04 Feb Force Majeure: Not Merely “Boilerplate” in Commercial Leases
Posted at 12:55h in Articles, COVID-19 Updates
Force Majeure: Not Merely “Boilerplate” in Commercial Leases
Henry FloresSenior Counsel
In the Chuck E. Cheese bankruptcy case, a recent decision by the United States Bankruptcy Court for the Southern District of Texas deals with an important and current commercial leasing issue: financially distressed tenants seeking to avoid lease obligations by arguing that pandemic-related limitations on their business operations constitute force majeure events that relieve them of rent obligations.[i]
The Chuck E. Cheese bankruptcy and related lease dispute
On June 24, 2020, the Chuck E. Cheese debtors filed chapter 11 in Houston. In early August 2020, the debtors filed a motion seeking rent abatement for 141 restaurant sites in 12 states that were closed or otherwise limited in their operation based on pandemic-related government directives (according to the debtors, Chuck E. Cheese had 741 company-operated and franchised sites in 47 states and 16 foreign jurisdictions as of the date of the bankruptcy filing). The debtors argued that rent abatement was appropriate under 3 alternative grounds (each of which the Court ultimately rejected), but we will focus on one argument – that government restrictions on the operation of restaurants and arcades constituted force majeure events allowing the debtors to delay performance.
Although numerous lessors objected to the proposed rent abatement, the debtors were able to settle with most of them, and the Bankruptcy Court was ultimately asked to rule on a request for rent abatement for 6 leases covering Chuck E. Cheese locations in 3 states – North Carolina, Washington and California.
The Court’s ruling and another recent force majeure case
In analyzing whether rent abatement was appropriate based on force majeure, the Bankruptcy Court looked to the language of the leases. One of the California leases specifically included an “anti-force majeure clause” that required performance in all circumstances, notwithstanding “reasons of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of either party.” Given that specific lease provision, the Court concluded that force majeure could not serve as a basis for rent abatement for that Chuck E. Cheese site.
The other 5 leases included customary force majeure provisions, but each lease had an important carveout – even if force majeure events occurred, the force majeure provision would not relieve the lessee from any monetary obligations under the lease (the precise language in the leases varied, but the effect was the same). Given the carveout language, the Court determined that rent abatement was not available under a force majeure theory.
Interestingly, in June 2020, a Bankruptcy Court in Illinois analyzed a restaurant lease that included a force majeure provision with a slightly different carveout – the lease provided that “lack of money” does not constitute a force majeure event.[ii] The lessor argued that the debtor could not pay rent due to a “lack of money,” which would undermine the debtor’s force majeure argument. The Court applied Illinois rules of contract interpretation (i.e., the specific reference to “governmental action” in the force majeure clause took precedence over the general reference to “lack of money”) and determined that the Illinois governor’s pandemic-related order barring dine-in restaurant service was a force majeure event that was the proximate cause of the debtor’s inability to pay rent.
The decision did not give the debtor a complete win – as the Illinois order allowed take-out or delivery restaurant service, the Court ordered the debtor to pay 25% of the amounts due under the lease based on the debtor’s estimate that the governor’s order rendered 75% of the restaurant unusable. The Court viewed the estimate as an admission by the debtor that it owed at least 25% of the rent and other monetary obligations arising under the lease.
This article does not attempt to compare or critique the approaches that the Courts took in the Chuck E. Cheese and Hintz cases. The point is this – what might seem like boilerplate force majeure language buried at the end of a lease or other contract can have a material impact in a future litigation or insolvency setting. It is not difficult to imagine different outcomes in the two cases if the force majeure carveouts were worded differently (or absent), or if the applicable rules of contract interpretation had been different.
The takeaway for commercial landlords and tenants?
Pandemic-related lease disputes are not going away in 2021. Unfortunately, disruption in the commercial lease arena could linger for some time. One recent report estimates that a record 10,000 U.S. retail sites will close in 2021, which would top the approximately 8,700 closures that occurred in 2020.[iii] Those retail closures will involve many leases and many rent disputes (and potentially much litigation).
Review existing leases. Commercial lessors and financially distressed tenants alike should consider a review of their existing leases, particularly through the lens of recent court decisions. This is especially true for businesses that are parties to leases in multiple states.
Consider refreshing “boilerplate” lease language. When negotiating a commercial lease, the parties have to balance efficiency and lease uniformity against the possibility that a force majeure clause that works in one state might be applied differently under the law of another state. At the lease negotiation stage, it makes sense to understand force majeure principles under the law that applies to the lease. Uniformity should not be the enemy of enforceability.
[i] In re CEC Entertainment, Inc., et al, jointly administered under case no. 20-33163 in the United States Bankruptcy Court for the Southern District of Texas (Houston Division)(Docket No. 1482, dated December 14, 2020).
[ii] In re Hintz Restaurant Group, Inc., 616 B.R. 374 (Bankr. N.D. Ill. 2020)
[iii] See https://www.cnbc.com/2021/01/28/10000-stores-set-to-close-in-2021-covid-keeps-pummeling-retailers.html
ABOUT THE AUTHOR: Henry Flores is Senior Counsel at Rapp & Krock, PC in the Bankruptcy and Creditors Rights group.
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