The ongoing health crisis, restaurant shutdown, and general economic uncertainty have made these unprecedented times for the hospitality industry. Many restaurants may close forever, and many others that were in development may never open in the first place. That being the case, it is understandable that many restaurant owners have halted expansion plans, and many more aspiring restaurant owners have decided to delay their plans.
Even in the midst of this whirlwind, however, it is important to remember that this all will be over some day. And, when it is, people will almost certainly want to go to restaurants again. That being the case, it is important that we think about ways that we can keep plans in motion, so restaurants – including new restaurants – can be ready to serve customers when the “all clear” is given.
One of the most important ways to ensure that happens is to move forward with restaurant leases that we were negotiating when the crisis hit. We have needed to be creative, of course, to protect our restaurant clients from the potential consequences of an uncertain future, and we have been doing that by including in our leases certain provisions that would otherwise be rare. These have included:
- Short-Term Termination Rights. The world we are living in now would have been almost unimaginable just a few weeks ago. And no one knows what the next few weeks will bring. That being the case, many landlords have agreed to include short-term termination rights in our restaurant leases. Rather than simply waiting and seeing what will happen, as many are doing, that a tenant will commit the resources to negotiating and signing a lease gives the landlord confidence that, but for the ongoing health emergency, the tenant is committed to the project and ready to proceed. And it gives the tenant reassurance that if things do not improve in the short term, they can walk away with minimal economic risk or consequence.
- Delayed Deadlines and Dates. One of the reasons restaurant tenants are reluctant to sign leases are that most leases contain provisions that start a clock running once the lease is signed. These can include deadlines to submit architectural plans, deadlines to commence work, and – most importantly – dates that rent will begin coming due. To address the current uncertainty, we have seen landlords agree that these deadlines and hard dates will be tied to some other event rather than the date of lease signature. What that event might be will vary depending on the circumstances of the particular deal, but some creative thinking can allow the lease to get signed now, rather than wait for this crisis to subside.
- Cotenancy Provisions. The two items noted above both deal with the short-term uncertainty we are all dealing with, but do not address potential consequences that have a longer time horizon. For example, what are the long-term effects on the restaurant, retail, and hospitality business of the current crisis? Will massive amounts of restaurants and other businesses close, either now or in future years? And what will become of vacancies if these stores do close? Will anyone be coming to fill their place? Clearly, we are dealing here with the worst case scenario, one that only the most pessimistic among us would expect. But, nevertheless, it is worth considering and planning for. One way to do so is to build a co-tenancy provision into your lease. This type of provision could give you certain rights if the total occupancy rate of your shopping center dropped below a certain level, or if an important anchor tenant of the center (a large retail store or movie theater, for example) were to close. Some of those rights could be reduced rent, or an option to terminate the lease entirely. Either way, you as the tenant would not be stuck paying full rent in a half-empty shopping center. Again, these provisions require some creative thinking, and there is no one-size-fits-all option. But if you are currently negotiating a lease, it is something you should consider, especially if it allows you to address future uncertainties and allow you to move forward now.
- Force Majeure Clauses. As we’ve written before, a force majeure clause in Lease excuses performance of lease obligations in the event of major unforeseen or catastrophic events out of the control of the parties to the lease. The problem is that in nearly all instances, these clauses specifically exclude obligations to pay rent, which continue notwithstanding the force majeure event. I expect that many of the lease negotiations that occur in the coming months will involve quite a bit of discussion of what the tenant’s rights and obligations will be if another similar government shutdown happens again, and for all force majeure clauses to specifically contemplate the type of governmental action that has occurred in recent weeks. Tenants should use these discussions as a way to ensure that these clauses work for them to the greatest degree possible.
The great likelihood is the world will look a lot better in a few months, not to mention April of 2021. These are just a few ways that you can manage your risk, so you can keep working now. That way, when the time comes you can be ready and open to greet that world, and the restaurant customers that will live in it.