The coronavirus pandemic has upended the U.S. economy, forcing businesses to close across the country. And restaurants have been extremely hard hit.
Earlier in the year, nonessential businesses were forced to shutter in an effort to curb the spread of the outbreak, and while some food establishments were able to pivot to takeout and delivery only, others were unable to thrive under those circumstances. This especially held true for higher-end restaurants -- those that relied on alcohol purchases and hefty markups for revenue.
At this point, restaurants have largely been granted permission to reopen, albeit at limited capacity. And that, too, is causing a revenue crunch.
All told, it's estimated that close to 20,000 restaurants have closed on a permanent basis in the course of the pandemic. And without additional aid, many more risk a similar fate.
As a landlord who rents space to restaurants, that puts you in a difficult position with regard to tenants who simply can't pay. The question is: Should you allow restaurant tenants to break their leases and deal with near-term vacancies? Or should you attempt to hold them to their lease agreements and get however much money you can?
A tough call
As a landlord with restaurant tenants, you may be better off getting some money rather than canceling a lease early and risking an extended vacancy period. But from both a moral and financial perspective, it could pay to let restaurant tenants off the hook if they claim they can't pay and ask to break their leases so they can minimize expenses and look at downsizing or moving to more economical locations.
Say you have a tenant whose business is truly struggling with eight months left on a lease. That tenant may only be in a position to pay you 10% or 20% of its rent for the next eight months. If you agree to terminate that lease, you may find that you're stuck with a vacancy for four months. But if you're able to find a tenant at that point that pays its rent in full, you'll ultimately come out ahead. Not only that, but you'll buy yourself a degree of goodwill, and as a commercial landlord, it certainly never hurts to build a reputation as someone who works with tenants rather than threatens legal action the second things go sour.
Of course, there may be another option: Negotiate existing lease terms with restaurants. If a tenant can't pay 100% of its rent, settle for 50%, at least in the near term. Unfortunately, it may be quite some time until restaurant revenue returns to its pre-coronavirus state, so you may need to hang tight until the greater economic situation improves. But if you work with your restaurant tenants during this rough patch and those same tenants enjoy a surge in business once the pandemic ends, they may be more than willing to stay on board as tenants and pay a reasonable amount of rent on an ongoing basis once things normalize.
In fact, that's another tactic it could pay to try out: Give restaurant tenants a break on their rent now on the condition that once revenue picks up, they catch up on missed payments. It's a risk on your part, because some businesses will eventually close their doors before the pandemic wraps up. But again, it could be a better bet than terminating leases and dealing with vacancies, or forcing tenants to adhere to leases they're in no position to cover.