In a recent decision from the U.S. Bankruptcy Court for the Northern District of Illinois, Judge Cassling ruled that an executive orders from Illinois Governor J.B. Pritzker triggered a force majeure clause of a non-residential lease, which partially released a tenant of its obligation to pay rent.
The Court was tasked with deciding whether the March 16, 2020 executive order issued by Governor Pritzker, that prohibited businesses from offering the on-premise consumption of food and drinks, triggered the force majeure clause of a non-residential lease and excused rent obligations under the lease. In Illinois, a force majeure clause will excuse a party’s failure to perform under the contract if the triggering event is a proximate cause of the party’s failure to perform. The force majeure clause in question excused the obligations under the lease if they were “prevented” or “hindered” by “government action or inaction” or “orders of government.”
The Court determined that the executive order triggered the protection of the force majeure clause in the lease because the executive order was both a government action and order from the government; the executive order significantly hindered the tenant’s ability to perform; and the executive order was a proximate cause of the failure perform. The Court explained that the order’s restrictions on businesses prohibited Hitz Restaurant Group from operating the in-person service portion of its business which significantly decreased its ability to generate revenue and make its rental payments. Finding that the force majeure clause was applicable, the Court held that the clause partially excused Hitz’s obligations to pay rent under the lease.
The Court reasoned that because the executive order did not shut down Hitz’s entire business, only the in-person service portion, Hitz could not be relieved from the entire rent payment. Instead, the Court reduced the tenant’s obligation to pay rent based on its reduced ability to generate revenue as a result of the executive order restrictions. Hitz explained that only 25% of its restaurant – the kitchen- was still usable under the executive order. Based on that estimation, the Court reduced the tenant’s obligation to pay rent down to 25% of the originally contracted amount, stating that the payment amounts would increase as executive order restrictions lessened.
The Court rejected the landlord’s three reasons why the force majeure clause was not triggered by the executive order. First, the fact that the Hitz was not physically prevented from writing a check because the executive order did not shut down the banks and post offices was rejected outright as lacking any foundation. Second, the landlord’s argument that the failure to pay rent was actually just a lack of money was not persuasive because Hitz specifically claimed that the executive order that shut down the “on-premise” portion of its business proximately caused its inability to generate revenue and pay rent. Lastly, the landlord’s assertion that the Hitz’s failure to obtain a small business loan to pay the rent precludes the use of the force majeure clause but there was no section of the lease, case law, or any authority to support that argument.
While force majeure’s application depends on the language of the clause and the specific circumstances, the doctrine may provide some relief for tenants affected by the COVID-19 pandemic.