In one of the first cases to consider the question of whether force majeure excuses the payment of rent following the outbreak of the COVID-19 pandemic, the United States Bankruptcy Court for the Northern District of Illinois held earlier this month that a lease’s force majeure clause does excuse—at least in part— a tenant’s obligation to pay rent under Illinois law (In re Hitz Restaurant Group, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020)).
In February 2020 (before the pandemic was officially announced), Hitz Restaurant Group (“Hitz”) petitioned for Chapter 11 bankruptcy. Under bankruptcy law, a tenant in possession is required to continue to pay rent due post-petition, and Hitz’s landlord, Kass Management Services, Inc. (“Kass”), filed a motion to enforce Hitz’s rent obligations arising after the petition. Hitz countered that its obligation to pay post-petition rent was excused by the lease’s force majeure clause, which provided:
“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” (emphasis added).
On March 16, 2020, Illinois Governor J.B. Pritzker enacted an executive order (“Order”) suspending on-premises consumption of food and beverages at restaurants, among other restrictions, in response to the COVID-19 pandemic sweeping across the United States. Pursuant to Illinois State contract law, a force majeure clause will only excuse contractual performance if the force majeure event was the proximate cause of the nonperformance. Applying the Order to the terms of the force majeure clause in the lease, Hitz contended the Order was both a government action and an order of government that hindered Hitz’s ability to perform its rent obligations by prohibiting on-premises consumption of food and beverage.
The court agreed, reasoning that the Order was the proximate cause of Hitz’s inability to pay rent because it “prevented [Hitz] from operating normally and restricted its business to take-out, curbside pick-up, and delivery.” Accordingly, the court held Hitz’s rent obligations were excused in part for the months following the Order, but only in proportion to its reduced ability to generate revenue as a result of the Order; because Hitz was able to operate its business for carry-out and delivery, rent was not excused in its entirety. Hitz estimated 75% of the restaurant was used for dining area and bar which was rendered unusable by the Order, while the remaining 25% of the restaurant was dedicated to the kitchen area that remained useful for carry-out and delivery orders. Therefore, the court reduced Hitz’s rent obligations by 75% for the months after the Order’s imposition. The court indicated monthly rental payments would likely increase as the governmental restrictions gradually lifted.
Kass insisted Hitz’s rent obligations were not excused for three reasons. First, Kass argued that Hitz was still capable of paying rent despite the pandemic since the banking system was not shut down. The court found this a “specious” argument and rejected it outright. Second, Kass argued the lease language clearly stated lack of money is not grounds for force majeure. The court also rejected this argument, holding that the government action was the proximate cause of Hitz’s failure to pay rent rather than lack of money, despite Hitz petitioning for bankruptcy well before COVID-19 took the United States by storm. Finally, Kass argued Hitz failed to apply for a loan from the Small Business Administration, thus precluding it from invoking the force majeure clause. The court rejected this argument as well, since there was nothing in the lease or case law that required Hitz to apply for those funds.
As one of the first decisions applying a lease’s force majeure clause to the governmental restrictions put in place across the nation in response to COVID-19, the In re Hitz Restaurant Group opinion reveals a possible avenue for retail tenants to obtain rent relief under state law—at least in Illinois. But before retailers wave the victory flag, keep in mind that many force majeure clauses contain more favorable language to landlords by directly stating that force majeure events do not excuse the payment of rent (vs. the clause in this case, which merely stated that lack of funds cannot be used to claim force majeure). Another potential concern for retailers is the court’s statement that “[f]orce majeure clauses in contracts supersede the common law doctrine of impossibility.” This is welcome news to landlords who worry that tenants may be able to argue that impossibility or frustration of purpose are available defenses in spite of a force majeure clause. Nevertheless, the first round in the COVID leasing wars goes to the tenants.