Force Majeure and Impossibility in the Era of COVID-19, New Court Decisions and an Emerging Bankruptcy Trend

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Force majeure clauses and the doctrines of impossibility and/or impracticability remain among the most-discussed legal topics of the COVID-19 pandemic.  Courts across the country, finally open, are grappling with those issues and giving some insight as to how these topics may play out in future cases.

An Illinois bankruptcy court recently addressed the issue of whether the force majeure clause of a commercial lease could be invoked by reason of COVID-19-related governmental restrictions.[1]  Unlike those in most commercial leases, the force majeure clause at bar did not expressly exclude payment of rent from the clause’s effect.  Instead, it provided that the tenant would 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.”[2]  The bankrupt restaurant tenant argued that an Illinois order shutting down restaurants for in-person dining triggered the force majeure clause, absolving the tenant of its obligation to pay post-petition rent under Section 365(d)(3) of the Bankruptcy Code, which requires a debtor to timely perform all obligations under an unexpired, nonresidential lease until the debtor assumes or rejects the lease.[3]

In response, the landlord argued that the subject force majeure clause was not triggered by the Illinois order because the 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” landlord.[4]  The bankruptcy court rejected this contention as “a specious argument . . . that lacks any foundation in the actual language of the force majeure clause of the lease.”[5]

The landlord also argued that the force majeure clause did not apply because the tenant’s failure to pay rent was due to a “lack of money,” and thus outside the scope of the force majeure clause.  The court rejected this argument as well, holding that the governmental restriction was “the proximate cause of [tenant’s] inability to generate revenue and pay rent.”[6]  The landlord finally argued that the tenant could have mitigated its inability to pay rent by applying for a Small Business Administration Loan, but failed to do so.  The court also rejected this argument, holding that nothing in the lease or law required the tenant to borrow money to reduce the impact of adverse governmental actions.[7]

The court concluded that the force majeure clause only partially excused the tenant’s performance, however.  The court found that the Illinois order “did not prohibit [tenant] from performing carry-out, curbside pick-up, and delivery services.”[8]  The court further found “that 75 percent of the square footage of the restaurant . . . was rendered unusable by” the executive order, but the remaining 25 percent “could have been used for carry-out, curbside pick-up, and delivery purposes.”  Although the court reserved final decision pending an evidentiary hearing, the court held that, in light of the foregoing, the tenant “still owes at least 25 percent of the rent amount to [landlord] . . . even after application of the force majeure clause.”[9] 

This specific force majeure clause’s inclusion of the rent obligation may be a distinguishing fact for many.  Even so, the Illinois court’s decision joins a growing line of bankruptcy courts that have allowed debtors to temporarily excuse the fulfillment of their post-petition rent obligations to landlords due to their allegedly impaired ability to generate revenue during the COVID-19 pandemic as a result of states’ executive stay-at-home orders and mandates.[10] 

Although a growing number of courts have allowed debtors to forgo and/or defer making their rent payments to their landlords, not all courts have been willing to let parties use the pandemic to avoid contractual obligations, including outside the bankruptcy context.  A state court in New York recently enforced a forum selection clause in a franchise agreement, over the plaintiff’s objection.[11]  The franchise agreement required suits to be brought in California.  The plaintiff argued that it should be excused from compliance with that clause “because of the risks involved with traveling during the COVID-19 pandemic.”[12] 

Although it did not explicitly invoke force majeure or the doctrines of impossibility or impracticability, the court rejected plaintiff’s argument and held that the clause should be enforced.  The court stated that “[w]hile the COVID-19 pandemic has presented challenging circumstances for litigants, the parties remain constrained by the express provisions of the Franchise Agreement to which they agreed upon.”[13]  The court found that this conclusion was bolstered by the fact that “Plaintiff has failed to demonstrate, or even argue, that the contractually specified forum is unavailable due to the COVID-19 pandemic.”[14]

There will likely be many more court decisions on the effects of force majeure clauses and the doctrines of impossibility and impracticability on contractual performance during the COVID-19 pandemic.  In the bankruptcy context, if an increasing number of courts relieve debtors, in part or fully, of their post-petition rent obligations, it may lead more debtors to seek court approval for the deferral of such obligations during the COVID-19 pandemic.  Moreover, under certain circumstances, the Bankruptcy Code requires that creditors possessing an interest in property receive “adequate protection,” such as periodic cash payments or replacement liens, to protect against a diminution in the value of their interest in such property.[15]  Accordingly, court decisions relieving debtors of their obligations to pay rent could raise questions about whether landlords, who become creditors upon the commencement of a bankruptcy proceeding by the tenant, are entitled to other forms of protection in the absence of rent payments and in the face of (perceived or actual) diminution in the value of their interest in the leased property  as a result of the pandemic.

 

[1] 2020 Bankr. LEXIS 1470 (Bankr. N.D. Ill. June 2, 2020) (ellipses in original).

[2] Id. at *3-4.

[3] See 11 U.S.C. § 365(d)(3).

[4] Id. at *6-7.

[5] Id. at *7. 

[6] Id.

[7] Id. at *7-8.

[8] Id. at *8. 

[9] Id. at *8-10.

[10] See also, e.g., 2020 WL 2374539, at *6 (Bankr. E.D. Va. May 10, 2020).

[11] 2020 N.Y. Misc. LEXIS 2596 (N.Y. Sup. Ct. June 8, 2020). 

[12] Id. at *14.

[13] Id. at *19. 

[14] Id.

[15] 11 U.S.C. § 361; see also 11 U.S.C. § 363(e).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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