“Now is the time for kindness and our humanity to shine forth, to help each other not get sick, by wearing face masks, gloves and self isolating and helping our society’s most vulnerable, seniors, get the good treatment and protection they need.”
IF the commercial lease tenant cannot pay the rent because business is non-existent — I mean, literally zero or close to zero, because the business is closed due to the government imposed lockdown — can the tenant be relieved of liability on the commercial lease agreement?
The Uniform Commercial Code (UCC) provides that performance under a contract may be excused when “performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”
Further, the Restatement (Second) of Contracts defines impossibility as “not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.”
Impracticable or impossible or frustration of purpose as an excuse
The tenant can argue that the lockdown is a government regulation, which rendered their performance under their lease contracts as “impracticable” or “impossible”. Now, what is “frustration of purpose”?
The classic example of this is that you rent an apartment so that you can see the President of the United States pass through on the street just below the apartment. Then, it turns out that the president canceled that trip because he decided to play golf instead in Mar-a-Lago. The fact that the president canceled his trip means you can no longer view him from the apartment that you rented, so your purpose of renting that apartment has been “frustrated,” thus you are now excused from paying rent on the lease contract. That sounds pretty simple, right?
A lot of small businesses simply cannot pay their rent nowadays because of the pandemic. There is just no business because of the lockdown and the natural fear of people of getting infected by the virus, which may lead to death. I have a friend up north who got the virus from traveling in February. He arrived back in California on March 7 and was rushed to the ER and ICU the minute the plane landed. He could not breathe and had a high fever. He’s still in a coma now and it’s been over two months that he’s been on a ventilator. He’s suffered multiple mini strokes because the virus causes the blood to coagulate. He truly needs divine intervention to get healed.
This is the kind of situation we are faced now and this is the real world that we live in now until a vaccine is discovered. Paying commercial rent seems to be a small problem when compared to the risk of dying.
Client to owe $500K of unpaid commercial lease
I just talked to a client who just signed a commercial lease in January for six years at $7,000 a month. Her business was booming in January and February but March, April and May just totally dried up. Nada. Zilch. She’s on the hook for more for almost half a million dollars of unpaid rent for six years. That’s $500,000 that she will owe even if she is evicted from the premises for not paying rent.
The best approach is to negotiate some kind of temporary agreement with the landlord to tide things over in the meantime. But landlords need money too because they owe mortgages that need to get paid. This is like a falling house of cards. So, they will not waive the rent, but probably will hold back on suing for eviction because it’s really not easy to get another renter. Might as well squeeze something out of the current renter. Anything is better than nothing.
The golden rule of Christianity
Now is the time for kindness and our humanity to shine forth, to help each other not get sick, by wearing face masks, gloves and self isolating and helping our society’s most vulnerable, seniors, get the good treatment and protection they need. After all, we pride ourselves as being a Christian country right? And what is the “golden rule” in Christianity? Jesus described the “golden rule” as the second great commandment for human beings to follow. The “golden rule” of Leviticus 19:18, quoted by Jesus of Nazareth (Mathew 7:12; Luke 6:31 is: “Do unto others as you would have them do unto you.” So this is how we should be treating each other, especially now during the time of the pandemic, we should be following the golden rule.
If the landlord insists on rent payment, then the client can either defend herself and try to get out of the contract by arguing impossibility/impracticability/frustration of purpose, or just file for Chapter 7 bankruptcy to get a fresh start without accumulated debt. The Chapter 7 discharge will just wipe out the entire $500,000 that she will owe on the lease.
Fresh start in life
Just remember even Walt Disney filed for Chapter 7 twice before his Disney theme parks and entertainment business became a worldwide success story. And Milton Hershey filed for Chapter 7 before his Hershey chocolate empire became the biggest chocolate business in the world. Disney and Hershey became billionaires after wiping out accumulated debt and getting a fresh start in life with Chapter 7 bankruptcy. This is the right thing to do.
Even several dioceses of the Catholic Church here filed for bankruptcy reorganization to handle the molestation lawsuits. Yes, even Orange County filed for bankruptcy reorganization about 15 years ago. Just two years ago in 2018, Sears filed for bankruptcy protection. It had 68,000 employees at that time and 700 stores.
Bankruptcy is protection and a fresh start. It’s something good that needs to be done at a certain point in time because of accumulated debt, which is now caused by the pandemic. Nothing in life or business is guaranteed, that’s why you need an escape valve. Bankruptcy is that escape valve.
The purpose of Chapter 7 bankruptcy is to give the individual debtor who is saddled with debt, a chance to become productive again by discharging his accumulated debt while allowing him to keep all or most of his assets via a legal system of exemptions.
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Disclaimer: None of the foregoing is considered legal advice as each case is different.
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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.
