The economic affects of the COVID-19 Pandemic are currently immeasurable, and will profoundly impact all of us for quite some time, even in ways that we cannot today appreciate or fully comprehend. While the Coronavirus Pandemic and Stay in Place Orders remain in affect, many, if at not all of us, will be scurrying to address short and long-term issues prompted by the Pandemic and the lengthy Stay in Place Orders.
Most, if not all businesses have been and will continue to be adversely impacted by both the Pandemic itself, as well as the Stay in Place Orders throughout the State of California. Many of you are parties to a contract or lease in which either (1) you are financially unable to perform your obligations, partially or entirety, or (2) because of the Stay in Place Order(s), you cannot either perform on the contract/lease, or reap the benefits of the contract or lease. This article will address the unique affects that the Coronavirus Pandemic and the Stay in Place Orders have on commercial leases, discuss the legal issues, and potential strategies in dealing with landlords and tenants during these stressful times. While this article is directed toward leases, many of the same principles impact dealing with commercial contracts in general.
Presently, in California, there are state and county Orders, staying or prohibiting evictions for as much as 90 days from the date of the applicable order. It is fair to say that there is a high probably that those Orders may be further extended. Many of the California courts are presently closed and are not accepting new filings. Further, for many businesses, the stay at home orders caused by the Coronavirus prevent commercial business from using or even accessing their businesses, which raises the question as to what impact the Stay in Place Orders may have on a commercial tenant’s duty to pay rent while the Stay in Place Orders are effective. Those tenants that cannot access their business, are unable to produce revenue sufficient to enable them to pay their rent (and other obligations) and are unable to reap the benefits of the lease.
From the landlord’s perspective, until the evictions’ moratoriums expire or are repealed, even if they wanted to remove a tenant for non-payment, they are unable to do so. And even if they could evict an existing tenant, it might be wise to reconsider evictions as a strategy except in certain narrow circumstances. If a commercial landlord has a tenant who historically has been a reliable tenant, but is now unable to pay because the Stay in Place Order temporarily prevents the tenant from operating their business, the landlord may not want to evict that tenant, even if they could.
Similarly, without question, after the Stay in Place Orders are lifted, many business tenants are not going to be able to sustain the record high rents that were negotiated prior to COVID-19. Again, if a landlord has a tenant who historically has been a reliable tenant, but the tenant will require a modest to substantial rent decrease in order to sustain the tenancy and business, the landlord will be wise to consider the concession. If the tenant left or was evicted, in the current environment, who would the landlord realistically be able to bring in as new tenant, at what price, and how long will the space be empty without any incoming rent, before finding a replacement tenant? Based on present projections, it could very well be years before a new tenant is found.
There are a variety of legal principles in California which may be a basis for a California tenant to avoid or suspend the duty to pay rent. I will speak of a few of those principles in a non-exhaustive function, just to make you aware of the various doctrines. If any of these principles appear of interest to you, you will have to do some research or call me to see if they might apply to your individual circumstances. All of these doctrines are going to turn on the specific facts in a case.
Force Majeure
Many commercial leases and contracts have force majeure provisions, which state that if there are certain acts of god or possibly government that impact the tenant or landlord’s duty to perform, that may be a basis either to suspend or relieve the duty to perform under the contract/lease. These provisions are typically self-defining. They may or may not be applicable to a viral pandemic and/or the Stay in Place Orders. Even if there is a force majeure provision, and even if it specifically addresses pandemics or viruses, there are still going to be important questions that need to be answered, such as whether there is causation between the virus/pandemic and a tenant’s inability to perform on the contract/lease, and other disputes as to whether a viral pandemic or county or state order to stay at home would trigger the remedies set forth in the force majeure provision.
Frustration of Purpose
Under the doctrine of frustration of purpose, if an unforeseen event frustrates the very purpose of the lease (or contract) for both parties, it may terminate or possibly suspend that parties’ duties to perform under the lease or contract. There are cases in California that state that if a governmental action prevents a tenant from using the leased premises for its principal purpose, the duty of the tenant may be terminated.
Impossibility
Similarly, under the doctrine of impossibility, if some event causes an impossibility to perform on a contract (including a lease), including governmental intervention or a “superhuman” cause, that “impossibility” may relieve or suspend performance on that contract/lease. Like the other legal principles discussed above, there are going to be questions such as what constitutes a “superhuman” cause, whether there is a causal relationship between the Pandemic and the impossibility to perform, and similar questions regarding the Stay in Place Orders.
Practical Approaches
The coronavirus creates a truly novel set of circumstances that simply are unprecedented. The courts will be tackling all of these issues likely for years. I strongly advise all parties who are evaluating a commercial lease or contract, to first try to take a practical, pragmatic approach to resolve the problem, and only if that approach fails should you consider litigation. While the courts are available as a remedy once they re-open, because we are tackling such a unique set of circumstances and issues, in many cases it is unknown how the courts will decide these cases. This uncertainty may make a pragmatic resolution in many instances more economically efficient, particularly during the periods where access to the courts is extremely limited.
In light of the Coronavirus Pandemic and its impacts on commerce in the Bay Area, I am placing emphasis of my practice on contractual issues arising from the affects of COVID-19 in the East Bay, California in Oakland, California, in Walnut Creek, California, and throughout the Bay Area. If you have questions, please feel free to contact me to discuss your case or to arrange for a consultation. I can be reached at (510) 465-0025 or (925) 708-3306.