The restaurant industry has been hit particularly hard by the COVID-19 shutdowns, forcing some restaurant owners to look for any additional relief available. Specifically, lease payments are one area they are looking for some leniency. Could there be some relief for restaurants under the force majeure clause of their lease?
Based on a recent bankruptcy court ruling, the answer may be yes. An Illinois bankruptcy judge recently used the force majeure clause of a restaurant’s lease to prorate the debtor’s rent and provide much needed assistance for the restaurant. Specifically, the Court in In Re Hitz Restaurant Group prorated the debtor’s rent citing the force majeure clause and reduced the rent to 25% based on the square footage used by the restaurant. In short, they had filed Chapter 11 bankruptcy and asked for a 100% abatement of rent. The restaurant’s force majeure clause stated, “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in the lease, in the event, but only so long as performance of any obligations are prevented or delayed, retarded or hindered by laws, government action or inaction, orders of government, lack of money shall not be grounds for force majeure.”
The restaurant cited to Illinois Gov. Jay Pritzker’s order, which directed all dining rooms in Illinois to close in March 2020, as the trigger for the force majeure clause. Much like Ohio, Illinois continued to allow carryout dining and beverages to be consumed off-premises. The Tenant continued to utilize kitchen space for carryout services, which equated to 25% of the restaurant’s square footage.
The landlord made three arguments against use of the force majeure clause:
- The landlord stated the banking and mail systems were not impacted, so it was still possible to wire transfer or mail rent payments.
- The Landlord argued that the Tenant’s inability to pay rent was simply from a “lack of money,” which was an exclusion under the force majeure clause of the lease.
- The landlord reasoned that rent could have been paid from SBA PPP loans to meet rent obligations.
The Court rejected all three of the landlord’s arguments, stating in part that nothing in the lease or specifically the force majeure clause required the tenant to borrow money if it was adversely affected by the government, and the “lack of money” exclusion was vague and directly in conflict with “governmental action.” With that said, the Court was still unwilling to let the restaurant completely off the hook for rent. As a result, the Court concluded that payment based on proportional use of the space was a fair measure of rent in these circumstances.
Why is this holding important? First, it is one of the earliest indications of how courts may interpret force majeure clauses in the context of the COVID-19 pandemic. This is an early point of reference for a seldom cited clause in a lease. Second, this may give restaurant owners some much needed relief. While it is unusual in most leases, a restaurant owner should perform a complete analysis of his or her lease to determine if it includes a force majeure clause, and what relief could exist for the business.
If you have any questions about the force majeure clause of your lease, reach out to Paige Rabatin at firstname.lastname@example.org or 216.736.7270.