Opinion of Interest – In re Cinemex:  COVID or Not, Parties Still Bound by Lease Terms

In a recent opinion issued in the Cinemex theater bankruptcy cases, In re Cinemex USA Real Estate Holdings, Inc., Case No. 20-14695-BKC-LMI, 2021 WL 564486 (Bankr. S.D. Fla. Jan. 27, 2021), Judge Laurel M. Isicoff of the U.S. Bankruptcy Court for the Southern District of Florida ruled that while Cinemex was excused from paying rent under a lease for one of its Florida theaters for the time period during which Cinemex, and other non-essential businesses, were barred entirely from opening under Florida’s COVID shutdown orders, Cinemex’s obligation to pay rent was not excused, and the lessors were entitled to payment of rent as an administrative priority expense, once Florida’s shutdown orders were lifted and Cinemex was allowed to reopen, even if only at partial capacity.

With respect to the time period during which Florida’s COVID orders mandated a full shutdown, Judge Isicoff found no rent was due based on an express contractual provision in the applicable lease excusing performance when it was impossible due to “acts of God [or] governmental action.”  Judge Isicoff noted that this provision did not fully excuse performance, but merely extended the lease term for a period equal to the delay – i.e., a term equal to the period of time during which the full shutdown orders were in effect would be added on the back end of the lease.¹

For the time period during which Florida’s COVID orders were modified allowing Cinemex to operate its theater at 50% capacity, Cinemex argued that its obligation to pay rent should still be fully excused, delayed or, at the very least, commensurately reduced by 50% based on the legal doctrines of impossibility or impracticability of performance.  Cinemex argued that requiring it to immediately pay full rent was not economically feasible since it could not afford to pay 100% of its rent while open at only 50% capacity. Cinemex also argued that its performance should be excused based on the potential for tort claims to be brought against it if the theater re-opened (e.g., from patrons who became infected at the theater), which claims threatened to be a further drag on Cinemex’s bankruptcy estate.

Rejecting Cinemex’s argument, the Bankruptcy Court emphasized that “courts are reluctant to excuse performance that is not impossible but merely inconvenient, profitless, and expensive to the lessor.” Cinemex, the Bankruptcy Court noted, was able to operate the theater;   it had just become more challenging and expensive to do so.  That, ruled the court, did not excuse Cinemex from its rent obligations.  With respect to Cinemex’s public health/tort claim arguments, the Bankruptcy Court sympathized with the debtor, noting that its concerns “about the health and safety of its employees and the audiences” were “laudable and reasonable.”  But the court reasoned that “addressing those concerns clearly is one of timing and not ability, as there are many businesses that have had to figure out how to reopen under the safety concerns and restrictions, and they… have figured out how to do so.”²  Such challenges therefore did not justify any additional rent abatement.

The court’s decision in Cinemex is another in a line of COVID-related rent cases that bankruptcy courts have recently struggled with (including the Chuck E. Cheese case discussed in our prior post here).  While these courts have often sympathized with the debtors, and have granted limited relief in whatever ways they could, the Cinemex court is consistent with their general reasoning that “in the absence of an agreed upon resolution,” parties are left with the provisions they have “bargained for in the contracts, or, where appropriate, the equitable remedies that common law has fashioned.”  Even during these unprecedented times of disruption, courts have generally avoided the temptation to provide relief that ignores the parties’ prior agreements and expectations.

¹ Rejecting the landlord’s argument to the contrary, Judge Isicoff also held that a parenthetical in the applicable provision that suggested the “act of God or governmental action” exception did not apply to the payment of rent should not be read as such, instead holding that the parenthetical only applied to one, inapplicable sub-clause within the provision.

² Indeed, since Cinemex had submitted its pleadings, the court noted that Cinemex itself had partially, and safely, re-opened.