Commercial Lease Rent Payments & Typical Force Majeure Event Carve-out: A COVID-19 Exception

Template MSN Case In a Nutshell Case Title | Massey, Stotser & Nichols, PC

As with all clauses, specific breach types may be carved out of a force majeure clause. One of the more common examples is  commercial leases that carve-out the tenant’s inability to pay rent. The court almost always enforces this carve-out on behalf of the landlord, holding the tenant responsible for payment – regardless of unforeseeable events. However, 2020 saw a departure during the COVID-19 pandemic on behalf of a Chicago restaurant tenant in In re: Hitz Restaurant Group.

 


Takeaways for Your Commercial Lease Force Majeure Provisions

Commercial landlords may wish to consider:

  • Separately addressing monetary obligations within the force majeure clause, expressly stating when each party may be excused from performance of its non-monetary obligations—and that no force majeure event will excuse the tenant’s monetary obligations.
  • Adding contract language requiring tenants to take all reasonable actions to offset a force majeure event’s impact on performance obligations. Using this case of In re: Hitz Restaurant Group as an example, this addition would have likely required Hitz to pursue the SBA loan.

 

In re: Hitz Restaurant Group

Case Nutshell The Contract 4 | Massey, Stotser & Nichols, PCThe Contract

Hitz Restaurant Group, LLC, (“Hitz”) signed a ten-year commercial lease with The South Loop Shops, LLC in late February 2019. It included the below force majeure clause.

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 act of God, fire, earthquake, flood, explosion, actions of the elements, war, invasion, insurrection, riot, mob violence, sabotage, inability to procure or general shortage of labor, equipment, facilities, materials or supplies in the open market, failure of transportation, strikes, lockouts, action of labor unions, condemnation, requisition, laws, 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 (each, individually and collectively, an event of “Force Majeure”). Lack of money shall not be grounds for Force Majeure.

Case Nutshell The Background | Massey, Stotser & Nichols, PCThe Background

Hitz took its premises in October 2019. In late February 2020, prior to governmental shutdowns related to COVID-19, Hitz filed for bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois (the “Court”). Soon after, the Illinois Governor signed the Stay at Home Order that included banning in-person restaurant services beginning March 16, 2020. This order stayed in effect through the end of May 2020 via several extensions – with partial effect afterwards.

Case Nutshell The Argument | Massey, Stotser & Nichols, PCThe Arguments for In re: Hitz Restaurant Group

    • In response to Hitz’s bankruptcy petition, the landlord filed a motion to request the Court compel Hitz to pay five months of post-petition rent.
    • Hitz opposed the motion, invoking the lease’s force majeure clause and citing impairment of its ability to meet contractual obligations due to “government action or inaction.” It concluded relief from payment of “post-petition rent during the pendency of this crisis.”
    • In response, the landlord made three arguments:
      • Hitz remained technically able to pay because the post office and banks remained open, enabling the transfer of funds.
      • The force majeure carve-out specifically stated the “lack of money shall not be grounds for Force Majeure.” 
      • Hitz could have deployed additional measures, including offering delivery or takeout service and/or applying for a Small Business Administration loan, but instead “made poor decisions and elected not to operate its business” during the shutdown.

Case Nutshell The Decision | Massey, Stotser & Nichols, PCThe Decision

The landlord’s arguments did not question the Stay at Home Order as the proximate cause of Hitz’s inability to pay the rent (even though the pre-pandemic payment issues and bankruptcy filing might have pointed to lack of funds or inability to operate a profitable restaurant as the proximate cause). Therefore, the Court did not have to determine the proximate cause of Hitz’s failure to pay.

The Court issued a memorandum opinion on June 2, 2020, addressing the landlord’s three arguments, indicating: 

    • The landlord’s argument regarding the post office’s ability to deliver a check and the bank’s ability to cash a check were “specious”, or irrelevant to the issue before Court.
    • The Court ruled the more specific force majeure provision listing “government restrictions” prevailed, trumping the broad carve-out based on insufficient funds for a variety of reasons.
    • The Illinois Shutdown Order only prohibited on-premises dining. Based on Hitz’s assertion that the dining space encompassed 75% of the restaurant’s total square footage, the Court ordered that the tenant’s rent obligations be reduced pro rata to 75% to proportionately reflect the lost revenues from on-premises dining (as opposed to takeout or delivery, which Hitz could have chosen to continue in its usual 25% of the space). The pro rata applied to rent for April, May, and June with March rent being due in full since that month’s rent came due prior to the Governor’s executive order.

*This point underlines the typical duty to mitigate requirement for parties invoking a force majeure clause.

Next Steps

We’d be happy to draft your future commercial real estate leases with specific language to mitigate your company’s risk, in case the “unavoidable” happens…again. Just give our Birmingham, AL MSN real estate attorneys a call.

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