Highlands Broadway OPCO, LLC v. Barre Boss, LLC.
2023 COA 5. No. 21CA1735. Landlords and Tenants—Commercial Leases—Breach of Contract—Force Majeure Clause—Affirmative Defenses—Impossibility of Performance—Frustration of Purpose—Failure to Mitigate Damages.
January 19, 2023
In May 2017, Barre Boss, LLC (tenant) entered into an 84-month lease with Highlands Broadway OPCO, LLC (landlord) for commercial property (the premises), where tenant planned to operate a fitness facility. The lease contained a force majeure clause that excused a party’s delay in performing under the lease for, among other things, acts of God and restrictive governmental laws or regulations; but the clause did not excuse tenant from “the prompt payment of any Rent.” Suzanne and Daniel Dipentino personally guaranteed tenant’s obligations to landlord. In response to the COVID-19 pandemic, the governor issued an executive order, effective in March 2020, that required tenant’s business to close. As a result, the parties signed a letter agreement with terms for landlord to defer tenant’s rent obligation. And in May 2020, the parties amended their lease to allow landlord to market the premises to prospective new tenants and to terminate the lease for any reason upon 30 days’ advance written notice. Tenant continued to pay rent through November 2020, but in December 2020, tenant notified landlord that it could no longer make monthly rent payments and that it was immediately surrendering possession of the premises. After tenant stopped making rent payments, landlord sued tenant and the Dipentinos (collectively, defendants) for breach of contract. Defendants’ answer raised the affirmative defenses of impossibility, frustration of purpose, and failure to mitigate damages. The court held that the affirmative defenses were unsupported, and it adjudicated the amount of landlord’s damages and entered judgment against defendants.
On appeal, defendants argued that the trial court erred by holding that the defenses of impossibility and frustration of purpose were unsupported. Defendants maintained that tenant was not liable to landlord because the pandemic was not foreseeable and the executive order made tenant’s performance under the lease illegal and thus impossible. However, the affirmative defenses of impossibility and frustration of purpose are premised on the occurrence of an unanticipated event, so neither defense applies when parties contractually allocate the risk of such an event through, for example, a force majeure clause. Here, the lease’s force majeure clause manifested the parties’ clear intent to allocate to tenant the economic risks associated with paying rent and related sums due under the lease. Further, the pandemic and the executive order were not unforeseeable because tenant and landlord entered into the letter agreement and the lease amendment in response to the financial impact on tenant of those circumstances. In addition, the executive order did not make it illegal for defendants to pay rent, which is the only contractual duty that landlord alleged that tenant breached. Accordingly, the trial court did not err.
Defendants also argued that landlord did not mitigate its damages because it failed to take reasonable steps to find a new tenant for the premises. Here, the landlord advertised the premises for re-lease, and the landlord’s real estate broker, who was an expert witness, testified that he took standard steps to re-lease the premises. Further, defendants did not call their own expert witness to testify that landlord’s efforts to find a new tenant for the premises were unreasonable. Therefore, the record supports the trial court’s determination that landlord undertook reasonable efforts to mitigate its damages. Accordingly, the trial court did not err.
The judgment was affirmed and the case was remanded for the determination and award of landlord’s reasonable attorney fees and costs incurred on appeal.