September 22, 2020
By
Joseph H. Langerak IV
Member, Stoll Keenon Ogden PLLC
(812) 759-3817
joe.langerak@skofirm.com
Christine H. Pham
Attorney, Stoll Keenon Ogden PLLC
(812) 759-3861
christine.pham@skofirm.com
A ruling by the United States Bankruptcy Court for the Northern District of Illinois was one of the first of its kind regarding the applicability of force majeure clauses in commercial leases and a tenant’s obligation to pay rent during the pandemic. In making its determination, the Court first looked at the applicability of the lease’s force majeure clause. Second, the Court analyzed whether the Governor of Illinois’s Stay At Home Order (Order) triggered the lease’s force majeure clause and whether the tenant was excused from its rent obligations.
The Hitz Restaurant Group (Hitz), the tenant, operated a restaurant in its leased space and failed to pay its February 2020 rent. It filed for bankruptcy shortly thereafter. The Illinois Stay At Home Order, which took effect on March 16, 2020, prohibited restaurants from providing “on-premises” dining services.
Hitz continued not to pay rent following the effective date of the Order. The landlord filed a motion with the Court to enforce Hitz’s obligation to pay past-due rent.
The lease’s force majeure clause contained language specifically excusing a tenant’s lease obligations if “performance of any of its obligations are prevented or delayed, retarded or hindered by…laws, governmental action or inaction, [or] orders of government…” Hitz argued that the Order triggered the lease’s force majeure clause since the Order hindered restaurants from operating at full capacity.
The Court agreed and noted the clause was triggered by the Governor’s Stay At Home Order, which the Court found to be a “governmental action.” The Court held that the Order “unquestionably hindered” Hitz’s ability to operate by prohibiting on-premises services and was the proximate cause of Hitz’s inability to pay rent, but only in part.
Since the Order allowed Hitz to operate on a take-out and delivery basis, the Court declined to abate the full amount of rent owed. The Court held that since the Order was effective mid-March, Hitz’s failure to pay March rent was not excusable under the lease’s force majeure clause as it was due at the beginning of the month. The Court limited its ruling to March through June rent payments, since the February rent payment was a pre-petition obligation and the Bankruptcy Code requires compliance with all post-petition rental payments.
The Court found that the force majeure clause unambiguously applies, “at least in part,” to the rental payments that were due after the effective date of the Order. Therefore, the Court reduced Hitz’s rent “in proportion to its reduced ability to generate revenue due to the executive order.”
Since neither party provided information sufficient to assist the Court in determining a definite amount in rent reduction, the Court considered Hitz’s assessment that only 25 percent of the restaurant’s square footage could be utilized during the Order. The Court concluded that Hitz owed the full rent amount for March 2020 and at least 25 percent of the rent due following the application of the force majeure clause.
In sum, the language of the force majeure clauses in each commercial lease will be analyzed by courts on a case-by-case basis through the lens of each state’s laws and governors’ orders and the language of the force majeure clause itself.
These force majeure claims and defenses by commercial tenants are being raised on an unprecedented basis nationwide. Each case that comes down will give more insight into how courts may interpret the claims. Commercial landlords and tenants must be aware of this ever-changing landscape as it may guide how they make tenant concessions, or perhaps demand strict payment, all depending how the cases unfold in each state.
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Stoll Keenon Ogden attorneys are ready – as we have been for more than 120 years – to answer your questions about force majeure clauses in commercial leases or other issues facing you or your business.
The firm’s Business Litigation practice group provides strategic advice to businesses and professionals faced with disputes, lawsuits, arbitration and other conflicts. We help manage disputes on the front end with guidance on sound business practices. For conflicts that could not be resolved early, we help clients through even the most complex, high-stakes disputes with a careful, focused and strategic approach.
On our Stoll Keenon Ogden website, you’ll find a variety of resources, including the latest information on new laws and directives enacted by federal, state, and local governments; access to firm attorneys; and details about business considerations related to the Coronavirus pandemic.
