The owners of a former downtown Tucson nightclub recently were awarded $1.6 million after suing their landlord for locking them out during the COVID-19 pandemic in 2020.
The case was a local test of so-called “force majeure” contract provisions, which can relieve parties of their contractual obligations for situations beyond their control.
Congress Street Clubs LLC, former owner and operator of Zen Rock nightclub located on East Congress Street, said it was legally forced to close its doors under state order in March 2020.
In a lawsuit filed in September 2020 in Pima County Superior Court, Congress Street Clubs said that despite the contract clause, its landlord, 111-121 E. Congress LLC, demanded that the club remain open and operating or face eviction.
The company contended the lease’s force majeure clause excused its obligation to pay rent while forcibly closed by Gov. Doug Ducey’s COVID-19 lockdown executive orders, and sued the landlord for breach of contract for failing to recognize the clause.
An eight-member Pima County jury agreed, and on Aug. 5 awarded Congress Street Clubs $573,963 in compensation for renovations and equipment it made to the property during its tenancy, and an additional $1,024,240 in compensation for the fair market value of the remaining lease term, according to Adam Peterson, a Tucson attorney representing Congress Street Clubs.
Peterson said the landlord may be liable for another $500,000 in additional penalties and attorney fees yet to be determined.
“The jury got it exactly right and this verdict will go a long way in compensating my client that lost its business of over 10 years as a result of landlord’s improper lockout,” said Peterson, a trial attorney with the Tucson law firm Farhang & Medcoff.
An attorney for 111-121 E. Congress LLC declined to comment on the decision or the possibility of an appeal.
Shutdown hits
Congress Street Clubs signed a lease for 121 E. Congress St. in February 2009 and opened Zen Rock after spending about $800,000 on improvements to turn the property into a nightclub. The initial lease period was through 2011 with auto-renewal options every five years until 2031.
The nightclub owners later leased an adjacent warehouse property to service the nightclub, spending $100,000 on improvements, and paid the landlord $65,000 for a liquor license, according to the lawsuit.
Peterson said Congress Street Clubs paid its rent on time up until it was forced to close in March 2020 due to Ducey’s initial executive order shutting down 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 be unable to follow as a dance bar, the lawsuit said.
Meanwhile, the club owners agreed to a rent forbearance agreement offered by the landlord in late March 2020 to forestall rent payments until after the club was up and running again, if the club owners applied for a government stimulus loan, according to Congress Street Clubs’ complaint.
Peterson said the club owners missed their April and May rent payments but paid June rent with proceeds from a $30,000 federal Paycheck Protection Program loan.
Even when Ducey lifted some restrictions in May 2020, Zen Rock was still unable to open, as four employees contracted COVID-19 and the bar couldn’t find workers.
And in late June 2020, another Ducey order closed down bars with Series 6 liquor licenses, such as Zen Rock, whose main business is the sale or dispensing of alcoholic beverages. That order was extended on a reviewable basis into July 2020.
Locked out
On or around July 31, 2020, the lawsuit says, 111-121 E. Congress St. entered the Zen Rock premises and locked out the club owners, also seizing $150,000 worth of equipment including lighting and sound systems.
To support its claim the lockout was improper, the club owners cited the lease’s force majeure clause, which allows either party to stop performing its contractual obligation during any delay or stoppage due to, among other things, “acts of God, inability to obtain labor or materials or reasonable substitutes therefore, governmental restrictions, governmental regulations, governmental controls....”
The lawsuit says 111-121 E. Congress initially claimed the lease’s force majeure clause was “incomplete,” and indeed, it ends with: “except the obligations” — with no period.
Peterson said the lease form was drafted by the landlord’s attorney and it’s not club owners’ fault if it was incomplete.
“The lesson here is, read your lease terms,” he said.
COVID-19 clauses
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 dealing with a tenant 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’s verdict award went a long way in trying to right this particular wrong in awarding my clients significant damages as a result of that improper lockout.”
Peterson said he’s unsure if the Congress Street Clubs decision could be used as a legal precedent in similar cases, since 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 “acts of God” beyond human control to let parties out of their contractual obligations.
“Force majeure” translates literally from French as “superior force.”
Such clauses and their specific verbiage have been under increased scrutiny since COVID-19 led to widespread business shutdowns in 2020, legal experts say.
“It’s a big issue,” said William Sjostrom, a professor at the University of Arizona’s James E. Rogers School of Law.
Contracts drafted since COVID-19 emerged likely now include “pandemics” as a triggering factor in force majeure clauses, he added.
“As soon as something happens, it’s in all the contracts,” he said.
He noted that the conviction of film producer Harvey Weinstein for sexual assault and rape in 2020 and subsequent corporate lawsuits led to the introduction of “Weinstein clauses” in merger and acquisition agreements, stating that no sexual harassment or assault allegations have been filed against their senior employees or officers within a certain time period.
Sjostrom, who teaches contract law, said even without a force majeure clause, a party to a contract may be relieved of commitments under the general legal doctrine of “impossibility” or “impracticability,” based on an unforeseen events that occur after a contract is signed that make performance impossible or highly impracticable.
Case law mixed
A recent article published by the American Bar Association said most contracts historically haven’t specifically included “pandemics” as a triggering factor in force majeure clauses, leaving the courts to interpret individual cases.
The courts have generally interpreted force majeure clauses narrowly to specific triggering events and scrutinize whether an event actually prevented performance under a contract, the ABA said.
The article cites a narrow interpretation of a case in Virginia in which a theater’s COVID-19 closure claim was denied because the lease specified that force majeure applied only when the property was “damaged or destroyed.”
A state college in Vermont got out of refunding student room and meal payments after the school closed because of COVID-19 because its room-and-board agreement specifically mentioned that no refunds would be given if the school closed due to events including “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, as a judge ruled that the COVID-19 pandemic qualified as a “natural disaster.”
