Restaurant Group Gets a Break on Its Rent During COVID-19 Pandemic

Cover image with gray block reading Restaurant Group Gets a Break on Its Rent During Pandemic

[July 28, 2020] On June 2, 2020, the Northern District of Illinois Bankruptcy Court addressed landlord-tenant debt obligations issues in light of the COVID-19 pandemic in its decision for In re: Hitz Restaurant Group [1]. The Court held that the restaurant tenant’s obligation to pay rent amidst the pandemic was partially excused due to the force majeure clause included in the parties’ lease agreement.

Hitz Restaurant Group owns and operates multiple bars and restaurants in the Chicago area, and like many other businesses, has struggled financially due to COVID-19 and the subsequent government-mandated closures. Illinois Governor J.B. Pritzker issued executive orders mandating restaurants to suspend dine-in functions and urging residents to stay home to curb the spread of the disease. Hitz Restaurant Group had stopped paying rent before the pandemic and closures took effect due to other financial difficulties. Even so, the Court held that Hitz would be partially excused from its rent obligations incurred during the pandemic. Hitz’s inability to pay rent before the pandemic does not preclude Hitz from relying on the force majeure clause in its lease agreement.

Under Section 365(d)(3) of the Bankruptcy Code, a debtor must “timely perform all the obligations … under any unexpired lease” until that Lease is assumed or rejected under the U.S. Code [2]. The Hitz lease contained the following force majeure clause:

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 is prevented or delayed, retarded or hindered by … governmental action or inaction, orders of government or civil or military or naval authorities, or any other cause, whether similar or dissimilar to the foregoing, not within the reasonable control of the party or its agents, contractors or employees … Lack of money shall not be grounds for Force Majeure.

The Court focused on the “government action or inaction” aspect of the clause, accepting Hitz’s argument that the Governor’s executive orders qualified as government action, which was the proximate cause of Hitz being unable to generate revenue and therefore pay rent. However, the Court did state that, because Hitz could have continued to operate delivery, take out, or curbside services under the Governor’s orders, Hitz should pay rent reduced proportionally to the restaurant’s inability to provide regular dine-in services.

The Court’s ruling in Hitz, though not binding precedent on other Illinois courts, may lead to much-needed relief for businesses struggling amidst government closures. Going forward, landlords and tenants are both likely to pay more attention to force majeure clauses. If other courts adopt the same reasoning as Hitz, businesses may not be liable for the inability to pay all or some of the rent due during government-mandated COVID-19 closures.

[1] In re Hitz Rest. Grp., No. 20 B 05012, 2020 Bankr. LEXIS 1470 (Bankr. N.D. Ill. June 2, 2020).

[2] 11 U.S.C. 365(d)(3).

Related: Bankruptcy; Litigation; Real Estate

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