Various Recent Commercial Lease Force Majeure Cases Regarding COVID-19
In Rame, LLC v. Metropolitan Realty Management, Inc., Index No. 157438/2020, Sup. Ct. NY, NY County (10/27/20), the Court allowed the tenant to keeps its lease pending the litigation over its frustration and impossibility defenses arising from COVID shutdown orders. However, the Court required the tenant to pay its monthly rent going forward and half of its past due rent.
In BKNY1, Inc. v. 132 Capulet Holdings, LLC, Index No. 508647/16, Sup. Ct. NY, Kings County (9/23/20), the Court held that the governmental orders mandating the closure of plaintiff's [tenant's restaurant] business did not relieve the tenant from having to pay rent. The Court limited the scope of the common doctrine of frustration of purpose and its holding seems to be based upon the fact, in that case, that: "Inasmuch as the initial term of the lease . . . is for approximately nine years . . . a temporary closure of plaintiff's business for two months (April and May 2020) in the penultimate year of its initial term could not have frustrated its overall purpose." Moreover, as in Hitz below, the Court noted that the tenant did prove that it did not have resources (presumably from sources other than those that would be realized from then continuing operations) with which to pay that rent.
In In Ricoh USA, Inc. v. Innovative Solfware Solution, et al, Case #2:20-cv-04025-MAK, Docket Entry No. 19, 2020 WL 7024290 20-4025 (11/30/2020), the Court found a force majeure clause to be a potential shield, but not a sword. Specifically, the Court held:
A force majeure clause, like this one, allocates the risk of loss “if performance becomes impossible or impracticable,” especially as a result of an event or effect the parties count not have anticipated or controlled.85 The clause generally lists a series of events such as earthquakes, storms, floods, natural disasters, wars, or other ‘acts of God’ which the parties to a contract have agreed upon as excuses of non-performance.”86 “A claim of force majeure is equivalent to an affirmative defense.”87 The force majeure clause in the Ricoh Dealer Agreement excuses performance of the parties’ obligations if non-performance results from specified events; it does not create a cause of action for breach of contract if a party continues to operate as if the specified events did not occur. Innovative argues Ricoh’s continued invoicing while schools closed due to the COVID-19 pandemic breached the clause. It does not.
This is a contract case, not a lease one. However, the holding would seem to apply to commercial leases, as well.
In In re Hitz Rest. Grp., 616 B.R. 374, 377–79 (Bankr. N.D. Ill. 2020), the Court held:
In Illinois, contracts are enforced according to their terms. See Consol. Coal Co. of St. Louis v. Schneider, 163 Ill. 393, 401, 45 N.E. 126 (1896). Under Illinois law, a force majeure clause will only excuse contractual performance if the triggering event cited by the nonperforming party was in fact the proximate cause of that party's nonperformance. Northern Ill. Gas Co. v. Energy Co-op., Inc., 122 Ill.App.3d 940, 78 Ill.Dec. 215, 461 N.E.2d 1049, 1058 (1984).
9The force majeure clause in this lease was unambiguously triggered by § 1 of Governor Pritzker's executive order. First, his order unquestionably constitutes both “governmental action” and issuance of an “order” as contemplated by the language of the force majeure clause. Second, that order and its extensions unquestionably “hindered” Debtor's ability to perform by prohibiting Debtor from offering “on-premises” consumption of food and beverages. Finally, the order was unquestionably the proximate cause of Debtor's inability to pay rent, at least in part, because *378 it prevented Debtor from operating normally and restricted its business to take-out, curbside pick-up, and delivery.
As discussed later in this opinion, it is significant to the analysis of Debtor's force majeure argument that Governor Pritzker's executive order did not prohibit all restaurant operations in Illinois. Indeed, his order not only permitted, but also encouraged, restaurants to continue to perform take-out, curbside pick-up, and delivery services. However, Creditor did not address that issue. Instead, it raised three arguments why the lease's force majeure clause had no effect at all on Debtor's obligation to pay post-petition rent under § 365(d)(3). Before turning to the issue of whether a force majeure clause can partially excuse performance, the Court addresses Creditor's three arguments that the force majeure clause does not apply to this situation at all.
Creditor first argues that the force majeure clause was not triggered because Governor Pritzker's executive order did not shut down the banking system or post offices in Illinois, and Debtor therefore would have physically been able to write and send rental checks to Creditor. (Dkt. No. 45, p. 3.) This is a specious argument that is unresponsive to Debtor's arguments and one that lacks any foundation in the actual language of the force majeure clause of the lease. The Court rejects it out of hand.
10Second, Creditor characterizes Debtor's failure to perform as arising merely from a “lack of money,” which it argues is not grounds for force majeure according to the lease's own terms. (Id.) But Debtor has not argued that lack of money is the proximate cause of its failure to pay rent. Instead, it is arguing that Governor Pritzker's executive order shutting down all “on-premises” consumption of food and beverages in Illinois restaurants is the proximate cause of its inability to generate revenue and pay rent. The Court agrees, at least in part, and rejects Creditor's argument to the contrary.2
Creditor finally argues that Debtor could have obtained the money to pay the rent, despite the Governor's partial shutdown, by applying to receive a Small Business Administration loan. (Id. at p. 4.) Its failure to apply for such a loan prevents it from seeking to enforce the force majeure clause. (Id.) But Creditor has not cited any language from the lease or any case-law authority to support this argument. Nor does it acknowledge or address the plain language of the force majeure clause in the lease. As previously discussed, that clause is triggered by “governmental action” and governmental “orders.” Nothing in that clause requires the party adversely affected by governmental action or orders to borrow money to counteract their effects.
The Court therefore rejects Creditor's three arguments and concludes that the *379 force majeure clause partially excuses Debtor's obligation to pay rent for April, May, and June 2020. Nevertheless, Debtor is not off the hook entirely. Governor Pritzker's executive order did not prohibit Debtor from performing carry-out, curbside pick-up, and delivery services. Instead, it encouraged Debtor and other Illinois restaurants to perform those services. It follows that, to the extent that Debtor could have continued to perform those services, its obligation to pay rent is not excused by the force majeure clause. The Court therefore holds that Debtor's obligation to pay rent is reduced in proportion to its reduced ability to generate revenue due to the executive order.
Consistent with Hitz, in One Wythe LLC v. Elevations Urban Landscape Design Inc, 67 Misc. 3d 1207(A), 126 N.Y.S.3d 622 (N.Y. Civ. Ct. 2020) and again in Westbury Flats, LLC. v. Backer, 68 Misc. 3d 1219(A) (N.Y. Civ. Ct. 2020), both subject to limited reporting as stated therein, the Court noted, in a footnote, but did not specifically rule:
Quite timely as to the imperative national public policy legislative interest in the protection of small businesses, inter alia, in the midst of This Court's decision, was enacted the historically unprecedented two trillion dollar stimulus package titled Coronavirus Aid, Relief and Economic Securities Act (CARES Act) to redress the decimation of our economy by force majeure of Coronavirus Pandemic of 2020.
In Palm Springs Mile Assocs., Ltd. v. Kirkland's Stores, Inc., No. 20-21724-CIV, 2020 WL 5411353 (S.D. Fla. Sept. 9, 2020), the Court, in denying Kirkland’s (the Tenant’s) motion to dismiss its landlord’s suit, stated and held, among other reasons:
Early in the year, the onset of the COVID-19 pandemic raised global public health concerns. . . In particular, Miami-Dade County applied restrictions to non-essential activities and business operations as an effort to slow the spread of the virus.
. . .
Kirkland asserts that the restrictions on business operations and non-essential activities qualify as force majeure events, and therefore its obligation to pay rent is automatically suspended. Kirkland's position is unavailing. First, Kirkland fails to explain how the governmental regulations it describes as a force majeure event resulted in its inability to pay its rent. Kirkland, instead, argues that the force majeure clause does not require any showing that the county's regulations are linked to Kirkland's nonpayment. This argument misses the mark, though. The restrictions on non-essential activities and business operations must directly affect Kirkland's ability to pay rent. See Chatsworth WL 4694146, at *4 (holding that the defendant failed to show its inability to pay rent resulted from a force majeure event).
The Court did not address Hitz. However, the Court left open, to the tenant, an opportunity to try to prove, as a factual matter, a linkage from “the force majeure event to an inability to pay its rent”.
In Richards Clearview, LLC v. Bed Bath & Beyond, Inc., No. CV 20-1709, 2020 WL 5229494, at *8 (E.D. La. Sept. 2, 2020), the Court held
In sum, the Court concludes that the exercise of judicial control is warranted in this case because BB&B had a plausible basis for believing that Fixed Rent was not due, and that even if BB&B was mistaken, it attempted to remedy the default relatively shortly after receiving notice thereof. Although the cure did not comply with the applicable deadlines in the Lease, any deficiency in that regard is excusable by the global circumstances. Moreover, there is no evidence that Landlord was harmed by the delay in any way, let alone a substantial one. In sum, lease cancellation, a disfavored event under Louisiana law, is not appropriate here.
Here, too, the Court did not address Hitz. Therefore, the Court seems to be allowing COVID-19 to provide the tenant with a reasonable delay, but not an excuse for not paying.
In In re Seven Stars on the Hudson Corp., No. 19-17544-SMG, 2020 WL 4558344 (Bankr. S.D. Fla. Aug. 7, 2020), Section 3.02 of the Lease provided:
Commencing on the Rental Commencement Date, Tenant shall pay to Landlord during the Term the Gross Rent specified in the Basic Lease Provisions, in advance upon the first day of each calendar month.
Section 20.14 of the Lease was a force majeure provision, and Paragraph (b) thereof provided that “This Section shall not excuse any rental obligations . . .” The Lease also had a time of the essence clause. Despite those provisions, although the Court did not excuse the tenant, Seven Stars, from paying the rent, it did allow Seven Stars to pay late. In doing so, the Court stated and held:
On March 13, 2020, the President declared a national emergency due to the COVID-19 pandemic.13 And on March 22, 2020, Broward County, Florida directed the closure of “[a]ll nonessential retail and commercial business locations” due to the pandemic.14 Businesses in Broward County – including Seven Stars' trampoline park and Xtreme Action Park – remained closed well into June 2020.
. . .
The Court does observe, however, that in granting Seven Stars some relief (as permitted, in this Court's view, under its lease) due to COVID-19 from the requirement that it timely pay rent while being legally prohibited from using its leased premises, and ordering that the deferred rent be paid in full as an administrative expense claim on the effective date of a Chapter 11 plan, the Court was ruling consistent with the mandate of 11 U.S.C. § 365 (and the Court's reading of the lease) that administrative rent must be paid in full as a condition of assumption. The Court merely deferred the deadline to comply with this requirement due to COVID-19 and applicable provisions of the lease (including the force majeure clause, which did not excuse payment during a force majeure event, but which also did not specifically require timely payment during such event).
Here, too, the Court did not address Hitz. Therefore, in a Bankruptcy context, as the Court construes 11 U.S.C. §365, the Court appears to be ruling that COVID-19 entitles a tenant to a delay in paying (but not an excuse from ultimately having to pay) the rent for the closed period) and is willing to stretch the language of the Lease toward that result.