Pandemic Triggers Reduction in Commercial Rent Obligation©

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In the case of In re Hitz Restaurant Group (2020 Bankr. LEXIS 1470 (N.D. Ill. June 2, 2020)), the United States Bankruptcy Court for the Northern District of Illinois- Eastern Division held that a force majeure clause in a commercial lease was triggered by the March 16, 2020, executive order issued by the Governor of Illinois (Executive Order) in respect to the COVID-19 pandemic and excused a restaurant tenant from 75% of its obligation to pay rent after the date of the Executive Order. The force majeure clause in the subject lease stated:

“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 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.”

The court held that the Executive Order “unquestionably constitutes both ‘governmental action’ and issuance of an ‘order’” that triggers the force majeure clause. The court further held that the Executive Order “unquestionably hindered” the tenant’s ability to perform its rental obligations, and that the Executive Order was the “proximate cause” of the tenant’s inability to pay rent. Therefore, the tenant’s obligation to pay rent was reduced in proportion to its reduced ability to generate revenue as a result of the Executive Order.

The court emphasized that the specific language used in the force majeure clause and the provisions of the executive order were an important factor in the interpretation and applicability of force majeure clauses. The court likely reached the conclusion it did because the lease included the words “governmental action” or “orders of government” and failed to include the phrase “A tenant’s obligation to pay rent and other monetary obligations under this lease shall not be excused as a result of a force majeure event.”

Although not binding on other courts, this decision may help to influence tenant negotiations with commercial landlords or decisions by other courts.

Please contact Theodore Nicholas, JD/MBA to discuss your personal situation.

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