Lease Requirements For Stay At Home Order
1. Does Doctrine of Commercial Frustration Allow a Commercial Tenant to Terminate its Lease or Suspend Lease Payments During Stay-At-Home Order
The World Health Organization has declared a pandemic. President Trump has declared a public health emergency. Governor Newsom has issued a statewide stay-at-home order except for essential needs. These government-imposed restrictions have forced the closure of most retail establishments.
I have been asked by clients if they have to continue paying rent on their commercial leases even though their stores are closed. My answer is, maybe. It depends on the type of lease you have and the type of business you are in.
In order to explain that answer, let’s get into a little bit of the law. During World War II, there were a number of cases dealing only with commercial frustration of purpose due to the wartime conditions and restrictions on being able to sell certain products or to operate certain hours, etc. These facts lead to a number of commercial frustration of purpose cases, allowing some tenants the right to cancel their lease while other tenants were able to suspend payments on their leases during the time the wartime orders were in effect.
If the lease (either expressly or impliedly) restricts the use of the lease property to a specific purpose and a commercial tenant cannot operate its business based upon the coronavirus then you may have a case. There is a mutual expectation of both the landlord and the tenant that has been “frustrated” because the tenant cannot operate that specific business that both the landlord and tenant expected under the terms of the lease. This obviously is due to government-imposed restrictions such as what were imposed during World War II.
If the commercial frustration merely limits the amount of profits or makes the performance more difficult, then there has not been a commercial frustration of purpose that would allow the tenant to get out of the lease or suspend lease payments.
In the case of 20th Century Lites, Inc. v. Goodman, 64Cal.App.2d, supp. 938 (1944), the tenant was required to have an electric advertising sign as part of the use at his business. The government issued an order prohibiting illumination of all outside lighting after sunset. The lessor sued the tenant for failure to make lease payments. The tenant defended on the basis of commercial frustration.
The Court of Appeal held that the government order, through no fault of the parties, frustrated the purpose of the lease, which was to use an illuminated sign at night. The Court rejected lessor’s argument that the contract still had value because the sign could be used during the day. The Court determined, based on the evidence, that the purpose of the electrical sign versus the ordinary sign, was to advertise at night, not during the day.
Restaurants, however, that are doing take-out may not be so lucky because they are still operating, albeit less profitably, and under certain restrictions. They probably will not be able to argue commercial frustration as a defense unless they are not allowed to do take-out as part of their lease.
A temporary period, such as what we have here, where the lease cannot be fulfilled based upon the order of the Governor, does not justify terminating the contract unless time is of the essence in the lease or the temporary impossibility defeats the purpose of the contract. I believe that the obligations under the lease are suspended during this period unless performance after the impossibility ceases would impose a substantially greater burden than terminating the contract or the temporary impossibility becomes permanent. Once the doctrine of commercial frustration is imposed, the contract is terminated.
At this time, no one knows how long Governor Newsom’s stay-at-home restrictions will continue. Some people say to the end of April, some say people say the end of August, but it really is unknown at this time. Applying the 20thCentury Lites case, the temporary stay could be deemed “permanent” at some point. When that point occurs is not clear at this time.
For those of you who have signed commercial leases who are unable to operate your business, I would look at your leases to see if your use of the premises is limited to one specific purpose and I would also look to see if you have a time is of the essence provision in the lease, which most do. You should then contact your attorney to determine what your options are.
2. Judicial Council Suspends All Unlawful Detainer Cases
On April 6, 2020, the Judicial Council, adopted new rules for all California courts. Specifically, no unlawful detainers can now be filed or heard for at least 90 days after the State declares the pandemic emergency over. In other words, for purposes of argument, let’s say that Governor Newsom declares that businesses can reopen and the stay-at-home orders are lifted. Let’s say that occurs on August 1, 2020. No unlawful detainer summonses can be issued until November 2, 2020. All current unlawful detainer cases are stayed and cannot be litigated until at least November 2, 2020, or later.
This order from the Judicial Council applies to both residential and commercial leases.
Comment: There may be some tenants who are not going to want to pay rent if they have a free ride for nine months without any consequences nor the right of the landlord to sue for unlawful detainer or failure to pay rent. Bear in mind that the landlord still has the obligation to maintain the premises, pay for utilities, pay the mortgage, etc. The landlord just does not have the ability to collect any rents to offset these expenses.
Finally, come November 2, 2020, assuming this is just an arbitrary date (whenever the 90-days is up), do you think there is going to be 10’s of thousands of unlawful detainer cases filed shortly thereafter? Our courts have no ability to absorb this onslaught of massive litigation in an expeditious manner. The civil clerk’s office will be swamped, the judges will be swamped and overloaded, the marshal’s office will be swamped because they will not be able to serve the writs of possession and execute on those expeditiously, etc. In my opinion, what ordinarily would take two or three months to evict a tenant, is now going to be 8-9-10 months. Who knows? The law that Governor Newsom imposed a statewide rule that tenants who do not pay their rent due to covid-19 impairment, up to 12 months to repay the past due obligation. This is in essence a free loan.
About the Author
Scott Souders is a real estate attorney who has practiced real estate law in excess of 42 years in Southern California. The Real Estate Law Update cites cases or statutes which are summarized and should not be relied upon without fully reading the cases or statute in the advance sheets and shepardizing the same and consulting with your own attorney.