The owners of a former downtown Tucson nightclub were recently awarded $1.6 million after they sued their landlord for locking them in during the 2020 COVID-19 pandemic.
The case was a local test of so-called “force majeure” contractual provisions, which can release parties from their contractual obligations in situations beyond their control.
Congress Street Clubs LLC, the former owner and operator of the Zen Rock nightclub on East Congress Street, said it was legally forced to close by state order in March 2020.
In a September 2020 lawsuit filed in Pima County Superior Court, Congress Street Clubs said that despite the contract clause, its owner, 111-121 E. Congress LLC, demanded that the club remain open and operate under penalty of expulsion.
The company argued the lease’s force majeure clause excused its obligation to pay rent during the shutdown forced by Gov. Doug Ducey’s COVID-19 lockdown executive orders, and sued the landlord for breach of contract for failing to acknowledged the clause.
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An eight-member Pima County jury agreed, and on August 5 awarded Congress Street Clubs $573,963 in compensation for renovations and equipment it made to the property while it was leased, and compensation additional $1,024,240 as compensation for the fair market value of the remaining term of the lease. , according to Adam Peterson, a Tucson attorney representing the Congress Street Clubs.
Peterson said the owner could be liable for an additional $500,000 in additional penalties and attorney fees to be determined.
“The jury is fully on board and this verdict will go a long way towards compensating my client who lost his business for more than 10 years as a result of improper foreclosure by the owner,” said Peterson, an attorney at the Tucson Farhang Law Firm. & Medcoff. .
An attorney for 111-121 E. Congress LLC declined to comment on the decision or the possibility of an appeal.
Congress Street Clubs signed a lease for 121 E. Congress St. in February 2009 and opened Zen Rock after spending approximately $800,000 on upgrades to turn the property into a nightclub. The initial lease period was until 2011 with options to automatically renew every five years until 2031.
The nightclub owners then leased an adjacent warehouse to service the nightclub, spending $100,000 on improvements and paid the owner $65,000 for a liquor license, according to the lawsuit.
Peterson said Congress Street Clubs paid its rent on time until it was forced to close in March 2020 due to Ducey’s initial executive order closing bars and restaurants as the pandemic took hold.
Zen Rock was unable to reopen even after subsequent state orders allowed bars and restaurants to operate under social distancing measures, which its owners said it would not be able to. to follow as a dance bar, according to the lawsuit.
Meanwhile, the club owners agreed to a rent forbearance agreement offered by the landlord at the end of March 2020 to prevent payment of rent until the club was operational again, should the club owners apply for a loan. government stimulus package, according to Congress Street Clubs’ complaint.
Peterson said the club’s landlords missed their April and May rent payments, but paid the June rent with the proceeds of a $30,000 federal Paycheck Protection Program loan.
Even when Ducey lifted some restrictions in May 2020, Zen Rock still couldn’t open, as four employees contracted COVID-19 and the bar couldn’t find workers.
And in late June 2020, another Ducey order shut down bars with Series 6 liquor licenses, like Zen Rock, whose primary business is the sale or distribution of alcoholic beverages. This order has been extended on a reviewable basis until July 2020.
On or about July 31, 2020, the lawsuit says 111-121 E. Congress St. entered Zen Rock’s premises and locked out the club’s owners, also seizing $150,000 worth of equipment , including lighting and sound systems.
To support their claim that the lockout was unfair, the club owners cited the force majeure clause in the lease, which allows either party to stop performing its contractual obligation during any delay. or termination due to, among other things, “force majeure, inability to obtain reasonable labor or materials or substitutes therefor, government restrictions, government regulations, government controls … »
The lawsuit says 111-121 E. Congress originally asserted that the force majeure clause of the lease was “incomplete,” and indeed it ends with: “except for obligations” — with no period.
Peterson said the lease form was drawn up by the landlord’s solicitor and it was not the club owners fault that it was incomplete.
“The lesson here is to read the terms of your lease,” he said.
Peterson said the jury’s decision was important even though it was a somewhat unusual case.
“Certainly not locally, we haven’t seen very many cases in many cases of tenants being locked out because they were forcibly closed by government order during the pandemic,” he said.
“But in this particular case, I think the jury verdict went a long way to righting that particular wrong by awarding my clients significant damages as a result of this improper lockdown.”
Peterson said he’s not sure the Congress Street Clubs decision can be used as a legal precedent in similar cases because the terms of leases and other contracts can vary widely.
A common boilerplate feature of contracts, force majeure clauses have long covered things like natural disasters and “force majeure” beyond human control to allow parties to avoid their contractual obligations.
“Force majeure” literally translates from French as “superior force”.
These clauses and their specific verbiage have come under intense scrutiny since COVID-19 led to widespread business closures in 2020, legal experts say.
“It’s a big deal,” said William Sjostrom, a professor at the University of Arizona’s James E. Rogers School of Law.
Contracts written since the emergence of COVID-19 likely now include “pandemics” as a trigger in force majeure clauses, he added.
“As soon as something happens, it’s in every contract,” he said.
He noted that film producer Harvey Weinstein’s conviction for sexual assault and rape in 2020 and the companies’ subsequent lawsuits led to the introduction of “Weinstein clauses” in merger and acquisition agreements, stating that no allegations of sexual harassment or assault have been filed against their eldest child. employees or managers within a certain period.
Sjostrom, who teaches contract law, said even without a force majeure clause, a party to a contract can be released from its obligations under the general legal doctrine of “impossibility” or “impracticability”. , based on unforeseen events that occur after signing a contract. signed which render execution impossible or highly impracticable.
Mixed case law
A recent article published by the American Bar Association said most contracts do not specifically include “pandemics” as a triggering factor in force majeure clauses, leaving courts to interpret individual cases.
Courts have generally interpreted force majeure clauses narrowly to specific triggering events and consider whether an event actually prevented performance of a contract, the ABA said.
The article cites a narrow interpretation of a case in Virginia in which a request to close a COVID-19 theater was denied because the lease specified that force majeure only applied when the property was “damaged or destroyed”.
A Vermont state university waived reimbursement for student room and board after school closed due to COVID-19 because its room and board agreement specifically stated that no refunds would be given if the school closed due to events such as a “widespread pandemic”. flu.”
And in a federal case in New York, an auctioneer was allowed to claim force majeure in a contract dispute with an art dealer because a judge ruled that the COVID-19 pandemic qualified as a “natural disaster “.