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June 29, 2020 Practice Points

Illinois Bankruptcy Court Grants Force Majeure Relief to Restaurant

The court made a preliminary finding that the restaurant must pay only 25 percent of its rent.

By David J. Marmins and Michael F. Holbein

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As we move from negotiations to litigation of COVID-19 force majeure disputes, one court has decided that the pandemic triggered the force majeure provision of a restaurant’s lease, and made a preliminary finding that it must only pay 25 percent of its rent. The United State Bankruptcy Court for the Northern District of Illinois has held that the executive order issued by the Illinois governor was a force majeure event as defined in a restaurant debtor’s lease, giving the debtor partial rent relief.

The debtor in the bankruptcy case In re Hitz Restaurant Group operates Giglio’s State Street Tavern in Chicago. After filing Chapter 11 bankruptcy on February 24, 2020, the debtor failed to make any post-bankruptcy rent payments. Sixty-two days into the case, the landlord and property manager moved for an order compelling the debtor to pay post-bankruptcy rent or granting the landlord and property manager relief from the automatic stay to pursue eviction under state law. The timing of this motion was significant because courts can, and often do, extend the time for performance under a commercial lease (discussed below) by 60 days.  See 11 U.S.C. § 365(d)(3).

Section 365(d)(3) of the Bankruptcy Code provides that a debtor must timely perform all obligations under an unexpired lease of non-residential real property “arising from and after the order for relief . . . until such lease is assumed or rejected.” The lease in question provides that rent is due on the first of the month. The debtor filed its bankruptcy petition, which constitutes the “order for relief,” on February 24. Accordingly, the Bankruptcy Code would ordinarily require payment of rent for March going forward.

However, on March 16, 2020, the Illinois governor issued an executive order suspending on-premises consumption of food and beverages in restaurants and bars. The debtor argued that this invoked the lease’s force majeure provision, which excused the debtor from paying rent where doing so is “prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, [or] order of government.” While the lease did not contain a commonly used “rent carve out” specifically requiring the tenant to pay rent regardless of a force majeure event, the landlord and property manager argued that the force majeure provision specifically stated that it could not be triggered simply by a “[l]ack of money.”

Applying Illinois law to interpretation of the force majeure provision, the court found that the executive order “unambiguously triggered” the force majeure provision. The court found that the order was both a “governmental action” and an “order” that “unquestionably ‘hindered,’” and was the proximate cause of, the debtor’s inability to pay rent, “at least in part.”

Because the order did not prevent the debtor from offering take-out, curbside pick-up, or delivery, the court held that the debtor’s obligation to pay rent was reduced in proportion to its reduced ability to generate revenue due to the executive order. In reaching its conclusion, the court rejected the landlord and property manager’s argument that the debtor could have made the rent payment because the banking system was still in operation—the court found this argument specious. The court also found the “lack of money” argument unpersuasive, noting that the more specific “governmental action” provision triggering the force majeure clause prevailed over the general “lack of money” exclusion. Finally, the court rejected the argument that the debtor could have applied for a Small Business Administration loan, presumably under the CARES Act. The court found no such requirement existed under law or the lease.

After determining that the force majeure provision offered the debtor partial relief in the amount of 75 percent of its rent for April, May and June, the court allowed the debtor approximately two weeks to make such payments.

In an interesting postscript to the case, the debtor apparently failed to make its reduced rent payments, and on June 23, 2020, the court entered an order granting the landlord and property manager relief from the automatic stay to pursue to state law remedies with respect to the premises.

David J. Marmins and Michael F. Holbein are partners at Arnall Golden Gregory LLP in Atlanta, Georgia.

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