Negotiating and Drafting Restaurant Leases

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Negotiating and Drafting Restaurant Leases Tenant Improvements, Operational Issues, Franchises, Good Guy Guaranties and More THURSDAY, APRIL 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Jeffrey A. Margolis, Founder, Margolis Law Firm, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

2 You re a Good Guy What Does That Mean and What s It Going to Cost You? and, of course, we ll need the standard good guy from the CEO A few years ago, I wrote a piece speculating that while the term was ubiquitous in our leasing community, no one knew what a standard good-guy guarantee looked like. That didn t surprise me as I concluded there was no such animal. It all depends. In this column, I d like to revisit that question and see if my answer is any different. As a refresher, traditionally landlords sought to secure a tenant s financial obligations with a security deposit (cash or LC), and for most companies the owner s personal guaranty: an unlimited personal guarantee covering every single aspect of tenant s lease obligations. It was serendipity that as those company owners grew more and more wary of leaving their entire net worth on the leasing table, landlords narrowed their focus to who the real enemy was: the ultimate Blue Meanie tenant who simply stopped paying rent and started playing the go-ahead-and-evict-me-but-you-know-its-gonna-take-six-months-or-moreand-meanwhile-i m-living-the-rent-free-good-life-at-your-expense game. Enter, stage left, the good guy, the financially responsible individual (typically the owner of the company) who said while my company may be floundering and in arrears, I ll sign on personally to take care of any rent shortfall to the date we vacate. Voila! The good guy becomes a limited guarantor. Landlord gets its money, and the premises were available for re-renting. So the basic understanding was that the principal, the good guy, would guarantee that all rent would be paid through the date that tenant surrendered the premises, vacant, in reasonably satisfactory condition with the keys turned over to landlord s agent. At the

3 point where all those conditions were satisfied, the guarantor (not the tenant) (we ll get back to that) was released from all further lease liability. Rather neat and simple right? (No. Stay tuned.) The old full-blown personal guarantor was delighted with this new arrangement (after all, who wanted to be called a bad guy?) and the landlord, seeking a modus vivendi, also agreed. They say the devil is in the details, so there were a few items to be ironed out, including whether to guarantee one payment only? Payment and performance? If payment, what was to be guaranteed? Just basic rent? So-called additional rent (taxes and operating)? Additional rent based on the landlord converting a performance obligation (i.e., a repair item) into a dollar obligation? Accelerated default rent? What about end-of term obligations to restore the premises? Then, of course, landlords had to consider freerent periods that had not yet been amortized same as to TI work and construction allowances. O.K., might as well throw in substantial yet unamortized brokerage commissions and legal fees. And what about back-door liabilities and concerns from the guarantor s point of view, including anywhere from two to six months prior notice being required, and how to get some protection in the sublease or sale of business scenarios. Ouch, almost forgot, where does all this leave the hapless tenant, with its security deposit now history and no rent relief available? Whew. Well, I think I ll stop this exhausting (yet, stimulating) recitation of good-guy questions and ask you kind readers to stayed tuned for next week s column when a la that jampacked final episode of Breaking Bad all will be revealed and sewn up in a (not so tidy) package. KEYWORDS: LEASES FINANCE SALES INFRASTRUCTURE MORE ABOUT

4 What Does It Mean to Be a Good Guy and What s It Really Going to Cost? BY JEFFREY MARGOLIS OCT. 23, 2013, 7 A.M. Last week, we took a look at the evolution of lease guaranties from full-blown general personal guaranties to the limited, now favored good guy guaranty. In a nutshell, a good guy guarantor stepped up to the plate to assure the landlord that the space would not be milked for rent, and the quid pro quo was that the guarantor could unilaterally control the end date of his obligations by taking care of tenants financial obligations through a new end date an end date based on completion (at a minimum) of the following checklist: physical surrender of the premises, vacant and in reasonably satisfactory condition with the keys turned over to the landlord s agent. We then dug deeper and found a whole slew of issues in need of negotiating. Categorically, these were money items and performance items. Money items include base rent, escalation charges (taxes and operating), accelerated rent, unamortized expenses such as TI, free rent and brokerage charges, and advance-notice requirements, all of which translate into dollars and cents. Meanwhile, performance items include obligations such as repairs, maintenance, compliance with laws, removing personal property and end-of-term obligations to restore the premises. O.K., so landlords had put the good guy on steroids, and now the deal makers and counsel have the unenviable task of sorting out what s fair. Having a so-called standard New York lease and being of that certain age where I can say I was a midwife at the birth of the good guy guaranty, allow me to take a shot.

5 Starting with the landlord s perspective, the base rent is paid to the date the tenant vacates. As to advance notice, yes, the landlord needs some notice to get geared up for rerental, but I ve seen as much as six months or more and that s excessive. Suggest one or two months. Accelerated (lump sum) rent? No. Broom clean well that s enough to assure the premises won t be trashed and the trash left in place. Fair. Yes, of course, vacant and free of any subtenancies. Performance? Not in the gene pool if you look at this guaranty s DNA: to disincentivize a tenant from remaining in possession without paying rent. But obviously, basic repairs should be included. And looking ahead to a sale-of-thebusiness-assignment or subletting, the cautious good guy guarantor will ask for (and should get) some release mechanism based on substitution of someone of equal financial wherewithal. I think this topic merits some spirited leasing community debate, so please sound off. KEYWORDS:

6 THE SAVVY RESTAURANTEUR EXIT STRATEGIES IN LEASING Tips and traps for the owner and restaurant lawyer OR 134 legal and practical pointers, tips and principles every restauranteur (and leasing lawyer) must know AS sooner or later your client restauranteur will want to sell the business and cash in his chips (his fish, too), or have to contemplate less balmy scenarios such as the business is failing or the location no longer works or the concept of the restaurant has become totally dated or your client s a multi-location chain and is being acquired in a bloody take-over play, and you want to/must transfer or terminate the lease Presented by Jeffrey A. Margolis, Esq. Principal, THE MARGOLIS LAW FIRM 11 EAST 44 TH STREET NEW YORK, NEW YORK (212) FAX (212) jeff@newyorkleaselaw.com NOTE: This paper is based Mr. Margolis presentation at ACI s Seminar: Negotiating Restaurant Leases, February 22-23, 2007, THEhotel at Mandalay Bay, Las Vegas, Nevada 1

7 Introduction The harsh realities: Statistics say you have 5-7 years, then your client s restaurant s concept is stale; or client is faring poorly in that location; or concept/ strategy has changed; or restaurant was acquired in a multi-store transfer, the acquirer now has three stores within a one mile radius, and your location is the weakest; or client has built a very profitable business and wants to retire, or maybe go to law school! Where do you go from there? Be pro-active in lease negotiations and plan ahead for the inevitable. 2

8 SALE OR OTHER TRANSFER OF A RESTAURANT EXIT Strategies FOCUS on negotiation of Assignment and Subletting and important related lease clauses 1. (Second) Introduction Memo to: The Savvy Restaurant Buyer RE: Purchase Due Diligence 1. Look at the lease 2. Look at everything else 3. Look at the lease again Measure transferability of a lease through the assignment or sublet clauses and the qualifications (criteria) for the new tenant. Consider the impact of: The obvious: The length of time left on the lease, requirement for Landlord s consent, etc. The not so obvious: Silent lease issues and consequences of not knowing where to look Onerous restrictions on the transferability of the lease can make it all but impossible to sell the business. Be on the lookout, for example: signage being limited to the original, named tenant an obligation per the use clause to operate only under the ABC trade name renewal rights that disappear if lease has been assigned 3

9 Questions to consider: When can a tenant assign? Landlord s consent required? o Criteria for Consent? Must landlord be reasonable? How has reasonable(ness) been defined? Is assigning party (original tenant) still liable for rent under the lease? 2. Assignment and Subletting 101 Assignment (defined): transfer of tenant s entire interest in the entire premises for balance of lease term; landlord and assignee have a direct relationship Sublease (defined): transfer of less than the entire premises or less than entire balance of lease term (even if the entire balance of the term less one day); subtenant has no direct relationship with landlord, only with tenant (sublandlord) Privity issues estate and contract-- the original tenant is still liable for lease obligations albeit secondarily. Surety concept assigning party remains liable to the landlord for performance and payment under the lease. 3. IT S THE LAW: TENANT S RIGHT TO ASSIGN OR SUBLET General rule: Absent a statute or express restriction in a lease, a tenant has an absolute right to assign or sublet. * *Caution here: A tenant may not sublet premises to be used in a manner which is injurious to the property or inconsistent with the terms of the original lease. Funk v. Funk, 633 P.2d 586, 588 (Idaho 1981). 4. IT S THE REALITY: LANDLORD S RESTRICTIONS ON ASSIGNMENTS OR SUBLEASES Traditional conflict in landlord s and tenant s points of view Bottom line: bargaining power determines the outcome 4

10 One must recognize realities of market conditions LANDLORDS FAVOR RESTRICTIONS Give me the leeway to market my property without competition from my own tenants. CONTROL TENANT MIX Owner, not tenant, is in the real estate business Tenant s point of view--in one word: FLEXIBILITY At very least: consent not be unreasonably withheld, delayed or conditioned Tenant: free alienability-- I ve invested, I ve created value. Or Hey Mr. Landlord, as long as you re getting your rent, don t bother me (Anonymous. Found on wall of Roman Forum Mall) Tenant s ability to assign/sublet essential to realizing the value of the business a. Landlord s Right to Restrict In some jurisdictions (such as New York) consent can be arbitrarily refused if lease does not provide for reasonableness standard. If the terms of the lease are clear and unambiguous, the provision will be enforced without a court inquiring as to the parties intent. One caveat: Restricting to whom the premises is leased and/or how the premises is used constitutes a restraint on the free alienation of land and will be strictly construed. Note Silent Lease Clauses: What if no time limit for landlord s consent provided for in Lease? For example, if lease provides that prior to landlord making a decision as to granting consent, tenant must submit a fully executed assignment agreement or sublease, simplify the approval process: Delete fully executed assignment requirement, providing a simple term sheet will suffice. Especially important if landlord has recapture rights. When Lease provides Landlord s consent cannot be unreasonably withheld : (1) Standards Landlord must act in an objectively reasonable commercial manner 5

11 What is reasonable will differ depending upon the type of property, commercial office building vs. multi-use complex vs. shopping center (2) Factors that may be weighed by landlord Proposed subtenant s or assignee s: Also, as to Tenant financial condition most objective reputation and character most subjective business experience Identity (already a tenant in the shopping center?) legality of use conflicts with exclusive or restrictive use provisions in other leases or OREA nature of the occupancy relevance to existing exclusives (shopping center)--suitability for tenant mix must be in good financial standing Tenant s lender must consent Tenant must not be in default The original tenant will remain liable even if it subleases Landlord may also NOTES Provide certain criteria deeming specific types of occupants or types use as unacceptable Disallow the tenant from increasing the number of occupants and/or regular visitors who frequent the premises Disallow the tenant from subleasing to other tenants of the Premises Disallow the tenant from presenting any party presently a tenant or with whom landlord is then negotiating Restrict the use of the leased space to the use that is specified in the lease agreement Provide that any increase in rent due to a sublease (profit) must be paid to the landlords Require tenant must take responsibility for landlord s expenses in connection with the assignment or sublet Most objective test: financial responsibility of the proposed assignee or subtenant: Proposed use: if same? if different? 6

12 Tenant mix in a shopping center interplay with exclusives Warmack case: holding it was reasonable to deny consent where the tenant mix is critical: Q: What constitutes unreasonableness --bad faith? Withholding consent so that the landlord may charge a higher rent than that contracted for with the original tenant b. Transfers by change in ownership If a landlord has the right to consent, the tenant should seek to have excluded, at the very least, assignments to affiliates; assignments in connection with mergers and consolidations; and assignments in connection with a sale of all or substantially all of the tenant s assets. Practice Pointer; The lease should impose no burdens at all (brokerage commissions, recapture rights, etc.) for affiliate transactions Merger--permitted assignment to affiliates /successors or in conjunction with sale of tenant s business especially if tenant operates in multiple locations generally held not to violate a simple no assignment clause today s modern leases, covers all bases c. Recapture A landlord has the authority to include a clause allowing it to recapture the space offered for assignment or sublease. This is anathema to the sale of the restaurant could help if tenant simply wanted to get out of lease (then a win/win) d. Profit If landlord participates, give broad definition to tenant s expenses Practice Pointer: Don t just net out general expenses, be very specific: Brokerage Legal Marketing Advertising Alterations Takeover 7

13 Free rent Cost of carrying space Transfer taxes Unamortized balance of tenant s original improvements to the space Make sure it s only excess rent that is shared, not any other consideration received from transferee in course of the sale Look out for unlimited expense reimbursements for landlord s consent (legal etc) 5. RELATED LEASE CLAUSES tenant s counsel must consider in negotiating exit strategies/representing a prospective buyer not so silent lease provisions Term-- Obtain a long term lease with options. A five year lease with three five year options gives tenant more flexibility esp. if business is not working out if there is only single asset liability, then try for as long an initial term as possible. Use clause/continuous operation try to insert specific approved up-front use changesminimize any elements of new use which would increase the burden on building services- -issues re existing exclusives if there is a change in use Practice Pointers: note interplay of go dark and continuous use add: right to close while restaurant biz is up for sale also during period new owners are making alterations modify clauses that require named tenant to be in actual occupancy avoid name specific or band specific limitations in use clause Try to be proactive negotiate upfront certain kinds of changes in use Trade fixtures permit financing--veto Landlord's Lien" language Alterations add non-structural changes permitted without landlord consent End of term--is tenant obligated to restore premises to original condition? That may be a very expensive proposition, esp. as to restaurant installations Liability parties bound Q: is assignor released on transfer? Hard to get, but possible if net worth of transferee meets certain criteria 8

14 Try to find specific conditions (substantial net worth of transferee, transferees paying additional security deposit, for example) that will release both the assignor and any lease guarantor Example of liability issue: assignee makes alterations that must be removed at end of term Pointer: try for a clause that says assignor not bound by voluntary acts of assignee/landlord OPTIONS-- make sure transferable esp. in the event of a sale Telecommunications rooftop rights Guaranties: -negotiate some limitations in lease guaranties - Good guy guarantee terminating after a certain number of years without a tenant default limited to a certain amount of rent, number of months rent or unamortized landlord costs also try for a release where there is a creditworthy successor tenant or guarantor Pointer: An unreleased assignor and guarantor might also want a right to obtain a new lease if the landlord terminates the lease and the unreleased assignor and guarantor performs the tenant s obligations Non-disturbance agreement: try to get it to run to named and any successor tenant--also try to get for a subtenant Final Pointer, If the landlord ever requests any accommodation or amendment related to any lease, try to use it as an opportunity to trim back any Assignment Restrictions in the lease. Should you wish to discuss any of the above or anything else of interest--feel free to call Jeff Margolis The Margolis Law Firm 11 East 44 th Street New York, NY (fax) jeff@newyorkleaselaw.com Thanks for attending the seminar, and Good Luck! 9