Highlands Broadway OPCO, LLC v. Barre Boss LLC

• Citation: 2023 COA 5
• Decision Date: 19 January 2023
• Docket Number: 21CA1735
• Parties: Highlands Broadway OPCO, LLC, Plaintiff-Appellee, v. Barre Boss LLC, Suzanne Dipentino, and Daniel Dipentino, Defendants-Appellants.
• Court: Court of Appeals of Colorado

2023 COA 5

Highlands Broadway OPCO, LLC, Plaintiff-Appellee, v. Barre Boss LLC, Suzanne Dipentino, and Daniel Dipentino, Defendants-Appellants.

No. 21CA1735

Court of Appeals of Colorado, Fourth Division

January 19, 2023

SUMMARY

A division of the court of appeals considers whether a commercial tenant that prematurely terminated its lease as a consequence of the financial impact of the COVID-19 pandemic and the Governor's related shutdown order may avoid liability for breach of its lease by asserting the affirmative defenses of impossibility and frustration of purpose. The division holds that such affirmative defenses do not relieve the tenant of its contractual duties because the force-majeure clause of its lease allocated the risk of acts of God and restrictive governmental regulations to the tenant, and the shutdown did not make the tenant's performance under the lease illegal. The division also holds that the record supports the trial court's factual determination that the landlord undertook reasonable efforts to mitigate its damages. Accordingly, the division affirms the trial court's judgment in favor of the landlord, and against the tenant and its guarantors, and remands for determination and award of the landlord's attorney fees and costs incurred on appeal.

Douglas County District Court No. 21CV30047 Honorable Jeffrey K. Holmes, Judge

Murray Wilkening, P.C., Murray Wilkening, Littleton, Colorado, for Plaintiff-Appellee

City Park Law Group, LLC, Wayne E. Vaden, Denver, Colorado, for Defendants-Appellants

OPINION

LIPINSKY, JUDGE

¶ 1 "It is difficult to overstate the adverse economic effects of the COVID-19 pandemic." Buzzell v Walz, 974 N.W.2d 256, 258 (Minn. 2022). The public's concerns about the spread of the virus in public settings, coupled with governmental shutdown orders, exacted a particular economic toll on small businesses. See 640 Tenth, LP v. Newsom, 294 Cal.Rptr.3d 123, 127 (Ct. App. 2022) ("We fully appreciate that the adverse effects of the present pandemic have not fallen equally on all segments of society, and that some small business owners are among those who have borne an especially heavy burden.").

¶ 2 As a consequence of the financial impact of the pandemic, including "government orders restricting consumer access," numerous businesses that leased space fell behind on their rental obligations or stopped paying rent altogether. See A/R Retail LLC v. Hugo Boss Retail, Inc., 149 N.Y.S.3d 808, 813 (Sup. Ct. 2021). Tenants' legal efforts to obtain relief from their contractual duties to their landlords flooded the courts. See id.

¶ 3 In this case, we consider the argument of defendant, Barre Boss LLC (tenant), that it should be relieved from its lease obligations because of the financial impact of the pandemic and the Governor's related shutdown order on its fitness business. Specifically, tenant and the guarantors of its lease obligations, defendants Suzanne Dipentino and Daniel Dipentino, argue that they are not liable to the tenant's landlord, plaintiff Highlands Broadway OPCO, LLC (landlord), because the COVID-19 pandemic and the executive order were unanticipated events that made it illegal, and thus impossible, for the business to operate. (We refer to the defendants collectively as "the Barre Boss parties," and we spell the individual defendants' last name "Dipentino," as it appears in the notice of appeal and briefs, although their last name is spelled "DiPentino" in parts of the record.) We disagree with this interpretation of the lease and therefore affirm the trial court's judgment in favor of landlord.

I. Background

¶ 4 In May 2017, tenant and landlord entered into an agreement (the lease) for tenant's lease of commercial property (the premises), at which Barre Boss planned to operate a fitness facility. The lease term was eighty-four months. The individual defendants personally guaranteed tenant's obligations to landlord. (Vanessa Dipentino, who signed the original lease on behalf of tenant and also personally guaranteed tenant's obligations to landlord, sought protection under the Bankruptcy Code and is not a party to this appeal.)

¶ 5 The lease contains a force majeure clause, which excuses a party's delay in performing under the lease

by reason of acts of God, . . . restrictive governmental laws or regulations[,] or by other cause without fault and beyond the control of the party obligated (financial inability excepted) . . . provided, however, [that] nothing contained in this Section . . . shall excuse Tenant from the prompt payment of any Rent or other charge required of Tenant hereunder . . . nor shall Tenant's inability to obtain governmental approval for Tenant's Permitted Use or for its occupation of the Premises excuse any of Tenant's obligations hereunder.

¶ 6 On March 25, 2020, in response to the COVID-19 pandemic, the Governor of Colorado issued an executive order, effective March 26, 2020, requiring "all businesses other than those qualified as 'Critical Businesses' . . . to close temporarily, except as necessary to engage in minimum basic operations needed to protect assets and maintain personnel functions." Colo. Exec. Order No. D 2020 017, at 2 (Mar. 25, 2020), https://perma.cc/V25Z-TRDD. Tenant's business was not deemed "critical."

¶ 7 Tenant subsequently requested rent relief from landlord in light of the forced closure of its business. In May 2020, the parties signed a letter agreement that landlord would defer tenant's obligation to pay the minimum rent due for April and May 2020. The letter agreement specified that tenant would repay the two months of deferred rent in twelve equal monthly installments from September 2020 through August 2021, "in addition to and together with the regularly scheduled monthly rent then due." The letter agreement further stated that landlord's consent to the rent relief was "a specific concession given only to Tenant for Tenant's agreement to continue the full performance of all [its] Lease obligations (as affected hereby)."

¶ 8 In addition, on May 27, 2020, the parties signed an amendment to the lease. Among other things, the lease amendment granted landlord the right to market the premises to prospective new tenants and to terminate the lease for any reason upon thirty days' advance written notice to tenant. The lease amendment further allowed tenant to "close its business operations at the Premises for any period of time, so long as Tenant continue[d] to pay" all rent and other payments due to landlord under the lease through an "early termination date" - the date specified in any notice of landlord's election to terminate the lease early. Additionally, tenant acknowledged that, as of the date of the lease amendment, it had "no existing claims, defenses (personal or otherwise), or rights of set-off whatsoever with respect to the lease."

¶ 9 Tenant continued to pay rent to landlord through November 2020. In December 2020, however, tenant provided landlord with notice of its "immediate surrender of possession of the premises." Tenant asserted in the notice that its business "ha[d] ceased to operate since the March 16, 2020 government mandated shut down associated with the Coronavirus outbreak"; that it had "sought, without success, to obtain a viable tenant for potential assignment and/or transfer of the lease"; and that, although it had obtained an "Economic Injury Disaster Loan," it had depleted the proceeds of that loan. For these reasons, tenant said it was "no longer able to remit monthly payments in accordance with the provisions of the Lease Term."

¶ 10 After tenant stopped making payments under the lease, landlord filed suit against the Barre Boss parties for breach of contract. In their answer, the Barre Boss parties pleaded, among other affirmative defenses, impossibility, frustration of purpose, and failure to mitigate damages. The trial in this case focused on those affirmative defenses and the amount of landlord's damages. (The Barre Boss parties do not appeal the amount of damages awarded to landlord.) After a one-day bench trial, the court held that the affirmative defenses were unsupported, adjudicated the amount of landlord's damages, and entered judgment against the Barre Boss parties.

II. Analysis

¶ 11 On appeal, the Barre Boss parties argue that the trial court erred by holding that (1) the Barre Boss parties' defenses of impossibility and frustration of purpose fail because tenant's performance under the lease was not impossible for an unforeseeable and indefinite period of time; and (2) landlord took reasonable steps to mitigate its damages.

A. The Affirmative Defenses of Impossibility and Frustration of Purpose

¶ 12 The Barre Boss parties contend that tenant was not liable to landlord because the COVID-19 pandemic was not foreseeable and the executive order made tenant's performance under the lease "illegal," and thus impossible. We disagree.

1. Applicable Law and Standard of Review

¶ 13 Impossibility or impracticability of performance is a defense to a breach of contract claim when "an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract." City of Littleton v. Emps. Fire Ins. Co., 169 Colo. 104, 108, 453 P.2d 810, 812 (1969) (quoting 6 Samuel Williston & George J. Thompson, A Treatise on the Law of Contracts § 1931 (rev. ed. 1938)). Similarly, a party may be excused from performance under a contract when the "party's principal purpose is substantially frustrated without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made." Town of Fraser...