With business interruptions and closures due to COVID-19, state courts can anticipate significant litigation surrounding “force majeure” clauses in contracts. This article illustrates one case decided on June 3, 2020, by a state court in Illinois.
On March 16, 2020 the Governor of Illinois issued an Executive Order requiring all businesses in the State of Illinois that offered food or beverages for on-premises consumption—including restaurants, bars, grocery stores, and food halls—to suspend on-premises consumption. The Executive Order did allow such businesses to serve food and beverages that were to be consumed off-premises. A restaurant in Illinois leased a location from which it operated its restaurant and bar business. The lease had a force majeure clause that provided in part:
Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by … laws, governmental action or inaction, orders of government…. Lack of money shall not be grounds for Force Majeure.
As a result of the Executive Order, the restaurant’s business revenue was severely impacted. The United States Bankruptcy Court for the Northern District of Illinois in In re Hitz Rest. Grp., No. BR 20 B 05012, 2020 WL 2924523, at *1–5 (Bankr. N.D. Ill. June 3, 2020) addressed the interplay between the COVID-19 shut-down order and the force majeure clause.
In the Hitz Rest. Grp. case the restaurant argued that because of the Executive Order it was forced to close its restaurant and bar was not able to pay its rent and that under the force majeure clause in its lease it was excused from the obligation to pay rent during the shut-down period. The landlord rejected this argument and sought payment and/or to evict the restaurant.
The Court concluded that the force majeure clause applied, at least in part, to the rental payments which became due after the Executive Order became effective. Under Illinois law, in order for the force majeure clause to be triggered, the triggering event must in fact be the proximate cause of the party’s inability to perform under the lease. The Court reasoned that the force majeure clause was unambiguously triggered by the Executive Order because the Executive Order unquestionably constituted both “governmental action” and issuance of an “order” as contemplated by the language of the force majeure clause. In addition, the Court noted that the Executive Order unquestionably hindered the restaurant’s ability to perform by prohibiting it from offering “on-premises” consumption of food and beverages. Finally, the Court stated that the Executive Order was unquestionably the proximate cause of the inability to pay rent, at least in part, because it prevented the restaurant from operating normally and restricted its business to take-out, curbside pick-up, and delivery.
However, the Court observed that it was significant to the analysis that the Executive Order did not prohibit all restaurant operations. Accordingly, the Court held that because a restaurant under the Executive Order could partially operate by providing carry-out, curbside pick-up, and delivery services, to the extent that the restaurant could have continued to perform those services, its obligation to pay rent was not excused by the force majeure clause. The Court further held that the restaurant’s obligation to pay rent was reduced in proportion to its reduced ability to generate revenue due to the Executive Order. Because 75% of the leased space was unusable for on-premises dinning and bar operations, the Court required 25% of the lease to be paid during the shut-down.
One interesting argument that the landlord made, but the Court rejected, was the argument that the restaurant could have obtained money to pay the rent by applying to receive a Small Business Administration loan. The Court noted that there was no language in the lease requiring obtaining a loan and no case-law authority to support such an argument. There was no real analysis of the requirement that a party must take reasonable steps to mitigate its damages and losses and the fact that under the Payroll Protection Program a restaurant could have obtained an essentially free loan to pay payroll and rent obligations.
This decision is one of the first reported opinions dealing with the interplay between force majeure clauses and COVID-19 shut-down orders. The language of each specific force majeure clause and the effect and impact of each shut-down order will be critical to any analysis of the issue. Further, the law in each jurisdiction must be consulted in the analysis of the issue as well. In the Hitz Rest. Grp. case the force majeure clause specifically referenced “governmental action or inaction, orders of government” and the Executive Order clearly qualified as such action and order. It remains to be seen if a force majeure clause without such specific language will be of benefit to a business owner in the wake of the COVID-19 impacts. If you need assistance with your restaurant or business lease as a result of the COVID-19 shut-down orders feel free to give any attorney in our Restaurant or Real Estate Practice Groups a call.
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