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Landmark legal decision for restaurant landlords and tenants

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Recent lawsuits and decisions set new precedents for restaurants struggling in the wake of the pandemic, reports Amelia Levin

A series of recent decisions will set the stage for restaurants and restaurant workers to claim more power in areas of real estate, employment and funding.

For restaurants owners, a case in New Jersey could help set the stage for them to push back against landlords during tough times. In New Jersey this summer, a state superior court judge denied a landlord’s motion challenging a local restaurant that had filed suit for an eviction as a result of stopped rent payments during the pandemic lockdowns.

In October 2020, the Office Tavern & Grill in Ridgewood was sued for eviction by its landlord because it had stopped paying rent when forced to close its indoor dining due to New Jersey Governor Phil Murphy’s Covid-19 Executive Orders. The Office Tavern’s owner countersued its landlord alleging, among other things, that its rent should be excused because the Executive Orders made it impossible to have indoor dining, as the lease specified. The landlord asked for the case to be dismissed. That motion was overturned.

Far-reaching impacts

So, what does this all mean? Attorney Bob Kasolas, of New Jersey-based Brach Eichler, says the court’s decision could have far-reaching impacts on the rights of restaurant operators affected by the State’s Covid-19 restrictions.

The decision confirms the viability of restaurants’ claims that they may not be required to pay rent when there is an “impossibility of performance,” an “impracticality of performance” or “frustration of purpose” between two parties in a lease.

“When a landlord and tenant enter a lease, both have specific assumptions,” Kasolas says. “If something happens that is completely unforeseeable and totally undermines the purpose of the lease for both sides, then there is an ‘impossibility’ or ‘impractically of importance’ of the lease that negates it because the restaurant cannot fulfill its specific purpose of providing dining for guests.” In this case Executive Orders causing the shuttering of any restaurant or foodservice operation — whether stand-alone or in a mall — prevents the business from carrying out its agreed-upon business operations, thereby rendering the lease temporarily illegal.

A big win

While the judge in the Office Tavern & Grill case did not officially decide the issue, the rejection of the landlord’s challenge presents an opportunity for restaurants in the future to claim more rights during periods of unforeseen closures or other events that might cause the business to cease operations.

“This is a big win for restaurants because now tenants can say, ‘I don’t owe you any rent – maybe tax and insurance, but not rent because the landlord is technically not allowed to lease the property if they can’t conduct business,” Kasolas says. “This will cause landlords to think twice before they enforce rent payments in these circumstances in the future.”

Restaurants and other foodservice businesses that have a “force major” provision in their lease, however, might not be able to harness this power. These provisions say that if there is an unforeseen disaster, such as a natural disaster or other that causes the business to cease operations, the business still must pay rent. It’s in restaurant owners’ best interest, therefore, to avoid or push back on leases with these clauses, or at least to agree to a lease with more specific language about under what circumstances they will have to pay rent or not pay rent.

Restaurant owners “should not agree to sign any lease that says if you get shut down for an extraordinary long time, that you will still have to pay rent.” Sounds obvious, but the pandemic has pushed restaurant owners to take a closer review of the language in their leases that they sign in the future. Fortunately, Kasolas says, “For the most part, I have seen landlords be reasonable when restaurants had to shut down during the pandemic.” A little due diligence moving forward, especially if there are any pandemic-related closures in the future, is encouraged.

Amelia Levin