Co-author: Scott Feir, Partner – Montgomery Purdue PLLC

Each Specific Lease’s Allocations of Risks Will Be Critical to Evaluating Landlord Claims for Unpaid Rent or Tenant Claims that Rent Should Be Waived

As the commercial landlord-tenant landscape continues to recover from the COVID-related disruptions, Washington courts continue to provide new guidance on the knock-on effects of government shutdown orders. Fitness Intl’s v. Nat’l Retail is the latest chapter. In this recent case, LA Fitness (the trade name for Fitness International, LLC) claimed it was not liable for unpaid rent during COVID shutdowns, claiming the landlord breached the lease. The landlord countersued arguing that the landlord did not breach the lease because the government, rather than the landlord, forced LA Fitness to close. The Court’s ruling addressed two separate questions: (1) may a landlord be held liable COVID shutdowns ordered by the government, and (2) if not, was the tenant excused from payment of rent during the shutdowns?

The Court Held the Landlord Did Not Breach the Lease

The Court ruled that the COVID shutdown orders were not a breach of the lease by the landlord. The court cited two reasons: “(1) the government, not National Retail, affected Fitness International’s use of the premises; and (2) the lease excludes interference by government orders.” On this issue, the tenant specifically claimed that the landlord breached the “covenant of quiet enjoyment.” The covenant of quiet enjoyment is a condition implicit in any tenancy that protects “the tenant from any wrongful act by the lessor which interferes with the tenant’s quiet and peaceable use and enjoyment thereof.” In simple terms, the landlord cannot unlawfully interfere with the tenant’s use of the property. The Court ruled that the landlord “was not responsible for the public health orders and was powerless to prevent the government’s closure of nonessential businesses like fitness clubs.” Therefore, the landlord could not be deemed to have breached the lease here. Additionally, the court also stressed that the lease in this case specifically stated the tenant was responsible for complying with government orders, extinguishing any remaining doubts about the landlord’s liability.

Under the Terms of This Lease, the Tenant Was Liable for Rent During Shutdowns

The second question the court addressed was whether the shutdowns relieved the tenant of its rent obligations during the shutdowns. The tenant relied on two separate theories in furtherance of its claim it was relieved of its rent obligations: (1) frustration of purpose; and/or (2) impracticability/impossibility.

As to frustration of purpose, the Court stressed two things. First, this specific lease’s terms listed a number of types of permissible uses, besides a gym, that the tenant could use the premises for, many of which would not have been shut down. As the Court explained: “Fitness International could alter its business practices to occupy the premises for other purposes.” The court further reasoned that frustration of purpose was not applicable because the tenant remained in possession of the premises while it knew the gym could not be operated.

As to impossibility and impracticability, the court held that these doctrines did not apply for similar reasons. Again stressing the lease’s flexibility on permissible uses, “the mere fact that a contract’s performance becomes more difficult or expensive than originally anticipated [i.e., changing uses], does not justify setting it aside.” So, while the COVID shutdowns presented challenges, they did not make the tenant’s use of premises under this lease impossible.

Key Takeaways Regarding COVID Shutdowns and Leases

The key takeaways from this case for commercial landlords and tenants are the following:

1. Washington courts will be skeptical of arguments claiming a landlord should be responsible, in whole or in part, for government-mandated COVID shutdowns.
2. Washington courts will generally respect clear allocations of duties and responsibilities between landlord and tenant regarding compliance with government orders.
3. If the lease gives the tenant multiple options as to its use of the premises, at least some of which were not subject to COVID shutdowns, Washington courts will be skeptical of arguments that the tenant should be relieved of its lease obligations.

There will undoubtedly be additional Washington court opinions analyzing the ramifications of COVID business disruptions in the coming months and years. This blog will continue to update the Seattle area legal and business community on these developments.