By Jim Sammon & Matt Viola
It’s no secret that the restaurant industry has been knocked to the canvas by the COVID-19 coronavirus pandemic. In order for it to rise again, it will be necessary for both restauranteurs – and, if they differ, their landlords – to understand the complex legal landscape that will exist at the end of this crisis. During this “standing 8-count,” it is best to get your wits about you before heading back into the fight.
Here are some of our suggestions:
1. Don’t be headstrong and think only short-term
The fallout from the pandemic has forced both restauranteurs and landlords to undertake difficult business decisions. How they cooperate with each other will affect both their short – and long-term – relationship. Think before you speak and be mindful of the potential consequences or your words and actions.
2. Communication with all parties and the commercial lender is key
On April 1, Ohio Governor Mike DeWine signaled the state government’s intentions on trying to ensure business continuity beyond COVID-19. The Governor suggested suspension of many contractual enforcement mechanisms commonly relied upon by both parties in commercial leases. However, these are “requests” by the Governor and don’t (and can’t) carry the force of law. Nor can the Executive Order be enforced by either party.
What both Orders do, however, is give a clear indication to all parties to a contract not to look to the courts for strict and timely enforcement of contract provisions – unless there is a showing of dire emergency by one party. In signing the Executive Order, both Governor DeWine and Lt. Gov. Jon Husted called upon commercial lenders to help in resolving this (hopefully) temporary lending crisis.
3. Look closely at the terms of the Commercial Lease Agreement
The import of both the Judicial and Executive branches actions should be seen as a “shape of things to come.” Restaurant leases are commercial contracts; as such, the parties are (normally) bound by the plain wording of the contract terms. But these are not normal times. Nothing within the Executive Order or the Supreme Court’s temporary suspension order negates any terms of contract. The terms of the contract will always be the key. Analysis of “force majeure” clauses, timeliness of notice of default, the ability to change locks on the establishment for failure to pay rent, the right of tenants to fixtures and personal belongings within the premises – these, and many more issues, are commonly spelled out within the specific contract between the parties.
Also, important provisions concerning notice requirements and continuous operation are often included within leases. It is very important to consider whether you intend to try and re-open once this crisis has ended, along with whether your lease agreement has a personal guaranty or a security interest in your fixtures (which are likely very expensive). If you do have a personal guaranty or your landlord has a security interest in your fixtures, just not paying rent and not re-opening when the crisis is over becomes a much more difficult decision.
4. Take a Deep Breath
The Governor’s Executive Order mirrored the Ohio Supreme Court’s temporary suspension of residential eviction and foreclosure hearings across the state through the end of the period of COVID-19 or July 30, 2020, whichever is earlier. In these uncertain times, our best advice is to take a deep breath, clear your head, have your contract reviewed and ensure all parties are on the same page moving forward.
If you have questions or would like to discuss further, please reach out to Jim Sammon at jpsammon@kjk.com or 216.736.7235 or Matt Viola at mtv@kjk.com or 216.736.7253.