COVID-19 Shutdown: Default Provisions and Restaurant Leases

With April 1 approaching, and April rents coming due, many restaurants are contemplating simply not paying rent, thinking that with courts being closed there is little landlords can do in response.  Before even considering this, however, it is critical that tenants understand the default provisions in their leases.  Here are some key questions to answer:

  • Do you have notice and cure rights before a landlord can declare default?  For any restaurant lease I negotiate for my clients, I make sure that the landlord cannot declare a default until it has provided tenant with written notice of the breach of the lease, and some period (usually 5-10 days) to cure the breach before it ripens into a default.  Tenants with such notice and cure rights will have some greater flexibility in the coming days because they can wait to see if landlords serve them with notice before they have to proceed with paying rent. This will put the onus on the landlord, and many landlords could be reluctant to send a notice (that could be publicized) in the current climate.  Without such notice rights, however, Tenants can be in default as of April 2, without any action by Landlord.
  • Are there consequences for default other than simply termination and eviction?  While all leases contain a specific section of landlord remedies in the event of default (most notably retaking possession of the property or terminating the lease), quite often there are other consequences for a tenant default outside of these remedies.  Examples include a forfeiture of option rights, an obligation to repay the full amount of any abated or “free rent” previously granted, or the loss of any cap or limitation on the lease guaranty obligations.  So, while a landlord may have difficulty trying to (or be reluctant t0) evict a restaurant tenant, that does not mean there could not be other significant consequences, that last long after the current crisis subsides.
  • Can the landlord exercise “self help” remedies?  While it may be impossible for a Landlord to go to court and get an eviction order for several weeks, if not longer, that does not mean a tenant will certainly be able to maintain possession of their space.  On the contrary, non-paying tenants would still run the risk that a Landlord could exercise “self help” remedies.  These remedies are those that the landlord does not need the court to mandate, or a governmental entity (e.g. a sheriff) to execute on.  Most simply, a landlord could change the locks on the premises and lock the tenant out.  This would be especially damaging to a tenant that is still operating at some limited capacity (i.e. carry out and delivery) or who has valuable equipment inside the premises — that the landlord could also seize.  Tenants should understand the availability of self-help rights to landlords in their leases, as well as under applicable law, before they consider simply not paying rent.

This post should make it clear that not paying rent in April (or going forward from there) is not something to be taken lightly, or without a full understanding of the potential repercussions.  As we’ve noted before, it is probably much more advisable to attempt to work something out with a landlord to avoid a default — and all the attendant consequences — altogether.