Navigating COVID-19: What you need to know about restaurant leases & legalities
On Wednesday, March 11, business was still ticking along as usual at the seven locations of Toronto-based casual brunch restaurant, Starving Artist. According to Brittany Jackson, who owns the franchise company and operates three locations with her husband, she didn’t have any idea what was coming until the end of the next day.
“As soon as the announcement was made on Friday to all schools and daycares, we knew it was only a matter of time before they were going to mandate us to shut down,” says Jackson. Her restaurants are still open, on a take-out only basis, but a total closure is anticipated soon. “At this point, we’re bleeding money by the day. But we’re going to see how it goes this week and then make a decision.”
Jackson is one of the thousands of small business owners across the country whose lives have been upended by the growing impact of COVID-19 on their personal lives and businesses. Pressures are mounting with staffing costs, supplier costs, utility bills, insurance payments and rent, and zero revenue from dine-in guests. She, and many others like her, are only beginning to make sense of the situation. At this moment, Jackson is waiting to hear back from her landlords. They’re going through their unique pressures as well, she acknowledges.
“Unfortunately, the small business owners are at the frontline of this,” she says. “Everything rests on our shoulders. Our staff are looking to us, our landlords are looking to us. We just hope that the government can help alleviate some of that pressure.”
With information changing rapidly and coming from various levels of government, it’s challenging for restaurant owners to know what to do to mitigate the damage from indefinite closures and protect their businesses. Here are some immediate actions that can be taken to prepare for a dialogue with your landlord.
How to engage with your landlord:
According to Brennan M. Carroll, a partner at the law firm BLG, the unique circumstances surrounding COVID-19 offers no historical context available in Canadian law jurisdictions. In these situations, a negotiated agreement between tenant and landlord is preferable to an adversarial process. For restaurant tenants, any new information or directives that are provided by the landlord verbally, especially regarding operations, should also be provided in writing.
Tenants should also keep notes on when their ability to operate in their full capacity are being affected by unexpected or uncontrollable events, such as childcare and homecare requirements (a common occurrence during a province-wide lockdown), public transit shut downs, and other incidents that might arise. While these events aren’t likely to lead to a lease termination, having them documented may come in handy in the future when it comes to negotiating a new arrangement, working with a government agency for financial assistance, or possible future litigation.
Understanding your lease:
According to Carroll, restaurant tenants should find their most recent copy of their lease to return to for reference as the situation develops. The lease should be signed by both parties, and any guarantors and indemnifiers of these leases should be brought up to date on the current state of operations.
Tenants should be particularly aware of these four specific provisions in their leases. These are:
The Force Majeure Clause
Deals with situations beyond the control of either landlord and tenant. Typically, this clause does not allow for termination of the agreement, but excuses performance of operations for the duration of the event (however, the tenant is usually obligated to continue rent payments).
The Quiet Possession Clause
Entitles the tenant to access the space without disruption from the landlord, other building tenants or third parties, as long as the tenant complies with the other lease obligations.
The Continuous Operating Covenant
A clause in which the tenant is obligated to continue operating their business from the premises. Since this covenant may be breached due to a government-mandated shut-down or partial shut-down (in which services are limited to take-out or delivery operations), the tenant should negotiate with the landlord to address the terms of temporary suspension of operations, rather than directly disputing with the landlord.
Compliance with Applicable Laws
It should be understood by both landlords and tenants that all parties intend on following the applicable laws and to confer in writing any differences between parties’ interpretations of the laws.
When to seek specific legal advice
- If the specific circumstances of a restaurant’s operation strays outside the lease or applicable law in a dispute.
- If your restaurant is in a shopping centre and your landlord closes the shopping centre and continues to seek rent from their tenants, while preventing access to the restaurant
- If it gets to the point where your restaurant is considering entering into bankruptcy or insolvency, especially if you’re operating in different jurisdictions throughout Canada.
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