The way your commercial rent agreements are written is critical, even when everything is running smoothly. It’s when something goes wrong, however, that you might find out that your lease provisions don’t work as expected. A recent court decision underscored the importance of properly drafted agreements. In re Cinemex USA Real Estate Holdings, Inc. could impact how landlords and tenants handle losses caused by COVID-19 lockdowns.
What Lead to In re Cinemex USA Real Estate Holding, Inc.?
In April of 2020, Cinemex USA Real Estate Holdings, Inc., and several related companies (the “Debtors”) filed for Chapter 11 protection. The Debtors operated 41 movie theaters in 12 states until COVID-19 restrictions shut them down temporarily.
Because the Debtors could not operate their theaters, they asked the United States Bankruptcy Court for relief from their commercial rent agreements. Specifically, they hoped to delay or excuse rent payments for some theaters, including one located in Lakeland, Florida (the “Lakeside Theater”).
The Language in Commercial Rent Agreements
The provisions in the Debtors’ commercial rent agreements were a primary issue, along with the doctrines of impossibility and frustration of purpose.
Debtors claimed that the language in at least one of the leases supported their claim that the government COVID-19 restrictions excused their performance of their commercial lease agreement for the Lakeside Theater. The landlord at the Lakeside Theater disagreed, claiming the lease language created a “carve-out” allowing them to continue to collect rent whether the theater was open or not.
Article 59 (Effect of Unavoidable Delays) of the lease states:
“If either party to this Lease, as the result of any … (iv) acts of God, governmental action, condemnation, civil commotion, fire or other casualty, or (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease), fails punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event.” (emphasis added)
This issue was further complicated when Florida allowed theaters to open at 50% capacity. Debtors also wanted rent forgiveness because of the capacity limitations, not just when they were shut down entirely.
The Court’s Ruling in In Re Cinemex
At hearing, the bankruptcy court granted part of the Debtors’ request by ruling that Cinemex did not have to pay rent for the time the Lakeside Theater was closed. However, the commercial rent agreement would be extended. Also, lease payments were due for the time the theater was open 50% and going forward.
The language in Article 59 is one reason the court excused rent when the theater was not in operation. Specifically, the “other than the failure to timely pay monies” language did not apply to subsection (iv) but only to section (v). Had the lease agreement been worded differently, the outcome might have been different.
Have an Experienced Attorney Review Your Commercial Rent Agreements
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.