Lease Payments, Force Majeure, and Covid-19 Related Shut-Downs
And so it begins….the first (as far as I know) case in what is sure to be a string of cases on the applicability of a force majeure clause to excuse COVID-19 pandemic-related nonperformance. In re Hitz Restaurant Group No. 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. Jun 3, 2020) a bankruptcy court in a Chapter 11 filing determined the obligation of Hitz Restaurant Group (“Debtor”) to pay post-petition rent to Kass Management Services (“Creditor”). The Debtor argued that its obligation to pay rent was excused under the lease’s force majeure clause which stated:
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 Debtor argued that the clause was triggered when the Governor of Illinois, J.B. Pritzker, issued an executive order on March 16 ordering all restaurants to suspend on-premises consumption. The order allowed – even encouraged – them to continue with delivery, drive-through, and curbside pick-up services.
First, the Court found that the force majeure clause did not excuse payment of the past-due March rent because that was due and payable on March 1, 2020. But the court concluded that the force majeure clause “unambiguously applies, at least in part” to the rental payments that were due after the March payment. It stated that the order “unquestionably” constitutes “governmental action” and issuance of an “order.” Second, the order “unquestionably ‘hindered’ the Debtor’s ability to pay rent” because it prevented ordinary business operations. The order was the “proximate cause” of the Debtor’s inability to pay rent. However, the court found that the Debtor was not entirely off the hook because it could have continued to perform pick up and delivery services. Therefore, it held that “Debtor’s obligation to pay rent is reduced in proportion to its reduced ability to generate revenue due to the executive order.”
The court rejected the three arguments made by the Creditor. First, the Creditor argued that the Debtor could physically pay and write checks because the banking and postal systems were not shut down in Illinois. The court rejected this argument “out of hand.” Second, the Creditor argued that “lack of money” was not an excusing condition. The court responded that the executive order was the “proximate cause of [the Debtor’s] inability to generate revenue and pay rent.” Third, the Creditor argued that the Debtor could have applied to relieve a Small Business Administration loan to pay the rent. The Court stated that there is no language in the lease or any case law authority to support that argument.
I’m not entirely convinced that the court got its analysis right (and maybe there are some things that pertain to it being a bankruptcy case that I am overlooking). The force majeure provision pretty clearly states the “lack of money shall not be grounds for force majeure.” I think textualists in particular would have a hard time interpreting the contract the way this court did. Furthermore, the clause itself does not dismiss performance – it only delays it. The clause states that performance is excused “in the event, but only so long.” Even if you were inclined to interpret the “lack of money” clause the way this court did as “unless that lack of money is due to a governmental order,” that would mean that the rent for April, May and June should be deferred, not excused. (In this case, the court ordered only 75% of the base rent to be excused; the Debtor had to pay 25% for those months. I think a better decision would have been to require that all of the rent be deferred, but not forgiven).
Another interesting note, the court states that “(f)orce majeure clauses in contract supersede the common law doctrine of impossibility.” That’s not exactly correct either. It depends upon how the clause is drafted. In many cases, the force majeure clause is used to excuse foreseeable circumstances which would not otherwise be covered under the impracticability defense. In other cases, the clauses are drafted so that a court may find they excuse only unforeseen circumstances – and these are the clauses that exclude unforeseeable circumstances that would otherwise be available under the impracticability defense. In fact, the case the Bankruptcy court cites to support its broad statement that a force majeure clause supersedes impossibility – Commonwealth Edison v. Allied-General Nuclear Services, 731 F. Supp. 850 (N.D. Ill. 1990) – states as much (“(M)erely reciting ‘force majeure’ in a contract, or including in the contract a standard, boilerplate, catch-all force majeure provision, invokes a body of common law doctrine interpreting the term that is largely indistinguishable from the doctrine of impossibility (or impracticability)”).