By: Jason Buckley, Garfield & Hecht, P.C.
The COVID-19 pandemic and government-mandated closure of certain businesses wreaked havoc on commercial tenancies. In Highlands Broadway OPCO, LLC v. Barre Boss LLC, the Colorado Court of Appeals clarified whether a tenant could raise defenses to a commercial lease when its business became unviable due to government-mandated closures.
In 2017, the commercial tenant entered into a commercial lease for its fitness business, and the tenant’s principals personally guaranteed the lease. The lease contained a force majeure clause that excused performance in the event of, among other things, restrictive governmental laws or regulations. However, the force majeure clause specifically stated that nothing would excuse the tenant’s obligation to promptly pay rent.
In March 2020, the Governor of Colorado issued an executive order requiring non-critical businesses, including gyms and fitness facilities, to close in response to the COVID-19 pandemic. Because the tenant’s business was closed by government order, the tenant and landlord negotiated rent deferment and amended the commercial lease to allow landlord to market the space to other prospective tenants. The tenant continued to pay rent through November 2020 but notified the landlord that it was surrendering possession and would not pay rent for December 2020.
The landlord sued the tenant and its principals, alleging breach of the commercial lease and damages. In response, the tenant alleged affirmative defenses of impossibility and frustration of purpose. After trial, the district court held that these defenses were unsupported and ruled in landlord’s favor.
On appeal, the tenant and principals argued that because the pandemic was not foreseeable and the Governor’s executive order forced the closure, the tenant’s performance under the lease was illegal and impossible. The appellate court rejected these arguments. It first held that the defenses of impossibility and frustration of purpose only apply when an unanticipated event occurs. Because the parties contractually allocated the risk of paying rent during an unforeseeable event (via the force majeure clause) the event was foreseeable and not subject to the tenant’s defenses.
This appellate case helps clarify defenses available in a situation where a tenant is unable to pay rent due to a government-mandated closure of business. The holding in this case is particularly helpful in transactional matters, as it helps parties negotiating a commercial lease to allocate risks.
The message here for attorneys representing tenants, particularly before any lease is signed, is to negotiate for standalone provisions that adjust rent obligations if there is another pandemic. A termination right for any tenant will probably not fly with any landlord but abatement (but still paying triple net pass throughs) or outright rent reduction or rent reduction where the difference between the reduced rent and contract rate is carried forward and repaid over time. In 2021 my partner Ron Garfield produced an article in the Colorado Lawyer (Vol.50 No.6) that included lease provisions for tenant relief in the case of a pandemic.
Garfield & Hecht, P.C., attorneys represent landlords and tenants in commercial lease preparation, negotiation, and drafting, as well as litigation regarding commercial leases. For more information, contact one of the following attorneys:
- Aspen: Ron Garfield (garfield@garfieldhecht.com, 970-925-1936)
- Glenwood Springs: David H. McConaughy (dmcconaughy@garfieldhecht.com, 970-947-1936)
- Avon: Kursten Canada (kcanada@garfieldhecht.com, 970-949-0707)
- Denver Tech Center: Jason Buckley (jbuckley@garfieldhecht.com, 720-961-9029)
