Time is Running Out for Bar and Restaurant Operators to Renegotiate Commercial Leases

Now is the time for restaurant, bar and other hospitality businesses owners to renegotiate their leases. In fact, time is running out.

Bar Convent Brooklyn kicked off their ”Law & Libations” webinar series yesterday. BCB content manager Maike Kumstel hosted James DiPasquale, founding partner of DiPasquale & Summers, to explain why there’s no time like the present to renegotiate leases, negotiate lower rent, or seek better lease terms.

DiPasquale & Summers is a law firm with offices in New York City and Honolulu. The firm serves the hospitality industry, assisting operators with forming their businesses, applying for liquor licenses, (re)negotiating lease agreements, and more. Past and present clients include Five Guys, Melt Shop (Restaurant Business 2020 Future 50), Craft+Carry, and even BMW.

To explain why hospitality venue owners need to move quickly if they plan to attempt negotiations with their landlords, DiPasquale cited bill number Int. 1932-2020. The bill was passed by the New York City Council on May 13 of this year, and signed into law by NYC Mayor Bill di Blasio on May 26. Key provisions that apply to hospitality:

• The prohibition of personal guarantees in commercial leases or other rental agreements;
• Protection for commercial tenants in NYC that were forced to stop serving food or beverages on their premises, or “otherwise required to cease operations” due to an executive order signed by Governor Andrew Cuomo that affected “restaurants, bars, video lottery gaming facilities, casinos, gym, fitness centers or classes, and movie theaters”;
• The legislation is limited to the time period between March 7, 2020 to September 30, 2020.

A personal guarantee is essentially a promise that a person will cover the debts and legal obligations of the business occuppying a landlord’s space. NYC’s current legislation, a reaction to the devastation the city has experienced due to Covid-19, prohibits the enforcement of personal guarantees and protects commercial tenants from eviction.

Owners and operators in other states may be facing similar situations. Given the the current challenges operators are facing, renegotiating lease terms may be a wise decision regardless of where they’re located.

As DiPasquale explained the situation in NYC, if restaurant or bar owner was forced to shut down or limit service between March 7 and September 30 due to Covid-19, a landlord can’t seek the recovery of unpaid rent. One interpretation of the current legislation is that a landlord even asking for rent can be considered harassment. Fines start at $10,000 for violations of these landlord-tenant rules.

It’s important to note a few things before going further. One, DiPasquale was addressing NYC specifically. Business owners in other cities and states need to understand the laws governing commercial leases where they operate. Two, there are currently two legal challenges to NYC’s legislation that may have a meaningful impact and change the laws. Owners and operators in NYC need to keep current with the legislation and related challenges. Third, the moratorium on commercial evictions in NYC expires August 20.

Unless the moratorium is extended, which DiPasquale said he could see happening but only by perhaps 10 or 20 days, that gives commercial tenants just three weeks to renegotiate the terms of their leases. Realistically, there’s probably much less time as some landlords likely won’t see a need to negotiate certain terms a week or less before the moratorium expires.

Of course, evicting a tenant during severely trying times means a vacancy. With so many business owners struggling, there’s “a glut” of inventory in NYC, as DiPasquale said. Some projections show a permanent closure rate for bars and restaurants of 50 percent. Recently, Yelp reported that number to be over 60 percent. Landlords must weigh their options: negotiate to keep their spaces filled or roll the dice on filling vacancies.

DiPasquale & Summers has been heavily involved in commercial lease negotiations with landlords big and small. Some landlords have been open to negotiations and some have not. As DiPasquale said, if a landlord isn’t willing to work their tenant, there’s not much that can be done. The possibility of facing both the inability to seek recovery and a vacancy may seems like powerful leverage in favor of the tenant. However, there are landlords that would rather avoid a history that shows a period of below-market rent because that may reduce a space’s value. Something for operators to keep in mind.

That said, DiPasquale outlined a fairly simple process for entering into negotiations before time runs out and the exercise becomes fruitless. “First and foremost, reach out to your landlord,” he said. That means the tenant should contact their landlord, not the tenant’s attorney—that will simply result in the landlord engaging their attorney. DiPasquale suggests a “dollars and cents” approach to negotiations: tenants should explain that they simply can’t survive with the current lease agreement terms.

If reaching out on their own doesn’t work, DiPasquale recommends finding a real estate broker with hospitality experience. Should that fail, then it would be appropriate to bring attorneys into the situation. Tenants should also bring attorneys into their situation if their landlords have threatened them with eviction. Even though landlords in NYC, for example, know that they’re not supposed to make such threats, some are still doing so. DiPasquale suggests contacting an attorney and having them send a letter outlining the tenant’s rights and the penalties landlords face for violations.

One webinar attendee asked what provisions a tenant should attempt to negotiate with their current landlord or a new one. DiPasquale shared that his firm has been including a provision that abates rent or reduces it by a corresponding percentage should a governmental order force the closure of the business or reduce its capacity by X percentage. (Currently, D&S is using the reduced rate of 50 percent). He said that many landlords have been receptive.

DiPasquale also suggested language that specifically includes pandemics in force majeure clauses. Currently, most contracts and agreements that have such clauses either don’t mention pandemics or specifically state that they’re not a triggering provision. Another idea is to negotiate for percentage rent. Should a rebound occur, a landlord would make more money. Should a business struggle, they’d make less but the tenant would likely be able to survive and not have to vacate or be evicted. Again, DiPasquale said many landlords are open to such a term. When asked what a tenant should do if a landlord has agreed to rent abatement, DiPasquale was quick to respond: Get it in writing.

Closing out the first session of BCB and DiPasquale & Summers’ “Law & Libations” webinar series, an attendee asked if they should pay their rent if they can afford to, given current legislation. DiPasquale identified the inquiry as an ethical question and said yes, if a tenant can pay rent they should do so. They entered into an agreement, after all.

DiPasquale & Summers is located in New York and Hawaii but the firm’s cofounder said operators with questions should feel free to contact the firm. To do so, click here.

Legal Disclaimer: Neither the author of this article nor the staff of Hospitality Villains are attorneys. This article does not constitute legal advice, explicit or implied. Anyone with legal questions should consult an attorney.

Image by Edar from Pixabay