Force Majeure Provision in a Lease Does Not Apply When Tenant Has Financial Ability to Pay – Covid-19

July 10, 2023by admin

Force majeure provision in a Lease Does Not Apply where a Commercial Tenant Has the “Ability” To Meet Its Contractual Obligations But Choses Not to Perform Due To “Financial Constraints” Caused By Covid-19 And Government Regulations

Force Majuere Provision Does Not Apply When Tenant has the Financial Ability to Pay Covid-19

In West Pueblo Partners, LLC v. Stone Brewing Co., LLC, WL 3151827 (2023), the California Court of Appeals held that a force majeure provision in a commercial lease did not excuse the tenant from the payment of rent even though its business was seriously impacted by Covid-19 and government regulations limited its business operations.  The Court reasoned that force majeure provision did not apply since the tenant had the “ability to meet its contractual obligations” but chose not to perform due to “financial constraints” caused by Covid-19 and government regulations.

The facts of the case are as follows:

The landlord – West Pueblo Partners, LLC – and the tenant – Stone Brewing Co., LLC – negotiated a lease in 2015.  The tenant was a large beer brewing and retail corporation that, among other things, operates restaurants known as “brewpubs.”

Included in the lease was a force majeure provision which stated: “If either party is delayed, interrupted or prevented from performing any of its obligation 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 obligation of the party shall be extended for a period equivalent to the period of such delay, interruption or prevention.” (emphasis added). 

When the Covid-19 pandemic emerged in early 2020, Stone Brewing faced significant economic hardship, most notably limited dining capabilities imposed by government regulations, and subsequently based on the force majeure provision of the lease it withheld rent for four months – December 2020 through March 2021.  In response, West Pueblo brought an unlawful detainer action and both West Pueblo and Stone Brewing filed motions for summary judgment.

Stone Brewing provided three arguments in support of its position that the force majeure provision in the lease permitted it to excused or deferred its obligation to pay rent:

  • The broad definitions of “delayed, interrupted, or prevented” within the force majeure provision are not synonymous with “unable to pay” and, therefore, it should be excused from paying rent “because of the pandemic’s impact on its business.”
  • In similar cases, the force majeure provision applied to delays in rental payment when a force majeure event interfered with a tenant’s operations or revenue and the cases did not impose an “inability to pay standard.” 
  • Extrinsic evidence of the parties course of conduct demonstrated that both parties understood the force majeure provision to include unforeseeable events that make financial “performance [more] difficult and expensive than the parties originally contemplated.”

The Court was unpersuaded by Stone Brewing’s arguments and on October 20, 2021, granted West Pueblo’s motion for summary judgment. 

The Court declined to consider extrinsic evidence as the force majeure provision of the lease was unambiguous. 

In granting West Pueblo’s motion, the Court held that the force majeure provision was unambiguous and “would apply to excuse Stone’s obligation only if the pandemic delayed, interrupted or prevented Stone’s payment of rent.”(emphasis added).  The Court held that the provision did not apply because during discovery it was admitted that “Stone always maintained the ready ability to make the rental payments and simply made a financial decision not to pay rent.”  

To delay or refrain from paying rent due force majeure provisions of the lease and Covid-19, Stone Brewing was unable to demonstrate that “timely performance would have either been impossible or was made impracticable due to extreme and unreasonable difficulty.” The Court held that “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 argues that the force majeure event made it more costly to do so.” (emphasis added). 

The Court concluded that the Covid-19 regulations limiting Stone Brewing’s ability to conduct its business did not constitute legal grounds to be excused or delayed its obligation to pay rent under the force majeure provision in the lease.  In support of its ruling, the Court recited the holding in SVAP III Poway Crossings, LLC v. Fitness International, LLC (2023) 87 Cal.App.5th 882: “Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.”

This article was written by Max Nemoy.

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