The list of states pausing or reversing reopening plans grows with 35 of these states showing increases in COVID-19 cases, and owners continue to try and preserve as much cash as possible. With the largest expense for many operations being rent, the need to negotiate with stubborn landlords continues to be an uphill battle. While the CARES act provided some relief via the Paycheck Protection Program, only 60% of the funds can be used to pay lease obligations. Operators are still facing closed bars, shutdown indoor dining rooms, and reduced capacity 120 days later when many jurisdictions shut down in mid-March.
Given many bars and restaurants are still locked into contractual disputes where they can face penalties, such as enabling a landlord to seize on-site assets for defaulting on a lease, for defaulting on their lease, Bar & Restaurant asked business law attorney Jessica Shraybman of Shraybman Law in Miami on how non-franchise restaurants can navigate this uncertain financial environment while going back and forth between reopening and closing.
Bar & Restaurant: With many operators having tough times negotiating new terms with their landlords, what are some strategies for opening a constructive dialogue so the two groups can find common ground and a mutual solution?
Shraybman: I am seeing this conversation go a number of ways. Landlords want to keep their spaces filled, and while some businesses are moving forward, hoping that permanent reopenings are on the horizon, most tenants are feeling reluctant due to the uncertainty. Starting the dialogue from a place of collaboration is key. Landlords want a good tenant and tenants want a landlord they can trust. Both sides should acknowledge they have a common goal. From there, it is all about making sure that each side is comfortable with and understands the terms of the deal.
Bar & Restaurant: What are the most popular modifications in leases that your clients have been able to secure given COVID-19 continues to slow reopening of on-premise or shut businesses down again?
Shraybman: A few landlords have been a bit flexible with whether/how Force Majeure affects a tenant’s duty to pay rent. How flexible the landlord is willing to be hinges on whether the landlord owns the land/building they are leasing outright or whether the landlord has his/her own financial obligations [such as mortgage]. Tenants on a Gross Lease, where rent payments are directly tied to earned revenue, are probably in the best situation right now because if they are not making money, they do not owe money. Others who are not currently on this model may have an opportunity to discuss and negotiate it with their landlords.
Bar & Restaurant: For those having their leases ending soon and are up for renewal, or newcomers to the business, what are some important changes to consider given operators may have more leverage moving forward?
Shraybman: Even with there being more vacant spaces, I am not sure it’s necessarily the case that operators have more leverage. Landlords want to fill their spaces but again, what’s important is making sure both sides are protected in the event that one or the other (or both sides) can’t satisfy their obligations [due to a resurgence of COVID or other reason] and are comfortable with the terms. Everything is negotiable.
Bar & Restaurant: What are the top questions new clients are asking for help regarding and what areas do you find are most important to focus on?
Shraybman: Tenants are asking, “how can I make sure I do not end up defaulting on my lease if I can’t open my business? Force Majeure means I do not have to pay my rent, right?” This is wrong. Meanwhile, landlords are asking, “How can I make sure I’m protected in case tenants can’t pay rent, and what can I do to help them in a worst-case scenario?” This again often depends on the landlord’s own financial plan. We continue to find the common ground between the two for a scenario that works for both.
Bar & Restaurant: Any other insight or predictions for the second half of the year you would like to share?
Shraybman: Entering into a new lease, or renewing an old lease, should be a very diligent decision. It takes only one or two sentences to have a big impact on your rights and responsibilities under a lease, and therefore the implications for your business. I am a huge proponent of businesses – and also, making sure business owners are making informed and wise decisions. Talk to your financial, legal, and other advisors. We are here for you!