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In Pennsylvania, parties have broad discretion to allocate risks between them in a contract. Only where there has been no contractual allocation of a risk should a court determine the allocation based on common law theories, such as impossibility and frustration of purpose.
Defendant Cole Haan Company Store, LLC ("Cole Haan"), a global footwear and accessories brand, entered into a long-term commercial lease with Plaintiff 1600 Walnut Corporation, General Partner of L-A 1600 Walnut LP ("1600 Walnut") in 2004. In 2014, the parties agreed to extend the lease through March 31, 2025. The lease allocates certain risks between the parties. Under the force majeure clause of the lease:
If either party is delayed, hindered or prevented from the performance of an obligation because of strikes, lockouts, labor troubles, the inability to procure materials, power failure, restrictive governmental laws or regulations, riots, insurrection, war or another reason not the fault of or beyond the reasonable control of the party delayed (collectively, "Force Majeure"), then performance of the act shall be excused for the period of the delay; provided, however, the foregoing shall not: (A) relieve Tenant from the obligation to pay Rent, except to the extent Force Majeure delays the Commencement Date; and (B) be applicable to delays resulting from the inability of a party to obtain financing or to proceed with its obligations under this Lease because of a lack of funds.
The lease also stated that it will automatically terminate if "the entire Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or conveyed in lieu thereof." Cole Haan permanently vacated the storefront in March 2020 and has not paid rent since that time. The March 23, 2020 Pennsylvania Governor's COVID-19 executive order prohibited Cole Haan from operating the store, but after June 5, 2020 Cole Haan and other retailers in Philadelphia were permitted to reopen with restrictions. Cole Haan did not reopen and not restart rental payments. Thus, 1600 Walnut brought this suit against Cole Haan to recover arrearages owed, base rent, additional rent, late fees, interest, attorneys' fees and costs.
Did the force majeure clause of the lease allocated the risk of a pandemic to Cole Haan?
Under the lease, Cole Haan remained obligated to pay rent, even in the face of a force majeure event. The parties agreed in the lease that, if "strikes, lockouts, labor troubles, the inability to procure materials, power failure, restrictive governmental laws or regulations, riots, insurrection, war or another reason not the fault of or beyond the reasonable control of the party" cause "delayed, hindered or prevented performance," Cole Haan is not relieved of its obligation to pay rent. "[L]ack of funds" is also not an excuse to performance of the contractual obligations under the terms of the lease. The COVID-19 pandemic was an event covered in the force majeure clause. The Governor's COVID-19 orders closing and restricting retail businesses were the most obvious proximate cause of Cole Haan's non-performance. Restrictive laws or regulations, such as the Governor's orders, however, clearly were within the meaning of the force majeure clause and could not excuse Cole Haan's contractual obligations.
Cole Haan, instead, averred that the pandemic itself, not governmental regulations, has prevented Cole Haan from fulfilling its obligations under the lease. Cole Haan argued that the pandemic falls outside of the force majeure clause because the listed examples in the clause were limited to "man-made events of relatively short duration," whereas the pandemic was a "naturally occurring phenomenon." The COVID-19 pandemic, however, was within the defined force majeure events of the lease. The pandemic fell in the same category as the other life-altering national events listed, such as war, riots, and insurrection. It can thus be concluded that the pandemic was included within the catchall provision of "another reason not the fault of or beyond the reasonable control of the party delayed."