negotiating and drafting restaurant...
TRANSCRIPT
Negotiating and Drafting Restaurant Leases Tenant Improvements, Operational Issues, Franchises, Good Guy Guaranties and More
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THURSDAY, APRIL 5, 2018
Presenting a live 90-minute webinar with interactive Q&A
Jeffrey A. Margolis, Founder, Margolis Law Firm, New York
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-more-
and-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
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 free-
rent 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 jam-
packed 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
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.
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 re-
rental, 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-the-
business-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:
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
1
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 44TH STREET
NEW YORK, NEW YORK 10017
(212) 490-0900
FAX (212) 490-0700
www.margolislawfirm.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
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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.
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
3
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
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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:
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
Also, as to Tenant
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
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
NOTES
Most objective test: financial responsibility of the proposed assignee or subtenant:
Proposed use: if same? if different?
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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 changes-
minimize 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
The Savvy Restauranteur, presented by Jeffrey A. Margolis, Esq., New York City
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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 44th
Street
New York, NY 10017
212-490-0900
212-490-0700 (fax)
www.margolislawfirm.com
Thanks for attending the seminar, and Good Luck!