Tag: lease

‘Lack of Money’ Exclusion From Restaurant Lease Force Majeure Clause Not Enough to Get Eatery [Fully] Off the Hook – IL ND

Topical and timely, In re Hitz, 2020 WL 2924523 [Bankr. N.D. Ill. 2020] presents as a useful quarantine-era case that interprets the scope of a force majeure clause in a restaurant lease.

The debtor filed for bankruptcy protection in mid-March 2020 after failing to pay rent for that month.  The creditor moved to modify the automatic stay and sought post-petition rent under 11 U.S.C. 362 and 365, respectively.  In response, the restaurant debtor argued that it was excused from paying post-petition rent based on the lease’s force majeure clause [the “FM Clause”].

The FM Clause excused, the restaurant’s lease performance where its obligations were delayed or hindered by “governmental action or inaction, and “orders of government.”  Notably, the FM Clause specifically carved out an exception for lack of funds.  It stated: [l]ack of money shall not be grounds for Force Majeure.”

The debtor argued that the FM Clause was triggered by Illinois Governor Pritzker’s Executive Order 2020-7 [the “EO”] which banned Illinois restaurants from offering food and drink for on-premises consumption for the two-week period ending March 30, 2020. The EO did, however, encourage restaurants to provide off-premises consumption via delivery and curbside pick-up.

The Court first held that because rent was due March 1, 2020 – fifteen days before the debtor’s petition, the FM Clause did not excuse debtor’s March 2020 rent payment.

To decide whether the FM Clause applied to the following months [e.g. did it excuse rental payments occurring after the March 16, 2020 petition date?], the Court framed the issue as one of basic contract interpretation

In Illinois, a force majeure clause will only excuse contractual performance where the triggering event is the proximate cause of the party’s nonperformance.

The Court found the EO plainly activated the FM Clause.  The EO constituted governmental action and an “order of government” that “hindered” the debtor’s performance of its lease obligations by lopping off its on-premises food and drink revenue.

The Court rejected the creditor’s first argument that the FM Clause didn’t control because the banking and postal systems were still open.  According to the creditor, despite Covid-19, the tenant could have still written rental checks and mailed them to the landlord.  The Court deemed this argument specious; it did not address the debtor’s force majeure argument – that the inability to sell food and drink on-site made it impossible to generate enough revenue to pay rent.

Next, the creditor focused on the lease provision that a “lack of money” didn’t equate to a force majeure event.  The Court nixed this argument, too.  It found that the debtor tenant was not claiming a lack of funds as the proximate cause of its failure to pay rent.  Instead, the EO was: it shut down all Illinois restaurants’ on-premises consumption of food and beverages for a two-week period.

For textual support, the Court applied the contract interpretation maxim that a more specific provision controls over a general one.  While the lease did except a general lack of funds from the FM Clause’s reach, it also counted “governmental action” and “orders of government” as specific force majeure events.  And since the EO plainly qualified as governmental action, the Court held the tenant could properly invoke the FM Clause to reduce its post-petition rent payments.

The creditor’s argument that the tenant could have applied for an SBA loan also fell flat.  The Court noted that nothing in the lease, the FM Clause or any cited legal precedent required a defaulting tenant to try to borrow money to ameliorate any adverse governmental action that hampered a tenant’s ability to pay rent.

The Court didn’t excuse the tenant completely, though. The Court noted the EO expressly urged restaurants to offer food and beverage for off-premises via delivery and curbside pick-up.  Because of this, the Court reduced the tenant’s rental duties in proportion to its diminished ability to generate funds to pay rent.  In its response brief, the debtor estimated the EO rendered 75% of the tenant’s indoor space unusable.  But it also allowed the remaining 25% of the space, including the kitchen, was still working.

Applying this simple math, the Court found the tenant was responsible for 25% of its normal monthly rent payment [including proportionate common area maintenance expenses] for the post-petition months of April – June 2020.

Take-aways:

This case likely augurs [or is at least representative of] a future glut of Covid-19 commercial lease default cases.

Where a general provision conflicts with a more specific one, the latter will control.  Here, while the lease specifically excluded a tenant’s lack of money from the force majeure’s reach, the more specific, “order of government” and “governmental action or inaction” language controlled and served to partially excuse the tenant’s rent liabilities.

The Court’s analysis also tacitly recognized a tenant’s duty to mitigate damages.  Since the tenant acknowledged that it still had a working kitchen and 25% of usable restaurant space, the Court proportionately reduced the tenant’s lease payments instead of completely excusing them.

 

 

New Lessor’s Vie for Radio Station Tenant’s Past-Due Rent Squelched – IL First Dist.

Soon after buying the commercial premises, the new landlord in 1002 E. 87th Street, LLC v. Midway Broadcasting Corporation, 2018 IL App (1st) 171691 started giving the radio station static over past-due rent that was owed to the prior landlord.

The defendant’s silence in response spoke volumes and the dispute swelled to an irreconcilable impasse.

The plaintiff sued to recover about $70K in past-due rent. The tenant then turned the tables on the landlord, filing a wave of defenses and counterclaims and a motion to dismiss plaintiff’s suit. The trial court dismissed plaintiff’s suit for lack of standing and plaintiff appealed.

Affirming the trial court, the appeals court examined the doctrine of standing in the context of a Code Section 2-619 motion filed in a lease dispute. The Court amplified its lease law analysis with a recitation of the applicable rules governing attorneys’ fees provisions.

Lack of standing is an affirmative defense under Code Section 2-619(a)(9). Standing requires a plaintiff to have an interest in a given lawsuit and its potential outcome. The defendant claiming a lack of standing has the burden of proving the defense.

Where a landlord conveys property by warranty deed without reserving any rights, it also conveys the property’s leases and the right to receive unaccrued rent. However, the new landlord does not have a right to recover rent that came due before it owned the property. That right remains the original landlord’s. [⁋ 17]

The Court squelched plaintiff’s arguments it was entitled to recover past-due rent owed to the prior landlord.  The court distinguished this case’s underlying facts from a recent case – A.M. Realty Western v. MSMC Realty, LLC, 2012 IL App (1st) 121183 – where a landlord sold a building and was still able to sue for rent that accrued during its tenure as building owner.  Midway Broadcasting’s facts plainly differ since the plaintiff was suing to recover rents that came due before plaintiff became the premises landlord.

Another factor weighing against the plaintiff landlord was Illinois’ venerable body of case law that holds that rent in arrears is not assignable. This is because past-due rent is viewed as a chose in action and not an incident of the real estate that passes from a seller to a buyer. And since there was no evidence in the record establishing that the prior landlord intended to assign its right to collect unpaid rents, plaintiff’s argument that the previous landlord assigned to it the right to collect defendant’s delinquent rent, missed the mark.

In a sort of reverse “you can’t transmit what you haven’t got” maxim, the plaintiff here had no legal basis to assert a past-due rent claim against the tenant since all unpaid rent came due during the prior landlord’s tenure.  Since that former landlord never assigned its right to collect rents, the plaintiff’s claim fell on deaf ears.

Next, the Court affirmed the tenant’s prevailing-party attorneys’ fees award and signaled that to “prevail” in a case, a party must win on a significant issue in the case. Like most leases, the operative one here provided that the winning party could recover its attorneys’ fees.  Illinois follows the American Rule – each side pays its own fees unless there is a contractual fee-shifting provision or an operative statute that gives the prevailing party the right to recover its fees.  Contractual attorneys’ fees provisions are strictly construed and appeals courts rarely overturn fee awards unless the trial court abuses its discretion.

In the context of attorneys’ fees disputes, a litigant is a prevailing party where it is successful on any significant issue in the action and receives a judgment in his/her favor or obtains affirmative recovery.  A litigant can still be a prevailing party even where it does not succeed on all claims in a given lawsuit. Courts can declare that neither side is a prevailing party where each side wins and loses on different claims. However, a “small victory” on a peripheral issue in a case normally won’t confer prevailing party status for purposes of a fee award.  [¶ 36]

The Court rejected the lessor’s claim that it was the prevailing party since the court entered an agreed use and occupancy award.  Use and occupancy awards are usually granted in lease disputes since “a lessee’s obligation to pay rent continues as a matter of law, even though the lessee may ultimately establish a right to *** obtain relief.”  [¶ 32].  Because of the somewhat routine nature of use and occupancy orders, the court declined to find the landlord a prevailing party on this issue.

Afterwords:

I found this case post-worthy since it deals with an issue I see with increasing frequency: what are a successor landlord’s rights to prior accruing rents from a tenant?  In hindsight, precision in lease drafting would be a great equalizer.  However, clear lease language is often absent and it’s left to the litigants and court to try to divine the parties’ intent.

The case and others like it make clear that rents accruing before a landlord purchases a building normally belong the predecessor owner.  Absent an agreement between the former and current lessors or a clear lease provision that expressly provides that a new owner can sue for accrued rents, the new landlord won’t have standing to sue for accrued unpaid rent.

The case also makes it clear that small victories (here, an inconsequential dismissal of one of many counterclaims) in the context of larger lawsuit, won’t translate to prevailing party status for that “winner” and won’t give a hook for attorneys’ fees.

The Illinois Commercial Real Estate Broker’s Lien Statute: A Top 10 List

The Illinois Commercial Real Estate Broker’s Lien Act, 770 ILCS 15/1 (the “Act”), provides a broker whose owed commission money with a strong remedy against a breaching property owner, buyer or tenant. Here are some of the Act’s key provisions:

1. What It Applies To:

“Commercial real estate.”  This is defined as any real estate in Illinois other than (i) real estate containing one to six residential units, (ii) real estate on which no buildings or structures are located, or (iii) real estate classified as farmland under the Property Tax Code.  770 ILCS 15/15

2. What It Doesn’t Apply To:

Real estate that isn’t “commercial”, including single family residential units like condominiums, townhouses, or homes in a subdivision when sold conveyed on a unit-by-unit basis.

3. Is Written Agreement Required? Yes.  770 ILCS 15/10.

4. When Does it Attach?:
The lien attaches when two things happen: (1) the broker becomes entitled to a fee or commission under a written instrument signed by the owner, buyer, tenant (or their agent); and (2) the broker records a notice of lien in the Recorder’s Office of the county where the commercial real estate is located.

5. Does the Lien Relate Back? No.   Unlike mechanics liens, the broker lien does not relate back to the date of contract between broker and owner (or buyer or tenant).  770 ILCS 15/10.

6.  Timing/When To Record:  In the case of a lease, the lien must be recorded within 90 days after the tenant takes possession of the premises,  Exception: if broker is given written notice of the planned lease signing at least 10 days before the intended signing date, the lien claim must be recorded before the lease signing date.

For a purchase, the lien must be recorded before the property is transferred to a buyer. The broker has 10 days from the recording date to mail a copy of the recorded lien to the owner of the property by registered or certified mail, with return receipt requested, or to personally serve the notice on the owner.  The broker’s lien shall be unenforceable if mailing of the copy of the notice of lien recording does not occur at the time and in the manner required by this Act. 770 ILCS 15/15.

7.  How to Enforce the Lien:  The broker enforces the lien by filing suit to foreclose it.  The broker must sue in the Circuit Court for the county where the property is located by filing a complaint and sworn affidavit that the lien has been recorded.  The lawsuit must be filed within 2 years after recording the lien.

8. Contents of the Lien Notice:  The lien notice shall state the name of the claimant, name of the owner, a description of the property upon which the lien is being claimed, the amount for which the lien is claimed, and the real estate license number of the broker.

9.  Q: Can the Liening Broker Recover Her Attorneys’ Fees?  A: Yes. The losing party must pay the winning party’s attorneys’ fees, costs, and prejudgment interest.

10.  Q: What About Priority? A: Prior recorded liens and mortgages against the property shall have priority over a broker’s lien.  770 ILCS 15/15.  These prior recorded liens include mechanics liens recorded after the broker’s lien notice but which relates back to a date prior to the lien recording date and prior recorded liens securing revolving credit and future advances of construction loans as described in Section 15-1302 of the Mortgage Foreclosure Statute.