Covid-19's Impact on Leasing and Other Real Estate Transactions

• Publication year: 2020
• Author: Louis Gonzalez, Jr., Josh Escovedo, and Mark Ellinghouse

COVID-19's Impact on Leasing and Other Real Estate Transactions

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

Louis Gonzales, Jr. is a shareholder and a senior trial attorney in Weintraub Tobin's Litigation group. He has developed expertise in all areas of real estate litigation including purchase and sale contracts, due diligence, disclosure, options, partnership, commercial landlord/tenant, and master-planned community disputes. Louis has tried over thirty jury trials to verdict and numerous court trials and binding arbitrations to judgment. Louis is active in the community, where he serves on many nonprofit boards, and in the Firm, where he serves on the Managing Board. He has been recognized by his peers as a Northern California Super Lawyer, Best of the Bar, Sacramento Top Lawyer, Best Lawyer, and 2020 Lawyer of the Year for Real Estate Litigation/Sacramento.*

Josh H. Escovedo is an experienced trial attorney at Weintraub Tobin and a shareholder in the Firm's Litigation, Intellectual Property, and Real Estate practice groups, serving clients throughout California and nationwide. Josh's litigation practice has a particular emphasis on disputes involving real property and intellectual property. He also handles a broad range of commercial litigation matters for clients in various industries, including hospitality, real estate, sports and entertainment, agriculture, and construction. Josh has extensive experience dealing with the United States Patent and Trademark Office and the United States Copyright Office and has successfully handled various matters before the Trademark Trial and Appeal Board. He received his J.D. from the UCLA School of Law and his B.A from California State University, Fresno.*

Mark Ellinghouse is a shareholder in the Real Estate and Corporate practice groups of Weintraub Tobin. Mark has experience in a broad spectrum of real estate matters, including retail, industrial, office, multifamily, land, and mixed-use projects. He represents individuals and entities large and small, regularly advising clients regarding corporate transactional matters including formation, governance and management, mergers and acquisitions, strategic partnering, joint ventures, licensing, and distribution arrangements. He received his J.D. and M.B.A. from the University of California, Davis, and his B.A. from the University of California, Los Angeles.*

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.

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.

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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:
1. 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;
2. 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,
3. 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.¹

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."² 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.³ 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.⁴ 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 contract⁵ 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.⁶

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.⁷ 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,⁸ suspend performance,⁹ or apportion the costs of the loss.¹⁰ 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."

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For most purposes, force majeure is considered the equivalent of the common law contract defense of impossibility.¹¹ But they remain disparate bodies of law, though courts often fail to draw the distinction.

An exemplary case is the 1946 California Supreme Court case, 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.¹² 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.¹³ Under the agreement, C.S.T., Ltd. was supposed to load the copra in the Fiji Islands and deliver it to San Diego, California.¹⁴ 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 cancelled because C.S.T., Ltd. could not obtain an export permit.¹⁵ 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.¹⁶ 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.¹⁷ The California Supreme Court affirmed the order.¹⁸ Although Pacific Vegetable Oil Corp. was on appeal from an arbitration award with a deferential standard of review, the case provides one of the...