ARIZONA APPELLATE COURT RULES THAT COVID CLOSURES DO NOT EXCUSE TENANT’S NON-PAYMENT OF RENT
By Bradley D. Pack
A “force majeure” clause (sometimes called an “Act of God” clause) is a contract provision that excuses a party from liability if their ability to perform was prevented by extraordinary circumstances beyond the party’s control, like a natural disaster or a riot. These clauses became the focus of heavy litigation during the COVID-19 pandemic when many commercial tenants were forced to temporarily close their businesses due to emergency proclamations and other measures taken to prevent the spread of infection. The Arizona Court of Appeals recently became the first Arizona appellate court to weigh in on the issue of whether a force majeure provision in a lease or other common law defenses relieve a tenant whose business had been shut down of responsibility for paying rent. The short answer, the Court held, is no—at least under the facts of that case.
Vereit Real Estate, LP v. Fitness Int’l LLC, 1 CA-CV 22-0402 (Ariz. App. Apr. 11, 2023) involved three Arizona fitness centers owned by Fitness International. In an effort to curb the spread of COVID-19, then-Governor Ducey issued executive orders that required such centers to close from March to August 2020. Fitness International did not pay rent for the three fitness centers at issue for the months of April through August 2020, leaving over $900,000 in rent unpaid. When the landlords sued for the unpaid rent, Fitness International defended on the ground that it was excused from paying rent under the force majeure provisions of the leases, the common law doctrine of frustration of purpose, and other affirmative defenses. The trial court ruled that none of these defenses applied, and entered judgment in favor of the landlords for the unpaid rent. Fitness International appealed. The Arizona Court of Appeals affirmed the trial court’s ruling in favor of the landlord, holding neither the contractual force majeure clauses at issue in the leases nor any of the common law defenses operated to excuse its payment of rent
The appellate court first noted that “force majeure is not a common law defense applicable when a contract lacks a force majeure provision.” Thus, force majeure clauses must be analyzed under traditional standards of contract interpretation. In this case, all of the leases expressly stated that “Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.” Two of the three leases included the additional language: “Nothing in this Section shall excuse Tenant from the prompt payment of any rental or other charges required of Tenant hereunder.”
The tenant acknowledged that the force majeure clause did not excuse payment of rent under the two leases that included the bolded language, but argued that it was excused from paying rent under the lease that did not include it. The court rejected the tenant’s argument. It held that under the plain language of the lease provisions common to all of the leases, “the failure to make lease payments can be cured by the payment of money.” Thus, non-payment of rent is not excused by a force majeure event (here, the COVID-19 pandemic or the emergency proclamation requiring gyms to close).
The court went on to hold that the frustration of purpose doctrine, which “arises when a change in circumstances makes one party’s performance virtually worthless to the other,” did not apply in this case. Initially, the court pointed out that Fitness International did not preserve for appeal its objection to the trial judge’s ruling that even if there was a temporary frustration of purpose (a legal doctrine that no Arizona appellate court has yet recognized), the obligation to pay rent was only “suspended” during the period of time when it was prevented from operating (meaning that it would have to pay the delinquent rent once it began operating again). The appellate court also held there was not a complete frustration of purpose because “Tenant has not shown that a four-month restriction imposed on 15-year commercial leases constitutes such a substantial frustration of purpose that the resulting value of leasing the premises is totally or nearly totally destroyed.” And, the frustration of purpose doctrine applies only “if the risk of loss was not placed on the party seeking relief.” Because the leases required Fitness International to pay rent “even during force majeure events,” the court held, the leases placed the risk of loss on the tenant, and precluded it from asserting a frustration of purpose defense.
Finally, the court rejected a variety of other defenses raised by Fitness International, finding that the defenses had either been waived or were not supported by the evidence.
The holding in Vereit does not necessarily foreclose the availability of defenses for commercial tenants faced with extraordinary disruptions to their business caused by forces beyond their control. The court’s holding that the force majeure clauses at issue did not excuse the payment of rent was heavily dependent on the specific language the parties used in their leases. With the lessons learned from the pandemic, tenants and landlords alike may find themselves negotiating over the language of force majeure clauses harder and more thoughtfully in the future. The benefit of being represented by experienced legal counsel in such negotiations cannot be overstated.
