What is a Force Majeure Provision in a California Lease?
In the recent decision in West Pueblo Partners, LLC v. Stone Brewing Co., LLC, the appellate court reviewed the force majeure provision in the commercial lease between them.
After the commercial tenant, Stone Brewing Co., LLC (Stone), did not pay rent for several months during the pandemic, the landlord, West Pueblo Partners, LLC (West Pueblo), sued for unlawful detainer.
Stone argued it was excused from paying rent because COVID-19 regulations and business interruptions triggered a force majeure provision found in its lease.
The trial court disagreed and granted West Pueblo’s motion for summary judgment.
The trial court found that the force majeure provision only excused performance if the claiming party was unable to meet its obligations due to factors outside its control; but, because the tenant admitted during discovery it had the financial resources to pay rent during the period of the COVID-19 regulations but simply refused to do so, it could not invoke the force majeure provision.
The appellate court affirmed the judgment. The trial court correctly interpreted the force majeure provision not to apply where the tenant had the ability to meet its contractual obligations but chose not to perform due to financial constraints.
The landlord, West Pueblo, is a four- member limited liability company that holds a single asset: the Borreo building (the building), located in downtown Napa.
The tenant, Stone, is a large beer brewing and retail corporation that, among other things, operates restaurants known as “brewpubs.”
Beginning in 2015, Stone began negotiating a lease (the lease) with West Pueblo to use the building for one of its new brewpubs. The lease was executed in May 2016, and provided that West Pueblo would deliver the building with certain improvements and that Stone would pay a base rent of $38,000 that would increase over the lease’s 20-year term.
The lease further provided that, absent special permission, “the Premises shall be used for a full service restaurant and brewery to include the sale of malt beverages for both on and off premise consumption events as well as the sale of [Stone’s] merchandise . . . .”
Among the provisions the parties negotiated in the lease was a force majeure provision.
That provision states as follows: “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.”
Stone took possession of the building in January 2018.
When COVID- 19 emerged in early 2020, California and local governments imposed severe restrictions on Napa restaurants and businesses. From March 20, 2020, to May 18, 2020, Stone could not offer any on-premises dining. From July 8, 2020, to September 2, 2020, it could not offer indoor dining.
From September 3, 2020, to October 19, 2020, it was required to limit indoor dining to 25 percent capacity. That limitation was loosened to 50 percent from October 20, 2020, to November 15, 2020, but regulations were again tightened to prohibit indoor dining from November 17, 2020, to December 15, 2020.
From December 16, 2020, to January 24, 2021, Stone was banned from offering on- premises dining yet again. Those restrictions were then loosened to prohibit only indoor dining from January 25, 2021, to March 2, 2021.
According to Stone, these restrictions were “devastat[ing]” to its operating profits, and as a result of the forced closure, it was faced with the business decision to lay off the vast majority of its team members in order to minimize the financial losses it started to experience on day 1 of the imposed closure.
With no known endpoint, it made the decision to continue to operate the business with a skeleton crew, not only as a service to the Napa community by offering donations to first responders and hospitals, but also with the hope that it could retain a certain number of the management team through the uncertain times.
During the first year of the pandemic in 2020, Stone argued that its monthly rent payments became unsustainable based on the negative impact COVID-19 regulations had upon its business generally.
Stone initially asked West Pueblo for rent relief, and later withheld rent for June and July 2020, contending it was entitled to do so under the lease’s force majeure provision.
Stone paid full rent through November 2020, but again withheld rent for the months of December 2020, January 2021, February 2021, and March 2021 based on the force majeure provision.
Stone’s failure to pay rent for these four months—December 2020 through March 2021—gave rise to this litigation. West Pueblo ultimately issued a “Five-Day Notice to Pay Rent or Surrender Possession” on March 23, 2021.
Stone did not pay, and West Pueblo filed an unlawful detainer action against Stone on April 6, 2021.
The parties filed competing motions for summary judgment.
West Pueblo’s motion argued that Stone’s force majeure defense fails as a matter of law because the undisputed facts showed that the COVID-19 government restrictions did not delay, interrupt, or prevent Stone from paying its rent.
To the contrary, Stone conceded during litigation that it had the ability to pay rent for the building, and West Pueblo argued that a mere increase in expense or difficulty does not excuse a party’s obligation to perform under the force majeure provision.
In granting West Pueblo’s motion, the trial court held that the force majeure provision was unambiguous: “In line with [West Pueblo’s] position in the case, the court finds this plain language unambiguously means exactly what it says—that . . . the [force majeure] provision would apply to excuse Stone’s obligation only if the pandemic delayed, interrupted or prevented Stone’s payment of rent.”
Applying that interpretation of the lease, the court held that the force majeure provision did not apply because Stone always maintained the ready ability to make the rental payments and simply made a financial decision not to pay rent.
On appeal, Stone argued the trial court erred in concluding it did not create a triable issue of material fact as to whether it was excused from performing its obligation to pay rent for the December 2020 through March 2021 period at issue due an erroneous interpretation of the force majeure provision.
In Stone’s view, the COVID-19 pandemic and its associated government closures were force majeure events that excused or deferred its obligation to pay rent.
As the trial court noted, there was no dispute that the COVID-19 pandemic qualified as a force majeure event potentially implicating the force majeure provision of the lease.
The only question then, is whether Stone’s performance of its obligation to pay rent was “delayed, interrupted, or prevented” by the COVID-19 pandemic and the related closure orders.
During discovery, Stone admitted in responses to requests for admission that even though the brewpub operated at a loss, it was able to and had the financial resources to pay rent to West Pueblo for the months it withheld rent under the force majeure provision. Further, although the brewpub operated at a loss, Stone’s requests for admission responses admitted that it generated an overall profit in January and February 2021.
The California Supreme Court has held, where a contract contains a force majeure provision, the mere increase in expense does not excuse the performance unless there exists "extreme and unreasonable difficulty, expense, injury, or loss involved."
This standard derives from the doctrines of impossibility and impracticability, which are common law defenses to contract performance.
Although a force majeure provision is often included in a contract to specify which qualifying events will trigger its application, the qualifying event must have still caused a party’s timely performance under the contract to “become impossible or unreasonably expensive."
As applied here, Stone’s ability to pay rent must have been “delayed, interrupted, or prevented” by COVID-19 because timely performance would have either been impossible or was made impracticable due to extreme and unreasonable difficulty.
There is no triable issue of fact as to this issue because Stone admitted that it had the financial resources to pay rent to West Pueblo for the subject months, even though the brewpub (a small component of Stone’s overall business) was operating at a loss.
The mere fact that Stone was generating less revenue during this time period did not render its performance impossible or impracticable, and the force majeure event therefore did not impair Stone’s ability to pay its rent. Stone merely argued that the force majeure event made it more costly to do so.
Based on the plain meaning of the force majeure provision and the undisputed material facts in this case, the COVID-19 and the related closure orders did not delay, interrupt, or prevent Stone’s timely performance under the lease.
LESSONS:
1. A force majeure provision may read: 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.”
2. Although a force majeure provision is often included in a contract to specify which qualifying events will trigger its application, the qualifying event must have still caused a party’s timely performance under the contract to “become impossible or unreasonably expensive.”