How to deal with landlords in the COVID-19 pandemic

As April 1 looms and closures continue to burden restaurants in the coronavirus pandemic, operators and landlords both are on the edge of their seats.

The Cheesecake Factory Inc. last week warned investors that it, like many multiunit and independent restaurant operators, wasn’t planning to pay rent because of closures related to COVID-19.

“Given the impact of governmental regulations and landlord decisions to close properties, considering the nature of our rent obligations and as part of ongoing efforts to manage our financial position and further preserve financial flexibility, we are not planning to pay rent on our leases for the month of April 2020 at this time,” the company said in Securities and Exchange Commision filings.

The 294-unit Calabasas Hills, Calif.-based company, which owns such brands as The Cheesecake Factory, Grand Lux Café, North Italia and a collection within its Fox Restaurants Concepts subsidiary, said it furloughed about 41,000 hourly workers after closing dining rooms to comply with state and city restrictions to stop the spread of COVID-19.

“We are in various stages of discussions with our landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of the COVID-19 related closure,” said Matthew Clark, chief financial officer of The Cheesecake Factory, in the filing. The company had warned landlords as early as March 18 that it would be unable to pay April rents.

“We’ve got to be able to ensure the successful re-entry of these businesses in a post-quarantine, post-COVID-19 world,” said Steven Kamali, founder of the New York-based Hospitality House, an advisory firm for food, drink, hospitality and real estate.

Kamali helped create a coalition, called The Restaurant Network to help operators “face a tremendous amount of liability” in terms of their rent. He said in a phone interview that the coalition included such notable restaurants as Boqueria, Cipriani, Smith & Wollensky and The Smith and such restaurant owners as Stephen Starr and chef Bobby Flay.

“At some point, when they look forward to re-opening, they are going to need relief from their landlords and the real estate community in order to successfully re-open,” Kamali said. “Moreover, there is strong concern in these groups whether they will have enough working capital to be able to open those businesses to the public.”

Kamali said The Restaurant Network, which he said as of late March covered about 300 business owners, has opened WhatsApp groups in New York, California, Illinois and Florida and is still organizing. The group is working to find experts in each of those cities.

Kamali said the group is also looking to provide a universal set of terms, or a framework, to deal with the real estate community.

“We are in this together,” he said. “We’re going to have to come up with some solutions to ensure that these businesses — or the landlords’ tenants — can ultimately re-open.”

The biggest hurdle to re-opening, he said, will be re-entry capital.

“How do you open your doors, pay staff, buy food, pay for liquor, pay for your insurance?” Kamali asked. “These are folks running on razor-thin 10% margins.”

The unknowable nature of the coronavirus pandemic makes the conversations between tenants and landlords especially difficult, Kamali noted.

“If this was a 30-day issue, you’d start to get your arms around it,” he said. “Sixty days. Ninety days. As time goes on, obviously the metrics start to change, both for the landlords and the tenants. The levers and pulleys are going in different directions at that point.”

Kamali likened restaurants to being on a respirator: They are not paying rent; they are not paying employees; they’ve halted the purchase of goods and liquor. “For all intents and purposes, this is probably the safest time for them,” he said. “Six months from now, when they re-open, the world may be unsure if it’s ready. That’s a major concern.”

Orlando, Fla.-based Archon Commercial Advisors on March 22 issued a “Tenant’s Guide to Rent Relief.”

Jon Hellein, co-founder of Archon, said, “The best piece of advice for existing operators is to conduct an in-depth review of their lease and seek counsel from their real-estate attorney.

“Many operators are weighing the short-term need to hold onto cash with any ramifications caused by non-payment,” Hellein said. “Their attorney should explain the specific language in their lease regarding default, curing default and any other applicable clauses.  Any attorney fees you pay now are nominal compared to potential legal pitfalls within your lease.”

Hellein and his team, including David Cobb and Janet Galvin, suggested that in addition to reviewing the lease, tenants should also review the any Force Majeure (“Act of God”) clause, if it exists, in the lease with the attorney. In addition, they say tenants should speak with the restaurant’s insurance agent and find out if business interruption Insurance applies.

“Some policies have language excluding a pandemic,” the Archon team advised. “Your landlord will require this information and being proactive can save you a step.”

“The next step is to start an open dialogue with your landlord,” Archon advised. “Tenants who proactively communicate will be treated very differently than those who immediately stop rent payment or abandon their unit. They will take a hard line on defaults and their attorneys are already engaged. They anticipate a wave of calls so best to reach out now and start the conversation.”

Restaurant tenants should draft a letter to the landlord to kick-off conversations, Hellein said.

“Be candid about the impact this crisis is having on your business,” Hellein said in answer to emailed questions. “Let them know you value the relationship, will continue to be a reliable tenant and feel it would be best for all parties to work together in good faith to negotiate an abatement of rent.”

“On your first call with the landlord, they are going to request a lot of information,” the Archon advisers noted. “They need this information for two reasons. First, they are trying to determine who actually needs help and who is trying to take advantage of the situation. Second, they will likely need lender approval of any modification and the documentation you provide will help with the approval process. Each tenant will be evaluated on a case-by-case basis.”

Cobb, Galvin and Hellein offered questions landlords would likely ask tenants:

• What kind of relief are you looking for?

• How are you going to use the savings to help your business?

• What are your sales?

• Have you applied for any other help or assistance?

• Has the government mandated that your business close?

• Have you laid off any employees within the last 30 days?

Additional details would be requested in a “rent relief application,” including:

• a personal financial statement and past three months of bank statements, at a minimum.

• a credit check. “However, running a credit check can hurt your score and you have enough to deal with right now,” the Archon team advised. “Refuse credit checks”

“If you are seeking rent relief it will come in the form of reduction, deferral or abatement,” Archon noted. “The landlord will push for deferral to protect the long-term valuation of their asset.”

Once the tenant reaches an agreement with the landlord, Archon said, “it will be documented as a lease amendment, and your attorney will need to review this legally binding document. … The agreement will include a confidentiality clause, which you should take seriously. If you have a friend, business partner or family member that has questions, refer them to your broker and your attorney.”

Hellein added that “it’s best to keep negotiations cooperative, especially in a high-stress situation.  We continue to hear reports of lenders, landlords and owners working cooperatively with each other, which is very encouraging.”

Contact Ron Ruggless at [email protected]

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