COVID-19’s Impact on Leasing and Other Transactions
December 16 2020
This article was first published in Volume 38, No. 4, 2020 of the California Real Property Journal, reprinted by permission.
The COVID-19 pandemic has strongly affected contractual relationships in the real estate industry. This article discusses the most important legal defenses for practitioners to be aware of, summarizes and evaluates the few recent cases considering how these defenses apply in the pandemic, and provides recommendations for limiting exposure during future pandemics.
COVID-19 has disrupted commerce and life as we know it. It has resulted in the passing of various ordinances and issuance of executive orders that have shut down businesses, disrupted the labor force, and kept the population at home. This has severely impacted countless businesses, resulting in a massive decrease in revenue and causing numerous businesses to reduce their workforce, if they are even able to stay open. As a consequence, parties have been forced to evaluate the enforceability of their lease agreements, looking for ways to either enforce or excuse performance.
As a general rule, a party must perform its contractual obligations or face liability for failing to do so. But California law recognizes many defenses that excuse the obligation of a party to perform those obligations, including force majeure, impossibility of performance, and the frustration doctrine. In addition, state and local authorities have passed ordinances and taken other actions to provide additional protections to contracting parties in response to the COVID-19 pandemic. While these enactments have mostly expired with respect to commercial leases, the lingering impacts of this health crisis continue to affect the contractual obligations of parties throughout the State, creating uncertainty for businesses across myriad industries.
The following is a discussion regarding the various judicial defenses that may apply in response to the effects of the pandemic, including how these defenses have been interpreted to date and how they may apply to the present circumstances. This article then analyzes some of the recent decisions across the country that have already considered how the pandemic affects existing contractual obligations. Finally, this article concludes by presenting some issues and solutions for practitioners to consider to begin the evolving effort of assigning the risk and cost of these events in future contractual relationships. While it is far too early to fully consider or react to this unprecedented situation, some early lessons and best practices are developing that practitioners should be aware of when providing advice to their clients.
II. FORCE MAJEURE, IMPOSSIBILITY OF PERFORMANCE, AND FRUSTRATION OF PURPOSE HAVE EMERGED AS THE APPLICABLE DEFENSES FOR FAILURE TO PERFORM, BUT ARE THEY MERITORIOUS?
In 1872, California codified force majeure, and at least some portion of the doctrine of impossibility of performance, in Civil Code section 1511. Section 1511 states:
The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:
- When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse; however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just;
- When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary; or,
- When the debtor is induced not to make it, by any act of the creditor intended or naturally tending to have that effect, done at or before the time at which such performance or offer may be made, and not rescinded before that time.
To invoke these defenses, a party must prove that the intervening event is the proximate cause of nonperformance of the contract.
A. Force Majeure/Act of God
“Force majeure,” French for “superior strength,” or the Latin “vis major,” has historically “embodied the notion that parties could be relieved of performing their contractual duties when performance was prevented by causes beyond their control, such as an act of God.” To be clear, force majeure is not necessarily limited to the equivalent of an act of God. The test for force majeure is whether under the particular circumstances, there was such an insuperable interference occurring without the party’s intervention, as could not have been prevented through the exercise of prudence, diligence, and care. Force majeure does not exclude human agency.
Act of God, on the other hand, is defined as an “irresistible superhuman cause” and refers to natural causes whose effects cannot be prevented by the exercise of prudence, diligence, and care, and the use of those appliances which one’s situation renders it reasonable to employ. Acts of God are defined by case law and are extraordinary events of nature with widespread impact.
The want of performance of a legal duty arising from tort or contract or an offer of performance, in whole or in part, or any delay of performance, is excused when it is prevented or delayed by an irresistible, superhuman cause, unless the parties have expressly agreed to the contrary.
Under California law, parties to a contract are permitted to waive or limit the application of Civil Code section 1511(2), which excuses performance if it is prevented or delayed by an irresistible, superhuman cause. California law also permits parties to draft force majeure provisions that stipulate the consequences of a force majeure event. The provision can completely excuse performance, suspend performance, or apportion the costs of the loss. But Civil Code section 1511(1), addressing impossibility by operation of law and the acts of the other party—as opposed to impossibility due to any other event—states that it may excuse a party from performance even if the parties have stipulated that “this shall not be an excuse.”
For most purposes, force majeure is considered the equivalent of the common law contract defense of impossibility. But they remain disparate bodies of law, though courts often fail to draw the distinction.
An exemplary case is Pacific Vegetable Oil Corp. v. C.S.T., Ltd., wherein the Pacific Vegetable Oil Corporation moved to set aside an arbitration award against it and in favor of C.S.T., Ltd. The dispute arose when C.S.T., Ltd. failed to deliver a cargo of copra to Pacific Vegetable Oil Corporation, who had contracted to purchase copra from C.S.T. Ltd. Under the agreement, C.S.T., Ltd. was supposed to load the copra in the Fiji Islands and deliver it to San Diego, California. But when the United States entered into World War II after the parties entered into the subject agreement, the first shipment was delayed and the second shipment was eventually canceled because C.S.T., Ltd. could not obtain an export permit. A dispute arose.
The arbitration panel found that C.S.T., Ltd. was not responsible for nonshipment resulting, directly or indirectly, from a contingency beyond its control. The panel found that the war was a “force majeure” that either directly caused the delay in the shipping vessel’s movements or indirectly caused the delay through the intervention of governmental action provided by the necessities of war. The Supreme Court affirmed the order. Although Pacific Vegetable Oil Corp. was on appeal from an arbitration award with a deferential standard of review, the case provides one of the better discussions concerning the application of force majeure.
As discussed above, parties are free to limit which provisions of their lease will be affected by the force majeure clause. In an unpublished opinion, which has no precedential impact but provides guidance on how a court may rule, the Second District Court of Appeal gave effect to language in a force majeure provision that stated: “[f]orce majeure shall not, however, excuse the obligation of a party to make any payments required under this Agreement.” Most modern commercial leases include similar provisions.
B. Impossibility of Performance
At common law, the determination that a contract was impossible to perform was limited to literal or physical impossibility of performance. The common law rule still applies in that a party may not escape a voluntarily assumed contractual obligation merely because performance would be more expensive or more difficult than contemplated when the agreement was executed. But modern cases recognize legal impossibility exists when performance is impracticable and can only be carried out with excessive and unreasonable cost or difficulty.
Yet facts that make performance more difficult or expensive than the parties anticipated do not constitute legal impracticability unless they are of the gravest importance. This is merely a difference of degree rather than a difference in kind. Regardless, a party invoking the impossibility defense must show that reasonable efforts were used to overcome the obstacles that prevented performance.
The impossibility or impracticability must attach to the nature of the thing to be done and not to the inability of the promisor to do it. For example, failure of the defendant to obtain permission to divert traffic from an old bypass road in time for the plaintiff to proceed with the contract to construct new roads did not excuse performance on the grounds of impossibility when the defendant was able to get consent later and might have arranged for the diversion at the date required by using greater diligence or better planning. A party also cannot assert impossibility of performance if that party has placed performance of the contract beyond that party’s control by a voluntary act. Simply put, if a party makes performance impossible through his own actions, he cannot raise impossibility as a defense.
Additionally, a party cannot assert impossibility based on extreme hardship if the party has received the full consideration or if circumstances have not entirely destroyed the purpose that both parties had in mind. There is no impossibility of performance when one party rendered services as agreed and nothing remains for the other party to do but pay the agreed compensation. But if performance depends on the existence of a given thing and existence was assumed as the basis of the agreement, performance is excused to the extent the thing ceases to exist.
With the pandemic, it is likely that the courts will focus on the nature of the thing to be done, often the payment of rent in the real estate context, not the inability of the specific party to do it. It follows that because the pandemic is not actually rendering payment of funds impossible, courts will probably not find that performance has been rendered impossible.
Parties will surely argue that the pandemic’s effect on their businesses has been so severe that it has left them without sufficient funds to pay their rent. That argument could be meritorious if the parties were truly without sufficient funds to pay rent. If the impact of the pandemic has merely rendered performance more difficult and burdensome though, the law is clear that such fact would not excuse the parties’ performance under their leases. In other words, the parties would have to truly be in dire straits for this argument to have a chance to prevail, and even then, there is authority stating that the individual obligor’s inability to perform is inadequate to excuse performance. The performance of the obligation must be, by nature, impossible for everyone.
Performance may likewise be excused by operation of law if the passage of a statute or ordinance makes the contemplated performance illegal. A contract that contemplates the doing of a thing that is at first lawful, but that afterward and during the running of the contract term becomes unlawful, ceases to be operative when the prohibitory law takes effect. This situation is governed by Civil Code section 1511, which states that performance of a contract is excused when prevented by operation of law.
C. Frustration Doctrine
The frustration doctrine applies when performance remains possible, but the fundamental reason of both parties for entering into the contract has been frustrated by an unanticipated supervening circumstance, substantially destroying the value of performance by the party standing on the contract. A promisor without fault in causing the frustration who is harmed by it is discharged from performance unless a contrary intention appears.
The defense is available only when the frustration is substantial. It is not enough that the transaction will be less profitable than originally anticipated or even that one party will sustain a loss. The frustration must be so severe that it is not fairly regarded as within the risks assumed by that party under the contract.
Frustration of purpose is like impossibility of performance since both developed from the commercial necessity of excusing performance in cases of extreme hardship. But frustration is not a form of impossibility. Frustration more properly relates to the consideration for performance.
The question is whether the equities of the case, considered in the light of public policy, require placing the risk of disruption or complete destruction of the contract equilibrium on the defendant or the plaintiff under the circumstances. The answer depends on whether an unanticipated circumstance has made performance vitally different from what was reasonably to be expected. The risk of the unanticipated circumstance cannot fairly be thrown on the promisor.
Courts must examine the circumstances surrounding the formation of the contract to determine whether they can fairly infer that the risk of the event causing the alleged frustration was not reasonably foreseeable. If it was foreseeable, the contract should have provided for it. The absence of a provision addressing the risk gives rise to an inference that the parties assumed the risk. Of course, if the parties have contracted with reference to the frustrating event or have contemplated the risks arising from it, they may not invoke the doctrine of frustration to escape their obligations.
For example, in 20th Century Lites, Inc. v. Goodman, the plaintiff lessor sought payments due from the defendant lessee for the lease of neon signs, which the lessee used to illuminate his business. The defendant alleged that the governmental order of August 5, 1942, prohibiting the illumination of all outside neon or lighting equipment between sunset and sunrise prevented him, without fault on his part, from using the equipment at night and that such use was the desired object and effect contemplated by the parties when they executed the contract. The trial court concluded that the governmental proclamation frustrated the desired object or effect that the parties to the contract intended to attain at the time it was entered into, resulting in harm to the defendant. The trial court therefore found that the parties were excused from further performance under the contract, and that the contract was terminated. The appellate court, finding the relevant authorities supported the trial court’s ruling, affirmed the judgment.
And in perhaps the most relevant example for the real estate industry, Lloyd v. Murphy, the plaintiffs leased to defendant a certain premises in Beverly Hills “for the sole purpose of conducting thereon the business of displaying and selling new automobiles (including the servicing and repairing thereof and of selling the petroleum products of a major oil company) and for no other purpose whatsoever without the written consent of the lessor” except “to make an occasional sale of a user automobile.” The defendant also agreed not to sublease or assign without plaintiff’s written consent. Later, on January 1, 1942, the federal government ordered that the sale of new automobiles be discontinued. The government modified the order on January 8, 1942, to permit sales to those engaged in military activities, and on January 20, 1942, it established a system of priorities restricting sales to persons having preferential ratings.
Two months later, on March 10, 1942, defendant explained the effect of these restrictions on his business to one of the plaintiffs authorized to act for the others, who orally waived the restrictions in the lease as to use and subleasing, and offered to reduce the rent if defendant should be unable to operate profitably. Despite plaintiffs’ offer, defendant vacated the premises on March 15, 1942, giving oral notice of repudiation of the lease to plaintiffs, which was followed by a written notice on March 24, 1942. Plaintiffs affirmed their oral waiver in writing on March 26, 1942. When plaintiffs failed to persuade defendant to perform his obligations, they rented the property to other tenants to mitigate damages.
On May 11, 1942, the plaintiffs sued for declaratory relief to determine their rights under the lease and for judgment for unpaid rent. At trial, the court found that that the leased premises was located on one of the main traffic arteries of Los Angeles County, it was equipped with gasoline pumps and adapted for maintaining an automobile service station, it contained a one-story storeroom adaptable to many commercial purposes, plaintiffs had waived the restriction in the lease and permitted defendant to use the premises for any legitimate purpose and to sublease the property, and that defendant continued to carry on the business of selling and servicing automobiles at two other locations in Los Angeles. The trial court held that war conditions had not terminated defendant’s obligations under the lease and gave judgment for plaintiffs, declaring the lease as modified by plaintiffs’ waiver to be in full force and effect and ordered defendant to pay the unpaid rent with interest, less amounts plaintiffs received from the replacement tenant. Accordingly, the defendant appealed, arguing that the purpose for which the premises was leased was frustrated by the restrictions placed on the sale of new automobiles by the federal government, thereby terminating his duties under the lease.
On appeal, the California Supreme Court reviewed the law on commercial frustration, stating as follows:
Although commercial frustration was first recognized as an excuse for nonperformance of a contractual duty by the courts of England[,] its soundness has been questioned by those courts, and they have refused to apply the doctrine to leases on the ground that an estate is conveyed to the lessee, which carries with it all risks. Many courts, therefore, in the United States have held that the tenant bears all risks as owner of the estate, but the modern cases have recognized that the defense may be available in a proper case, even in a lease. As the author declares in 6 Williston, Contracts (rev. ed. 1938), § 1955, pp. 5485-87, “The fact that lease is a conveyance and not simply a continuing contract and the numerous authorities enforcing liability to pay rent in spite of destruction of leased premises, however, have made it difficult to give relief. That the tenant has been relieved, nevertheless, in several cases indicates the gravitation of the law toward a recognition of the principle that fortuitous destruction of the value of performance wholly outside the contemplation of the parties may excuse a promisor even in a lease….
“Even more clearly with respect to leases than in regard to ordinary contracts the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into.”
The principles of frustration have been repeatedly applied to leases by the courts of this state and the question is whether the excuse for nonperformance is applicable under the facts of the present case.
Applying the law to the facts of Lloyd, the California Supreme Court found that the lease at issue was executed a year after the National Defense Act had been approved, authorizing the President to allocate materials and mobilize industry for national defense. The automotive industry was therefore already in the process of conversion to supply the needs of the military and to meet lend-lease commitments. Moreover, automobile sales were soaring because the public anticipated the production would soon be restricted. These facts were commonly known and it could not be argued that the risk was unforeseen by an experienced automobile dealer. In fact, the court found the prevailing conditions at the time the lease was executed, and the absence of a provision contracting against the effect of war, gave rise to the inference that the risk was assumed. Accordingly, the California Supreme Court held that defendant failed to prove the possibility of war and its consequences on the production and sale of new automobiles was an unanticipated circumstance wholly outside the contemplation of the parties.
The California Supreme Court also held that the defendant failed to carry the burden of proving that the value of the lease had been destroyed. In reaching this conclusion, the California Supreme Court held that the sale of automobiles was not made impossible or illegal, but merely restricted. Therefore, because governmental regulation did not entirely prohibit the business from being carried on in the leased premises, but only restricted it, making it less profitable and more difficult to continue, the lease was not terminated, and defendant was not excused from further performance. The California Supreme Court likewise found that defendant could use the premises for the purpose for which it was leased since new automobiles and gasoline continued to be sold.
The California Supreme Court ultimately recognized that the “consequences of applying the doctrine of frustration to a leasehold involving less than a total or nearly total destruction of the value of the leased premises would be undesirable.” “Confusion would result from different decisions purporting to define ‘substantial’ frustration. Litigation would be encouraged by the repudiation of leases when lessees found their businesses less profitable because of the regulations attendant upon a national emergency.” Accordingly, the judgment was affirmed.
D. Applicability to Real Estate Contracts Affected by the COVID-19 Pandemic
While these defenses have unquestioned application under California law, the question then becomes whether these defenses have merit in the context of the COVID-19 pandemic. Should tenants feel confident challenging the enforcement of their leases on these grounds? Should landlords be fearful that these defenses will inhibit their ability to enforce the payment obligations in their leases?
It would be premature to reach any final conclusions regarding how these defenses will be applied in California cases, as few opinions have been issued since the onset of the pandemic in mid-March 2020. While the case law discussed above provides some guidance on how courts would apply the law to lease-payment disputes during the pandemic, many would argue that the circumstances at issue in those cases may not apply to present-day circumstances. The cases above address wartime circumstances and related governmental orders from approximately eighty years ago. But while some see a stark contrast in the situations, others point to the fact that the crux of the issues then and now is whether a governmental order that prohibits certain conduct contemplated by a binding contract should be excused. These differing viewpoints make evident that a court could find the cases discussed above to be controlling or distinguishable. Either way, the analysis is fact-intensive and could lead to vastly different conclusions depending on the situation.
Below is a discussion of a select sample of the opinions that have addressed whether these defenses apply in the context of the COVID-19 pandemic.
III. THE FEW OPINIONS ADDRESSING THE APPLICABILITY OF THE COVID-19 CONTRACT DEFENSES ESTABLISH THAT THE MERITS OF SUCH DEFENSES ARE UNPREDICTABLE.
While many jurisdictions have yet to issue rulings deciding how to deal with effects of the pandemic, a few recent decisions have shed some light on how these cases may play out in the near future.
A. In re Hitz Restaurant Group
The first, In re Hitz Restaurant Group, before the United States Bankruptcy Court for the Northern District of Illinois, involved a motion to enforce the obligation of the Hitz Restaurant Group to pay post-bankruptcy petition rent under 11 U.S.C. § 365(d)(3). That section of the Bankruptcy Code requires a debtor-in-possession to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of [commercial] real property until such lease is assumed or rejected, notwithstanding § 503(b)(1) of this title.”
In other words, tenants are required to timely pay any unexpired lease payments for commercial property with limited exceptions. In this case, the landlord sought to require the debtor/tenant to pay rent under its existing lease. The tenant objected to this obligation on the grounds that its obligation to pay rent was excused by the lease’s force majeure provision.
In reviewing whether the debtor/tenant’s argument that any post-petition rent payments were excused by the lease’s force majeure provision, the court analyzed the plain language of the provision, which provided:
Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government . . . . Lack of money shall not be grounds for Force Majeure.
According to the tenant, the force majeure provision was triggered by the governor’s executive order concerning the pandemic. That order prohibited all businesses in Illinois that offer food or beverages for on-premises consumption from providing service. The order only permitted those businesses to operate for delivery and takeout. In that regard, the order was similar to Governor Newsom’s order affecting similarly situated California businesses.
The court concluded that the governor’s order unquestionably triggered the lease’s force majeure provision and partially relieved the tenant’s lease obligation. To that end, the court found that the order constituted both “governmental action” and an “order  of the government” as contemplated by the language of the force majeure provision in the lease. The court also found that the order undoubtedly “hindered” the tenant’s ability to perform under its lease by prohibiting the tenant from providing on-premises services. Finding that the order was the proximate cause of the tenant’s inability to pay rent because it prevented the tenant from operating normally and restricted its operations, the court applied the force majeure provision to partially relieve the tenant of its payment obligation.
The landlord made three different arguments against the application of the force majeure provision. First, the landlord argued that the force majeure provision was not triggered because the governor’s order did not shut down the banking system or post offices in Illinois, rendering the tenant able to physically write and send rental checks to the landlord. The court summarily dismissed the argument as “specious” and “lack[ing] any foundation in the actual language of the force majeure [provision].”
Second, the landlord argued that the tenant’s failure to perform arose from a “lack of money,” which landlord argued was expressly excluded as grounds for application of the provision. The court rejected this argument because the tenant never argued that “lack of money” was the proximate cause of its failure to pay rent. Instead, it argued that the executive order was the proximate cause of its inability to generate revenue and pay rent. In a footnote, the court explained that if “there is a conflict between the lease’s general provision that ‘lack of money’ does not trigger the force majeure [provision], while the lease’s more specific provision that a ‘governmental action’ or ‘order of government’ does, the court concludes that the [more specific] provision must prevail.”
Finally, the landlord argued that the tenant could have obtained the money to pay the rent, despite the governor’s order, by applying for an SBA loan, and that its failure to do so barred its enforcement of the force majeure provision. The court dismissed this argument as well, finding no legal authority or language from the provision to support the argument.
It was significant to the court’s analysis that the tenant’s operations were not completely prohibited. To the contrary, the order permitted and encouraged restaurants to continue providing takeout, pickup, and delivery services. As a result, the court concluded that the force majeure provision applied to only partially excuse the tenant’s lease obligation, but expressly stated “the [tenant] is not off the hook entirely.” Because the governor’s order permitted the tenant to continue operations in a limited capacity, the court found “to the extent that [tenant] could have continued to perform those services, its obligation to pay rent is not excused by the force majeure [provision].” The court therefore held that the tenant’s obligation to pay rent must be reduced in proportion to its reduced ability to generate revenue due to the order.
Apparently, neither party provided the court with much information to determine the appropriate amount of rent reduction. The landlord did not address the issue and the tenant only stated that it “estim[ated] that 75[%] of the square footage of the restaurant, consisting of its dining room and bar, was rendered unusable.” In effect, tenant conceded that the remaining 25% of the restaurant’s square footage could have been used for permitted services. Accordingly, the court interpreted the tenant’s estimation as an admission that it owed at least 25% of the rent (and CAMs) and ordered that amount to be paid within two weeks of its ruling.
This outcome appears unsatisfactory for both landlord and tenant. For the tenant, the fact that its statement regarding use of the square footage of its leased premises was used as the basis for determining rent could be perceived as unfair, as usable square footage does not necessarily indicate whether tenant has full use of such space (such as for in-house dining) or correlate to the impact of the force majeure event. For the landlord, the court’s conclusion supporting application of the force majeure provision despite the tenant’s ability to operate and an express provision carving out lack of money as a justifiable excuse was undesirable. In addition, though, the landlord did not anticipate that the court would consider a percentage reduction in rent and therefore did not introduce evidence supporting a greater percentage of rent to be paid by the tenant, thereby missing the opportunity to argue for a higher monthly rent requirement.
B. Backal Hospitality Group LLC v. 627 West 42nd Retail LLC
In another decision that arose due to governmental orders in response to the pandemic—Backal Hospitality Group LLC v. 627 West 42nd Retail LLC—the tenant argued that New York Governor Andrew Cuomo’s restriction on large gatherings made the performance of its lease impossible. Canvas Events, LLC (“Tenant”) and 627 West 42nd retail, LLC (“Landlord”) had entered into a lease in June 2018 whereby Tenant was to operate an event space, and Tenant provided a $500,000 letter of credit in lieu of a security deposit.
On March 22, 2020, Governor Cuomo issued an executive order that banned large gatherings at all facilities in New York due to the ongoing pandemic. This executive order effectively prevented Tenant from operating as an event space, and without income from these events, rendered Tenant unable to pay rent. The parties attempted to negotiate relief under the lease to no avail, and Tenant then attempted to unilaterally terminate the lease without penalty and requested instructions from JPMorgan regarding how to terminate the letter of credit. After Tenant informed Landlord of the parties’ purported agreement to terminate the lease and vacate the space, Landlord rebuked Tenant, stating that Landlord “in no way agreed to terminate the lease” and that it reserved all rights under the lease.
Later, Landlord contacted JPMorgan and filed paperwork to draw on the letter of credit to satisfy the outstanding rental arrears of $413,161.19. In response, Tenant filed an action seeking a declaration that the lease had been terminated and an order permanently enjoining Landlord from preventing Tenant from cancelling the letter of credit securing the lease. After filing the action, Tenant sought a temporary restraining order preventing Landlord from drawing on the letter of credit and enjoining Landlord from using or transferring any of the funds it had already drawn. Tenant argued that it was entitled to injunctive relief because it was likely to succeed on the merits and would suffer irreparable harm if the relief demanded were not granted and because the equities weighed in their favor. Finally, Tenant argued that “it is impossible for plaintiffs to perform under the lease given the March 22 order prohibiting large gatherings.”
The court first found that Tenant could not unilaterally terminate the lease because Landlord never consented to the termination or allowed Tenant’s surrender of the premises, which was required by the lease. The mere fact that Tenant had surrendered the premises and returned the keys was not enough. The lease stated that the “delivery of keys to an employee of [Landlord] or of its agent shall not operate as a termination of this [l]ease or a surrender of the [premises].”
Relevant to the impossibility defense discussed above, the court rejected Tenant’s argument. The court pointed to paragraph 36.4 of the lease, which stated:
If the fixed rent or any additional rent shall be or become uncollectable by virtue of any law, governmental order or regulation, or direction of any public officers or body, Tenant shall enter into such agreement or agreements and take such other action (without additional expense to Tenant) as Landlord may request, as may be legally permissible, to permit Landlord to collect the maximum Fixed Rent and Additional Rent which may, from time to time during the continuance of such legal rent restriction be legally permissible, but not in excess of the amounts of fixed rent or additional rent payable under this Lease. Upon the termination of such legal rent restriction, (a) the Fixed Rent and Additional Rent, after such termination, shall become payable under this Lease in the amount of the Fixed Rent and Additional Rent set forth in this Lease for the period following such termination, and (b) Tenant shall pay to Landlord, if legally permissible, an amount equal to (i) the Fixed Rent and Additional Rent which would have been paid pursuant to this Lease, but for such rent restriction, less (ii) the Fixed Rent and Additional Rent paid by Tenant to Landlord during the period that such rent restriction in effect.
The court found that the parties had “contemplated a scenario in which performance of the lease might become prohibited by a governmental order.” The parties abided by the lease in attempting to negotiate a resolution, but Tenant violated the lease when it attempted to unilaterally terminate the lease without written consent from Landlord. The court ultimately denied Tenant’s motion for an injunction.
Putting aside the fact that Tenant improperly terminated the lease, Tenant’s impossibility defense was undercut by the express terms of the lease. Tenant was not allowed to argue that performance was impossible because the exact scenario creating the impossibility—a governmental order preventing performance—was foreseeable and contemplated by the parties. This case provides a clear lesson that the terms of the lease can operate to defeat such an argument and that a well-drafted lease is often a landlord’s best defense against a challenge from a tenant.
C. Lantino v. Clay LLC
An impossibility defense was raised in another case out of New York—Lantino v. Clay LLC. There, though not in the real estate context, the court again had occasion to consider an impossibility defense and shed light on how courts are handling this defense in the context of New York’s COVID-19 shutdown order.
In that case, in December 2018, a group of employees of a number of gyms filed an action alleging that their employers “routinely and knowingly operated their fitness business without sufficient funds to cover employee payroll.” The employees alleged that the defendants “routinely” paid their employees late and “on many occasions, because the corporate bank account was not sufficiently funded, employees’ paychecks would bounce.” On September 9, 2019, the parties’ settled for $300,000, but in the event of a default, the amount would be increased to $1,000,000. The parties’ settlement agreement provided that if the defendants are in default, “Plaintiffs’ counsel may enter the Consent Judgment [for an entry of judgment in the amount of $1,000,000], without further notice.”
On April 17, 2020, plaintiffs did just that because defendants failed to make a scheduled settlement payment. In response, defendants did not contest that they were in default. Instead, defendants argued that “their performance should be excused based upon the doctrine of impossibility because of their inability to pay” due to Governor Cuomo’s March 15, 2020 PAUSE Executive Order, which prevented the operation of certain businesses—including gyms—in response to the COVID-19 pandemic.
The court cited the legal standard for the impossibility defense, which does not excuse contractual performance “where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy.” As such, the court rejected defendants’ argument, holding that “at best, Defendants have established financial difficulties . . . that adversely affected their ability to make the payments called for under the Settlement Agreement.”
Unlike the Backal decision above, the governmental interference with the parties’ contractual performance did not appear to be contemplated by the contract itself. Rather, the court was forced to look at the impact that the regulation actually had on defendants’ ability to perform their contractual obligation. But as demonstrated, financial difficulties, including bankruptcy, are insufficient to invoke the impossibility doctrine under New York law.
While the two New York cases appear to be consistent with the California precedential authorities discussed above, the Chicago case is not. In any event, these decisions confirm an utter lack of predictability in litigating these cases, making an informed cost-benefit analysis infeasible since even the savviest of attorneys cannot predict the outcome of such cases with a reasonable level of certainty.
IV. CONSIDERATIONS FOR ADDRESSING PANDEMICS IN LEASES
Perhaps the most meaningful conclusion from these early cases deciding COVID 19-related matters is not their outcomes, but rather the fact that each confirms the unpredictability of court interpretations of lease disputes on these matters. Both commercial landlords and tenants enter into lease agreements for the purpose of providing certainty and predictability in their relationship, setting forth the likely (and sometimes unlikely) situations that may occur during the term and pre-negotiating their outcomes.
In the current pandemic, the unpredictability of judicial interpretations reinforces the need for contract provisions that comprehensively address unpredictable outcomes such as outbreaks, epidemics, and other “acts of God” with reasonable, comprehensive solutions. The cases discussed in Section III above confirm the danger of failing to negotiate a resolution when unforeseen events transpire, because each party risks a negative outcome when relying on a judicial forum to reach a conclusion. Both landlords and tenants risk such unpredictable results if they fail to address force majeure events in their future agreements. The present circumstances have made that clear.
There are numerous issues to consider when addressing the impact of the pandemic on leasehold obligations. The extent to which each of these issues should be addressed in a lease will vary based on the particular circumstances of each transaction. Practitioners should carefully consider the potential negative outcomes that could occur if the pandemic continues to affect lease operations or, worse, the circumstances change such that performance by either landlord or tenant is even more constrained than they are now. Some issues to consider include:
- Definitions. Landlord and Tenant should clarify the definition of force majeure to either include or exclude epidemics, pandemics, and outbreaks. The parties should also consider whether governmental orders either preventing or restricting performance affect a party’s leasehold obligations. These provisions do not necessarily need to be reciprocal.
- Effect of Force Majeure. If pandemic is included within the definition of force majeure, the parties may want to define how the force majeure provision applies. For example:
- Is notice required by the party claiming excuse of performance?
- When does the force majeure period expire?
- Does either party have an extended period to cure nonperformance occurring during a period of force majeure?
- Does either party have a right to terminate the lease if the force majeure period extends beyond a set period (i.e., one year)?
- Should either party, as a condition precedent to claiming excuse of performance, be required to prove application for available benefits and assistance, such as insurance coverage or available public funding, or diligence in re-opening for business?
- Pre-Negotiate Remedies. If force majeure applies, should the tenant automatically be excused from payment of rent and, if so, on what terms? Parties may want to pre-determine the terms of deferral or abatement, including the maximum period of deferral, the percentage of rent due, application of interest, etc. The parties should also consider whether such remedies replace available eviction protections and whether these additional protections are waived (to the extent permitted by law). In any event, the remedies negotiated should be conditioned on continued performance of the lease.
- Landlord Expectations. Landlords will want to disclaim, to the extent applicable, any liability or responsibility for containing or preventing the spread of outbreaks in public areas of the building. This may include removing any expectation that the building will be free of contamination or any representations to that effect. Landlords should only be required to comply with minimum mandatory safety standards, which will be helpful for defining landlord’s standard of care in any eventual dispute. Landlords should clarify that their safety compliance costs are included as operating expenses.
- Tenant Expectations. Tenants should be required to comply with, and to cause their invitees to comply with, all safety precautions enacted by their landlords. Moreover, tenants should be required to take their own precautions for ensuring the safety of their premises and to notify their landlords of any outbreaks or other safety concerns.
- Shared Spaces. Landlords and tenants should consider each party’s standard of care for spaces with shared use. For example, if a landlord is providing janitorial services in a tenant’s space, what standards and duties apply? Similarly, what responsibilities will each party have in common areas, such as building lobbies and parking areas? Should any restrictions be applied to this access?
- Insurance. Both parties should explore the availability of insurance to address losses incurred as a result of a force majeure event. While insurers have largely taken the position that business-interruption insurance does not cover losses incurred due to a pandemic, at least one recent decision suggests a judicial trend to the contrary. If such insurance is available, it may be the most economical and realistic solution for addressing the impacts of a pandemic.
V. ALTHOUGH PARTIES CAN SAFEGUARD AGAINST SIMILAR CIRCUMSTANCES IN THE FUTURE, CALIFORNIA LAW PREVENTS PARTIES FROM COMPLETELY SHIFTING THE RISK TO ONE PARTY.
While there are certainly measures that can be taken to reduce exposure to situations similar to the COVID-19 pandemic, such as those discussed above, California law imposes limitations on the ability of the parties to a contract to waive certain defenses. Specifically, Civil Code section 1511(2) excuses a party who fails to perform as a result of a traditional force majeure event, such as “an irresistible, superhuman cause, or . . . the act of public enemies of [California] or of the United States, unless the parties have expressly agreed to the contrary.”
However, Civil Code section 1511(1) clearly states that parties are excused from performing when their performance or offer is “prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse.” It follows that parties to contracts in California can waive their traditional force majeure defense, but if performance is prevented by an act of the other party or the operation of law, the parties cannot be deemed to have waived their defense even if they contractually agreed that such conduct would not be an excuse for failure to perform. Section 1511(1) only allows the parties to impose notice requirements on the exercise of such a defense.
It seems fair to say that, in California at least, the parties can take certain measures to mitigate their risk from another pandemic-like occurrence, but California law will not allow the parties to completely reallocate that risk to one party, which would likely be the party with less bargaining power. For better or for worse, this is the state of the law in California.
The impacts of the COVID-19 pandemic will be felt for years to come. Practitioners will be closely monitoring how the historical legal theories and precedents will be applied to disputes regarding the enforceability of parties’ leasehold obligations. As is readily apparent from the above discussion, this application is uncertain and presents risks to any litigant pursuing a cause of action that relies on their application. Perhaps the best solution is to attempt to address these issues in a negotiated agreement, assigning the risks and costs to the parties before a dispute has arisen. In any event, counsel will need to quickly become familiar with these concepts to provide competent advice to their clients.
 H.K. Islands Line America S.A. v. Distribution Servs., Ltd., 795 F. Supp. 983, 989 (C.D. Cal. 1991) (as to force majeure); see also Oosten v. Hay Haulers Dairy Emps. & Helpers Union, 45 Cal. 2d 784 (1955).
 Arthur Linton Corbin, 6A Corbin on Contracts § 1324 (1962).
 Pac. Vegetable Oil Corp. v. C.S.T., Ltd., 29 Cal. 2d 228, 238 (1946).
 Ryan v. Rogers, 96 Cal. 349, 353 (1892); Mancuso v. S. Cal. Edison Co., 232 Cal. App. 3d 88, 103–04 (1991).
 Cal. Civ. Code §§ 1427, 1428, 1708).
 Id. § 1511(2); Sun Oil Co. v. Union Drilling & Petroleum Co., 208 Cal. 114, 120 (1929).
 See Civil Code § 1511(2) (“unless the parties have expressly agreed to the contrary”); see also San Mateo Cmty. College Dist. v. Half Moon Bay P’ship, 65 Cal. App. 4th 401, 411 (1998) (discussing the propriety of force majeure provisions that narrow the scope of application).
 Pac. Vegetable Oil Corp., 29 Cal. 2d at 230.
 Rehart v. Klossner, 48 Cal. App. 2d 46, 49–50, 119 (1941).
 Mathes v. City of Long Beach, 121 Cal. App. 2d 473, 477 (1953).
 1 Witkin, Summary of Cal. Law: Contracts § 828, at 916-17 (10th ed. 2005); Citizens of Humanity, LLC v. Caitac Int’l, Inc., 2010 Cal. App. Unpub. LEXIS 6194.
 Pac. Vegetable Oil Corp., 29 Cal. 2d at 229.
 Id. at 230.
 Id. at 232, 237-38.
 Id. at 238.
 Id. at 242.
 Williams & Meyers, Oil and Gas Law § 683.2(5), at 423 (“A force majeure clause may be applicable only to particular covenants of the lease, or may be applicable to covenants generally, to conditions as well as to covenants, or to limitations as well as conditions and covenants.”); see also San Mateo Cmty. College Dist. v. Half Moon Bay P’ship, 65 Cal. App. 4th 401 (1998) (holding force majeure provision as drafted applied to some, but not all, covenants in the lease).
 Citizens of Humanity v. Caitac Int’l, Cal. App. Unpub. LEXIS 6194, at *45 (2010).
 Kennedy v. Reece, 225 Cal. App. 2d 717, 724 (1964).
 Butler v. Nepple, 54 Cal. 2d 589, 599 (1960).
 Mineral Park Land Co. v. Howard, 172 Cal. 289, 293 (1916); Christin v. Superior Court, 9 Cal. 2d 526, 533 (1937); In re Marriage of Benjamins, 26 Cal. App. 4th 423, 432 n.3 (1994).
 Kennedy, 225 Cal. App. 2d at 725.
 McCalden v. Cal. Library Ass’n, 955 F.2d 1214, 1219 (9th Cir. 1990).
 Kennedy, 225 Cal. App. 2d at 725.
 Hensler v. City of L.A., 124 Cal. App. 2d 71, 83 (1954).
 P. Venture Corp. v. Huey, 15 Cal. 2d 711, 717 (1940).
 Browne v. Fletcher Aviation Corp., 67 Cal. App. 2d 855, 862 (1945).
 Mineral Park Land Co. v. Howard, 172 Cal. 289, 292 (1916).
 Cal. Civ. Code § 1511(1).
 Industrial Dev. & Land Co. v. Goldschmidt, 56 Cal. App. 507, 509 (1922) (effect of Prohibition on lease restricting use of leased property to liquor business).
 See, e.g., Baird v. Wendt Enters., Inc., 248 Cal. App. 2d 52, 55 (1967) (foreign jurisdiction’s adoption of building code precluding issuance of permit to construct building “prevented” performance of contract within meaning Civil Code section 1511).
 Cutter Labs., Inc. v. Twining, 221 Cal. App. 2d 302, 314–15 (1963).
 Dorn v. Goetz, 85 Cal. App. 2d 407, 411 (1948).
 FPI Dev., Inc. v. Nakashima, 231 Cal. App. 3d 367, 399 (1991); Nieman v. Peterson (1978) 86 Cal. App. 3d Supp. 14, 19.
 Lloyd v. Murphy, 25 Cal. 2d 48, 53–54 (1944).
 Autry v. Republic Prods., Inc., 30 Cal. 2d 144, 148 (1947); e.g., La Cumbre Golf & Country Club v. Santa Barbara Hotel Co., 205 Cal. 422, 425-426 (1928) (“Where from the nature of the contract it is evident that the parties contracted on the basis of the continued existence of a person or thing, condition or state of things, to which it relates, the subsequent perishing of the person or thing, or cessation of the existence of the condition will excuse the performance, a condition to such effect being implied in spite of the fact that the promise may have been unqualified.”).
 Lloyd, 25 Cal. 2d at 53–54.
 Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 70 Cal. 2d 666, 676 (1969); U.S. Roofing, Inc. v. Credit Alliance Corp., 228 Cal. App. 3d 1431, 1448 n.10 (1991) (doctrine inapplicable because crane defect foreseeable as demonstrated by lease disclaimer provision).
 20th Century Lites, Inc. v. Goodman, 64 Cal. App. 2d Supp. 938 (1944).
 Id. at 938-40.
 Id. at 940.
 Lloyd v. Murphy, 25 Cal. 2d 48, 50-51 (1944).
 Id. at 51.
 Id. at 52.
 Id. at 52-55 (internal citations omitted) (emphasis added).
 Id. at 55.
 Id. at 55-56.
 Id. at 56.
 20th Century Lites, Inc. v. Goodman, 64 Cal. App. 2d Supp. 938, 945 (1944).
 Id. at 945 (quoting Johnson v. Atkins, 53 Cal. App. 2d 430, 433 (1942) (“Such a frustration brings the contract to an end forthwith, without more and automatically.”).
 In re Hitz Restaurant Group, No. 20-B-05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020). Section 365(d)(3) was added to the Bankruptcy Code to relieve landlords from the burden of proving that the rent payments they sought to collect prior to rejection were “actual and necessary” costs of preserving the bankruptcy estate. Congress was concerned that lessors of commercial property were frequently forced to extend credit to an estate during the time given for assumption or rejection of the lease.
 Backal Hospitality Grp. LLC v. 627 West 42nd Retail LLC, 2020 N.Y. Misc. LEXIS 4050, *1 (Sup. Ct. 2020).
 Id. at *2-3.
 Id. at *3.
 Id. at *3-4.
 Id. at *4.
 Id. at *4-5.
 Id. at *5-6.
 Id. at *10-11.
 Id. at *11.
 Id. at *11-12.
 Id. at *12-13.
 Id. at *13.
 But see Section V below concerning California law.
 Lantino v. Clay LLC, 2020 U.S. Dist. LEXIS 81474 (S.D.N.Y. 2020).
 Id. at *2.
 Id. at *3-4.
 Id. at *4.
 Id. at *4-5.
 Id. at *6.
 Id. at *7 (citing 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (1968).
 Id. at *7-8.
 But see Section V.
 Studio 417, Inc. v. The Cincinnati Ins. Comp., 2020 U.S. Dist. LEXIS 147600 (W.D. Mo. 2020).
 Cal. Civ. Code § 1511(2).
 Cal. Civ. Code § 1511(1).