Rebuilding: Rent Agreements + Alternative Rent Structures
When it comes to rent agreements, regardless of the city, both restaurant tenants and landlords are in a difficult financial position due to the COVID-19 crisis.
We’ve pulled together a list of tips and resources for restaurant tenants looking for solutions to fulfill or navigate their rent agreements, including suggested alternative agreement structures for future lease negotiations.
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Rent Structures in Lease Agreements ⟶
Navigating Rent Negotiations ⟶
Rent Structures in Lease Agreements
Fixed Payment Lease Structure – In a standard lease, the tenant pays the landlord monthly rent based on the pre-determined market value of the property, generally broken down by number of dollars per square foot.
Percentage of Sales Lease Structure – In a percentage of sales lease, there are two components: the tenant pays a base rent (or minimum rent) and a percentage of the monthly or annual gross sales. The landlord and tenant negotiate a "breakpoint," which is the level of sales where percentage lease payments kick in. Usually, a “natural breakpoint” is used, which is the amount of gross sales that, when multiplied by the applicable percentage, equals the amount of the annual fixed rent. These arrangements can either (1) include a fixed floor with a percentage rent on any sales excess over a breakpoint or (2) just a percentage of sales, without a fixed floor. [Source]
Management Agreement – Most management agreements include two components for compensation — a base fee and an incentive fee. The base fee is typically charged as a percentage of total revenue. Incentive fees, on the other hand, are paid to the management company once a certain profit threshold is reached. [Source]
Navigating Rent Negotiations
Below are a few key takeaways for owners and operators navigating rent negotiations, particularly during this time:
Seek expert advice to help navigate lease terms, finances, and insurance claims, since every situation is different. It is important to note that state laws vary and to check your city and state rental laws. An attorney can help you to navigate these unchartered waters.
Building and maintaining a strong relationship with your landlord is essential, as ideally you will be able to come to a mutually beneficial agreement. Remember that finding a new tenant is a headache for landlords, so negotiating can benefit both sides.
Record all conversations in writing to ensure proper documentation. If new arrangements such as deferred rent payments were discussed and approved (ie. via email), attach this adjustment as an addendum to your original contract.
If possible, consider renegotiating your lease. Landlords are often willing to renegotiate with current tenants instead of either having property sitting unoccupied, or having to invest in potential buildout changes required by a new tenant.
Communicating with Your Landlord
Below are some essential tips that NYC-based restaurant attorney Jasmine Moy shared to help tenants communicate with their landlord:
Acknowledge the hardship and let your landlord know what you’ve had to do with your business operations (whether you’ve shut down entirely or reduced service to takeout/delivery only) as a result of city or state requirements;
Acknowledge that this is unprecedented and that you are looking forward to working together to find a solution;
Get some confirmation that they are willing to look into some combination of abatements/deferrals/reductions and confirm they’ll be ready to document that in a lease amendment in the coming weeks; and
Get confirmation that they won’t issue any default notices (for nonpayment of rent or otherwise) in the meantime.
Rent Relief Options + Where We Go From Here
Relief Options
See if your landlord is able to offer momentary relief, which may look like the following:
Partial or full rent abatement for coming months
Use of security deposits as a monthly deposit while you are still fully closed
Rent reduction for a limited time period, to be paid later on or in an ideal situation, to be forgiven
Deferral of payment to the end of your lease terms.
Review your lease to see if there is a force majeure (“Act of God”) clause, and discuss legal implications with an attorney, if possible.
Speak with your insurance broker and find out if business interruption insurance applies. At the end of March, Thomas Keller sued his insurance company since business interruption insurance did not go into effect. As a result, he formed BIG: The Business Interruption Group, which is requesting insurance companies to pay the coverage they deserve after paying insurance premiums for their businesses. We will continue to keep an eye out for how this evolves.
Apply for any and all relevant applications for emergency loans and help available through the Small Business Administration and other aid programs. Please see our lists below:
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Where Do We Go From Here?
It is more difficult than ever for restaurants to accurately forecast sales, particularly as they are faced with delivery and takeout only, or allowing guests to dine in at a reduced capacity. In the future, rent structures may look more consistently like the following, depending on how and where landlords are willing to negotiate:
Percentage Lease – As mentioned above, the tenant pays a base rent (or minimum rent) and a percentage of the monthly or annual gross sales.
Percentage-only Lease – In the future, will landlords be willing to consider a percentage-only lease, where the tenant pays a percentage of the monthly or annual gross sales but not a base rent?
It is critical to think about business viability now more than ever, and there needs to be a more open and honest dialogue between restaurants and landlords to understand the best path forward for both parties.
Additional Sources
Archon
A Tenant’s Guide to Rent Relief
Eater
‘I Am Preparing For This Possibility of Going Bankrupt and Belly Up’
Eater
For Restaurants Fighting to Stay Open, Landlords Prove a Major Hurdle
Holland and Knight
Real Issues Facing Retail Landlords in Light of COVID-19
Hospitality Net
Management Fees – A Growing Expense
Investopedia
Percentage Leases
Nation’s Restaurant News
How to deal with landlords in the COVID-19 pandemic
Small Busines Chron
The Percentage of Rent vs. Revenue for Restaurants
Squarefoot
A Guide to the Different Types of Commercial Leases
Disclaimer: The consolidated resources are here for your consideration. The information provided above is not legal advice. We recommend talking to your lawyer to ensure all state + federal compliance is maintained. If you do not have legal representation, we would be happy to connect you with legal counsel. We understand that circumstances are changing quickly and we are updating content as it is available.
