Restaurant Leases and Obligations During the COVID-19 Crisis

The COVID-19 outbreak has impacted every business imaginable. Some brands are suffering in more ways than one with unknown answers to daunting questions like “How will I pay my rent if my business is not able to operate?” and “Will I be evicted if I don’t pay April’s rent?” Restaurants specifically are struggling to make ends meet while also operating in accordance with the CDC’s guidelines on takeout and delivery, however, some may not be able to do either under current business operation models. So, what rights do lessees have during this crisis?

1851 spoke with Terry Dunn, an attorney from Einbinder & Dunn to help answer some questions for restaurant owners who are struggling to find the funds necessary to pay rent as a result of COVID-19.

1851 Franchise: What are the restaurant owners' lease obligations during the COVID-19 crisis?

Terry Dunn: You need to review your lease carefully and identify your obligations and the consequences if you are unable to fulfill them. Most leases will require you to pay rent on the first of the month, possibly give you a notice and cure period if you do not and after you have not paid within the cure period or in cases where there is no notice to cure, immediately permit the landlord to hold you in default and take action against you. This action may involve terminating your lease and/or taking legal action against you. Most leases require tenants to pay rent regardless of any other circumstances. However, if your lease has Force Majeure language or language addressing an inability to perform, there may be relief to rent obligations built-in if the premises are unavailable due to circumstances beyond the parties’ control. However, this is rare in retail/restaurant leases. Landlords are pressuring tenants to continue paying rent, but with the court systems shut down or slowed down, there is not much many of them can actually do about it behind taking action to claim the lease is terminated and then enforce that later. Most leases have operating requirements imposed upon the tenant, but contractually those will be difficult to enforce given the circumstances.

1851: Are there any exceptions to the laws currently?

Dunn: Nothing statutory yet. We have argued with landlords that the doctrine of impossibility or impracticability of performance forgives tenants’ rent obligations. These legal concepts are arguably applicable to this situation, but that theory has not been tested. There is no legal precedent for the current situation. There has been a discussion about commercial tenant rent relief in Albany, but there has been no law created at this point.

1851: What is being done currently to help alleviate struggling restaurant owners who cannot afford to pay their lease?

Dunn: Restaurant operators can apply for the same benefits available to all small business owners under the Paycheck Protection Program and other federal programs. Some of this money can be allocated to rent. There may be other state equivalents developed. It is important to research what is available to you as a small business owner or ask someone to advise you as to what is available. These programs and their applications are enormously complicated and still evolving.

1851: What advice do you have for restaurant owners during this time?

Dunn: Talk to your landlord if you can. Some are being reasonable during this difficult period. It does not make a lot of sense for them to take a hard line: there are no other tenants, the courts are largely unavailable and the bird in the hand may be their best bet. Having said that, we constantly encounter landlords who are just not reasonable. If you can pay something and they are willing to accept what you can afford, make sure it is reflected as an amendment to the lease. If you cannot pay rent, then you don’t. At that point, it would be wise to take a legal position with your landlord as to why you don’t have to.

It is not clear to anyone, including the landlords, how the legalities of the current situation are going to work out. But you are not alone; every commercial tenant is basically in the same position. So if possible, it would be wise to wait as long as you can and see what the public policy trends are.

1851: Right now, who has more control between lessee and lessor?

Dunn: The lessor always has more control in a commercial lease. But a smart landlord would see the wisdom in working with businesses that will be successful when the restrictions are lifted.