If you are a commercial renter and your business has been mandatorily closed as a result of the COVID-19 pandemic, you may be wondering if you still have to pay rent.
Short answer: it depends.
In March, several Bay Area counties including San Francisco and Marin adopted the Shelter in Place ordinance, of which Section 3 states: “All businesses with a facility in the County, except Essential Businesses as defined below in Section 10, are required to cease all activities at facilities located within the County except Minimum Basic Operations, as defined in Section 10.”
If your business is considered “non-essential” and has been ordered completely closed by law due to COVID-19, and you are unable to use the premises whatsoever, then you can likely argue successfully that you should not be required to pay rent for a building that you are not using. But if your business is not classified as non-essential and you can use the premises for some kind of profit while still respecting the 6-foot social distancing recommendation, then you will have a more difficult time making this argument.
When you rent a building you are required to make monthly payments for the use of the premises and the landlord is required to provide you access to the premises according to the terms of the contract. But if the law makes it illegal to run your business, your performance may be excused by the doctrine of “impossibility.”
California law excuses performance that has been rendered legally impossible.
“Impossibility of performance” is a term of art. Clearly, it is still humanly possible to run your business and continue paying rent. But under contract law, if performing the contract under the terms of the contract causes you to violate the law, it could discharge your duty to pay rent.
The Second Restatement of Contracts § 264 states, “[i]f the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.”
This means that if supervening law prohibits a performance or imposes requirements that make it impracticable to run your business in such a way that it defeats the purpose of the contract, this generally relieves you from your duty to perform. The fact that you can still theoretically run your business, break the law, and risk the consequences does not bar you from claiming discharge while the law is in place.
Does this mean you can walk away and void the entire contract? No. Unless the law defeats the purpose of the entire contract. You still have a responsibility to fulfill the rest of the lease after the temporary shelter in place is lifted. In other words, this may excuse you from making one or two payments, but as soon as the shelter in place is lifted it’s business as usual.
But it’s not business as usual, we’re in a recession; do I still have to pay rent after the shelter in place is lifted? Yes. Financial difficulty is not an excuse to discharge performance, even to the extent of insolvency or bankruptcy.
What are my options? While the shelter in place is active, a reasonable landlord will try to find creative solutions to retain you as a renter, care for the building in the interim, and even potentially collect partial rent. For example, one solution is to defer payments until the next rental cycle, when the spread of COVID-19 is controlled, the market (hopefully) begins to normalize, and you’re able to reopen your doors again. But if the landlord requires that you pay full rent for a building that you are not using whatsoever, he is receiving a benefit that he has not earned. Vice-versa, if the renter can still use the premises to run basic operations and turn a profit, he probably should pay a pro-rata amount of the entire rent.
The takeaway here is to be reasonable and understanding. Work together to find creative solutions that foster future business growth and community because when this is all over you’re going to want to have an amicable relationship with your landlord and your landlord is going to want to retain you as a renter, especially in an economic downturn. These are difficult times for everybody. Think cooperation not litigation.
*This material is intended for general information purposes only and does not constitute legal advice. Each case requires unique legal analysis of law and facts. For legal issues that arise, the reader should consult legal counsel
*This material is intended for general information purposes only and does not constitute legal advice. Each case requires unique legal analysis of law and facts. For legal issues that arise, the reader should consult legal counsel.