Stone Brewing closes Napa brewpub amid legal battle with landlord over pandemic rent payments

Stone Brewing closed its downtown Napa restaurant and brewpub and laid off 40 workers Thursday amid a legal fight with the property owner over unpaid rent.

The craft brewer claims the terms of its lease for The Borreo Building at 930 Third St. protected it from the “unforeseen event” of the government restrictions imposed during the coronavirus pandemic.

The company said the property owner, West Pueblo Partners, forced it to close.

“We’re incredibly disappointed to leave Napa,” the company said in a statement. “We poured so much passion into the renovation of the beautiful 1877 Borreo Building. We’d hoped to be a part of Napa’s vibrant downtown for many more years.”

Stone Brewing opened in the building in May 2018.

Kevin Teague, one of the four in West Pueblo Partners, told the Business Journal that a Napa County Superior Court recent ruling speaks for itself. On Oct. 15, Judge Victoria Wood ruled in favor the landlord’s claim of unlawful detainer of rent.

The landlord started legal action to evict Stone Brewing on March 23 of this year after not having received rent for December 2020 through March, according to the ruling.

The brewer then sued the ownership, claiming that a clause the lease related to extraordinary events excused its nonpayment of rent. West Pueblo then filed its court claim for unlawful detainer on April 6, claiming $211,273 hadn’t been paid in those four months.

At issue in the Stone Brewing case in Napa is a concept in contract law that has become high profile in insurance and real estate disputes following widespread California fire-safety power outages starting in 2018 and particularly since March 2020, when widespread lockdowns of economic activity started around the world as public health officials tried to stop the spread of the virus.

Called “force majeure” (French for “superior force”), these contract clauses cover what happens when either party can’t perform on what’s agreed. This is that provision in Stone Brewing’s Napa lease:

“If either Party is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act, labor dispute, unavailability of materials or any cause outside the reasonable control of that Party, then the time for performance of the affected obligations of the Party shall be extended for a period equivalent to the period of such delay, interruption or prevention.”

While the judge agreed with Stone Brewing that the pandemic could qualify as a force majeure event, Wood said that the brewer was reinterpreting the lease provision. She wrote that the plain meaning of “delay, interruption or prevention“ covered the responsibility to make payments. Wood said that it does not cover economic situations that were having "some degree of negative impact on the revenue flow previously utilized to pay rent,“ citing a legal filing from Stone Brewing.

The judge pointed to a 2003 Hawaii federal district court ruling in OWBR v. Clear Channel Communications that said “a force majeure clause does not excuse performance for economic inadvisability, even when the economic conditions are the product of the force majeure event.”

The brewer argued that it faced over $1 million in losses from the closure of the Napa location, one-third of the hit to its hospitality business, according to the ruling. Escondito-based Stone Brewing has eight other locations.

Jeff Lerman, whose San Rafael-based firm Lerman Law Partners specializes in real estate, said the Napa case might have had another outcome, if it survives any appeal, if the tenant weren’t able to pay rent.

He also found it curious that Wood didn’t refer to California Civil Code Section 1511.1, which lays out a scenario when parties to a contract are excused from performance of its terms: “When such performance or offer is prevented … by the operation of law, even though there may have been a stipulation that this shall not be an excuse….”

“There’s no way to know at this point whether that might have made a difference to this trial court, however,” Lerman told the Business Journal in an email.

Stone Brewing also argued that common-law principles of “commercial frustration” (also called “frustration of purpose”) and “impracticability“ also could apply to its decision to withhold rent. This is a tactic that some North Bay real estate attorneys have floated as a potential approach in pandemic-closure related lease disputes.

But Judge Wood wrote that the allocation of risks in the Napa lease’s force majeure clause disarmed those defenses, because each side of the contract had already agreed to which disruption of the arrangement will excuse which obligation. She pointed to a case this year from New York State Supreme Court Appellate Division 3rd District (A/R Retail v. Hugo Boss Retail) that said “force majeure provisions can be fatal to a frustration of purpose defense.”

Stone Brewing in its statement about the brewpub closure said that it plans to appeal the Napa County Superior Court decision. It also said that it is offering to relocate Napa workers to its Southern California locations.

Phil Diamond, a mediator with Diamond Dispute Resolution and a real estate attorney of counsel to the Lerman firm, said mediation can help avoid a falling out between landlord and tenant, particularly during the pandemic.

“The parties just have to be willing to come to the table to try to make the best of a bad situation,” Diamond told the Business Journal in an email. “The alternative is a long, expensive court battle, and the loss of jobs while the battle is being waged and beyond.”

He said that disputes coming out of the pandemic often have issues that can happen at any time, and remote work technologies like video conferencing and digital signatures can allow the sides to loop in a mediator from anywhere.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.

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This story was updated Nov. 1 with comment from San Rafael real estate attorneys Jeff Lerman and Phil Diamond, also a mediator who operates Diamond Dispute Resolution.