Is Commercial Rent Excused Due to Covid-19 and Governmental Orders?
In the recent decision in SVAP III Poway Crossing, LLC v. Fitness International, LLC, the appellate court consideredDefendant Fitness International, LLC's (Fitness) appeal from a judgment entered in favor of plaintiff SVAP III Poway Crossings, LLC (SVAP) on SVAP’s breach of contract claim for Fitness’s non-payment of rent under the parties’ lease.
Fitness contended that the trial court erred in granting summary judgment because its obligation to pay rent was excused due to the COVID-19 pandemic and resulting government orders prohibiting it from operating its fitness facility for several months.
Specifically, Fitness contended that the court should have found that the obligation to pay rent was excused based on:
(1) SVAP’s own material breach of the lease;
(2) the force majeure provision in the lease;
(3) Civil Code section 1511;
(4) the doctrines of impossibility and impracticability; and
(5) the doctrine of frustration of purpose.
The appellate court concluded that these contentions lack merit and it affirmed the judgment in favor of SVAP.
SVAP is the owner and landlord of the building commonly known as the Poway Shopping Center.
Fitness is a California limited liability company renting certain space in the shopping center pursuant to a retail lease between the parties.
The lease provides Fitness the right to occupy the premises for a period of fifteen years, subject to three five-year renewals. The parties later extended the initial term of the lease to October 31, 2025.
In March 2020, California Governor Gavin Newsom proclaimed a State of Emergency in California due to the threat of COVID-19.
Soon after, he issued an executive order placing limitations on residential and commercial evictions for non-payment of rent. The order also stated, however, that it did not relieve a tenant of the obligation to pay rent, nor restrict a landlord’s ability to recover rent due.
Governor Newsom also issued an executive order directing all California residents to follow the State public health directive to stay home or at their place of residence, with certain exceptions, and directing all non-essential businesses to immediately cease operating to prevent further spread of COVID-19.
Gyms and fitness centers were included in the category of non-essential businesses.
Because the government orders made it temporarily illegal for Fitness to operate its health club and fitness center at the premises, it ceased doing so in March 2020.
Fitness was intermittently unable to operate its health club and fitness facility for certain periods from March 2020 through March 2021 due to government closure orders.
In May 2020, SVAP sued Fitness for breach of contract based on defendant’s non-payment of rent.
The complaint alleged that Fitness had defaulted on its obligations pursuant to the lease by failing to pay rent for April and May 2020, Fitness remained in occupancy of the premises, and SVAP had not terminated the lease.
SVAP further alleged that it had performed or was excused from performing all its obligations under the lease.
The complaint sought damages from Fitness for the outstanding rent payments, late payment service charges, interest, and attorneys’ fees and costs. SVAP attached the parties’ lease and its three amendments to the complaint.
Fitness alleged that the essential purpose of the lease was for Fitness to operate a full-service health club and fitness facility in the premises, but it was impossible for Fitness to do so for several months because of the COVID-19 pandemic and resulting closure of the premises in response to government orders.
According to the cross-complaint, Fitness’s 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.
Fitness also alleged that SVAP breached the contract by failing to provide Fitness a credit for rent paid, failing to comply with the lease’s provisions regarding rent abatement, and violating various other representations, warranties, and covenants by SVAP to Fitness in the lease.
The cross-complaint further alleged that SVAP acted in bad faith by demanding payment under the lease and filing its lawsuit against Fitness. Fitness sought a judgment declaring, among other things, that it was not required to pay rent for the closure periods.
It also sought specific performance of the lease’s rent abatement provisions and the enforcement of certain promises alleged to have been made by SVAP filed a motion for summary judgment seeking judgment in its favor on its breach of contract claim and dismissing Fitness’s cross-complaint.
SVAP contended that it was undisputed that the parties had entered into the retail lease, Fitness had withheld more than eight months’ worth of rent, and its failure to pay was not due to lack of funds.
SVAP argued that this failure to pay constituted a breach of the lease, the lease (including its force majeure provision) allocated the risk associated with the pandemic to Fitness and precluded Fitness’s asserted defenses, and none of the other statutes or doctrines invoked by Fitness excused the breach.
Fitness opposed summary judgment, arguing that because its business operations were restricted intermittently during the pandemic, its obligation to pay rent was temporarily excused under Section 1511, the force majeure provision of the lease, and the equitable doctrines of impossibility, impracticability, and frustration of purpose.
Fitness further argued that SVAP had materially breached the lease because during the closure periods: (1) Fitness did not have the right to use the premises as a health club or to quietly enjoy the premises without interruption and disturbance as warranted by SVAP; and (2) SVAP failed to abate rent as required.
The trial court disagreed with Fitness and granted SVAP’s summary judgment motion.
There is no dispute SVAP has established the following elements for its breach of contract claim based on Fitness’s non-payment of rent: (1) the existence of a valid and binding contract between the parties for the lease of retail premises; (2) SVAP permitted Fitness to occupy the premises for the term of the lease; (3) beginning in April 2020, after the start of the pandemic and resulting closure orders, Fitness intermittently failed to pay rent to SVAP for several months; and (4) as of October 2021, Fitness owed $520,361.29 to SVAP in unpaid rent.
The crux of the parties’ dispute on appeal is whether Fitness’s obligation to pay rent during the closure periods was excused.
Section 1.9, of the Lease, on which Fitness relied, is titled “Initial Uses” and provides that the initial uses of the premises “shall be for the operation of a health club and fitness facility.”
Section 1.9 also provides that Fitness “shall have the right throughout the Term and all Option Terms to operate for uses permitted under this Lease.” Fitness repeatedly asserts that this means SVAP “guaranteed” it the right to operate, free from government interference, a fitness facility at the premises throughout the term of the lease.
The parties’ inclusion of Section 2.2—which required SVAP to guarantee that, “as of the Effective Date, Tenant’s Initial Uses of the Premises will not violate any applicable rule, regulation, requirement or other law of any governmental agency, body or subdivision thereof applicable as of the date hereof”—would be rendered meaningless if Section 1.9 were read to require SVAP to make that guarantee throughout the term of the lease.
Instead, the reasonable interpretation of Section 1.9 is that SVAP merely agreed not to restrict Fitness from using the premises in any way permitted under the lease.
Section 8.2 supports this interpretation, as it specifically allows Fitness to “change the use of the Premises to any alternate lawful retail use” not otherwise prohibited by the lease or certain other restrictions.
This language further underscores that SVAP’s obligation under the contract was not to ensure Fitness’s ability to operate a health club and fitness facility for the entire duration of the lease term, but rather to provide Fitness with possession of the premises in exchange for its payment of rent to SVAP.
Fitness did not dispute that SVAP has provided possession of the premises throughout the lease term, nor does Fitness argue that SVAP—as opposed to the government—has restricted its use of the premises in any way. Therefore SVAP fulfilled its obligations and did not breach the lease.
Fitness contended that its performance is excused because the government closure orders resulting from the COVID-19 pandemic constitute a force majeure event under the lease.
The closure orders were “restrictive laws,” but the laws did not delayed, hindered, or prevented Fitness from performing under the contract. First, the lease does not require SVAP to guarantee Fitness the unlimited right to use the premises as a health club and fitness facility even when prohibited by law. Rather, the obligation owed by SVAP was the delivery of the premises to Fitness. SVAP fulfilled that obligation.
Second, the trial court properly concluded that the obligation owed by Fitness was the payment of rent. There is no evidence or argument before us that the pandemic and resulting government orders hindered Fitness’s ability to pay rent. Even if they had, the lease explicitly excludes from the definition of force majeure event any “failures to perform resulting from lack of funds or which can be cured by the payment of money.”
Fitness’s claims of impossibility and impracticability were similarly unpersuasive. Impossibility is defined as not only strict impossibility but also impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.
A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost. The defense of impossibility may apply where, as here, a government order makes it unlawful for a party to perform its contractual obligations.
Fitness contended that the defense of impossibility applied here because the government closure orders made it illegal for it to operate its fitness facility.
But, Fitness’s obligation under the lease was to pay rent, not to operate a fitness facility. The government closure orders did not make it illegal for Fitness to pay rent. In fact, one of the orders explicitly stated that it did not relieve a tenant of the obligation to pay rent.
Fitness also contended that Civil Code sections 1511(1) and 1511(2) excuse its obligation to pay rent during the closure periods.
Section 1511(1) provides that a party’s performance of its contractual obligation is excused where the operation of law prevents or delays the performance. Section 1511(1) does not excuse Fitness’s performance because the pandemic and resulting government orders did not prevent Fitness from performing its contractual obligation to pay rent.
Indeed, one of the orders explicitly stated that commercial tenants (such as Fitness) remained obligated to pay their rent despite a moratorium on commercial tenant evictions. Section 1511(1) therefore does not excuse Fitness’s payment of rent.
Section 1511(2) similarly was no support to Fitness. It excuses performance only where prevented or delayed by an “irresistible, superhuman cause” and the parties have not “expressly agreed to the contrary.”
The irresistible, superhuman cause identified by Fitness here is the COVID-19 pandemic. Again, however, the pandemic did not prevent Fitness from performing its contractual obligation to pay rent.
Moreover, the parties had “expressly agreed to the contrary” by including a force majeure provision in their contract stating that any failure to perform that could be cured by the payment of money would not constitute a force majeure event.
Finally, Fitness contended that its obligation to pay rent was excused under the doctrine of temporary frustration of purpose because the value of the lease was destroyed by the government orders during the closure periods.
The doctrine of frustration excuses contractual obligations where performance remains entirely possible, but 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.
A party seeking to escape the obligations of its lease under the doctrine of frustration must show: (1) the purpose of the contract that has been frustrated was contemplated by both parties in entering the contract; (2) the risk of the event was not reasonably foreseeable and the party claiming frustration did not assume the risk under the contract; and (3) the value of counter-performance is totally or nearly totally destroyed.
Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.
The lease only required Fitness to operate a fitness facility for one day and permitted other uses thereafter.
It is also clear from the parties’ actions and argument that neither considered the contract to terminate as a result of the orders. On the contrary, Fitness continued to occupy the premises throughout the closure periods and did not attempt to rescind the lease. It therefore remains obligated to pay rent while in possession of the premises.
Liability under the lease continues as long as the lessee continues in possession.
LESSONS:
1. Impossibility is defined as not only strict impossibility but also impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.
2. A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.
3. Civil Code section 1511(1) provides that a party’s performance of its contractual obligation is excused where the operation of law prevents or delays the performance. Section 1511(1) does not excuse Fitness’s performance because the pandemic and resulting government orders did not prevent Fitness from performing its contractual obligation to pay rent.
4. The doctrine of frustration excuses contractual obligations where performance remains entirely possible, but 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.
5. Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.