The COVID-19 pandemic has affected the restaurant industry more than nearly any other. Establishing or renewing leases during these uncertain times can be a confusing process. Restaurant owners who want more information about restaurant leases and COVID-19 or negotiating a lease during this time should consider visiting with an experienced restaurant attorney for help. Consider contacting Yates Law, LLC for targeted legal advice and representation based on your unique needs at (551) 237-8921 for help with your restaurant lease and related legal issues.

How COVID-19 Affected Restaurant Leases

The COVID-19 pandemic had a quick and harsh effect on restaurants. In the weeks and months immediately following the onset of COVID-19 in the United States, many restaurants were required to close down. Sadly, many were unable to reopen. The National Restaurant Association estimated that more than 110,000 restaurants were closed permanently or long-term by December 2020. 87% of full-service restaurants – which include independent, chain, and franchise restaurants – reported an average 36% drop in sales revenue for the year.

For those restaurants that were able to re-open, months of lost revenue impacted their ability to meet their financial obligations, including restaurant leases. COVID-19 also imposed continuing restrictions with social-distancing guidelines and limited capacity rules. These restrictions made it difficult for businesses with already slim margins to remain in business during this trying time. However, a lot of empty real estate allowed some successful restaurants to expand or set up new locations, often at a discounted rate.

Force Majeure Provisions

The COVID-19 pandemic also had many landlords checking their lease agreements for what happens in the event of a pandemic or matters stemming from it. Many commercial leases contain a force majeure provision, which determines what happens in the event of major upheaval, such as natural disaster, pandemic, war, government order, prohibition of business, or supply chain issues. This type of provision may allow one or both parties to extend timeframes for payment, excuse performance of lease provisions, cancel the contract, or take other legal action. The principle behind such provisions is that it protects parties who are unable to perform a contract because of unforeseeable or inevitable factors.

Force majeure provisions are often limited to performing duties, rather than purely economic ones. Therefore, they might not excuse the payment of rent under commercial leases. Additionally, courts have ruled that this type of clause does not excuse non-performance in events that are not specifically mentioned in the force majeure clause.

Restaurant Leases and COVID-19 – Legal Defenses

Some restaurants that have been affected by COVID-19 and had trouble paying rent have been successful in raising the following legal defenses:

• Executive orders
• Frustration of purpose
• Impossibility of performance
• Impracticality of performance
• Force majeure

The Governor’s COVID-19 executive orders that limited indoor dining have frustrated the purpose of restaurant leases and, in some cases, have made it impossible or impractical for restauranteurs to keep their businesses and running and pay off financial obligations.

Even if a lease did include a force majeure provision, the parties might not have contemplated this specific type of pandemic or how long it would continue to have an impact on a business. These factors can affect whether the courts will enforce such clauses and carefully scrutinize the language and its intent in the restaurant lease.

For these reasons, many restaurants are considering turning to law firms that have experience in the restaurant industry, such as Yates Law, LLC, to advise them on their existing restaurant leases during COVID-19 and in negotiations.

Provisions to Include in Commercial Leases During COVID-19

Restaurant owners may want to take additional steps in protecting their livelihoods during COVID-19 by including provisions in their commercial leases such as:

• Assignments and transfer provisions that allow them to sublet the property to other tenants, if necessary
• Gross sales termination right that allows restaurant owners to terminate the lease if their annual gross sales fall below a certain number
• Exclusive use rights that prohibit other occupants nearby to operate a similar concept to the existing tenant’s
• Percentage rent exclusions that limit the percentage of gross sales the landlord receives based on sums such as for the payment of city, county, state, or federal taxes, credit card processing fees, refunds, returns, employee discounts, insurance proceeds, promotional sales, or automatic gratuities
• Personal guaranty burn-offs that extinguish the personal guaranty after a certain time
• Abatement of rent during periods of shut-downs
• Abatement of renewal rent increases so that rent does not increase during the pandemic

Ways to Resolve Issues in Commercial Leases Brought on by COVID-19

For restaurants that are experiencing financial difficulty due to COVID-19, there may be several possible legal strategies that can provide a resolution between the restauranteur and landlord, such as:

• Deferring rent – With this option, the restauranteur would be able to postpone paying rent until a determined time in the future.
• Rent abatement – During periods of rent abatement, no new rental payments would become due. Some restaurant owners are requesting rent abatement provisions in their leases in case there are additional shutdowns in the future that affect on-site dining.
• Extensions – The landlord might grant an extension to meet financial obligations.
• Early termination – In the event the business owner is unable to continue operations, an early termination may be best for both parties.
• Real estate loan forbearance – The landlord may be able to seek loan forbearance on payments to the financial institution that granted the mortgage. This might allow the landlord to provide greater flexibility to the restaurant owner.
• Percentage-rent agreement – Under this type of agreement, the restauranteur pays the landlord a percentage of their gross revenue. Alternatively, they may pay a lower base rate than market value, as well as a percentage of their gross revenue.
• Improvements or refurbishment – If the building will be vacant, this may create the perfect time to improve it or retrofit it for new uses.
• Personal or corporate guaranty – The landlord may agree to make changes to the lease in exchange for a new personal or corporate guaranty. However, this can subject the restauranteur to more liability than they are willing to take on.

Consider Contacting Yates Law, LLC for Help

If you would like assistance with restaurant leases affected by COVID-19, or any other legal matter, consider contacting Yates Law, LLC at (551) 237-8921 to ensure your legal and financial rights remain protected.