In a June 3, 2020, decision,[1] the U.S. Bankruptcy Court for the Northern District of Illinois held that a force majeure provision partially excused a restaurant’s obligation to make post-petition rental payments after the Governor of Illinois, J.B. Pritzker, suspended in-person dining services due to COVID-19.[2] Governor Pritzker issued an executive order, effective as of March 16, 2020, suspending restaurants from operating services for on-premises consumption, but permitted, and encouraged, operating services for delivery and pick-up.[3] In In re Hitz Restaurant Group, the court found that the governor’s suspension of in-house dining services “unambiguously triggered” the force majeure provision of the debtor’s lease such that the debtor’s nonpayment of post-petition rent was partially excused.[4]
Hitz Restaurant Group operated a bar and restaurant in Chicago under a lease agreement with Kass Management Services Inc. (the landlord).[5] The lease required that rent be paid on the first of each month.[6] Hitz allegedly had trouble making timely rental payments starting in July 2019, which caused the landlord to file a complaint in state court for possession of the property and monetary damages.[7] The trial in the state court action was scheduled to begin on Feb. 25, 2020.
On Feb. 24, 2020, Hitz filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the Northern District of Illinois.[8] Hitz did not make its pre-petition Feb. 1, 2020, rental payment or post-petition March 1, 2020, rental payment.[9] On March 12, 2020, the landlord filed a motion seeking, in part, an order (1) enforcing Hitz’s obligation to pay its post-petition rent pursuant to 11 U.S.C. § 365(d)(3), and (2) modifying the automatic stay under 11 U.S.C. § 362(d)(1).[10]
Section 365(d)(3) requires a debtor to “timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected.”[11] Unlike other administrative expenses, § 365(d)(3) relieves landlords from the burden of proving that rent payments were “actual and necessary” costs of preserving the estate.[12] Accordingly, a debtor-tenant is generally required to pay post-petition rent due under a nonresidential unexpired lease.
Hitz argued that the order triggered the lease’s force majeure provision, excusing its nonpayment.[13] Agreeing with Hitz, the court found that although § 365(d)(3) ordinarily requires full payment of post-petition rent, the order “unambiguously” triggered the force majeure provision, partially excusing Hitz’s obligation to make the post-petition rental payments.[14] The force majeure provision stated, in relevant part:
Landlord and Tenant shall be excused from performing its obligations ... in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed ... or hindered by ... laws, governmental action or inaction, orders of government.... Lack of money shall not be grounds for Force Majeure.[15]
The court explained that determining whether the order triggered the force majeure provision was a matter of contract interpretation under Illinois law.[16] Interpreting the language of the force majeure provision, the court concluded that the order triggered a force majeure event because the order (1) “unquestionably constitutes both ‘governmental action’ and issuance of an ‘order’ as contemplated by the language of the force majeure clause,” (2) “unquestionably ‘hindered’ [Hitz’s] ability to perform,” and (3) “was unquestionably the proximate cause of [Hitz’s] inability to pay rent, at least in part.”[17]
The court stated that the force majeure provision would only excuse Hitz’s performance if the triggering event — the Order — was the proximate cause of Hitz’s nonperformance.[18] Although Hitz allegedly had a history of incomplete rental payments, the court found that the order was the proximate cause of Hitz’s failure to make the post-petition payments.[19] However, only performance after March 16, 2020, was excused, because the March rental payment was due by March 1, 2020, before the effective date of the Order.[20]
Hitz was also “not off the hook entirely” for the full rental payments, because the order did not prohibit carry-out, pick-up and delivery services.[21] Based on Hitz’s admission that 25% of the square footage of the restaurant could have been used for these services, the court ordered Hitz to pay 25% of the April, May and June rent pursuant to § 365(d)(3).[22]
The landlord asserted the following arguments — all of which the Court rejected — as to why the order did not trigger the force majeure provision: (1) Hitz was physically able to write and send checks to the landlord because the order did not shut down the banking system or post office; (2) Hitz’s failure to perform was a result “lack of money,” which the lease specifically excluded as a force majeure event; and (3) Hitz could have paid rent if it attempted to obtain a Small Business Administration loan.[23] The court easily rejected the first argument, stating that it is a “specious argument ... unresponsive to [Hitz’s] arguments and one that lacks any foundation in the actual language of the force majeure clause.”[24] The court similarly rejected the second argument, finding that the order shutting down restaurants was the proximate cause of Hitz’s failure to pay rent, not lack of money.[25] The court rejected the third argument because the landlord failed to provide supporting case law, and the lease did not require Hitz to obtain a loan to counteract the adverse effects of a triggering event.[26]
Hitz may provide helpful insight into how courts may treat force majeure provisions in the wake of the effects of COVID-19. The court’s application of the order to the provision’s language, “laws, governmental action, [or] orders of government” may pave the way for tenants or other contracting parties to declare force majeure events based on government-mandated closures in their jurisdictions. Hitz could also influence how landlords draft or negotiate force majeure provisions in the future.
It is important, however, to keep in mind the limitations of Hitz: The force majeure event was not strictly COVID-19 or the declaration of COVID-19 as a “pandemic.” Rather, the governmental action as a result of COVID-19 was the triggering event. Therefore, it remains unclear whether the COVID-19 pandemic itself would trigger a force majeure event. Ultimately, the application in any particular case will be fact-specific and depend on the specific language of the force majeure provision.
[1] In re Hitz Restaurant Group, No. 20 B 05012, 2020 WL 2924523, at *1 (Bankr. N.D. Ill. June 3, 2020).
[2] Amy and Victoria are members of the Financial Industry Group at Reed Smith LLP, practicing in the area of Commercial Restructuring & Insolvency.
[3] Ill. Exec. Order No. 2020-07 (Mar. 16, 2020), available at https://www2.illinois.gov/Documents/ExecOrders/2020/ExecutiveOrder-2020….
[4] In re Hitz Restaurant Group, 2020 WL 2924523, at *2.
[5] See In re Hitz Restaurant Group, Case No. 20-05012-DRC, Doc. No. 7 (Bankr. N.D. Ill. Mar. 12, 2020).
[6] In re Hitz Restaurant Group, No. 20 B 05012, 2020 WL 2924523, at *1.
[7] See Doc. No. 7.
[8] In re Hitz Restaurant Group, Case No. 20-05012-DRC, Doc. No. 1 (Bankr. N.D. Ill. Mar. 12, 2020).
[9] In re Hitz Restaurant Group, 2020 WL 2924523, at *1.
[10] Id.
[11] 11 U.S.C. § 365(d)(3).
[12] In re Hitz Restaurant Group, 2020 WL 2924523, at *1 (citations omitted).
[13] Id. at *2.
[14] Id. at *1-2.
[15] Id. at *2 (emphasis added).
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id. at *3.
[22] Id. at *4.
[23] Id. at *3.
[24] Id.
[25] Id.
[26] Id.