"POST PANDEMIC" RESTAURANT LEASING Negotiating Your Next Deal
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ith roughly 50 percent of the adults in the U.S. now fully vaccinated, and COVID-19 case and mortality rates steadily declining, the U.S. economy is beginning to reopen and the prospects for restaurant operators continue to improve. Over the last 12 months, restaurant tenants and landlords adjusted to the challenges presented by the COVID-19 pandemic as well as they could, making on-the-fly adjustments to existing lease agreements. Going forward, both the economic and regulatory environment appear ready to allow restaurant tenants to plan for their futures with greater certainty than at any time in the last year, and such planning may include lease extensions or leases of new space. How has the pandemic affected the way landlords and restaurant operator tenants approach their deals? Here's a look at four post-pandemic trends and concerns to consider when negotiating your next lease deal: 1. Drive Throughs. According to Matt Sichel, a senior director at NAI Elliott in Portland, drive-through tenants generally fared well during the pandemic, rather predictably. As a result, there is strong demand in the Portland metropolitan market for leased space with drive-through capabilities. For tenants considering leasing drive-through space, but without a lot of operating experience with drivethrough service, it will be very important to scrutinize the proposed lease terms regarding what the tenant must do to address certain common ills arising from drive-through service: blocked parking lot drive lanes, blocked parking spots, and lines spilling into surrounding streets. For tenants with restaurant space near a drive-through, it will be important to understand what, if any, rules will be in place to ensure that the neighboring drive-through tenant mitigates and minimizes congestion and blocked access to the premises. All restaurant tenants should consider the parking area layout at
their prospective retail space, and perhaps even visit the space during high drivethrough volume time periods, to understand how well the retail center can handle drivethrough congestion. 2. Tented Seating Areas. According to Sichel at NAI Elliott, in addition to an increase in demand for outdoor seating areas for tenant use, tented areas are probably going to be a permanent feature at retail establishments for the foreseeable future. Given that landlords with available extra space at their developments appear to be increasingly comfortable with, and willing to provide, this additional amenity to restaurant tenants, operators should be certain to consider asking about adding specific provisions in their leases for the express right to have exclusive tented outdoor seating areas, in the same way they would negotiate other exclusive outdoor seating areas. 3. Shared Outdoor Dining Areas. If you're entering a lease with a landlord that only is able to offer and provide general outdoor eating areas for use by all the restaurant tenants at their retail center, as opposed to dedicated outdoor dining space for specific tenants, it's important to get certain baseline assurances about the adequacy of that arrangement. Specific considerations to keep in mind include: (i) the ratio of the number of tables and seats guaranteed to be available for use, to the number of restaurant operators at the development who will likely make use of the area; (ii) if the seating and tables must be secured each night, who is responsible for setup and take-down each day, and when; and (iii) how is clean-up and trash mitigation handled (both in terms of how frequently and who is in charge of clearing rubbish, keeping the tables and chairs reasonably clean, and emptying the surrounding trash barrels, which will fill up faster than in the balance of the retail center).
4. Dealing with Future Shutdowns. As every small restaurant operator knows, the average lease and its underlying obligations are backstopped by a personal guaranty from the restaurant owners; a failed store means not only the lost investment in the project, but also possibly being personally sued for the landlord's losses. Post-pandemic, this one-sided risk allocation is starting to shift, as more tenants are requesting, and more landlords are now giving, rent abatement provisions in their leases to address future shutdowns affecting on-site dining. Currently, these abatements have largely been structured as proportionate rent reductions based upon occupancy reductions, but that may change as operators' business models continue to evolve. Regardless, tenants should feel more confident in demanding that landlords, by crafting balanced rent adjustment provisions in their leases, take on a greater share of the economic risk associated with future catastrophic events like the COVID-19 pandemic. JEFFREY P. KAPP, BUSINESS AND COMMERCIAL REAL ESTATE ATTORNEY, JORDAN RAMIS PC
About
Jeff focuses his practice on transactional business law with a special focus on complex commercial real estate transactions, finance, and development. Contact him at jeffrey.kapp@jordanramis.com or 503.598.7070. OregonRLA.ORG 41
