Court Decision May Provide Relief to Businesses Unable to Pay Rent Due to COVID-19 Orders

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A recent court opinion from the United States Bankruptcy Court in Illinois could provide relief for restaurants and other businesses suffering from the financial impact of COVID-19 regulations.

Hitz Restaurant Group (“Hiltz”) was unable to pay its rent after the Illinois governor issued an order on March 16, 2020 which stated

all businesses…that offer food or beverages for on-premises consumption—including restaurants, bars, grocery stores, and food halls—must suspend service for and may not permit on-premises consumption.

The order drove Hiltz into bankruptcy. During the bankruptcy proceedings, Hiltz’s landlord filed a motion seeking a court order requiring the restaurant to pay its delinquent rent.

Hiltz argued that the governor’s order triggered the force majeur clause in its lease and thus excused the restaurant from making monthly rent payments.

Force majeur is a French term that means “greater force.” Many contracts and leases contain a force majeur clause that states either party may be released from its contractual obligations if a greater force such as government order prevents the fulfillment of the obligation.

In this case, Hiltz’s lease contained the following provision:

Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Leases” if such actions “are prevented or delayed, retarded or hindered by…laws, governmental action or inaction, orders of government.

According to the bankruptcy court, this clause “unambiguously applies” to the rental payments which became due after the governor’s order.

The force majeure clause in this lease was unambiguously triggered by [the governor’s] executive order. First, his order unquestionably constitutes both “governmental action” and issuance of an “order” as contemplated by the language of the force majeure clause. Second, that order and its extensions unquestionably “hindered” Debtor’s ability to perform by prohibiting Debtor from offering “on-premises” consumption of food and beverages. Finally, the order was unquestionably the proximate cause of Debtor’s inability to pay rent, at least in part, because it prevented Debtor from operating normally and restricted its business to take-out, curbside pickup, and delivery.

The court rejected the landlord’s argument that Hiltz could have applied for a loan under the federal government’s Payment Protection Program because nothing in the lease’s force majeure clause required Hiltz to borrow money under such circumstances.

Nevertheless, Hiltz was not entirely off the hook. Because the governor’s order allowed Hiltz to continue its take-out service, the restaurant could still operate at a reduced capacity. Approximately 25% of the restaurant’s annual revenue was generated by its take-out service. Therefore, the court ordered Hiltz to pay the landlord 25% of all rental payments due during the governor’s order.

Although the court’s decision was made using Illinois law, the case will likely have an impact on future bankruptcy decisions in other regions.