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Force Majeure and COVID-19: Illinois Bankruptcy Court Rules That Force Majeure Provision Partially Excuses Rent Payments

June 4, 2020

Force Majeure and COVID-19: Illinois Bankruptcy Court Rules That Force Majeure Provision Partially Excuses Rent Payments

June 4, 2020

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The landlord argued that the force majeure clause did not apply at all for three primary reasons. The Bankruptcy Court rejected each of the landlord’s arguments.

The United States Bankruptcy Court for the Northern District of Illinois ruled that a force majeure clause in a commercial lease partially excused a restaurant tenant from paying rent during the period of the Illinois state executive order restricting dine-in restaurant operations. In re Hitz Restaurant Group, No. 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. Jun. 3, 2020). This decision is one of the first to test the application of a force majeure clause in the COVID-19 pandemic.

The Chapter 11 bankruptcy debtor in this case is a Chicago restaurant. The federal Bankruptcy Code requires a debtor in possession to pay post-petition rents “until such lease is assumed or rejected.” 11 U.S.C. § 365(d)(3). The debtor argued that a force majeure clause in its lease excused payments as a result of an Illinois state executive order restricting dine-in restaurant operations during the course of the COVID-19 pandemic.

The force majeure clause at issue read:

Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by… laws, governmental action or inaction, orders of government. … Lack of money shall not be grounds for Force Majeure.

The Illinois executive order required restaurants to “suspend service for… on-premises consumption” but also “permitted and encouraged” restaurants to “serve food and beverages so that they may be consumed off-premises.”

The landlord argued that the force majeure clause did not apply at all for three primary reasons. The Bankruptcy Court rejected each of the landlord’s arguments.

First, the landlord argued the force majeure clause was not applicable because the banking and mail system was still functioning. The landlord argued the debtor “would have physically been able to write and send rental checks to Creditor.” The Bankruptcy Court ruled this was a “specious argument” and rejected it “out of hand.”

Second, the landlord argued that the debtor’s inability to pay rent was merely as a result of “lack of money” under the terms of the force majeure clause. The Bankruptcy Court rejected this argument on the ground that the executive order was the “proximate cause” of the debtor’s failure to pay rent, not a “lack of money.” In a footnote, the Bankruptcy Court addressed the possibility there was a “conflict” between the phrase “lack of money” and “governmental action” and ruled that “governmental action” was more specific and therefore “prevails” in the analysis.

Third, the landlord argued that the debtor chose to forego applying for a loan under the SBA Paycheck Protection Program, a federal program that could have provided a forgivable loan to the debtor to meet certain rent and payroll obligations. The Bankruptcy Court rejected that argument because “nothing in [the force majeure] clause requires the party adversely affected by governmental action or orders to borrow money to counteract their effects.”

In spite of rejecting the landlord’s arguments, the Bankruptcy Court ruled that the “Debtor is not off the hook entirely” as a result of the force majeure clause because the Illinois executive order encouraged restaurants to operate carryout, curbside pickup and delivery services. Therefore, “to the extent that Debtor could have continued to perform those services, its obligation to pay rent is not excused by the force majeure clause.” The Court therefore ruled that the debtor’s rent obligation was reduced only “in proportion to its reduced ability to generate revenue due to the [Illinois] executive order.”

The debtor estimated that only 25 percent of its square footage was usable as a result of the Illinois executive order limiting its operations to takeout only. The court therefore applied that ratio to determine the amount of rent the debtor owed for April, May and June 2020. The court suggested that going forward, the percentage of rent due may increase as “shut-down restrictions are gradually lifted.”

This decision stands out for several reasons:

First, it is one of the first to address the applicability of a force majeure provision in any context related to the COVID-19 pandemic. The case law on force majeure provisions is limited in most states, including Illinois. This decision provides an early data point into how courts may apply force majeure provisions to issues related to the COVID-19 epidemic, including government shutdown orders.

Second, the application of a force majeure provision to excuse a tenant of rent obligations is unusual. Many commercial leases do not include force majeure provisions that would excuse the tenant’s rent payments. This particular force majeure provision included an exclusion for situations caused by “lack of money.” But the Bankruptcy Court ruled that provision did not apply and instead ruled that the proximate cause of the debtor’s failure to pay was not “lack of money” but instead the Illinois executive order shutting down dine-in restaurant operations.

Third, even though the Bankruptcy Court ruled the force majeure clause applied, its decision underscores the limited relief that a force majeure clause can provide a contractual obligor. In this case, the debtor argued that it should be excused from all rent payments from March 1 forward. The Bankruptcy Court rejected that argument and entered more limited relief, excusing the debtor from paying 75 percent of its rent obligations during the pendency of the Illinois executive order.

For more information about the doctrine of force majeure and implications of COVID-19, consider Duane Morris’ previous Alert on the subject.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

For More Information

If you have any questions about this Alert, please contact Gregory S. BombardDominica C. AndersonSheila Raftery WigginsSean S. Zabaneh, any member of the COVID-19 Strategy Team, or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.