Earlier this month, the United States Bankruptcy Court for the Northern District of Illinois held that a force majeure clause in a lease partially excused a restaurant from paying rent after the restaurant closed as a result of a statewide order limiting restaurants and bars to carry-out and delivery service to prevent the spread of COVID-19. The case is among the first to consider whether COVID-19 is a force majeure event that may excuse a tenant from paying rent under a lease.
In the case, the debtor, Hitz Restaurant Group (the “Debtor”), leased space from Kass Management Services, Inc. (the “Landlord”). The force majeure provision of the lease provided:
Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only for so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by … laws, governmental action or inaction, [or] orders of government…. Lack of money shall not be grounds for Force Majeure.
The Debtor argued this provision of the lease was triggered on March 16, 2020, when Illinois Governor J.B. Pritzker issued an executive order requiring restaurants, bars, food halls, and other establishments to stop allowing on-premises consumption of food and beverages. Such businesses were permitted to offer food and drinks for carry-out, curbside pickup, and delivery, however, provided they had an environment where patrons could maintain adequate social distance.
The Landlord first argued that the force majeure clause was not triggered because the executive order did not shut down the banking system or post offices in Illinois. In other words, the Debtor was physically capable of writing and sending a check to the Landlord. The Court called this argument “specious” and rejected it without further consideration.
The Landlord next argued that the Debtor’s failure to pay rent arose from a mere lack of money – which was explicitly not grounds for force majeure by the terms of the lease. The Court rejected this argument, as well, reasoning that the Debtor was not refusing to pay rent because of a mere lack of money; rather, the Debtor was arguing the shutdown order was the proximate cause of its inability to generate the revenue necessary to pay rent under the lease.
Finally, the Landlord argued that the Debtor could have obtained the money to pay rent by applying for a Small Business Administration loan. The Court noted, however, that there was no requirement in the force majeure clause or elsewhere in the lease that the Debtor borrow money to counteract the effects of a governmental action or order contemplated by the force majeure clause.
Having rejected the Landlord’s arguments, and having concluded that the force majeure clause applied, the Court did not let the Debtor off the hook entirely, however. The Court noted that the Governor’s order did not prohibit the Debtor from offering carry-out, curbside pick-up, and delivery services. On the contrary, the executive order encouraged restaurants, bars, and other eating and drinking establishments to offer such services. Thus, to the extent the Debtor could have offered those services and earned revenue, the Court concluded it was not excused from paying rent.
The Court noted that neither party had provided much help in calculating the appropriate rent reduction in light of the force majeure event. The Debtor estimated, however, that approximately 75% of its square footage, constituting its dining room and bar, was unusable as a result of the executive order, whereas approximately 25%, constituting its kitchen, could have been used to prepare food for pick-up, take-out, and delivery. As a result, the Court concluded the Debtor was liable for at least 25% of its rental payments for the months of April, May, and June 2020, and that the Debtor will likely be liable for a higher percentage as statewide restrictions on restaurants and bars are gradually lifted.
In re Hitz Restaurant Group contains important lessons for landlords and tenants alike. For landlords, the case is a reminder, first and foremost, of the importance of carefully drafting a force majeure clause. Had the force majeure clause been drafted more narrowly in favor of the landlord, the outcome of the case may well have been different. For tenants, the Court’s holding suggests that governmental action in response to the COVID-19 outbreak may excuse payment of rent or other contractual obligations, but only up to a point. To the extent a tenant is able to resume business operations consistent with the Governor’s order, even on a limited basis, the tenant is not excused and must continue to pay rent and fulfill its other contractual obligations.
Hahn Loeser’s Commercial Services & Restructuring Group is available to assist with force majeure and other contractual performance issues that may arise for your business. If you have questions, please reach out to your primary contact at Hahn Loeser, or contact one of the attorneys listed on the full attachment below.