Does COVID-19 Closure Trigger Force Majeure Rent Relief for a Retail Tenant?

Historically, boilerplate force majeure clauses have excused parties from performing lease obligations made impossible by unforeseen and unpreventable events, including government actions that make performance impossible. During the pandemic, retail and restaurant tenants across the country relied on the “government actions” language clauses to justify their failure to pay rent during the months state government shutdown orders prevented them from operating.

Is that argument legally sound? Of course, it will be up to the courts to answer that question in the months and years to come. But even at this early stage, the caselaw has started to develop. Here’s a look at the first two reported cases that have applied “government action” force majeure language to the COVID-19 context.

COVID-19 Shutdown Does NOT Excuse Failure to Pay Rent

Facts: A retail tenant in a shopping center stopped making rent payments in April, citing Miami-Dade County restrictions on nonessential activities and business activities to curb the spread of the virus. The landlord was having none of it and sued the tenant for over $460,000 in past-due rent, accelerated future rent, and attorneys’ fees. The tenant asked the court to dismiss the case, claiming that the county orders triggered the following force majeure clause of the lease:

Whenever a period of time is prescribed in this Lease for action to be taken by either party, such party will not be liable or responsible for, and there will be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the reasonable control of such party. [Emphasis added.]

Ruling: The Florida federal court rejected the motion to dismiss and allowed the landlord to take his eviction case to trial.

Explanation: The tenant’s assertions that the restrictions on business operations and nonessential activities constituted force majeure clause events and excusing its obligation to pay rent was “unavailing,” according to the court. For one thing, the tenant didn’t explain how the orders resulted in its inability to pay. Force majeure relief isn’t automatic. It was incumbent on the tenant to show how the orders directly affected its business and its ability to pay rent. The good news for the tenant is that it would get the chance to make that showing at trial.

• Palm Springs Mile Assocs. v. Kirkland's Stores, Inc., 2020 U.S. Dist. LEXIS 163880

COVID-19 Shutdown DOES Excuse Failure to Pay Rent

Facts: A restaurant chain filed for bankruptcy after being forced to close down due to a Governor of Illinois Executive Order suspending all on-premises consumption of food and beverage. The landlord asked the bankruptcy court to set aside the usual Chapter 11 restrictions and give it permission to evict the tenant for not paying post-petition rent. The tenant claimed the “orders of government” language in the force majeure clause of the lease excused it from having to pay rent; the landlord cited the part of the clause indicating that “lack of money” wasn’t a force majeure event:  

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 . . . laws, governmental action or inaction, [or] orders of government . . . Lack of money shall not be grounds for Force Majeure. [Emphasis added.]

Ruling: The federal bankruptcy court in Illinois ruled that the force majeure clause excused the tenant’s nonpayment of rent.

Explanation: It was the Executive Order itself rather than the lack of money that hindered the tenant’s performance, the court reasoned. Accordingly, there was a force majeure event and the “lack of money” limitation didn’t apply. The landlord’s contention that the tenant could have gotten the rent money by applying for a Small Business Administration loan fell on deaf ears because the lease didn’t require the party whose performance was hindered by a government action to apply for such a loan.

But the landlord didn’t walk away empty-handed. The court noted that the Executive Order applied only to on-premises consumption and not curbside pickup and delivery services. Based on the tenant’s own assertion that the Executive Order rendered 75 percent of the restaurant space unusable, the court found that the tenant could have dedicated the remaining 25 percent for curbside pickup and delivery. So, the force majeure clause excused only 75 percent of its post-petition rent, the court concluded.

• In re Hitz Restaurant Group, No. BR 20 B 05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020)

5 Takeaways

1. Tenants must be able to document the business losses they suffered as a result of shutdown orders.
2. Tenants must also be able to tie those losses directly to the shutdown orders.
3. Courts are likely to require tenants to carry on whatever business activities are not banned by the shutdown orders.
4. Courts may look for ways to avoid enforcing “lack of money” limitations on force majeure clauses.
5. Tenants will probably not be required to seek government loans to cover their rent obligations unless the lease expressly requires it.