While the COVID-19 pandemic has greatly impacted the ability of many retail and entertainment businesses to operate and pay their expenses, the pandemic’s effect on the children’s indoor arcade and dining business of the Chuck E. Cheese chain has been especially severe. According to the opinion discussed below, governmental restrictions have generally prevented Chuck E. Cheese from operating its arcade games for children, which account for 50% of its revenue.
In June 2020, CEC Entertainment, Inc. (CEC), the operator of the Chuck E. Cheese stores, filed under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas. In August, CEC filed an abatement motion seeking rent abatement beyond the 60-day abatement period provided by §365(d)(3) of the Bankruptcy Code regarding leases in North Carolina, Washington state, and California. In support, CEC argued (i) the bankruptcy court has the equitable power under the Bankruptcy Code to order an abatement, (ii) force majeure clauses in its leases excused its payment of rent, and (iii) the doctrine of frustration of purpose was applicable to relieve CEC of its rental obligation.
The Bankruptcy Court rejected CEC’s arguments and denied the abatement motion. In re CEC Entertainment, Inc. et al., Case No. 20-33163, (Bankr. S.D. Tex. December 14, 2020). With respect to CEC’s argument that the bankruptcy court had the power to order the abatement under the Bankruptcy Code, the court ruled that §365(d)(3) clearly requires a debtor to “timely perform” its post-petition lease obligations until its lease is assumed or rejected. Although §365(d)(3) also grants the court the power to permit a debtor to defer the payment of rent that becomes due during the first 60 days of a case, the court ruled that it is not allowed by the plain wording of the statute to extend the time for performance beyond the 60-day period.
The court also rejected CEC’s arguments based on the force majeure clause in its leases and/or the application of the doctrine of frustration of purpose under the laws of the three subject states. The force majeure clauses at issue did not help CEC, because they specifically obligated CEC to continue to pay rent notwithstanding the occurrence of a force majeure event. The common law doctrine of frustration of purpose did not apply, because the force majeure clauses in the leases superseded that doctrine and allocated the risk of a force majeure event to the tenant. As a result, although the court expressed its sympathy with the hardship that CEC has endured due to the pandemic, it did not excuse CEC from the payment of rent set forth in the leases beyond the 60-day abatement period provided by the Bankruptcy Code.
The CEC decision highlights the benefit for a landlord to have a clearly worded force majeure clause in its leases that enables the landlord to require its tenant to continue payment of rent notwithstanding the occurrence of a force majeure event. Because the force majeure clauses in the CEC leases at issue clearly required CEC to pay rent, CEC’s situation was distinguishable from that described in In re Hitz Restaurant Group, 616 B.R. 374 (Bankr. N. D. Ill. 2020). In Hitz, a bankruptcy court applied force majeure to excuse the debtor from paying rent due on the portion of its indoor space that could not be used for dining due to governmental restrictions. The Hitz decision was discussed in the June 2020 Issue of Relating to Real Estate.
On December 27, 2020, the federal Consolidated Appropriation Act (CAA) was enacted into law. In addition to its numerous provisions providing financial and other relief to individuals and businesses, the CAA amended §365(d)(3) of the Bankruptcy Code to permit a Subchapter V debtor to defer the payment of rent for up to an additional 60 days (for a total of 120 days) if the debtor shows that its inability to pay rent is due to COVID-19 financial hardship. Subchapter V is only available to small business debtors. This amendment will sunset in two years.
Lawrence Coppel wrote this summary. Larry is former Senior Counsel at Gordon Feinblatt and can be reached at firstname.lastname@example.org.
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