Updated on April 5, 2024
Here, we follow a commercial breach of lease case during COVID where the landlord was successful against a tenant who failed to pay rent. We briefly summarize why the court decided that despite COVID lockdowns hampering the ability for the tenant to open and fully function as a business, the tenant was still responsible for missed rent payments.
A Commercial Landlord/Tenant Case Involving Issues Relating to Breach of the Lease During COVID
The Court of Appeals recently decided a very interesting commercial landlord/tenant matter in the case of SVAP III Poway Crossings LLC vs. Fitness International LLC. (Super. Ct. No. 37-2020-00016039-CU-BC-CTL) This case involved SVAP III Poway Crossings, LLC (“SVAP”), the owner and landlord of the Poway Shopping Center, and Fitness International LLC (“Fitness”), a company that was renting space in the shopping center pursuant to a lease agreement.
In SVAP III Poway Crossings LLC , Fitness appealed a judgment in favor of SVAP and against Fitness for non-payment of rent during COVID. Fitness argued that the obligation to pay rent should be excused for several reasons including (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.
In the end, the court of appeal ruled in favor of SVAP and found that all of Fitness’ arguments as to why payment of rent should be excused lacked merit. The reasoning of the court is explored in more depth below.
Fitness argued that during the COVID pandemic, when California was in a State of Emergency and non-essential businesses were ordered closed by the government, SVAP breached the lease by not allowing Fitness to operate its health and fitness facility. The court of appeals, however, found that SVAP was only required to allow the operation of a health club and fitness facility as an initial use – it was not bound to keep the facility open for the entirety of the lease. Accordingly, SVAP did not breach the lease agreement.
Next, Fitness argued that the government closure orders were a force majeure (act of god) event under the lease thereby excusing Fitness’ performance. The court found that the force majeure clause only applied to situations where a party was prevented from performing. In this case, the court reasoned that nothing prevented Fitness from making rent payments.
Next, Fitness argued that Civil Code section 1511(1) excused Fitness’ performance by operation of law because of the government regulations and forced shut downs during covid. Fitness argued as discussed above that, the government orders were an operation of law that prevented Fitness from using the premises and thus excused Fitness from paying rent. The court rejected this argument and found that neither the pandemic nor the government orders prevented Fitness from paying rent.
Fitness also argued that the government’s forced shutdowns translated into a defense of impossibility. The court again stated that Fitness’s obligation was to pay rent and the government order did not make it illegal for Fitness to pay rent. The court further stated that case law regarding impossibility refers to impossibility of performance – here the only performance that was required of Fitness was to pay rent.
Lastly, Fitness argued the doctrine of frustration of purpose, arguing that the value of the lease was destroyed by the government closure orders. The court rejected this argument reasoning that since the lease was for years, closure orders preventing operation of a fitness facility for months did not destroy the value of the lease.
With nationwide closures ending a long time ago the cases that were litigated are finally making their way out of the cost of appeals. As a result, we are getting greater clarify on what essentially amounts to a lack of Covid based defenses for commercial tenants.
While there were plenty of measures designed to protect tenants – like PPP loans, in the end there appears to have been little room under traditional law for tenants to defeat their rental obligations. That said, every jurisdiction is different and there may be additional ways to discount claimed rental losses.
The attorneys at Schorr Law are well prepared to represent both small businesses and commercial enterprises. Contact us today to find out if you qualify for a free 30-minute consultation. You can call us at 310-954-1877, text us at (310) 706-2265, or fill our contact form.