The restaurant industry has long held a reputation for high operating costs and notoriously slim profits. But in the wake of the COVID-19 pandemic, these issues have become even more pronounced.
Faced with mandatory dining room closures and rapidly falling sales, many restaurateurs are watching their bank accounts dwindle and beginning to worry about how they’re going to pay their bills – especially their rent.
Though food and labor generally account for the lion’s share of a restaurant’s operating costs, strategies such as reducing inventory and laying off staff can quickly bring those costs under control. But when it comes to rent, it’s much harder to bring costs down quickly. And short of a nation-wide rent freeze, one of the few options available to restaurateurs right now is to negotiate their lease with their landlords.
In this article, we’ll tackle the tough issue of how to negotiate your rent during COVID-19 so you can keep your business afloat. We’ll cover:
How COVID-19 impacts your lease obligations
How to negotiate rent during COVID-19
Temporary protections for restaurant owners
Examples of how restaurants are negotiating their leases during COVID-19
Disclaimer: The materials available in this post are for informational purposes only. We are not lawyers and do not propose to provide you with legal or business advice. As such, the information in this post should not be used as a substitute for obtaining such advice. In particular, we would suggest you contact your attorney to obtain legal advice with respect to the matters discussed in this post.
How COVID-19 Impacts Your Lease Obligations
Before beginning to negotiate rent with your landlord, it’s important to understand your obligations as a tenant. Leases can vary widely in their terms, and your obligations as a tenant will depend on what is actually in your lease and what you or your attorney may have negotiated before you signed the agreement.
In many commercial leases, there is a “force majeure” clause that sets out a course of action if you or your landlord cannot fulfill your obligations due to an act beyond your control, such as war or a natural disaster.
Though some leases may specifically address plagues or diseases, the force majeure clause likely won’t get you out of paying your lease. As restaurant lawyer Jasmine Moy explained in a recent interview with Eater, “Even in the best circumstances, the force majeure clause usually only affects the landlord’s ability to claim a ‘default’ (any failure to perform some lease requirement is a default) by you, the tenant, with regards to everything but the payment of rent and additional rent (e.g., your taxes and utilities).”
In other words, the closure of your restaurant due to the pandemic might get you out of your obligation to make repairs, but it doesn’t get you out of paying your monthly rent. In most cases, you will still be legally obligated to pay rent and TMI (taxes, maintenance, insurance), even in the midst of the COVID-19 pandemic.
How to Negotiate Rent During COVID-19
Though you may be legally obligated to pay your rent, you might not be able to do it. Though some restaurants have been able to successfully pivot to takeout and delivery in the wake of mandatory dining room closures, many have not. This means that for some restaurants, there’s simply no revenue coming in that can be put towards those looming rent payments.
If you find yourself in a situation where you can’t pay your rent, you’ll need to negotiate with your landlord. Below, we’ll go over how to negotiate rent for your restaurant and some of the protections that may be available to you as a small business owner.
If you’re unable to pay your rent, the very first thing you should do is open up a dialogue with your landlord. Or if you have an attorney, have your attorney reach out to their attorney.
Even if you’re not involving attorneys, it’s recommended that you preface all communications with the term “Without Prejudice” to set the stage for negotiation, rather than confrontation. You can then begin your letter or email to your landlord by explaining how COVID-19 has impacted your business. Whether you’ve been forced to pivot to takeout and delivery or shut down your restaurant entirely, outline how efforts to slow the spread of COVID-19 have impacted your ability to operate.
It’s also important to acknowledge that the situation is unprecedented and that you’re currently exploring different solutions. Be clear that your ultimate goal is to return to business as usual as soon as possible.
Finally, remember to approach all communications with your landlord in the spirit of collaboration. Explaining your own situation and taking the time to understand more about your landlord’s financial position can help both parties work out a solution to the short term cash flow issues caused by COVID-19.
After opening up a dialogue, the next step is to work out a potential compromise that works for both parties. When working on a compromise with your landlord, it’s important to understand some of the most common strategies for restructuring leases:
Rent Deferral: Rent payments or a portion of those payments are postponed for a certain period.
Rent Abatement: Rent payments or a portion of those payments are suspended for a certain period.
Rent Reduction: Rent payments are reduced for a portion or all of the term left on the lease.
Loan Conversion: Past due rent payments are converted into a payable loan over time, however the tenant continues to pay the current rent.
Though you might be pushing for rent abatement, this isn’t always possible. In some cases, a lender’s involvement may be required in order for a landlord to change a lease agreement. In other cases, the landlord may not have the funds to pay their own mortgages and they risk losing the property entirely if they do not collect some or all of the rent on a property.
Though not every option is available to every tenant, some potential compromises can include:
Paying a portion of your rent and TMI to your landlord
Paying TMI only and asking for a rent deferments (sometimes known as a “rent holiday”)
Deferring your rent entirely for a predetermined period and then paying back a percentage of the amount due over a defined period (e.g. two years)
Deferring TMI and paying partial rent
Agreeing to a longer term lease at a lower rate
Creating a shorter term lease agreement that expires when normal business operations resume
Though your landlord may agree to a longer-term lease, experts caution against making any long-term commitments right now. It’s still unclear how long restaurant restrictions will remain in place and whether they may become even more restrictive in the coming weeks. Not to mention the prospect of government support may also impact these negotiations. As a result, it’s best to focus on upcoming rent payments and agree to revisit the issue again the following month.
Experts also caution against breaching your lease or even threatening to breach your lease by stating that you will not be paying rent. Though modifying your lease is never a perfect solution for either party, going to court over nonpayment of rent is an even more expensive and time-consuming process. Not to mention, there may be funding options available to cover your rent in the short-term, such as the Paycheck Protection Program.
Whatever combination of abatements, deferrals, and/or reductions that you and your landlord agree on, you should get confirmation that your landlord is ready to document the changes in a lease amendment in the coming weeks. You should also get confirmation that your landlord will not issue any default notices (for nonpayment of rent or otherwise) in the meantime.
In most cases, a lease will specify that any changes to the agreement must be documented in writing and signed by both parties. It’s important to make sure that any changes to your lease – especially with respect to any rent payments – should be documented. If possible, it is recommended to have an attorney review any changes before signing an updated agreement.
How Restaurants Are Negotiating Their Leases
On March 18th, the Cheesecake Factory made headlines when the company informed all of its landlords that it would not be paying April rent due to a severe decline in traffic and a subsequent decrease in cash flow. Though independent restaurants do not have the same leverage as national chains, many have managed to strike deals with their own landlords for some form of rent relief.
In Toronto, Grace An of Buna’s Kitchen contacted her landlord as soon as she noticed business beginning to slow. An and her landlord managed to come to an agreement that An would pay half of April and May rent when those are due, but the remainder would be paid back over time by adding an extra couple hundred to her future monthly rents. It’s a move that not only allows her to avoid emptying her savings but also filing for bankruptcy.
The owners of San Francisco’s Raven Bar managed to strike a similar deal with their landlord. In light of the state-mandated closure of bars and restaurants, the building’s owners agreed to waive April rent and defer May’s rent over a period of two years.
In some cases, simply having a strong relationship with their landlords has allowed restaurateurs to secure long-term relief. For instance, Washington D.C. restaurants Thamee, Primrose, and Lucky Buns have all received some form of rent abatement, deferment, or forgiveness. In the case of Primrose, the owner of the building, The District of Columbia Firefighters Association, agreed to forgive rent for as long as it takes due to how the restaurant has supported the association over the years.
And these deals are not limited to mom and pop landlords. Some larger commercial real estate firms have also been proactive in offering their tenets support. For instance, the Detroit firm Bedrock has announced that it will waive all rent, expenses, and parking fees for April, May, and June for any of its restaurant and retail tenants that qualify as “small businesses.” Restaurants that will benefit from the rent waiver include Bon Bon Bon, Maru Sushi & Grill, Lovers Only, Madcap Coffee Company, and more.
Though anecdotal, these stories demonstrate that many landlords are willing to be flexible and negotiate with restaurateurs given the unprecedented impact of the COVID-19 crisis.
Temporary Protections for Restaurant Owners
While not all landlords are in a position to negotiate rent with their tenants, some state and municipal governments have stepped up to implement temporary tenant protections. This is not only vital for restaurateurs at risk of losing their commercial properties, but also restaurant staff who are struggling to pay rent on their own homes.
Moratoriums on Evictions
As of April 1st, at least 34 states and several Canadian provinces have issued moratoriums on evictions. This means that renters cannot be physically removed from the property for non-payment. The catch is that the new rules vary widely based on location and some of the new rules only apply to residential rentals, not commercial rentals.
Not to mention, some states and provinces have barred evictions entirely, while others are only putting off evictions if the tenant has been diagnosed with coronavirus or has lost their job as a result of the pandemic. And in 12 U.S. states, including Georgia and Colorado, no measures have been taken to limit or halt evictions.
To find out if your state or municipality has issued a moratorium on evictions and whether it applies to commercial rentals, you can check the running eviction policies list created by The Eviction Lab at Princeton University with help from researchers at Columbia University.
State and local eviction moratoriums provide some measure of relief, they do not prevent rent from being due. As a result, there have been calls from across the U.S. and Canada for a rent freeze. This could simply mean a halt to rent increases, but it could also mean the postponement or total forgiveness of rent payments.
As of April 1st, no states have implemented a rent freeze. However, the issue is currently on the table in some places. For instance, in New York, State Senator Michael Gianaris has proposed a bill that would offer 90 days of rent relief for residential and commercial tenants impacted by COVID-19. If the new bill passes rent would be completed waived, not just deferred.
In Canada, some provinces have already taken steps to offer rent relief. For example, Alberta Premier Jason Kenney has instituted a rent freeze until Alberta’s state of emergency is lifted. He has also declared that late fees cannot be imposed on tenants over the next three months.
Other Canadian provinces, including B.C. and Manitoba, have issued a freeze on rent increases but not a total deferral of rent.
While the situation is different for every restaurateur, understanding how to negotiate rent for your restaurant can help you manage your costs during the COVID-19 crisis. And as intimidating as it may be to talk numbers with your landlord, remember that most landlords want restaurants to survive the pandemic and to stay on the premises as their tenants. Landlords know that if they lose tenants right now, it means even greater uncertainty about how and when they’ll find someone new to take over the space. In other words, it’s in their interest to help you survive this crisis and get back to business as usual.
You can find more COVID-19 resources for your restaurant here. And if there is any topic you would like to see or story you would like to share, you can contact our resource team directly at [email protected].
Katherine is the Content Marketing Manager at TouchBistro, where she writes about trending topics in food and restaurants. The opposite of a picky eater, she’ll try (almost) anything at least once. Whether it’s chowing down on camel burgers in Morocco or snacking on octopus dumplings in Japan, she’s always up for new food experiences.