The First of its Kind, Court Rules That Commercial Tenant is Entitled to Reduction in Rent Due to COVID-19 – June 19, 2020

by Arash Beral, Jeffrey S. Goodfried and Jeffrey M. Jensen

In what appears to be the first notable decision in the country tackling COVID-19 related implications vis-à-vis commercial contracts, the Bankruptcy Court for the Northern District of Illinois issued an order recently requiring a tenant (a restaurant) to pay only 25% of rent due during the term of a government-mandated shutdown.  The case is In re Hitz Rest. Grp., No. BR 20-B-05012, 2020 WL 2924523 (2020).

The debtor in that case argued that its rent obligations should be excused by a force majeure provision in the lease in light of the governor of Illinois’ March 16, 2020 executive order affecting restaurants. The force majeure provision in the 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 of its 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.”

The Illinois order prohibited restaurants from serving food for on-premises consumption, but allowed take-out and delivery orders. The Court found that the force majeure provision applied because the executive order was both a “governmental action” and an “order[] of government,” it hindered the debtor’s performance, and it was the proximate cause of the debtor’s inability to pay rent.

Nevertheless, the Court did not excuse the debtor’s rent obligations altogether.  Because the executive order allowed restaurants to operate by carry-out and delivery orders, the Court held that the debtor’s rent obligation would be “reduced in proportion to its reduced ability to generate revenue due to the executive order.” Under the evidence submitted in that case, the Court found that the tenant was required to pay 25% of rent during the shut-down period.

While this case has no precedential effect in California, it gives us a glimpse of how a California court may treat COVID-19 related commercial contract disputes. From the very beginning of the COVID-19 crisis, our firm has been carefully monitoring the impact of the various government orders on our clients. We have worked with both commercial landlords and commercial tenants to ensure that their rights are fully protected.  With a mixture of institutional knowledge, creative thinking, and business acumen, we continue to assist our clients navigate these unchartered times.

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This article is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this article does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.

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