During the COVID emergency of 2020, many commercial borrowers and commercial tenants suffered loss of revenues and fell into arrears on their scheduled mortgage or rent payments. Business revenues fell either because the businesses were required to be closed by government order or regulation, or because of declines in patronage generally. Now that the courts have reopened, lenders and landlords are attempting to collect these arrears. The question has arisen whether the defenses that COVID has made it impossible or impracticable for borrowers or tenants to comply with their mortgage and lease obligations are valid.
There is a dearth of case law in Pennsylvania considering these defenses in a context similar to a COVID emergency. What little law does exist suggests that neither the general economic downturn caused by COVID nor governmentally required closures of businesses trigger the defenses of impossibility or impracticability.
First, some caveats: This article is not intended as an exhaustive study of the subject. There may be other cases not discussed in this article that could lead to a different conclusion. Also, this article is not intended as legal advice that may be relied on in all instances. Specific language in a particular mortgage or lease, or the specific wording of a particular governmental order or regulation may also be grounds for reaching a different result. Last, this discussion is focused on commercial, not consumer or residential transactions.
Impossibility or impracticability has long been accepted as a defense to contract performance in Pennsylvania, provided that the event giving rise to the impossibility is something that could not have been anticipated by the parties and not the fault of the party asserting the defense. For example, in, Lovering v. The Buck Mountain Coal Company, 54 Pa. 291 (1867), the defendant was excused from delivering a quantity of coal after a railroad bridge was destroyed in a flood, rendering it impossible to transport the coal from the mine to the contracted destination. However, for the doctrine to apply, the act itself must be impossible of performance, not the party’s ability to perform it. Mere financial inability to pay money by itself is not sufficient to invoke the defense. Luber v, Luber, 418 Pa. Super. 542, 614 A.2d 771 (Pa. Super. 1992). A claim of personal inability to perform the action contemplated by a contract does not rise to the level of legal impossibility. Felix v. Giuseppe Kitchens & Baths, Inc., 2004 Pa. Super. 120, 848 A.2d 943 (2004). In short, a party generally assumes the risk of his own inability to perform his contractual obligations. Luber, supra. In Luber, a husband was not excused from payments due under a marital settlement agreement because other financial obligations made it difficult for him to pay his ex-wife, and in Felix, the contractor was not excused from performing a settlement because it had difficulty ordering cabinets on credit or paying money. The court in Felix explained that ordering cabinets or paying money were not things that were incapable of being performed, but were acts that the contractor could not perform because of its business problems.
More recently, in Step Plan Services v. Koresko, 12 A.3d 401 (Pa. Super. 2010), the court again held that an individual’s financial position cannot generally be an implied basic assumption of a contract, and it will not excuse non-performance. The court cited and relied on examples to Section 261 of the Restatement (Second) of Contracts, to the effect that neither a party’s financial condition resulting from a bank failure, nor governmental regulations that have made its business unprofitable, will excuse a party from its duty to perform its contractual obligations. 12 A.3d at 412-13.
Other states have reached a similar result in analogous situations. For example, in Perry v. Champlain Oil Co., 101 N.H. 97, 134 A.2d 65 (1957), the New Hampshire Supreme Court held that the loss of the contract with the gasoline supplier did not excuse performance under a lease, even though the gas station would be less profitable. In Wooldridge v. Exxon Corp., 39 Conn. Supp. 190 (1984), the Connecticut Superior Court held that an oil embargo which drastically diminished the supply of gasoline, increased prices and decreased demand did not justify rescission of a gas station lease. And in Lloyd v. Murphy, 25 Ca. 2d 48, 52-57 (1944), the California Supreme court rejected the defense despite a change in the federal government’s system of priorities for the sale of new automobiles. Courts in Illinois, New York and Utah have reached similar results in cases involving nonpayment of rent allegedly due to COVID induced governmental restrictions. However, courts in Indiana and Massachusetts have applied the defenses of impossibility or frustration of purposes in commercial rent collection cases in ceratin circumstances.
In summary, that a company was required by the government to shut its doors for a period of time or lost revenues due to decreased patronage due to the COVID emergency, will not excuse failure to pay rent or a mortgage. However, the actual language of a lease or mortgage could affect the outcome of a case.
Please call on us if we can assist you in collecting unpaid rents or other commercial debts. We can also review your lease or mortgage to optimize the language to bolster your protection.