Until the COVID-19 pandemic, most lawyers would strain to recall that the force majeure clause was a bit of obscure boilerplate buried in the depths of a contract that sometimes excused performance if there were Acts of God or similar events beyond the reasonable anticipation or control of the parties. However, lawyers now spend hours parsing the words of force majeure provisions to predict the impact of the pandemic on their clients' deals, agreements and leases. 

On June 3, in In Re: Hitz Restaurant Group, a federal bankruptcy court issued one of the first judicial decisions squarely interpreting a force majeure clause in the context of COVID-19. The result suggests that courts will recognize the pandemic as a force majeure event, but also that courts will limit the pandemic-related relief they grant on force majeure grounds.

Background

Hitz Restaurant Group was a commercial tenant that filed a Chapter 11 bankruptcy petition in mid-February, just as the pandemic began. Hitz remained in possession of the space it rented. Hitz's landlord filed a motion requesting that the Bankruptcy Court force Hitz to pay post-petition rent, or vacate. Hitz invoked the force majeure clause in its lease as a defense. The provision stated: 

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 (emphasis supplied).

Hitz argued that pandemic-related shutdown orders issued by the Illinois governor in March activated this language because the orders prohibited all food and beverage sales by Hitz except for takeout and delivery. The Bankruptcy Court agreed with Hitz—to a point.

The Court's Decision

The Bankruptcy Court ruled that the Illinois shutdown order caused by the pandemic was a force majeure event. According to the court, this is because the governor's directive "unquestionably" was a "governmental action" and an "order" that "hindered" the ability of Hitz to perform its lease obligations by prohibiting Hitz from offering indoor dining. However, the court would not allow Hitz entirely to escape its rent obligations on force majeure grounds. Rather, since Hitz could still offer carryout, curbside pickup and delivery, the court merely reduced Hitz's rent obligation in proportion to the revenue Hitz lost from the governor's order. Based upon Hitz's estimate that it used one-quarter of its floor space, mostly in its kitchen, to generate takeout meals, the court held that Hitz still had to pay at least 25% of its rent and that this would increase as the pandemic eased and the governor gradually ended the shutdown.

Takeaways

The first lesson of the Hitz case is that the historic enormity of the pandemic has afforded courts cause to recognize force majeure clauses. Prior to the pandemic, it was likely that the Bankruptcy Court in Hitz would have paid little heed to force majeure arguments. This is because those provisions were likely nothing but an afterthought when the parties signed their lease. Nevertheless, the words were still there in the text of the Hitz lease. The pervasive impact of the pandemic and resulting government shutdown orders made the court receptive to Hitz's force majeure arguments, and the court enforced the provision, likely to the surprise of the lawyers. 

However, while courts will grant force majeure relief, it is evident from Hitz that they might do so only in a conservative and minimal manner. Rather than eliminating Hitz's rent obligation, the Bankruptcy Court cut Hitz's rent just to the extent the government's action harmed Hitz's revenue. As the governor lifts his shutdown orders, Hitz will have to return to full payment. In short, force majeure offered Hitz only temporary help, to survive the immediate problem caused by the shutdown. The pandemic may be a force majeure, but it is decidedly not a magical "get-out-of-your-contract-free card." 

In the end, courts will focus on the specific language of the force majeure clause. That is because of the fiction that the provision manifests the intent of the parties, even if they never really thought through or actually negotiated the force majeure language. Interestingly, Hitz's lease stated, "Lack of money shall not be grounds for Force Majeure," i.e., a cash flow problem is not a force majeure event. This unartful force majeure language was probably intended to mean that the tenant had to pay its rent even if there was a force majeure event, which is a very common requirement in commercial leases and a key distinction that may dissuade many courts from following the Hitz decision. Drafting that failed more specifically to exempt rent payments from force majeure likely lost the case for Hitz's landlord. 

In the future, considering the uncertainly of our times caused by the pandemic and rolling government shutdown orders, it would serve commercial lawyers and their clients well to scrutinize and rigorously revise seemingly harmless force majeure "boilerplate" before signing a lease, note or other contract.

Jonathan W. Hugg, a partner at Schnader Harrison Segal & Lewis, is co-chair of the firm's financial services litigation group. His practice concentrates on commercial and appellate litigation, with an emphasis on financial institution, real estate, regulatory enforcement and municipal matters. Contact him at [email protected].