Force Majeure & Reducing Rent In Response To COVID-19

Rental issues surrounding the fallout of COVID-19 continue to pile up.

Last month, I wrote about the deferred rental payments in recent retail bankruptcies. However, many landlords are grappling with tenants seeking to reduce rental obligations as a result of COVID-19 via a clause contained in many (but not all) real estate leases—the force majeure clause.[1]

Force Majeure Clause

In a recent decision out of the Seventh Circuit, Judge Donald R. Cassling (Chicago) held the force majeure clause in the debtor’s lease could be used to reduce a restaurant debtor’s rent by 75% as a result of Illinois’ executive order prohibiting on-premises consumption of food and beverage.

After filing for chapter 11 relief in late February 2020, the debtor failed to pay its rent in March, April, May, and June after the governor of Illinois issued an executive order on March 16, 2020 that effectively shut down all on-site dining in restaurants while encouraging restaurants, such as the debtor, to continue take-out service.

Eventually, debtor’s landlord brought a motion to compel payment of rent under Section 365(d)(3) of the Bankruptcy Code, which is designed to give landlords a priority, administrative claim for post-petition rents, or alternatively, or to modify the automatic stay under Section 362(d)(1). The debtor, meanwhile, defended based on the force majeure clause in its lease, which clause excused the lessee-debtor from “performing its obligations . . . so long as the performance of any of its obligations are prevented or . . . hindered by. . . laws, governmental action or inaction, orders of government ..". 

In his June 3 ruling, Judge Cassling found the force majeure clause “unambiguously” applied to rent due after the March 16^th executive order because the executive order was “unquestionably” both a “governmental action” and an “order.” Accordingly, Judge Cassling concluded the debtor was “partially excused from paying post-petition rent for April, May and June."

To determine how much rent the debtor was still required to pay, the Court focused on the fact that the executive order did not prohibit carry-out service. Specifically, the Court relied on the debtor’s estimate that 25% of the square footage in its restaurant was for the kitchen and carry-out service. Judge Cassling then gave the debtor a deadline for paying all of its March rent, which had been due on March 1^st and prior to the executive order, and 25% of its rent for April, May and June. The Court also required the debtor to pay 25% of the common-area charges and real estate taxes due for those months. Finally, the Court noted the debtor’s failure to pay reduced rent by the deadline would represent “cause” for lifting the automatic stay.

Debtors’ and creditors’ rights, obligations, and potential liabilities under the Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out of court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.

[1] In re Hitz Restaurant Group, 20-05012 (Bankr. N.D. Ill. June 3, 2020)