On March 18, 2022, the Illinois Appellate Court issued its first opinion addressing efforts by a commercial tenant to escape liability under its lease by reason of the COVID-19 pandemic.  55 Jackson Acquisitions, LLC v. Roti Restaurants, LLC, 2022 IL App (1st) 210138 is lengthy, factually detailed, and instructive. It is useful because it lays out the issues to be considered when the doctrines of impossibility, impracticability, and frustration of purpose are interposed as defenses to commercial lease enforcement.

The facts are not unusual for COVID era lease disputes.

Landlord and tenant entered into a multi-year commercial lease commencing on January 1, 2017 for the operation of a restaurant to sell “food for on and off premises consumption, including the sale of beer, liquor and wine, and ancillary items and uses found in other Roti establishments.”  The lease obligates tenant to conduct and operate its business in a “proper, lawful, and reputable manner”, and to “comply in all matters with all laws, ordinances, rules, regulations, orders, and public authorities or officers exercising any power of regulation or supervision over tenant or the premises, or the use or operation thereof.” Tenant timely opened its restaurant and operated its restaurant in compliance with the lease.

Fast forward to March 2020.  On March 9, 2020, JB Pritzker, Governor of Illinois, declared all counties in the State of Illinois as a disaster area in response to the outbreak of COVID-19. On March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. On March 13, 2020, President Trump declared a nationwide emergency pursuant to Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5127-5207 (the “Stafford Act”) covering all states and territories, including Illinois. On March 18, 2020 the Commissioner of Health of the City of Chicago issued a Shelter in Place For COVID-19 Order. On March 20, 2020, the Governor of Illinois issued Executive Order 2020-10 directing Illinois residents to stay at home.  On March 26. 2020 the Commissioner of Health of the City of Chicago issued Order No. 2020-3 applying the Governor’s Stay-At-Home Order closing numerous public areas, restricting public and private gatherings, and restricting travel. On March 26, 2020, President Trump declared a major disaster in Illinois pursuant to Section 401 of the Stafford Act.  In the midst of the onset of the COVID-19 disaster, the tenant, Roti, “closed the premises” on Mach 18, 2020 and stopped paying rent.

In August 2020, the landlord filed suit for eviction and rent, alleging that Roti entered into a lease to rent the premises but failed to pay rent under the lease since March 2020. The landlord sought possession and $79,173.88 in past due rent as of the date of filing the complaint.

Roti defended the lawsuit by admitting it was a party the lease but arguing that it was essentially dispossessed on the premises in March 2020 and excused from performance of the lease because it was complying with public health orders. It also claimed that it was excused from performance because of civil unrest resulting in looting and rioting that began on May 28, 2020. Roti asserted that both the public health orders and the unrest “made it illegal and impossible or impractical for Roti to operate a restaurant at the premises as anticipated under the lease, its sole permitted use of the Premises.”

Roti raised five affirmative defenses. An affirmative defense claiming COVID-19 constituted a physical casualty was rejected based upon the language of the lease. The other four affirmative defenses, as well as two counterclaims, were based upon the common law doctrines of impossibility or impracticability of performance, and commercial frustration of purpose. There was no applicable force majeure provision in the lease, resulting in only common law defenses being available.   

Eventually, both the landlord and the tenant filed cross motions for summary judgement, which were heard on January 8, 2021.

Tenant Roti’s motion for summary judgment was based primarily upon the common law doctrines of impossibility and frustration of purpose. It was supported by a sworn declaration alleging facts in support of its defense that the public orders relating to COVID-19 made it impossible or impractical to conduct business as a restaurant from the premises.

Landlord’s motion for summary judgement argued that Roti had not established impossibility or frustration of purpose, and that Roti was in default, without legal excuse, for failure to pay rent as required by the lease.  In support of Landlord’s motion for summary judgment the Landlord filed a sworn declaration alleging that other restaurants or cafes in the vicinity of the premises remained open and operating during the COVID-19 pandemic and, in fact, a Potbelly and a Starbucks in the same building a the premises “are currently open for business and have been open during much of the pandemic.”  Roti responded that Landlord’s sworn declaration did not specifically refute Roti’s declaration that the public orders made it impossible and impractical to operate its business and noted that other businesses “have different physical setups, business models, and management decision-making”.

The trial court granted Roti’s motion for summary judgment and denied Landlord motion for summary judgement based upon the doctrines of impossibility and frustration of purpose, noting that restaurants cannot make enough money to pay their staff during governmental restrictions for COVID-19 and opined that restaurants would not be profitable until they could return to full operational capacity.   The trial court ruled that “the lease remains in full force and effect except that all rent payments by Roti are abated until the public health orders are lifted such that Roti can return to full operational capacity.” The Landlord appealed.  

Addressing the doctrines of impossibility, impracticability, and frustration of purpose, the Appellate Court spelled out the conditions for application of each doctrine, noting that in each case the doctrines of impossibility, impracticability and commercial frustration are to be narrowly construed.

The doctrine of impossibility, the Appellate Court noted, excuses performance only if the performance is rendered objectively impossible because the subject matter of the contract is destroyed or by operation of law. The doctrine applies only if the parties did not and could not anticipate the circumstances creating the impossibility, the party claiming impossibility did not contribute to the circumstance, and that party demonstrates it tried all practical alternatives to allow performance. The person claiming impossibility has the burden to prove it.

The doctrine of impracticability applies only where, “after a contract is made, a party’s performance is made impractical without its fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made. . .” As with the doctrine of impossibility, a party claiming impracticability is expected to make a reasonable effort to overcome obstacles to performance and will be excused only if performance is impractical despite reasonable efforts. A party seeking to excuse performance by reason of impracticability must show that it can operate only at a loss and that the loss will be so severe and unreasonable that failure to excuse performance would result in a grave injustice.

The doctrine of commercial frustration rests on the proposition that, “from the nature of the contract and surrounding circumstances” at the time the parties entered into the contract, the parties “must have known that it could not be performed unless some particular condition or circumstance would continue to exist.” The parties must be deemed to have entered into the contract on the basis that “the condition or circumstance would continue to exist, so that the contract is construed to be subject to an implied condition that the parties shall be excused from performance if performance becomes impossible from such condition or circumstance ceasing to exist.

Applying the doctrines of impossibility, impracticability, and commercial frustration to COVID-19, the Appellate Court found “no genuine dispute that the parties did not and could not anticipate the circumstance allegedly causing impossibility – the COVID-19 pandemic and the public health orders – when they entered into the lease, nor that Roti did not contribute to the circumstances of the pandemic or the said orders”. Similarly, the Appellate Court found “no genuine dispute that the allegedly frustrating event – again, COVID-19 and the orders – were not foreseeable when the lease was formed.”

The Appellate Court noted that summary judgment is a drastic means of disposing of litigation and should be granted only where there is no genuine issue of a material fact. In reversing the trial court, the Appellate Court found that a genuine issue of material fact prevented entry of summary judgment for either party. Roti claimed that operating a restaurant from the premises during the pandemic was impossible. Landlord claimed other restaurants in the vicinity, including restaurants in the same building as the premises, were open during the pandemic. The factual issue was whether Roti’s efforts established that Roti had tried all available practical alternatives to perform under the lease and that operating a restaurant during the pandemic was objectively impossible. To be excused, performance must be objectively impossible.  To be objectively impossible, the facts must show that “the thing cannot be done”.  If the facts show only that “I cannot do it”, the facts establish only subjective impossibility, which is not sufficient to excuse performance.

Accordingly, the Appellate Court reversed and remanded for further proceedings on Landlord’s complaint and Roti’s affirmative defenses and counterclaim.

*This article by R. Kymn Harp first appeared in the April 2022 Newsletter of the Illinois State Bar Association’s Section on Real Estate Law, Vol. 67, No. 9.