New case sides with Illinois bar and restaurant over rent decrease under force majeure clause during reduced operations under COVID-19 orders. Happened in the context of a bankruptcy, but the opinion contains valuable arguments and guidance that bars and restaurants should be aware of.

It was bound to happen. And I’m happy it was in Chicago, Illinois, that a restaurant and bar fought and received an equitable reduction in rent proportionate to the potential loss in revenue (more on this below) suffered by the restaurant under the COVID-19 stay at home and business closure orders issued by the State of Illinois. The restaurant/bar had filed for bankruptcy protection before the COVID-19 crisis, so the order and opinion come from the bankruptcy court in the context of the landlord and management company filing motions to be able to proceed with eviction of the restaurant/bar and for the payment of full rent under the lease. 

• You can find the lease that the parties entered into here.
• You can read the full opinion from the court here.

The bar/restaurant was in no position to pay much – having filed for bankruptcy protection before the COVID-19 crisis, but after the State’s closure orders, it was in even less of a position given the reduction in income caused by the closure of indoor eating at bars and restaurants.

When the landlord and management company pressed, the restaurant/bar argued that the force majeure clause in the parties lease excused the obligation to pay rent during the COVID-19 closure.

Section 29.5 of the parties’ Lease (see link above) is the Force Majeure Clause. It provided:

“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 act of God, fire, earthquake, flood, explosion, actions of the elements, way, invasion, insurrection, riot, mob violence, sabotage, inability to procure or general shortage of labor, equipment, facilities, materials or supplies in the open market, failure of transportation, strikes, lockouts, action of labor unions, condemnation, requisition, laws, 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 (each, individually and collectively, an event of “Force Maieure11,[sic]). Lack of money shall not be grounds for Force Majeure.”

The court agreed that the language was triggered by Governor Pritzker’s executive Order 2020-7 closing food and beverage business operations for on-premise consumption. Finding that the date of the order was the date that the force majeure clause began operating to reduce the amount of rent owed.

Here’s what you need to know about force majeure clauses and why they are important to contractual relationships:

“Ordinarily when performance of a contract would be illegal because of a statute, regulation, or other official action that has occurred since the contract was signed, the promisor is discharged without liability, pursuant to the common law doctrine of impossibility (today often called “impracticability”). 407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 244 N.E.2d 37, 296 N.Y.S.2d 338 (1968); Restatement of Contracts (Second), §264 (1981). If, however, the parties include a force majeure clause in the contract, the clause supersedes the doctrine. Northern Indiana Public Service Co. v. Carbon County Coal Corp., 799 F.2d 265, 276 (7th Cir. 1986); Wiggins v. Warrior River Coal Co., 696 F.2d 1356, 1359 (11th Cir. 1983). For, like most contract doctrines, the doctrine of impossibility is an “off-the-rack” provision that governs only if the parties have not drafted a specific assignment of the risk otherwise assigned by the provision.” Commonwealth Edison Co. v. Allied-General Nuclear Services, 731 F. Supp. 850, 855 (N.D. Ill. 1990).

In line with this reasoning, the court found that the triggering of the force majeure clause was a matter of contractual interpretation, the court went on to note that the triggering event needs to be the proximate cause of the party’s non-performance in order to excuse contractual performance pursuant to a force majeure clause. Siding with the restaurant/bar debtor, the court reasoned:

“The force majeure clause in this lease was unambiguously triggered by § 1 of Governor Pritzker’s executive order. First, his order unquestionably constitutes both “governmental action” and issuance of an “order” as contemplated by the language of the force majeure clause. Second, that order and its extensions unquestionably “hindered” Debtor’s ability to perform by prohibiting Debtor from offering “on-premises” consumption of food and beverages. Finally, the order was unquestionably the proximate cause of Debtor’s inability to pay rent, at least in part, because it prevented Debtor from operating normally and restricted its business to take-out, curbside pickup, and delivery.”

The court then went on to do two interesting things. It rejected the arguments of the creditor landlord/management company and it also found that the force majeure clause operated to reduce the rent proportionately and in totality.

With regard to the landlord-side arguments, restaurants and bars operating in the current COVID-19 crisis will recognize many as they are the same arguments landlords have been pressing since the crisis began to refuse compromise on rental obligations where food and beverage establishments’ ability to pay is impacted by closure and partial-closure orders. Here are the issues and how the court ruled:

• The Government Shutdown Order Is Not a Triggering Event. “Creditor first argues that the force majeure clause was not triggered because Governor Pritzker’s executive order did not shut down the banking system or post offices in Illinois, and Debtor therefore would have physically been able to write and send rental checks to Creditor. (Dkt. No. 45, p. 3.) This is a specious argument that is unresponsive to Debtor’s arguments and one that lacks any foundation in the actual language of the force majeure clause of the lease. The Court rejects it out of hand.”
• Lack of Money is the Proximate Cause, Not the Government Shutdown Order. “Second, Creditor characterizes Debtor’s failure to perform as arising merely from a “lack of money,” which it argues is not grounds for force majeure according to the lease’s own terms. (Id.) But Debtor has not argued that lack of money is the proximate cause of its failure to pay rent.Instead, it is arguing that Governor Pritzker’s executive order shutting down all “on-premises” consumption of food and beverages in Illinois restaurants is the proximate cause of its inability to generate revenue and pay rent. The Court agrees, at least in part, and rejects Creditor’s argument to the contrary.” (There’s a footnote on this point in the opinion you will want to read.)
• The Restaurant/Bar Must Apply for SBA PPP or other Financing. “Creditor finally argues that Debtor could have obtained the money to pay the rent, despite the Governor’s partial shutdown, by applying to receive a Small Business Administration loan. (Id. at p. 4.) Its failure to apply for such a loan prevents it from seeking to enforce the force majeure clause. (Id.) But Creditor has not cited any language from the lease or any case-law authority to support this argument. Nor does it acknowledge or address the plain language of the force majeure clause in the lease. As previously discussed, that clause is triggered by “governmental action” and governmental “orders.” Nothing in that clause requires the party adversely affected by governmental action or orders to borrow money to counteract their effects.”

Then, noting that Governor Pritzker’s order did not prohibit the bar/restaurant from performing carry-out, curbside pick-up, or delivery services, and even encouraged Illinois restaurants (no word on bars) to perform those services, the court went on to interpret the contract in a rather equitable fashion: 

“It follows that, to the extent that Debtor could have continued to perform those services, its obligation to pay rent is not excused by the force majeure clause. The Court therefore holds that Debtor’s obligation to pay rent is reduced in proportion to its reduced ability to generate revenue due to the executive order.”

In ruling on this point, the court initially ordered that 25% of the rent be paid given a per-square-foot calculus about the amount of the bar/restaurant square footage that was open versus what was unusable and closed, but the court invited the parties to provide further proofs – related to actual operational data – and noted that the rental amounts would increase under this formula as the State allowed expanded operations.

All-in-all, a fairer and better result for restaurants and bars than being stuck with the tab for spaces they cannot use by government order. Perhaps bankruptcy protection to force the issue of a reduction in rent for reduced operations during the current crisis is a worthwhile course of action where landlord’s are holding firm to refusals on reductions.