How Struggling Franchise Restaurants May Be Able to Find Rent Relief

As the restaurant industry struggles to recover from the COVID-19 pandemic, rent costs are quickly becoming the primary hurdle that many operators are stumbling over. After three months of being shut down, it is estimated that nearly two-thirds of all restaurant owners are at risk of bankruptcy. 

A recent court ruling in Chicago could provide a way for restaurants reeling from the forced shutdowns of their dining rooms to get a break on rent payments for the months they were limited to off-premise services. 

Hitz Restaurant Group, a multi-concept restaurant operator based in Chicago, had a lease that specifically cites “laws, government action or inaction, orders of government” as examples of a force majeure. The “force majeure clause” waives both parties’ responsibilities if an unforeseen act prevents either one from meeting their responsibilities. Hitz filed for Chapter 11 bankruptcy protection from creditors, citing the loss of sales from the COVID-19 pandemic.

The situation was an early test of whether states’ orders to suspend dine-in service because of COVID-19 could actually invoke the common force majeure lease stipulation. Apparently, the answer is yes.

According to an article on Restaurant Business, Hitz argued to a bankruptcy court judge that its rent obligations for April, May and June should be waived because Illinois Gov. Jay Pritzker had directed all dining rooms in Illinois to close in March. One of its landlords, Kass Management Services, contended that it was due the full rent because the restaurant on its property could still offer takeout and delivery. It also argued that Hitz could have borrowed the money under the Paycheck Protection Program (PPP) to meet its rent obligations.

It is certainly a tough situation, with both sides having valid arguments. In the end, the judge presiding over the bankruptcy case decided that Hitz’s rent obligation should be “prorated to what percentage of the restaurant in question was devoted to takeout and delivery.” 

Hitz’ kitchen was still in use during the pandemic, and the back of the house accounted for roughly 25% of the place’s footprint, according to the case. Therefore, Cassling directed the restaurant company to pay 25% of its rent, or $2,640.31 per month, to Kass for April, May and June.

Cassling also rejected the landlord’s argument that money could have been obtained through the PPP loans, saying the force majeure clause in Hitz’s lease said nothing about borrowing money to meet its obligations.

This is a significant win for restaurant operators looking for rent abatement. The ruling comes as many restaurant operators are saying their survival depends on the willingness of landlords to provide a break on rent, if not total forgiveness. The situation is increasingly urgent now that on-premise restaurant service has been allowed to resume in some form within every state, meaning restaurants are starting to resume operational costs.

Prior to this ruling, the concept of force majeure had seldom entered into legal wranglings over unpaid rent. Now, it could be the key to many franchisees’ success.

“The force majeure clause is already starting to figure into restaurants' efforts to secure rent abatements,” executive director of the Restaurant Law Center Angelo Amador told Restaurant Business. “The strategy could prove helpful to operations that have or are thinking of filing for bankruptcy protection; have a force majeure clause in their leases; couldn't afford rent during the months they were closed because of a health order; and remain in the location and intend to reopen.”

Moving forward, this court ruling could be a beacon of hope for business owners and could set a valuable precedent in how courts may apply force majeure provisions to issues related to the COVID-19 epidemic, especially government shutdown orders.