Court Upholds Force Majeure Defense for Nonpayment of Rent Related to Covid-19
In what is likely a first-of-its-kind decision, the U.S. Bankruptcy Court for the Northern District of Illinois has held that governmental restrictions imposed to combat the spread of the novel coronavirus qualify as a force majeure event and represent a valid reason for a business to suspend performance of its contractual obligations during the pandemic and ongoing governmental restrictions placed on many businesses.
On June 3, 2020, the U.S. Bankruptcy Court held, in In re Hitz Restaurant Group, that a lease’s force majeure clause permitted either party to suspend performance due where they were “prevented or delayed, retarded or hindered by… laws, governmental action or inaction, orders of government….”
In this case, a restaurant closed because of Illinois’ restrictions on businesses sought Chapter 11 protection and argued that its post-petition rent was excused because of the force majeure clause in the lease. The landlord argued the force majeure clause was not applicable because 1) the restaurant was not prevented from making payment (the banks and post office were open), 2) lack of money was not an event of force majeure under the lease, and 3) the restaurant could have applied for governmental assistance to pay rent, but chose not to. The court rejected each line of reasoning, finding the first irrelevant, the lack of money argument unpersuasive insofar as it was not the reason for nonpayment, and the third also irrelevant and not required under the force majeure provision.
The court found persuasive the debtor’s argument that it could not pay rent because it could not serve customers – the government’s restriction on its business was the reason for the lack of funds. However, the court also found the debtor was able to use 25% of the rental space for take-out dining, and assessed its post-petition rent accordingly.
The takeaway here for businesses is that courts are looking at force majeure clauses carefully in light of the Covid-19 pandemic, and there may be defenses when and if landlords (or other creditors) begin seeking recovery of unpaid rent as a result of Covid-19.
While this does not definitively answer the question of whether, and how, Covid-19 shutdown orders across the country affect contracts with force majeure provisions, it is a helpful jumping-off point that may prove instructive for businesses unsure of their legal obligations or options. It likewise offers some guidance for commercial landlords who have tenants that have not or will not pay rent as a result of government-mandated shutdowns.
Marks & Klein is a leading U.S. franchise and business law firm, counseling a broad array of start-up concepts now considered some of the fastest-growing franchise brands in the country. To learn more, call 732-747-7100 or email email@example.com.
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