By Jeffrey P. Kapp, ShareholderThis article was originally published in the April 23, 2021 edition of the Daily Journal of Commerce Oregon.
The impact of the COVID-19 pandemic upon the food and beverage industry has been well documented and is readily apparent. According to the National Restaurant Association, total restaurant sales for calendar year 2020 came in approximately $240 billion below the projections and, as of December 1, 2020, more than 110,000 eating and drinking establishments closed either temporarily or for good. In addition to being important economic drivers, restaurants also have become an integral part of American social life. As such, it comes as no surprise that the Small Business Administration has recently rolled out a multi-billion dollar “Restaurant Revitalization Fund” to help the sector get back on its feet.
Restaurant tenants and landlords have now largely adjusted to the challenges presented by the COVID pandemic, making on-the-fly adjustments to existing lease agreements. As we race towards mass vaccination and (hopefully) reopening of the economy, we might ask: What, if any, lingering impact will the pandemic have on the restaurant industry and the restaurant leases in particular? What demands will changing business models and tenant needs place upon owners and space designers in the post-pandemic?
Here’s a look at five early trends in the emerging post-COVID marketplace, and some thoughts on their legal and business implications:
1. Drive Throughs. According to Matt Sichel, a Senior Director at NAI Elliott in Portland, drive-through tenants generally have fared well and in the Portland metropolitan market there is strong demand for leased space with drive-through capabilities. This is not surprising – long drive-through lines are now a common sight. Those long lines do, however, present a challenge for landlords trying to take advantage of this trend. Even restaurant chains with expertise in handling heavy drive-through volume have, at times, faced issues – blocked drive lanes, blocked parking spots, and lines spilling into surrounding streets. In a multi-tenant shopping center, these traffic flow issues can impede access to, and parking for, the surrounding tenants. The issue may need to be addressed, not just from a design angle, but also from a legal angle by building rules and obligations into leases and shopping center master declarations to require drive-through restaurants to mitigate the impact of their lines, and granting landlords certain rights to address recurring issues. A robust mitigation plan will also provide assurances to prospective tenants of those surrounding spaces, who may be wary of leasing space near drive-through tenants.
2. Curbside and Third-Party Delivery Service. Restaurant tenants took the effort to add curbside and third-party delivery service capabilities during the pandemic, and they certainly are not going to remove these additional “to go” service options from their arsenal going forward. Proximity of parking spaces to their premises’ doors is of increased importance to facilitate these services. From a design perspective, ensuring that retail projects have sufficient dedicated parking for such curbside/delivery service traffic will minimize congestion from restaurants staff running orders to cars. From a contractual standpoint, landlords may end up facing more pressure than before to grant tenant-specific dedicated parking to tenants who have not historically received such rights.
3. Outdoor Seating. Despite the new emphasis on take-out as a source of revenue, many restaurant formats still depend upon on-site, in-person dining experiences. According to Sichel at NAI Elliott, in addition to an increase in demand for outdoor seating areas for tenant use, tented areas are probably going to be a permanent feature at retail establishments for the foreseeable future. The grant of exclusive, and non-exclusive, rights to use outdoor areas at shopping centers raise certain practical issues that should be addressed in new leases. If a landlord wishes to provide a single mass outdoor seating area, available to all restaurant tenants for use by their customers, then the restaurant tenants’ leases may need to incorporate concepts usually found in mall “food court” leases. Increased ground rubbish, more frequent common area trash bin emptying near the eating area, sufficient supply of tables and chairs, and daily cleaning and securing (at night) of such tables and chairs are all responsibilities that need allocating. The restaurant tenants likely should bear either the main cost, or the actual task, of handling these issues. As for tented eating areas used by individual tenants – these are often placed in parking spaces, which can render certain challenged parking situations even more difficult (not to mention any questions about zoning code requirements that may arise).
4. Changes in Space Needs. It has been written that, on average, around 60 percent of a restaurant’s leased area is typically devoted to dining spaces. That rule of thumb percentage may no longer hold, given the pressure from demand for outdoor seating options and the increased emphasis on take-out discussed above. Additionally, the line between “indoor” and “outdoor” is being further blurred, as tenants are increasingly including amenities like roll-up doors in their proposed build-outs to increase outdoor eating capacity. Lease restrictions on permitted “outdoor” activities in project common areas may increasingly need to affect activities inside tenants’ spaces too, as the line between inside and outside of leased space begins to blur.
5. Dealing with Future Shutdowns. For many small restaurant tenants, the obligation to pay rent and costs is backstopped by a personal guaranty from the owners; a failed store means not only the lost investment in the project, but also possibly being personally sued for the landlord's lost rent. As a result, more tenants are requesting, and receiving, rent abatement provisions in their leases to address future shutdowns affecting on-site dining. Currently, these abatements are structured as proportionate rent reductions based upon occupancy reductions. If trends shift toward more take-out-based revenue, perhaps other solutions will arise, such as temporary “percentage rent” structures. Regardless, tenants are now less willing to shoulder shutdown risks alone.
Jeff focuses his practice on transactional business law with special expertise in complex commercial real estate and finance transactions. Contact him at firstname.lastname@example.org or (503) 598-7070.