Ill. Force Majeure Ruling Could Be Problematic For Landlords

By Elizabeth Thompson, Jared Hawk and Thomas Laser
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Law360 (June 24, 2020, 5:07 PM EDT) --
Elizabeth Thompson
Jared Hawk
Thomas Laser
In the first of what will likely be many cases on the issue in Illinois, the U.S. Bankruptcy Court for the Northern District of Illinois, in a ruling published on June 3, held that that a restaurant lease's force majeure provision excused, at least partially, the lessee's obligations to pay rent during the COVID-19 pandemic.

Though force majeure provisions are not new and both Illinois state and federal courts have analyzed whether they apply to excuse one party's performance of its contractual obligations, there remains a relative dearth of case law actually excusing performance under such a provision. There can be little question that force majeure provisions will become increasingly relevant as businesses across the state — and indeed, the country — continue to feel the widespread negative economic effects of the COVID-19 pandemic.

The recent decision in In re: Hitz Restaurant Group[1] analyzed the issue in depth and provides needed guidance to businesses suffering from government-mandated closures as a result of COVID-19. The facts of the case are straightforward and likely common to what many businesses currently face in Illinois.

Hitz Restaurant Group LLC operates several bars and restaurants across the Chicago metro area, including a restaurant called Giglio's State Street Tavern located at 825 South State Street in Chicago. The property out of which Giglio's operates is owned by South Loop Shops LLC and managed by Kass Management. In February 2019, Hitz executed a 10-year lease agreement with Kass and South Loop to operate Giglio's out of that property.

The lease required Hitz to pay rent monthly on the first day of each month and contained a broad force majeure provision:

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 … governmental action or inaction, orders of government or civil or military or naval authorities, or any other cause, whether similar or dissimilar to the foregoing, not within the reasonable control of the party or its agents, contractors or employees … Lack of money shall not be grounds for Force Majeure.

Kass alleged that in July 2019, Hitz stopped paying rent under the lease agreement and on Jan. 2 this year, it filed an eviction action in the Circuit Court of Cook County against Hitz.

On Feb. 24, Hitz filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, which automatically stayed Kass' state court eviction action. As a result, Kass sought relief in the bankruptcy court by filing, on March 12, a motion for relief from the automatic stay. The motion argued that Hitz continued to occupy the restaurant and as of the date of filing, owed $79,158.02 in past-due monthly rent and other charges, and an additional $15,646.93 for post-petition rent for the month of March.

Although COVID-19 had, by March 12, become a pandemic according to the World Health Organization, Illinois had yet to experience broad community spread of the disease. On the date that Kass filed its motion, Illinois had 32 positive COVID-19 cases. By the time Hitz filed its response to the motion on April 6, the landscape had totally changed, with Illinois reporting a total of 12,262 positive cases of the disease. By then, Illinois Gov. J.B. Pritzker had entered several executive orders shutting down schools, requiring Illinois residents to stay at home, and, notably, requiring all bars and restaurants to suspend on-premises consumption.

On April 22, Kass brought a second motion, now seeking to require Hitz, as a debtor in possession under the Bankruptcy Code, to pay post-petition rent obligations under the lease. At the time of that filing, restaurants and bars remained closed for on-premises consumption pursuant to executive order, and the number of positive COVID-19 cases in Illinois had risen to 35,108.

Section 365(d)(3) of the Bankruptcy Code requires a debtor in possession of nonresidential real estate to "timely perform all the obligations … under any unexpired lease" until that lease is assumed or rejected under the U.S. Code.[2] Kass argued that Section 365(d)(3) required Hitz to pay its rent post-Feb. 24 (the date Hitz filed its Chapter 11 petition) and requested that if the court was to deny its motion to lift the automatic stay, it order Hitz to pay those obligations.

On May 12, Hitz filed its response, arguing that the force majeure provision in the parties' lease excused its performance. Citing the "governmental action or inaction" and "orders of government" provisions within the force majeure clause, Hitz asserted that the governor's executive orders restricting the operation of its business relieved it of its obligation to pay post-petition rent during the pendency of the pandemic.

On May 26, Kass filed its reply in support of its motion. By then, COVID-19 cases in Illinois had reached 113,195. In its reply, Kass argued that because the pandemic had not halted Hitz's ability to transfer money, "issue and deposit checks or negotiable instruments, or otherwise tender payment in U.S. currency," the lease's force majeure provision did not apply. In support of its argument, Kass cited the language in that provision that lack of money is not grounds for force majeure.

Perhaps one of the first courts across the country to decide the issue of whether gubernatorial orders prohibiting the operation of a business excuse the payment of rent (but certainly not the last), the Northern District of Illinois Bankruptcy Court held that Hitz's obligation to pay post-petition rent was suspended, at least in part, by the lease's force majeure provision. The court first noted that Section 365(d)(3) "would ordinarily require full payment of the March 2020 rent and all rental payments falling due thereafter."

The court then considered whether Hitz's argument regarding the force majeure provision excused its performance under the lease, finding the force majeure clause "unambiguously applies," at least in part, to the rental payments that became due after Pritzker closed restaurants for on-premises consumption on March 16.

Because determining whether the March 16 executive order (and extensions thereof) triggered the force majeure provision was a matter of contract interpretation, the court looked to Illinois state law on the issue. In Illinois, force majeure provisions only excuse contractual performance if the triggering event cited by the nonperforming party, here Hitz, was the proximate cause of that party's nonperformance and specifically falls within the plain contractual language of the provision.

Looking to the language of the lease, the court found that Pritzker's order was both "governmental action" and issuance of an "order" as contemplated by the lease's force majeure provision. Next, the court stated that the order both "hindered" Hitz's ability to perform by prohibiting Hitz from offering on-premises food consumption and was the proximate cause of Hitz's inability to pay rent. The court made this finding notwithstanding the fact that Hitz had allegedly not paid rent since July of 2019 — well before the pandemic — and had filed for bankruptcy in February this year, also prior to the pandemic and corresponding executive orders.

Despite finding that the force majeure provision applied and excused Hitz's post-petition rental obligations under Section 365(d)(3), the court limited its holding because the governor's orders expressly allowed, and in fact encouraged, Hitz to provide carryout, curbside pickup and delivery. Because Hitz could offer these services — but apparently chose not to — its obligation to pay rent was only reduced to the extent its ability to generate revenue was reduced by its inability to provide on-premises consumption.

Finding that the parties had not adequately addressed this argument, the court held Hitz's statement that 75% of its restaurant was nonoperational as an admission that it owed at least 25% of the rent payments for April, May and June. Thereafter, because the governor's restrictions were set to be gradually lifted, the rental amount, too, would gradually increase.

The court also rejected Kass' other arguments. Kass argued that Hitz was still physically able to write and send its rent checks and, therefore, there was no force majeure event. The court found this assertion to be a "specious argument" unresponsive to Hitz's claim, lacking "any foundation in the actual language of the force majeure clause."

Second, the court refused to rely upon the "lack of money" clause of the force majeure provision, holding that Hitz did not argue that it was lack of money that prevented its performance, but rather the governor's orders that prohibited on-premises consumption, which in turn was the proximate cause of its inability to generate revenue and pay rent.

Accordingly, the court ordered that Hitz pay 25% of its rental obligations for April, May and June (and all of the March payment that preceded the pandemic and the governor's March 16 order prohibiting on-premises consumption) by June 16.

Though the Hitz case is limited to the bankruptcy context of a debtor in possession's obligation to pay post-petition rent, it may prove helpful to businesses struggling to pay their rent during the COVID-19 restrictions. Indeed, the case appears to stand for the proposition that a lessee with a force majeure provision in its lease could invoke that provision to lessen or eliminate its rental obligations during the time the lessee was required to be shut down due to government orders.

The bankruptcy court's analysis is particularly interesting in that it could be read to entirely excuse performance under a lease agreement for a nonessential business that was required to shut its doors to the public with no provision for delivery or curbside pickup.

For example, Pritzker's executive orders required the near-total closure of nonessential businesses, such as clothing stores, and without revenue from sales, such businesses have likely been impacted just as much — if not more — than restaurants who have been permitted to operate on a limited basis. These nonessential businesses may be able to look to the Hitz case for support to excuse their entire rental obligation during the time they were unable to operate, depending on their lease language. Such result may greatly assist failing businesses but has the potential to be problematic for landlords.

Furthermore, according to the court, the force majeure defense can be used even where a lessee has failed to pay rent before the force majeure event occurred. The bankruptcy court took a somewhat circular view of the lease's provision that "lack of money" is not grounds for force majeure and it is difficult to imagine a situation where its reading of that language does not render it superfluous.

Where such language might otherwise have undermined a force majeure defense in a breach of lease case, the Hitz case provides an argument for struggling businesses with large rental obligations during the COVID-19 pandemic even where such language exists in the parties' agreement.

Accordingly, the court's decision should be taken into consideration when drafting contracts, such that the parties make it abundantly clear that the inability to pay rent because of a "lack of money" is expressly excluded from the force majeure clause, even where such "lack of money" arises from another source (i.e., a governmental shutdown order). Although force majeure provisions are often overlooked and treated as boilerplate during contract negotiations, parties should carefully review such provisions to ensure that they adequately protect their interests in the event of a force majeure event.  

Even though the decision can be read broadly, each lessee must carefully consider the language of its own lease agreement, as absent the specific language including "governmental action or inaction" and "orders of government" as force majeure events in the parties' lease, the outcome in this case may have been different.

Similarly, the bankruptcy court's decision, while persuasive, is not binding precedent on Illinois state courts or a federal district court hearing a breach of contract action in which force majeure may be a defense. Therefore, consultation with a lawyer regarding any decision to withhold rental payments is critical, and there is no guarantee that a court hearing such a case would follow the analysis set forth in the Hitz case.

Clarification: This article has been updated to clarify that the ruling in In re: Hitz Restaurant Group was published on June 3. 

Elizabeth A. Thompson is counsel, Jared S. Hawk is a partner and Thomas A. Laser is an associate at Saul Ewing Arnstein & Lehr LLP.

The authors wish to thank Saul Ewing partner David Wayne for his contributions to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of Portfolio​​ Media Inc. or any of its​​ respective affiliates. This article is for general information purposes an​​d is​​ ​​not ​​intended to be and​​ should not be taken as legal advice.

[1] In re: Hitz Restaurant Group , No. 20 B 05012, 2020 WL 2924523.

[2] 11 U.S.C. 365(d)(3).

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