California Outlook: Key Questions About Commercial Leases During the COVID-19 Outbreak and Government Lockdown
Government lockdowns in response to the COVID-19 outbreak have had a significant economic impact. The impact on commercial leases has been profound. State, county and city governments have issued rules closing or restricting “non-essential” business and/or limiting the number of customers at a single location.
Office tenants, many of whom invested in stylish, imaginative and captivating spaces, are paying high rents on empty boxes in the sky. Stores and companies which rely on consumer traffic are unable to operate their businesses, or are facing significant declines in revenue. Government aid only goes so far and may not be available in the future. Some tenants are unable or unwilling to pay the rent on arguably unusable space and contend that their obligation should be excused. As a result, commercial landlords and tenants find themselves facing off over who should bear the loss.
Does a Force Majeure Clause Apply to a Commercial Lease? Many commercial leases contain a “force majeure clause,” which is a contractual provision that excuses performance due to an unexpected event beyond the control of the parties. A force majeure clause, if properly written, might excuse performance by both tenants and/or landlords. Adding to the complication, some leases may have different force majeure clauses for different events. Tenants and landlords should have their force majeure clauses reviewed in order to assess any potential claim, defense or risk.
What is the Doctrine of Frustration of Purpose? “Frustration of Purpose,” also called “Impossibility of Performance,” is a defense to an action for breach of contract. The Restatement Second of Contracts, Discharge by Supervening Frustration, Section 265, states that:
“Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.”
Frustration of purpose applies not just in cases of physical impossibility, but also in cases of extreme impracticality of performance. Performance is possible, but the value of performance has been destroyed by a chance event, which supervenes to cause an actual but not literal failure of consideration.
Can the Doctrine of Frustration of Purpose Be Temporary in Nature? Temporary frustration of purpose, also called “temporary impossibility,” suspends performance while the temporary condition exists. The Restatement Second of Contracts, Section 269, states that:
“Impracticability of performance or frustration of purpose that is only temporary suspends the obligor’s duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.”
Thus, if the delay becomes so lengthy, such that the delayed performance becomes materially more burdensome, then the “temporary” frustration or impossibility may become permanent.
What Damages Are Available for Breach of a Commercial Lease? Generally speaking, in California, Civil Code section 1951.2 grafts “loss of bargain” damages onto real property law.
The landlord can recover the following four categories of damages:
unpaid rent which had been earned up to the time of termination of the lease;
unpaid rent accruing between the termination of the lease and the time for judgment;
unpaid rent which accrues after the judgment until the term of the lease expires, which the landlord could reasonably secure for that time period; and
all detriment otherwise caused by the breach, for example, real estate commissions, repairs, clean-up and other expenses.
Item three, above, is the one which the landlord and tenant dispute when there is no new tenant. Under California law, the landlord must act to mitigate its losses, including taking reasonable action to find a new tenant. Moreover, the old tenant may introduce evidence showing that the landlord did not act reasonably and expeditiously to mitigate damages.
Conclusion: Collection of debt for commercial space during COVID-19 is an unfolding area of business law. Trial courts are just starting to litigate these issues, and the defense of frustration of purpose will be tested in new ways. There is too much at stake for either the tenant or landlord to move forward without the assistance of a highly-skilled attorney.
Nathan Wirtschafter, Esq. is a California business trial attorney. His law practice encompasses a broad range of business matters, including business litigation and business collection. The firm represents clients in state and federal courts, arbitration and mediation. He can be reached at (818) 660-2518 and firstname.lastname@example.org.
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The COVID-19 lockdowns have had a profound impact on commercial leases.
Landlords and tenants find themselves facing off over who should bear the loss for commercial space which is arguably unusuable.
A force majuere clause may excuse performance by either the landlord or the tenant. Also, the doctrine of "frustration of purpose," also known as "impossibility" may act as a defense to an action for breach of lease.
This is an emerging area of the law, where tenants and landlords need smart advice.