Covid and Contracts

A force majeure clause reduced a restaurant debtor’s rent by 75% after the governor’s executive order prohibited on-premises consumption of food and beverage, according to Bankruptcy Judge Donald R. Cassling of Chicago.

The debtor filed a chapter 11 petition on February 24 and didn’t pay rent due on the first of March, April, May, and June. The Illinois governor issued an executive order on March 16 effectively precluding sit-down dining in restaurants. However, the executive order explicitly encouraged restaurants to continue take-out service.

The landlord filed a motion to compel payment of rent under Section 365(d)(3). Alternatively, the landlord sought a modification of the automatic stay under Section 362(d)(1).

Designed to give landlords more than an administrative claim, Section 365(d)(3) requires the debtor to “timely perform all the obligations . . . from and after the order for relief under any unexpired lease of nonresidential real property until such lease is assumed or rejected, notwithstanding § 503(b)(1) of this title.”

In defense to the motion, the debtor raised the force majeure clause in the lease. It excuses the debtor from “performing its obligations . . . in the event, but only so long as the performance of any of its obligations are prevented or . . . hindered by. . . laws, governmental action or inaction, orders of government . . . .”

In his June 3 opinion, Judge Cassling ruled that the force majeure clause “unambiguously” applied to rent due after the issuance of the executive order. In his judgment, the executive order was “unquestionably” both a “governmental action” and an “order.”

Judge Cassling concluded that the executive order “partially” excused the debtor from paying rent for April, May and June. To determine how much rent the debtor must pay, the judge noted how the governor did not prohibit carry-out service.

To decide how much the debtor should pay, Judge Cassling relied on the debtor’s estimate that 25% of the square footage in the restaurant was for the kitchen and carry-out service. He therefore gave the debtor a June 16 deadline for paying all of March rent and 25% of rent for April, May and June. He also obliged the debtor to pay 25% of common-area charges and real estate taxes for those months.

Judge Cassling said that failure to pay reduced rent by the deadline would represent “cause” for lifting the automatic stay.

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Case Details

Case Citation

In re Hitz Restaurant Group, 20-05012 (Bankr. N.D. Ill. June 3, 2020)

Case Name

In re Hitz Restaurant Group