Practice Updates

Bankruptcy Courts Use Force Majeure Clauses in Commercial Leases to Provide Relief during the Pandemic

In cases as recent as January 27, 2021, bankruptcy courts have held that a force majeure clause in a lease agreement allowed for full or partial rent abatement despite the requirement by Section 365 of the U.S. Bankruptcy Code of debtors leasing non-residential real property to perform their rent obligations. Section 365(d)(3) of the Code allows a court to extend the deadline for payment of rent obligations for 60 days, which courts have seemed to grant liberally in the face of the pandemic. However, some courts are now allowing for additional abatement above and beyond the 60 days allowed in Section 365(d)(3).

In In re Cinemex USA Real Estate Holdings, Inc, No. 20-14695-BKC-LMI, 2021 Bankr. LEXIS 200 (Bankr. S.D. Fla. Jan. 26, 2021), following the 60-day extension granted pursuant to Section 365(d)(3), the court found that the force majeure clause in the commercial lease excused payment of rent while the debtor was forced to remain closed as a result of government shut downs in response to the COVID-19 pandemic. The court abated rent beyond the initial 60-day period until the theater could reopen.

Similarly, In In re Hitz Restaurant Group, 616 B.R. 374 (Bankr. N.D. Ill., 2020), the court held that stay-at-home order issued during the COVID-19 pandemic, which prevented debtor from providing on-premises dining at its restaurant and limited it to takeout and curbside service, partially relieved debtor of obligation to pay rent under the force majeure clause in its lease. The court awarded partial abatement of the rent owed, holding that the rent obligation should be reduced in proportion to the extent that the shutdowns limited debtor’s ability to generate revenue.

However, in In re CEC Entm't, Inc., 625 B.R. 344 (Bankr. S.D. Tex. 2020), the leases contained stricter language in its leases, prohibiting debtor from delaying rent payments on account of a force majeure and the court held that the debtor was not entitled to rent abatement beyond the 60-days allowed by Section 365(d)(3).

Following these decisions, debtors should closely examine the terms of their commercial leases to determine whether a force majeure clause can provide a basis to avoid the obligations of Section 365(d)(3) and if additional relief may be available in the form of rent abatement.