A bankruptcy court in Illinois has held that a governor’s shut-down order, combined with a force majeure provision in a restaurant’s lease, partially excused the restaurant’s obligation to pay rent.* The case is significant because it provides commercial tenants a basis to seek relief from rental payments due to COVID-19.
Governor’s Executive Orders as Force Majeure Event
Hitz Restaurant Group (“Hitz”) did not pay its February 2020 rent for a restaurant it operated in Chicago, and shortly thereafter the company filed a Chapter 11 bankruptcy petition. Hitz then did not pay any of its post-petition rent for March, April, May, or June.
In response to COVID-19, the Illinois governor issued an executive order effective on March 16, 2020, requiring all restaurants to suspend and not permit on-premises consumption. The order effectively allowed only for pick-up, delivery or third-party carry-out options, as did the executive orders in place during the same time period in Minnesota and other states.
On April 14, 2020, Hitz’s landlord filed a motion asking the court to compel Hitz to pay its rent for February through June 2020. Hitz opposed the motion, arguing that the governor’s executive orders were the events named in the force majeure clause of its lease that fully excused its obligation to pay rent for those months:
“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 court found that the force majeure clause unambiguously applied to payments due after the March 16 executive order. Importantly, the court concluded that the executive order shutting down all restaurants for on-premises consumption was the proximate cause of the tenant’s inability to generate revenue and pay rent.
A Victory, with Limits
The landlord argued that banking systems and post offices were still open in Illinois, and therefore the restaurant could still have been able to write and send rental checks. The landlord also argued that tenant’s failure to perform was caused merely by a lack of money and therefore not grounds for force majeure. The landlord further contended that tenant could have obtained rent money by applying for a Small Business Administration loan. The court rejected all of these arguments, noting that nothing in the lease required the tenant to borrow money and the tenant’s failure to apply for a loan does not prevent it from invoking the force majeure clause.
The tenant’s victory in the Hitz case did not totally excuse the obligation to pay rent. According to the bankruptcy court, the force majeure clause only partially excused that obligation. The obligation was instead reduced in proportion to tenant’s ability to generate revenue through the take-out or delivery restaurant services permitted by the executive order. The court estimated that the restaurant would owe at least 25 percent of its rental payments for April, May, and June 2020, which was the proportion of the restaurant’s square footage that remained open during the government shutdown. The court also noted that the rental payments were likely to increase as the government shutdown slowly eases. The restaurant was also required to pay 25% of the common area maintenance fees and real estate taxes for April, May, and June 2020.
Although the Hitz case, like all cases, is based on particular facts and circumstances, it is nevertheless important for all restaurants and other commercial tenants seeking rent relief because their business has been negatively affected by various forms of shutdown orders. If you have questions concerning force majeure clauses, or need advice concerning the impact of COVID-19 on your business operations and lease obligations, MMB is ready to assist you.
* In Re: Hitz Restaurant Group, Order #20 B 05012 (Bankr. N.D. Ill. R. 1001-2(A))
