Lease Negotiation Tactics for COVID-19 Relief
One of the largest fixed costs in a restaurant is rent and it’s become a sword of Damocles hanging over operators looking to weather the storm without breaching their lease.
Now to negotiate with landlords during the COVID-19 pandemic was the central topic of a Franchise Times webinar titled Real Estate Update: Operator Tactics Today and Opportunity for the Future. The webinar, part of the Restaurant Recovery Week series, featured four experienced lease negotiation experts and real estate gurus: David Ahn, president of CRE Companies; Bob Elmer, principal at Lee & Associates and Property Works; and Jeff Hoffman and Joe McKeska, both senior managing directors at A&G Real Estate. The webinar was moderated by Restaurant Finance Monitor president John Hamburger.
McKeska summed up what’s going on in the restaurant space succinctly.
“We are seeing everybody mostly in triage mode, trying to preserve liquidity and manage as best they can if they’re open. Obviously, it’s drive-thru, carryout and delivery only for a lot of folks,” said McKeska. “Going forward, people are starting to look forward to what the emergence will look like and what sales level might be like. And as it relates to real estate, what stores are going to be economically viable. There will be a lot of stores that people operated in the past that may not be viable in the future, and restructuring their leases to adjust the cost needs to reflect the new normal.”
The group dug into many aspects of negotiating leases, what landlords are facing and what kind of tactics have worked. Find a recording of the full webinar on the Restaurant Recovery Week page, and read on for four key insights from the panelists.
Don’t make the same mistakes as 2008
Slow action and a wait-and-see approach did not help operators fare well in the Great Recession, according to David Ahn.
“I think there has to be a plan for each location. With any sizable portfolio of locations there are some stores that underperform, some stores that the group would like to close. I think you need to treat them different than the stores you want to keep open,” said Ahn. “Unfortunately, what happened in ‘08 and ‘09, people held on to locations that they really should not have. They allowed these infected locations to drag down the business. If I were advising Cheesecake (Factory), for example, I’d look to see what locations were critical and what locations we want to let go. Once you have a better idea of that, it’s looking at what makes sense, is it deferring rent or paying rent.”
He said if deferral is the plan, those poor performers could bleed more cash as sales take a predicted slow climb back to normal.
Transparency is key
Landlords are key partners in a business and they have their own issues with COVID-19. Strip center owners, for instance, now see between 60 and 65 percent of normal rents; malls see 25 percent and both have their own lenders. To get key changes in lease negotiation, they’re going to want something, too. There is potential to give landlords the priority in vendor payments to encourage them to renegotiate the lease, or offering a percentage of rent may be key concessions. But every situation is different.
“I think, unfortunately, it’s not a one size fits all. The nature of our business is every location and every landlord is different and to some degree they all have their own issues,” said McKeska
He said it is important operators come to the landlord with real numbers so it’s clear that they are not trying to take advantage of the dire situation. Those with plenty of cash on the books, for instance, likely won’t be looked on kindly by landlords looking to pay their mortgage.
“I think that’s a tough conversation for large operators with access to capital compared to someone who’s business model is being disrupted so dramatically, at some point they can’t see a path to profitability,” said McKeska. “I think it’s important for companies to communicate with landlords about what their business situation is or it may fall on deaf ears.”
Don’t rely on force majeure
The term force majeure has been a popular in many operators' lexicon recently, but the “superior force” language is not really all that strong in most leases.
“First off, it depends what your lease says. Typically, force majeure covers a superior force, something unforeseen. Often these ideas are listed, like acts of god, war or acts of government. So, if I’m a tenant, I say, ‘This is exactly what this is!’” said McKeska. “But almost all leases say rent is not covered under force majeure. Your other costs are not required but rent still is.”
Unless an operator had extremely keen foresight, they likely don’t have any sort of “global pandemic” clause in their lease or insurance—which would typically help pay rent in a disaster situation.
He suggested looking closely at the lease language before bringing a force majeure argument to a landlord.
Give opportunities a close look
As the economy reopens, there will be opportunities, but deep due diligence may be more important than ever.
“There’s clearly going to be a lot of carnage over the next half of 2020 and in through 2021. Folks who didn’t get any response about a location inquiry are now are getting calls from landlords asking if they’re still interested,” said Hoffman.
But in the new normal, operators potentially have more options but also more risk. He said it’s important to rethink the real estate strategy going forward.
“Now, it’s thinking where you want to be, and what businesses are going to be around. Some may be open but may close later in the year,” said Hoffman. Operators "can reach out to brokers, banks with some visibility into that and other advisors who have some visibility into who is restructuring. You’re going to be able to find that with some diligence.”
And that may be very important as businesses continue to close down. If a key traffic driver shuts down just as your location opens up, a trade area could radically change for the worse.
For more insights, don’t miss the rest of the Restaurant Recovery Week series.