the premises had been leased for almost two decades. The Court relied on 20th Century Lites, where an appellate court concluded that where a governmental regulation is not a permanent prohibition but merely temporary, the commercial frustration doctrine does not apply.
In layperson's terms, life happens, things go wrong, and when it does, the commercial tenant is still obligated to pay the rent.
However far-fetched it is for a fitness center to reinvent itself and use the commercial space for another purpose, this is not the landlord's problem.
Also, SVAP’s airtight commercial lease agreement that allocated the risk of government-ordered closures to the tenant also helped the commercial landlord sway the court in its favor.
First, the lease had a provision that did not require SVAP to guarantee the tenant the unlimited right to use the premises as a health club and fitness facility even when prohibited by law. This provision made it clear that SVAP’s only obligation owed by SVAP was the delivery of the premises to the tenant.
Second, the lease’s Force Majeure provision explicitly excluded from the definition of force majeure event any “failure to perform resulting from lack of funds or which can be cured by the payment of money.” This meant that the closure orders resulting from Covid-19 did not constitute a force majeure event under the lease because it did not prevent the tenant from being able to pay rent.
In parting thoughts
Although the pandemic is over, landlords are still dealing with residue in the form of continued or increased tenant protections, with COVID being used as a pretext to advance the agenda of tenants' advocates.
Commercial real estate is a different creature, but the common denominator is how to deal with the mountain of rent debt accrued. This is a topical matter best approached with the proper counsel of Bornstein Law.
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