COURTS BEGIN TO ANSWER QUESTIONS ABOUT THE MEANING OF CONTRACTS, AND FORCE MAJEURE CLAUSES, DURING THE COVID-19 PANDEMIC
A U. S. Bankruptcy Court in the Northern District of Illinois,
In re Hitz Restaurant Group
, 2020 WL 2924523 (Bankr. N.D. Ill. 2020), has become one of the first to rule on force majeure language in a specific contract and to begin answering the questions many have asked since government orders began shutting businesses.
The answer was not entirely definitive. On the one hand, the Court did find a force majeure. But, on the other hand, it did not find the force majeure rendered the lease in question completely unenforceable. Rather, it made clear parties’ contract rights, especially in a pandemic, will continue to depend
on the specific language of their contracts, as well as the specific government orders and their impact.
The Court did offer some guidance and perhaps practical help as parties continue to consider the impact of COVID-19 on their contracts:
- FORCE MAJEURE CLAUSES CAN BE TRIGGERED BY COVID-19 STAY-AT-HOME ORDERS.
As a starting point, the Court held the “force majeure clause in this lease was unambiguously triggered.”
The case involved a restaurant tenant, whose business was largely shut down by an executive order issued by the Governor of Illinois. The specific force majeure language in the lease said:
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Landlord and Tenant shall each be excused from performing its obligations
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or undertaking provided in this Lease, in the event, but only so long as the
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performance of any of its obligations are prevented or delayed, retarded or
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hindered by . . . laws, governmental action or inaction, orders of
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government . . . Lack of money shall not be grounds for Force Majeure.
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Because the executive order constituted both a governmental action and an order, which hindered the tenant’s ability to offer on-premises consumption of food and beverages, the “order was unquestionably the proximate cause of [the tenant’s] inability to pay rent, at least in part, because it prevented [the tenant] from operating normally and restricted its business to take-out, curbside pick-up, and delivery.”
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2
. BE PREPARED TO SHOW EXACTLY HOW COVID-19 STAY-AT-
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HOME ORDERS IMPACTED YOUR BUSINESS.
Even though the Court found the force majeure clause triggered, it did not excuse the tenant entirely from paying rent – because the restaurant was not entirely shut down by the executing order.
The executive order issued in Illinois encouraged restaurants to provide off-premises services. Given that, the Court seemed frustrated that “neither party offered much assistance . . . in determining the amount of the rent reduction caused by the force majeure clause.” Based on a few questions apparently answered by the tenant during a hearing, the judge concluded roughly 75 percent of the leased space was for seating, and could not be used, whereas 25 percent of the leased space was for the kitchen. The kitchen, the Court decided, was still useful.
While inviting further evidentiary submissions, the Court determined the tenant should pay 25 percent of the rent, corresponding to the 25 percent of the leased property still useable by the restaurant.
It seems the Court would have appreciated much more evidence and analysis regarding the specific impact of the executive order on the specific tenant, including an analysis of what the restaurant was and was not still able to do.
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3.
DO NOT MAKE FRIVOLOUS ARGUMENTS
Probably always a good rule, but the Court showed little patience for several arguments made by the landlord.
First, the landlord argued the Governor’s order did not shut down the banking system or post offices, and therefore the tenant was physically able to write and send rental checks. The Court rejected this “specious” argument.
Next, the landlord argued tenant’s failure to perform arose from a “lack of money,” which is expressly excluded under the lease from being a force majeure. In an extensive footnote, the Court rejected this argument, explaining the more specific references to “governmental action” or “orders of government” prevail over the general provision referring to “lack of money.”
Finally, the Court rejected the landlord’s argument that the tenant could have obtained the money to pay rent by applying for a Small Business Administration loan. The Court noted no language from the lease or any law authority required a tenant adversely affected by governmental action to borrow money to counteract the force majeure.
As the pandemic hopefully subsides, and parties to various contracts move forward with their relationships, it remains important to review carefully the language in all contracts, but particularly in force majeure provisions. It may be particularly important to consider potential damages, and potential mitigation strategies. In any event, parties should understand their rights before communicating with landlords, tenants, vendors, suppliers, or customers, let alone before becoming involved in litigation.
We have been fully operational during this pandemic and stand ready to help your business review its commercial contracts. Please do not hesitate to
contact us
with your questions and concerns.
