Shauna Correia in the Sacramento Business Journal: If Asked For a Religious Exemption From A Vaccine Mandate, Be An Optimist

In a contributed article for the Sacramento Business Journal, Shauna Correia discusses an extremely challenging issue that many businesses and HR professionals are facing – how to evaluate religious exemption requests from vaccine mandates. The October 8, 2021 article explores two important questions that arise:

What sort of religious belief or religious practice qualifies for a religious exemption?

How do employers know whether a proposed accommodation is reasonable or an undue hardship?

Read the full article in the Sacramento Business Journal, here. (paywall may apply)

How New Legislative Policy May Affect COVID-Related Lease Disputes

Over the last eighteen months, we have been forced to devote significant resources to interpreting how largely-forgotten legal doctrines apply to real estate contracts in a post-COVID world. These principles, including force majeure, frustration of purpose, and impossibility/impracticability, were generally overlooked in real estate transactions until life-altering global events required their use. Indeed, many of the cases interpreting these doctrines date back to the world wars that dominated the first half of the twentieth century. Modern practitioners often did not even address these concepts in their agreements.

Now, these policies have come front and center, driving the discourse between parties trying to adjust their expectations to an entirely different business environment. As I have previously discussed, the judicial process is slow to provide guidance on these issues, failing to provide many opportunities for expedited resolutions and the judicial policy which flows from them. Legislators have, perhaps unsurprisingly, been happy to step into this role, and we have seen a tremendous amount of new policy designed to address the impact of COVID on existing and future contractual relationships. One such new policy is particularly noteworthy.

As a quick background, the frustration of purpose doctrine generally provides that where the fundamental reason of a party entering into a contract has been frustrated by an unanticipated, supervening circumstance which substantially destroys the value of that contract and purpose, that party can be discharged from its duty to perform its contract and the contract can be extinguished. Historically, 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; rather, the frustration must be so severe that it is not fairly regarded as within the risks assumed by that party under the contract.

On August 4, 2021, the San Francisco Board of Supervisors passed Ordinance 122-21, which provides that for certain commercial tenants, COVID-19 is presumed to have frustrated the purpose of the lease, excusing these tenants’ obligation to pay rent. This ordinance has essentially rewritten how the frustration of purpose doctrine applies, allowing temporary interruptions of normal operations, such as during the COVID-19 pandemic, to be deemed sufficient to allow for relief. While the ordinance does not override an agreement to the contrary and sunsets after 2025, it should assist small retailers who might otherwise be left without relief.

I find this ordinance disconcerting for several reasons. First, by altering the application of a fundamental legal doctrine, the Board of Supervisors undermines at least a century of existing case law, potentially creating even more uncertainty regarding how these doctrines apply now and going forward. Second, the ordinance ignores the interests of landlords, who risk losing their income stream due to COVID and may not be any more capable of sustaining their business than the tenants protected by the ordinance. Finally, the approach manipulates a legal doctrine to achieve its purpose rather than attacking the issue head-on by, for example, offering cash, tax, or other incentives to parties affected by COVID.

Of course, San Francisco is one of perhaps the most progressive political communities in the country. We have not seen similar enactments in other jurisdictions and I do not predict they will follow. The ordinance highlights the importance of understanding the political climate in which properties are located, as these sorts of policies may be more or less prevalent depending on such factors. While the overall impact of the Board of Supervisors’ ordinance is unlikely to have mass application or significantly change the market, it is a notable development in the global reaction to the unique circumstances presented by a global pandemic.

NY Court of Appeals Decision Highlights Growing Trend of Higher Courts Ruling Against COVID-Related Lease Defenses

Since the start of the COVID-19 health crisis, we have been approached by both landlord and tenant clients asking how COVID affects their leasehold obligations. While we have generally encouraged our clients to approach these matters in an honest and amicable manner with a focus on resolution, disputes have arisen between owners and occupiers. Legal resolution does not come quickly, as the legal process tends to delay final adjudication for several years. Some decisions have been rendered in interim proceedings (such as bankruptcies), but on the whole, there simply has not been enough time for COVID-related disputes to proceed through both the trial and appellate levels and provide guidance on how these lawsuits will be resolved.

A recent decision by a New York appeals court is perhaps one of the first to provide some clarity regarding how an appellate court will interpret how common COVID-related defenses will apply in a lease enforcement action. In The Gap, Inc., v. 170 Broadway Retail Owner, LLC, the tenant (The Gap) sued its landlord under theories of casualty, frustration of purpose, and impossibility, seeking to avoid its obligation to pay rent and terminate its lease in response to the COVID-19 pandemic. When the landlord filed a motion to dismiss the tenant’s complaint, the trial court denied the motion, finding that the tenant had stated a valid claim and providing implied approval that these arguments could be used by tenants to avoid their leasehold obligations.

On appeal, the appellate court unanimously overturned the trial court’s decision.  The judges first concluded that the casualty provision of the lease was not triggered by COVID-19 because no physical loss or damage had occurred. The court then addressed the tenant’s equitable arguments, finding that frustration of purpose did not apply because the tenant was not completely deprived of the benefits of its premises, and it was not impossible for tenant to perform its obligations under the lease such that the lease could be rescinded. The tenant was ordered to pay all back rent and continue paying rent in accordance with the lease going forward.

Although not binding in California, this decision is emblematic of the trend among courts reviewing the impact of COVID-19 on commercial leases. On the whole, most courts have concluded similarly to the New York appeals court, deciding that tenants must bear the risk of a pandemic absent some unique circumstances or lease terms that would vary this conclusion. This is true even in the business interruption insurance context, leaving tenants without many legal options for relief. Hopefully, the various governmental stimulus packages have supported these tenants’ business operations sufficiently to weather the worst of the pandemic and take advantage of what appears to be a booming economic recovery. For landlords, these decisions are welcome support for opposing any tenants who attempt to opportunistically rely on COVID to justify temporary or permanent relief from their leases.

The Importance of Lease Drafting: Lease Language Takes Center Stage in “Cinemex”

When in the throes of protracted lease negotiations, frustrated clients often ask me whether a proposed term is truly necessary to the contemplated transaction.  Most clients start these discussions with the goal of achieving a fair form of lease, but as consideration of the minutiae of lease provisions continues, clients typically hit a point where they no longer wish to spend any more money on legal fees and simply want to “get the deal done.”  This sentiment is both understandable and reasonable, especially where the risks associated with a provision may not outweigh the cost in legal fees required to resolve it in a favorable manner.  This sentiment can also cause mistakes, however, if either side is so committed to consummating a transaction quickly that it is willing to sacrifice clarity or accuracy in its lease.

A recent decision out of a Florida bankruptcy court highlights the importance of the language of a lease, as something as simple as a misplaced phrase can have disastrous results. The case, In re Cinemex[1], involved a movie theater operator who filed for Chapter 11 bankruptcy protection and sought to avoid its obligation to pay rent under one of its leases pursuant to a force majeure provision. That provision excused either party’s obligation to perform its obligations under the lease for certain enumerated conditions as follows:

If either party to this Lease, as the result of any … (iv) acts of God, governmental action, condemnation, civil commotion, fire or other casualty, or (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease), fails punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event.

Cinemex, the tenant, relied on the fourth subsection to circumvent its rental obligations, claiming that the Florida Governor’s orders closing movie theaters fell squarely within the “governmental action” exemption.  The Landlord argued that the subsequent parenthetical (emphasized in bold above) carved out Tenant’s obligation to timely pay rent from this exception.  The carve-out on which the Landlord relied is very common in commercial leases, where landlords insist on the continued payment of rent regardless of the circumstances.

The court found that, because of its placement immediately following the fifth subsection (for matters beyond the reasonable control of a party) rather than before or after the entire five-subsection list, the Landlord’s carve-out only applied to the fifth subsection and did not apply to the fourth subsection.  As a result, the Tenant was permitted to claim application of the force majeure provision and was excused from its obligation to pay rent during the period in which the governmental action prevented its operations at the premises. This was undoubtedly not the Landlord’s intent, and resulted in lost rent to the Landlord.

This case is a good reminder that the specific language of a lease, and its placement within the document, can be critical to determining its application.  When lease negotiations bog down, it can be difficult for clients to appreciate how a provision can be applied or why it is so important, especially when the negotiations have been ongoing for weeks or months.  But part of the reason clients hire attorneys is to ensure that this language is drafted precisely to have its desired effect. As the Cinemex decision illustrates, inartful drafting can lead to disastrous results for parties to a lease (the court in Cinemex conclude the lease was not a “well drafted document”).  While they can be stressful and expensive, protracted lease negotiations are sometimes necessary to ensure that the lease matches the parties’ intent and will be interpreted exactly as the parties desire.

[1] In re Cinemex U.S. Real Estate Holdings , CASE NO. 20-14695-BKC-LMI (Bankr. S.D. Fla. Jan. 26, 2021).

Litigation Update: North Carolina Court Finds Insurers Liable Under Business Interruption Policies for COVID Losses Resulting from Shutdown Orders

In our last update, we highlighted a recent case out of the US District Court of Missouri (Studio 417) in which the court issued a preliminary ruling that allowed a group of policyholders to proceed with claims against their insurers based on allegations that the insurers wrongfully denied claims due to losses sustained as a result of the COVID-19 health crisis under business interruption insurance policies.  Prior to that ruling, insurers had largely stonewalled policyholders who submitted COVID-related claims under business interruption policies.  That case confirmed that these individuals could state facially valid claims for recovery and seek damages from the insurers based on the allegation that the presence of the virus on workplace surfaces constituted loss of or damage to property.

In what is further welcome news to policyholders, a North Carolina court went a meaningful step further, finding the insurers liable for wrongful denial of policyholders’ COVID-related business interruption claims in that case (North State)—claims based on the effect of COVID-prompted government shutdown orders as opposed to the virus’s physical presence at a particular policyholder’s business.  The North State case involved a similar set of circumstances as the Studio 417 dispute: a collection of restaurant owners and other retailers filed a lawsuit against their common insurer, alleging a right to recover insurance proceeds to offset losses incurred due to government-mandated shutdowns that affected their respective businesses.  The insurer denied coverage, finding that no physical loss or damage had occurred such that coverage would have been triggered as required by the insurance policy.

In finding the insurers liable for breach of the insurance policies, the North State court held that the ordinary meaning of the phrase “direct physical loss” includes the loss of ability to utilize or possess the insured property.  According to that court, the “loss” requirement “describes the scenario where businessowners and their employees, customers, vendors, suppliers and others lose the full range of rights and advantages of using or accessing their business property.  This is precisely the loss caused by the [g]overnment [o]rders.”  Moreover, because nothing in the insurance policies precluded recovery for virus-related causes of losses (which is not always the case in business interruption policies), the court concluded that the ordinary meaning of direct physical loss was either clearly applicable to government shutdowns or, at worst, the proper interpretation of an ambiguous phrase in the policy.  This decision represents a major win for policyholders, who now have a final court ruling supporting their claim for coverage despite the “direct physical loss” requirement.

On the whole, insurers remain relatively successful in thwarting policyholder efforts to obtain coverage under their business interruption policies for COVID-related losses.  Whether through hardline stances at the claims stage, aggressive litigation tactics, and/or major funding advantages, insurers can often overpower their insureds and cut off these claims before reaching the courts.  These recent decisions, however, highlight the potential for recovery for policyholders who maintain their resolve in pursuing insurance coverage during these unprecedented times. While odds of success remain long, desperate and/or persistent individuals may be able to obtain recovery for their COVID-related claims if they have business interruption policies.  Only time will tell whether cases like Studio 417 and North State coalesce into a widely adopted judicial perspective on the interpretation of business interruption policies.

California Proposition 19 Limits Parent-Child & Grandparent-Grandchild Exclusion

Since 1986, when Proposition 58 passed, certain transfers of real property between parents and their children have been excluded from reassessment for purposes of determining property taxes. Proposition 58 provided an exclusion from reassessment for (1) a principal residence of the transferring parent, and (2) the first $1 million of full cash value of all “other real property” transferred from a parent to a child. Proposition 193, passed in 1996, added a similar reassessment exclusion for transfers between grandparents and their grandchildren (when the grandchildren’s parents are deceased).

In November 2020, California voters approved Proposition 19. Proposition 19 limits the tax benefits described above. Beginning on February 16, 2021, the transferee must continue to use the property as a principal residence in order to qualify for the exclusion. Family farms are also eligible, but the transferee must continue to use the property as a family farm.  Also, the property tax bill will increase if the value of the property at the time of transfer equals or exceeds the parent’s assessed value plus $1 million. If that happens, the transferee’s new combined base year value equals (1) the existing factored base year value, plus (2) the amount by which the fair market value exceeds the sum of the existing factored base year value and $1 million. For an example, see page 4 of Letter to Assessors No. 2020/061. The $1 million amount will be adjusted for inflation beginning February 16, 2023, and every February 16 after that.

Before and After Proposition 19:

Before Proposition 19Proposition 19
Principal Residence
  • Principal residence of transferor
  • No limit on value excluded from reassessment
  • Principal residence (land, in excess of area of reasonable size used as site for residence, may be excluded as “other real property”)
  • Principal residence (or family farm) of transferor and transferee
  • Limit on value that can be excluded from reassessment: current taxable value plus $1,000,000 (adjusted for inflation)
  • Principal residences and family farms
Other Real Property
  • Transferor lifetime limit of $1,000,000 of factored base year value
  • Eliminates exclusion for “other real property” other than the principal residence
Grandparent-Grandchild Middle Generation Limit
  • Parents of grandchild must be deceased on date of transfer
  • No change: Parents of grandchild must be deceased on date of transfer
Filing Period
  • File claim within 3 years after transfer, or before transfer to third party (whichever is earlier)
  • File for homeowners’ exemption within 1 year after transfer
Effective Dates
  • Through February 15, 2021
  • On and after February 16, 2021

The above chart is based on a summary published by the California Board of Equalization.

*This post was updated on January 7, 2021, to correct an error, by changing “current fair market value” to “current taxable value” in the first row of the chart above.

PPP Second Draw Loans

In December 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the CAA).

In total, the CAA provides $900 billion in COVID relief, including $284 billion for additional Paycheck Protection Program (PPP) loans for new borrowers and “second draw” loans for existing borrowers.

The eligibility requirements for a “second draw” PPP loan (PPP2 Loan) are as follows:

1) The borrower must spend the full amount of the first PPP loan before receiving the PPP2 Loan.

2) The borrower must employ no more than 300 employees per physical location.

3) The borrower must demonstrate a 25% or more reduction in gross receipts in a quarter during calendar year 2020 compared to the same 2019 quarter.

The size of a PPP2 Loan can be up to 2.5 times the average monthly payroll costs during the 1-year period before the loan or during the 2019 calendar year. A borrower in the hospitality or food services industry (with an NAICS code beginning with 72) is eligible for a loan of up to 3.5 times average monthly payroll costs. The amount of each PPP2 Loan is subject to an overall cap of $2 million.

The Small Business Administration has not provided guidance as to how to calculate whether the business suffered a 25% or more reduction in gross receipts.

The SBA is expected to publish a new application form and guidance for PPP2 Loans.

Because the PPP2 Loan program should use much of the existing PPP framework, financial professionals believe the rollout of this new round of loans should go more smoothly compared to the initial PPP rollout last year.

COVID Relief Bill: PPP-Paid Expenses Are Deductible (Updated 12/28/2020)

This past Monday, December 21, a $900 billion pandemic relief bill came out of the U.S. House and Senate. It is called the Consolidated Appropriations Act, 2021. If President Trump signs it, it will become law. Weighing in at 5,593 pages in length, it addresses many areas, including vaccines, education, childcare, jobless benefits, energy, and national security.

Part of the bill is the COVID-Related Tax Relief Act of 2020 (COVIDTRA). One reason why COVIDTRA is getting attention is that it provides direct payments to individual taxpayers, “recovery rebates” – similar to the direct payments that went out to individuals earlier this year.

Another thing COVIDTRA does is clarify that taxpayers whose Paycheck Protection Program (PPP) loans are forgiven ARE allowed deductions for otherwise deductible expenses that were paid with PPP loan proceeds. See COVIDTRA Section 276(a)(1). This overrides the IRS’s earlier position that businesses could not claim deductions for expenses paid with PPP loan proceeds when the loan is forgiven or expected to be forgiven. COVIDTRA also clarifies the tax basis and other attributes of the PPP borrower’s assets will not be reduced as a result of PPP loan forgiveness.

When a PPP loan is forgiven, the borrower does not need to include the amount of the forgiven PPP loan in taxable income. That is a great benefit for the borrower. Now, under COVIDTRA, the ability for taxpayers to deduct expenses paid with forgiven PPP loan money further amplifies the benefits of the PPP loan.

For example, think about a partnership that gets a $100 PPP loan. The partnership spends the $100 on PPP-specific expenses (payroll, rent, etc.), and then has the PPP loan forgiven. The partnership does not pay any federal income tax on the $100. Also, according to COVIDTRA, the partnership can reduce its taxable income by $100 by deducting the $100 that it spent on the PPP-specific expenses. If the owners of the partnership are all taxed at a rate of 37% on ordinary income passed through from the partnership, $100 of PPP money (received tax free) also saves them $37 in taxes.

If it becomes law, this will be a significant tax benefit for many businesses.

On Tuesday, December 22, President Trump threatened not to sign the bill, pressing for higher direct payments and changes to various provisions.  However, on Sunday, December 27, he signed the bill as passed by Congress.

If you have further questions, please contact:

Jim Clarke – 916.558.6084

COVID-19’s Impact on Leasing and Other Transactions

By Louis Gonzalez, Jr., Josh Escovedo, and Mark Ellinghouse

California Real Property Journal

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.

I.      INTRODUCTION

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.

Recent Federal Decision Regarding Business Interruption Insurance Could Mark a Turning Point for COVID-Affected Businesses (Updated 9/29/2020)

Many businesses affected by COVID-19 and the related shelter-in-place orders are turning to their business interruption insurance policies in hope of finding relief. In general terms, a business interruption insurance policy replaces some or all of a business’s income when the business is forced to curtail or cease its operations as the result of a disaster. In the vast majority of cases, insurance companies have turned away COVID-related business interruption claims, claiming that these policies do not provide coverage for COVID-related claims. Rather than fight with insurance companies, many business owners elect to focus their efforts on other forms of relief, including PPP loans and other forms of public assistance. But some, like the owner of the world-renowned Napa Valley restaurant The French Laundry, have sued to enforce their business interruption insurance policies.

Policy holders contend that their business interruption policies were written as part of “all-risk” property insurance coverages, which are designed to comprehensively protect against all risks except those expressly excluded under the policy terms. The insurance companies’ argument is based on a common policy term referring to “physical damage or loss” as the trigger for business interruption coverage. Insurance companies argue that this term means that coverage exists only where the business has suffered physical damage or physical loss, such as in the case of a fire or a storm—actual, tangible, physical alteration of the business’s property. Under the insurers’ interpretation, no coverage exists because COVID-19 and its effects did not cause physical damage or alteration to the policy holder’s property.

In what policy holders hope marks the start of a growing trend, one federal court in Missouri preliminarily ruled in favor of the insured businesses and against the insurance companies. The case, Studio 417, Inc. v. The Cincinnati Ins. Co. (“Studio 417”),[1] involved a collection of salon and restaurant owners whose business interruption claims were rejected by their insurer based on the physical damage or loss argument. After the businesses filed suit, the insurer brought a motion to dismiss their claims on the grounds that the business interruption policies in place did not afford protection under the express policy terms and applicable law.

The court ruled in favor of the policy holders, finding that they had adequately alleged facts that established coverage and that, based on those allegations, the insurance company wrongfully denied coverage. The court’s reasoning focused on the policies’ “physical damage or loss” triggering language. The court found that the word “or” was meaningful, that it differentiates between the concept of “physical damage” and “physical loss,” and that the business owners need only allege that they had incurred either physical damage or loss to qualify for coverage. The court reasoned that the insurance company’s reading of the policy terms would effectively merge the concepts of “physical damage” and “physical loss,” making the “physical loss” policy term superfluous and meaningless.

Noting that the policy did not specifically define the terms “physical damage” and “physical loss,” the court relied on the plain meaning of those terms, finding that physical loss exists when property is taken from one’s possession or when a business is prevented from using the property. Based on this reading of the policies, the court found that the businesses alleged facts establishing coverage because the COVID-19 virus is a physical substance that rendered the business locations unsafe and, coupled with the government orders, rendered their locations unusable. The alleged presence of the COVID-19 virus onsite was key to the Studio 417 decision.

It is important to note that the Studio 417 decision is not a final determination on the merits of the claims—it merely resolved a motion to dismiss, which is a preliminary motion where the court accepts the plaintiffs’ factual allegations as true and deals only with matters of law. The plaintiffs will still need to prove their claims at trial, which the insurer will undoubtedly defend vigorously. The Studio 417 decision is meaningful, however, because it preliminarily establishes as a matter of law what the business interruption policy terms mean. The burden will be on the plaintiffs to prove the facts establishing “physical loss.”

It is also important to recognize that the Studio 417 decision may not necessarily have far-reaching impact. Although it is a federal court decision, Studio 417 was decided based on Missouri state law; the decision is not binding nationwide. In fact, federal court determinations of state law are not even binding on the Missouri state courts. Studio 417 was, however, recently cited with apparent approval by a federal court in California confronted with similar issues. In that case, Mudpie Inc. v. Travelers Cas. Ins. Co. (“Mudpie”),[2] a similar set of plaintiffs brought a claim for coverage under their business interruption insurance policies. Unlike in Studio 417, the court in California found that the plaintiffs did not allege sufficient facts to establish a claim in Mudpie. But the court gave the plaintiffs an opportunity to amend their claims—to add factual allegations—which indicates the court’s implicit recognition that a COVID-related claim, if based on the right facts, could trigger coverage under a business interruption policy in California.[3]

For business owners who had largely written off the availability of business interruption coverage for relief, Studio 417 presents a ray of hope and potential lifeline for their struggling businesses. The Studio 417 decision might also provide a roadmap for policy holders considering litigation to enforce their policy rights. As federal and local assistance programs wind down and the true effects of the COVID-19 health crisis begin to have more widespread, potentially catastrophic effect, Studio 417 could signal an inclination for courts to find coverage for insured businesses. If such a trend develops, insurance companies will undoubtedly be more inclined to provide or, at least negotiate, some level of relief for their insureds.

It goes without saying that a trend toward enforcing coverage could mean the difference between the success or failure of many businesses. But the implications of coverage are far-reaching, impacting vendors who work with those businesses, landlords whose properties house those businesses, and the development of policy terms going forward. Policyholders are encouraged to resubmit their claims for coverage and monitor the progress of cases in their state to determine whether Studio 417 represents a positive bellwether or merely a mirage. Policyholders should also be on the lookout for changes in policy terms, such as new defined terms, as their policies come up for renewal.

For assistance with reviewing your business interruption policies and other available forms of relief, and/or the effect on your existing obligations, please contact the attorneys at Weintraub Tobin.

[1] Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-cv-03127-SRB, Order Denying Mot. to Dism., issued Aug. 12, 2020 (W.D. Mo.)

[2] Mudpie Inc. v. Travelers Cas. Ins. Co., No. 20-cv-03213-JST, Order Granting Mot. To Dism., issued Sept. 14, 2020 (N.D. Ca.)

[3] See also, Optical Services USA/JCI v. Franklin Mutual Insurance Co., No. BER-L-3681-20, a recent New Jersey decision reaching a similar conclusion in a matter involving an insurer challenging coverage under a business interruption insurance policy.