By Paul J. Mirr
June 30, 2020
Back in mid-March (which seems much longer than three months ago!), many governors issued stay-at-home orders, silencing the bustle of everyday activity. Restaurants and bars locked their doors, schools moved online, and weekend traffic on Wisconsin’s interstate highways decreased 60%. It was the equivalent, Paul Krugman wrote at the time, of a “medically induced coma, done for the patient’s own good.” While it is undoubtedly true that the shutdowns served their purpose (i.e., slowing the spread of COVID-19 and saving lives), the service sector paid the price. As stupefied consumers flooded grocery stores to amass their own personal stockpiles of canned beans, toilet paper, and butter, revenue dried up at the “nonessential” businesses forced to radically curtail their normal operations or completely close their businesses.
Ever since, legal experts have debated whether the shutdown orders would (or should) trigger a force majeure clause in a commercial lease. Force majeure is a legal theory that frees both parties from their contractual obligations when an extraordinary event beyond a party’s reasonable control prevents that party’s ability to fulfill a contract. Since the beginning of the stay-at-home orders, one unanswered question was whether these governmental mandates would excuse a tenant’s obligation to pay rent based upon a force majeure clause in the tenant’s lease.
One possible answer to that question was recently supplied by In re Hitz Restaurant Group, in which the Northern Illinois Bankruptcy Court held that a force majeure provision in a lease was “unambiguously triggered” by Illinois’ Stay At Home Order—more specifically, by the order’s suspension of in-house dining services.
The decision concerns Hitz Restaurant Group (Hitz), which operated a Chicago restaurant in a leased space. Hitz failed to pay rent in February 2020 and filed for bankruptcy shortly thereafter. Illinois’ Stay At Home Order went into effect on March 16, 2020, prohibiting restaurants from providing in-house dining services. Unsurprisingly, Hitz continued to not pay rent during the stay-at-home period. When the landlord filed a motion asking the Court to compel its tenant to pay rent for February through June, Hitz opposed the motion on the strength of a force majeure clause tucked into the lease: The provision excused the landlord and the tenant from their contractual obligations if their completion is “prevented or delayed, retarded or hindered by … laws, governmental action or inaction, [or] orders of government.” Of extreme importance is the fact that the lease contained a provision that stated “lack of money shall not be grounds for Force Majeure.” Sounds pretty unambiguous, right? Not so fast.
The landlord made three arguments as to why the Illinois Stay At Home Order did not trigger the force majeure provision in the lease, none of which were successful:
- the landlord argued that since the order did not shut down banks or post offices, Hitz could conceivably have paid rent—the Court dismissed this argument as “specious”;
- the landlord argued that the clear stipulation in the lease that a “lack of money shall not be grounds for Force Majeure” prevents the force majeure clause from being applied in this case (i.e., even though the tenant had no money, this should not come in to play in the force majeure analysis due to the express language of the lease); but this argument was also rebutted by the Court, which wrote that the proximate cause of Hitz’s inability to pay rent was the Illinois shutdown order, not a lack of money;
- finally, the landlord argued that Hitz could have secured a loan through the Small Business Administration; however, the Court found no legal support for the proposition that a tenant must apply for a loan before invoking a force majeure.
Instead, the Court held the clause was triggered by the Illinois Stay At Home Order because the Order constituted a “governmental action” of the kind provided for in the force majeure clause. The Order “hindered” Hitz’s ability to pay its rent and was the proximate cause of the restaurant’s inability to pay rent—having prohibited in-house dining and restricting the restaurant’s business to take-out and delivery.
However, the court declined to abate the full amount of rent that Hitz’s owed as it found the restaurant was not forced to completely close during the stay-at-home period, and that it could have generated some revenue by providing take-out and delivery services. Instead, the court abated Hitz’s rent “in proportion to its reduced ability to generate revenue due to the executive order.” Neither party provided information sufficient to allow the court to make a definite assessment of that number, so the Court abated an even 75% because, according to Hitz, about 75% of the restaurant’s square footage was utilized as dining space.
The court’s decision is extremely concerning for landlords and amounts to yet another in a growing list of tenant-friendly COVID-era decisions, following other bankruptcy court decisions based on equitable arguments under Federal Bankruptcy Code provisions. While the decision will not be binding on other courts, it could reverberate broadly, given the Court’s insistence the economic pain inflicted by the virus should be broadly distributed, influencing the interpretation of force majeure clauses and their applicability to other stay-at-home orders.
The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.
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