Where Do I Start? How Lease Review May Help Restaurant and Bar Owners Mitigate Losses from Defaults During COVID-19 Crisis
It is not uncommon for bar and restaurant owners to be unfamiliar with all of the terms of the lease they signed when they started their business. Often, business owners either just signed their lease without really understanding all of the terms, or relied on an attorney to protect them in the lease negotiation. Whether you are in this category or not, if you have not read your lease in full, or haven’t in quite a while, now is the time. By now, you should know whether or not you will be able to make your lease payments, and if the answer is no, there are a number of things you need to be aware of:
- First, what did you actually agree to in the lease agreement?
- Second, did you provide a separate personal or corporate guarantee, and if so, what are the default provisions? What effect will a default have on your personal finances, or finances of another business you own?
- Third, how much do you stand to lose if your landlord takes your deposit, and how much time is left on the term of your lease If your lease is about to end, do you want to stay in the space or are you ready to move on, and is it financially feasible to break your lease?
So what do you do now? It’s important to understand what you agreed to in the beginning. Review your commercial lease to understand if there is specific language relevant to what’s going on and what options you have within the terms of your agreement.
First, review the lease agreement for the terms and phrases that may provide a basis for some form of relief. Look especially for these terms that apply directly to the COVID-19 pandemic: “epidemic,” “pandemic,” “contagious disease” or “public health emergency”. Pay particularly close attention to clauses relating to “force majeure,” commercial insurance, subletting/licensing, “go dark” default, “condemnation/casualty” provisions, late payment penalties, co-tenancy requirements, or bankruptcy.
Key terms to look for in your lease include:
- Burn down: does your liability lessen year after year?
- Force Majeure: this is better known as an “Act of God….” but how is this lease provision worded? Thus far, interpretations of force majeure clauses have not been in tenants’ favor, however this is an evolving issue.
- Good Guy Clauses: Do you have the right to pay up current and agree to walk away? Your lease may or may not include this lease term.
- Termination Rights: What are your rights if you terminate your lease?
- Security Deposits and Letters of Credit
- Security Deposit – know that your landlord is going to go after this if you are in default, so is there a way to mitigate your loss?
- Letters of Credit – the landlord has a right to collect, and LOCs survive bankruptcy. Check for burn down provisions.
- Utility Provisions – Who is responsible for maintaining the utilities on the property? What is the result if the tenant allows utilities to be cut off? This can be a default under the terms of some leases.
- Late Fees – Will they accrue if you fail to pay your lease payment, and is there a way you can negotiate with the landlord for a waiver during this crisis?
- Default access – If you are in default the Landlord may be able to prevent access and claim personal property left on the premises, so it is important to know your limitations and potential exposure to loss of equipment and supplies.
- Holdover – For tenants in the process of relocating, what does the lease provide if you are prevented from occupying new space and have to stay in your current space past the end of your lease?
Next, talk to your landlord.
- Ask about reducing your lease payment. If there is any potential that you will not be able to pay your upcoming lease payment, reach out to your landlord as soon as possible. Being proactive will help you manage the situation and plan for the future. You may want to discuss rent concessions, forgiveness, or delays with your landlord until things have stabilized.
- Partial payment or deferral: If you are unable to pay the lease payment in full, consider seeking partial forgiveness, setting up a payment plan to defer lease payments, or applying part of your security deposit to your current payment due. You may be able to add missed payments as extra months at the end of your lease. Landlords will likely be more receptive to your offer to pay at least some of the lease payment with a schedule in place for the outstanding balance.
Make sure to maintain a record of all communications with your landlord, and always consider how your current communications and actions could be viewed by in the future, in the event there is any type of dispute proceedings.
Look beyond your relief funding sources. Your strategy should involve not only looking for funding sources for immediate relief, but also call your creditors to ask for extensions, forbearances and deferrals or any other forms of relief from creditors. You may even be able to get some relief from your insurance payments. Most insurers will actually give you a credit on premiums while the quarantine continues. Other options may be trying to raise funds through 1) crowdfunding 2) selling gift cards for future food purchases, and many restaurants putting out virtual content, recipes, and entertaining bartenders making cocktails, just to keep their business in the customers’ minds.
At this time, commercial evictions have not been prohibited. Thus far, Florida has suspended residential evictions for at least May 15th, but lawmakers chose not to stop commercial evictions. The Governor’s office has stated that small business owners and other commercial tenants should still have a measure of protection because the emergency order also suspended all foreclosure proceedings — against both residential and commercial property owners. However, on a more positive note, a coalition of lobbies including groups representing restaurants, hotels, tourism businesses and franchisees, wrote the nation’s governors urging them to issue 90-day rent abatement and eviction moratorium orders for commercial tenants. The National Retail Federation also made the same request, and the Florida Restaurant & Lodging Association has suggested a commercial moratorium in Florida as well.
Stay tuned for updates to relief options, and in the meantime please contact us if you have any question or need assistance.