Under section 365(d)(3) of title 11 of the United States Code (the “Bankruptcy Code”), a debtor-in-possession is required to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.” Section 365 was implemented to relieve landlords from the burden of proving the rent payments owed by the debtors prior to rejection were “actual and necessary” costs of preserving the bankruptcy estate. Section 365 has been heavily litigated since early 2020 due to the new respiratory Coronavirus Disease 2019 (“Covid-19”).
On March 11, 2020, the World Health Organization (“WHO”) declared Covid-19 a global pandemic. By the end of March 2020, forty-two states, in addition to numerous counties and cities were under some sort of stay-at-home order, which affected approximately 94 percent of the population.
This memorandum examines whether Covid-19 impacts a nonresidential debtor’s duties to comply with its lease obligations. Part I of this memorandum discusses the debtor’s obligations post-petition to comply with its duties to pay rent. Specifically, the debtor’s obligations under section 365(d)(3) and section 503(b)(1) of the Bankruptcy Code. Part II of this memorandum discusses how force majeure might excuse a debtor from paying rent. Lastly, Part III discusses the common law remedies that can be argued along with a force majeure clause.