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Posted on: Aug 14, 2020

In the Age of COVID-19, the Force Majeure Clause Takes Center Stage

By April Pyatt, Ice Miller LLP

Recently, 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 lease excused a restaurant tenant from its obligation to pay a portion of post-petition rent. The force majeure clause in the subject lease 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 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.

In this case, the tenant argued that the force majeure clause was triggered by the March 16, 2020 executive order issued by the Governor of Illinois (executive order) in regard to the COVID-19 pandemic, which prohibited on-premises consumption and dining at restaurants,  and limited restaurant operations to in-house delivery, curbside pick-up, drive-through or third party delivery services, and therefore, its obligation to pay rent for the months of March, April, May and June of 2020 should be excused. The landlord argued, among other things, that the force majeure clause was not applicable because the tenant’s lack of money from its operations to pay rent was not a grounds for force majeure under the force majeure clause.

The court agreed with the tenant that the force majeure clause in the lease was triggered by the executive order and determined that it was applicable with respect to the rental payments payable after the date of the executive order. However, since the March rental payment was due and payable prior to the issuance of the executive order, the court determined that the tenant was obligated to pay March rent. The court opined that the executive order “unquestionably constitutes both “governmental action” and issuance of an “order” as set forth in the force majeure clause. The court further opined 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.

In rejecting the landlord’s argument that “lack of money” was not grounds for force majeure, the court stated that the tenant had not argued that “lack of money” was the cause of its failure to pay rent, but that instead the executive order was the cause of such inability. As a result of these determinations made by the court, the court held that the tenant’s obligation to pay rent would be reduced in proportion to its reduced ability to generate revenue as a result of the executive order. Based on the tenant’s estimation that it was unable to use 75 percent of the restaurant square footage as a result of the executive order, the court preliminarily determined that the tenant should be obligated to pay at least 25 percent of the rental payments due for April, May and June of 2020.   

In determining that the tenant was entitled to rent relief in this case, the court emphasized the specific language used in the force majeure clause and compared it to the provisions of the executive order hindering the tenant’s ability to pay rent. If the force majeure clause of the subject lease had not included the words “governmental action” or “orders of government,” or if it had otherwise been qualified by the following statement: “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,” the court would probably have reached a different conclusion.

Although not binding on other courts, the federal bankruptcy court’s decision in this case could potentially influence subsequent court decisions regarding tenant relief claims and the interpretation and applicability of force majeure clauses to stay-at-home or similar executive orders issued by governmental authorities during the pandemic. Regardless, in any such case where the applicability of the force majeure clause is at issue, the specific language used in the subject force majeure clause will be an important determining factor as to whether a tenant’s request for rent relief is granted by the court.

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