Biz Brief: Force Majeure Clause Triggered by COVID-19
On June 2, 2020, an Illinois bankruptcy court considered the force majeure clause in a restaurant’s lease. In re Hitz Restaurant Group, 2020 Bankr. LEXIS 1470. The court held that the force majeure clause was triggered by the government mandated shutdown order due to COVID-19 and thus restricted the amount of rent that the tenant was obligated to pay.The Hitz case originates from a bankruptcy court in Illinois. As such, it is not “binding” authority in California. However, the analysis is reasonable, and it is one of the first cases to directly deal with the issue of the impact of a COVID-19 shutdown order on a restaurant lease.
The Hitz court reviewed Illinois law, and reasoned that a force majeure clause excuses performance if the triggering event was the proximate cause of that party’s nonperformance. Northern Ill. Gas Co. v. Energy Co-op., Inc., 461 N.E.2d 1049, 1058 (Ill. App. Ct. 1984). The Court found that the Governor’s Executive Order (“Order”) restricted the tenant’s operation to only take-out, curbside pickup and delivery services. As such, the court concluded that the Order was a sufficient triggering event, which was the proximate cause of tenant’s inability to pay rent.
The court rejected the landlord’s arguments that the tenant should be prevented from asserting the force majeure clause as a defense, including the assertion that the tenant failed to apply for a Small Business Administration loan. Rather, the court observed that “nothing in [the] clause requires the party adversely affected by the governmental action . . . to borrow money to counteract their effects.” On the other hand, the court reasoned that since the Order permitted the restaurant to continue operations at 25%, that the tenant was liable for at least 25% of its monthly rent obligation.
We have not seen a case directly on point in California, which makes Hitz intriguing. We would anticipate that if a California court were to consider a similar lease, that the court would start by reviewing the specific force majeure provision contained in the lease. Then the court would likely look at California Civil Code §1511 which outlines three scenarios where performance is excused — operation of law, act of “superhuman cause,” or inducement by the other party.
The issue would then turn on whether a stay-at-home order issued pursuant to the COVID-19 pandemic would be deemed such a substantial interruption to one’s business that it could not have been prevented through “prudence, diligence and care.” Horsemen’s Benevolent & Protective Assn. v. Valley Racing Assn., 4 Cal. App. 4th 1538, 1566 (Cal. App. Ct. 1992). It is certainly reasonable to imagine that a California court, just like the Hitz court, could find that a government-mandated shutdown due to COVID-19 would sufficiently trigger a force majeure clause and therefore excuse performance in a restaurant lease. If the restaurant could “partially” operate, perhaps the court would similarly find that “partial” rent was due. We should anticipate that this issue will be litigated in California.