Post-COVID Optimism for Hospitality

OPTIMISM ABOUNDS AS INDUSTRY REACTS TO GOOD NEWS AND DEALS PICK UP STEAM

This has been a good couple of weeks.  Simple words rarely uttered in these spine-tingling times as we continue to get clobbered by Covid and are hanging on by our tweezers. Winter is in sight, outdoor dining is dwindling, the infection rate is rising and indoor dining is on the chopping block.  So, who could blame us for being a little depressed and downtrodden these past months?

And then as hope was fading, in rapid succession we were hit with the rat-a-tat of Biden, viable vaccines, 1932-A court win and an aroused congress talking seriously about another round of PPP funds. Each of these developments alone are important bridges back to Pre-Pan but together they practically take us home and allow us to start planning for next year. Optimism, fueled by hope, is here and it’s legit and not just some self-manufactured coping mechanism. The end is far from nigh for hospitality so let’s dig in a little to the positivity.

We have all been waiting for a vaccine to pass the test and now it has with flying colors.  It’s the spine of the rebuild and it’s here and there are three of them with more on the way and they all seem to be effective and safe.  Distribution plans are now being formulated and we can expect enough vaccinations to be available by June or July according to The Fauch and other experts.

Congress seems to have stirred and opened their eyes to the urgency of more cash money needed by the industry as all of a sudden, everyone’s talking about more PPP.  Cryin’ Mitch and Sideparts are still being miserly but the number 300 Billion for additional PPP funds is getting thrown around. Although you may recall that the initial 350 Billion in round 1 went dry in 2 weeks and then they added more and a final total of 525 Billion was eventually distributed to small businesses so 300 Billion might be short but we will take it as a start.

Lastly, a Federal Judge ruled last week that the commercial liability law, 1932-A, that allows guarantors on leases to return the keys to Landy without personal liability, was perfectly constitutional.  Affirming that if you have to close up shop due to Covid and walk away from your lease, Landy can’t take you to the cleaners.

All of this is important, uplifting news and while it’s not time for celebration quite yet, we all deserve to take five and soak up and savor the good vibrations.  Post-Pan is in sight, hope is in the air and optimism abounds. 

Here at the firm, we have seen a big uptick in new deals.  Leases, management agreements, liquor licenses are all heating up.  Developers are getting aggressive, Landys are making rational rent deals, investors are looking to get into the action again and, across the board, the industry is coming back.  We know that the next six months will see tough times with more people getting sick and closures and all that winter grief, but then spring will arrive and, with it, a new era for hospitality in NYC.

So, let’s talk about some of the new developments….

1932-A Decision Analysis by Maya Petrocelli, Chair, Litigation Group

Finally, the decision we have all waited months for has come – 1932-A is constitutional! In Melendez, et al. v. The City of New York, et al., the Honorable Judge Ronnie Abrams (Federal District Judge for the Southern District of New York) not only upheld 1932-A, but also upheld both the residential and commercial tenant anti-harassment laws. A win across the board for New York City tenants and guarantors.

In a nutshell Judge Abrams ruled that (i) the “Guaranty Law” (the law limiting the ability of commercial landlords to enforce a personal guaranty) does not violate the Contract Clause of the U.S. Constitution (“no State shall. . .pass any…Law impairing the Obligation of Contracts”); (ii) the Harassment Laws (commercial and residential laws prohibiting landlords from harassing tenants out of their lawfully-occupied properties) do not violate free speech by prohibiting landlords from sending to their tenants “routine rent demand notices and discussions about the consequences flowing from unpaid rent and efforts to collect rent”; and (iii) the Harassment Laws do not violate due process.  Judge Abrams made clear that her decision was based on deference to the good-faith efforts of policymakers to regulate in the interest of public good.

While Judge Abrams’ ruling that the Guaranty Law is constitutional is positive news and is forward progress for guarantors hit hard by COVID-19, we caution that we are not yet out of the woods. This decision will likely be appealed to the Second Circuit and, from there, potentially to the Supreme Court of the United States. 

We also note that, while Judge Abrams’ decision addressed the constitutionality of the New York State Harassment Laws and the Guaranty Law, it did not address how these laws are to be applied in day to day situations. Given the lack of guidance on how to apply such laws, we have no doubt that landlords will continue to play games and do everything they can to keep commercial tenants and guarantors on the hook for as much money as possible.

These gray areas include: (i) whether 1932-A protects a guarantor where rent or other amounts were owed prior to March 7, 2020; (ii) whether 1932-A permits a tenant to surrender the premises and, in such a situation, protects a guarantor from liability for liquidated damages, or for rent for a certain portion of the unexpired term, pursuant to the terms of the lease; and (iii) whether a guarantor is able to surrender the premises pursuant to a Good Guy clause without paying the good guy amounts if the good guy notice period extends past March 31, 2021.  To date, there has only been one state court decision interpreting the parameters of 1932-A so the courts’ interpretation of the law is still evolving.

However, one thing is clear: If you are interested in breaking your lease, surrendering your premises, or triggering your Good Guy Guaranty clause, please give us a call to discuss the best course of action to lead to the best result.

So how does this affect you right now?

Before when we would bring up 1932-A, Landy lawyers would scoff and ignore it as a threat based on, quite frankly, all of our expectations that there was a decent chance that the law would be struck down by the federal court.   But now, 1932-A is no longer an empty threat/empty leverage and Landy lawyers won’t be able to treat it as such.  At this point even they will have to acknowledge (either outwardly or just internally with their clients) that this is a problem for them.

Clients can use this to their advantage in many ways.  For clients who are looking to leave, it still makes sense to enter into a surrender and release agreement.   As one client put it, you are buying finality – you won’t have to follow the appeals and worry about this down the line and instead can focus on new business ventures.  However, the cost of doing so has now been greatly reduced – with this decision as leverage, landlords are more likely to accept a significantly lesser amount in exchange for a surrender and release agreement.  The best way to start that conversation is to send a 1932-A notice or a good guy notice, depending on the circumstances.

For clients who are looking to stay, you can threaten to leave under the protection of 1932-A.  Landy can either negotiate in good faith to share the burden of the pandemic with tenants until next summer and enter into a substantive and fair abatement of rent/additional rent and then post-pandemic resume normal rent, or face an empty space which will remain empty for months and can only be rented at a reduced value.

Here’s our man in LA, Adam Weisblatt, owner of Found Oyster, that was recently named as one of Esquire’s best restaurants of 2020.  Congratulations to Adam!

LA Report by Adam Weisblatt

Well, damn…

Just a few weeks ago, it felt like we were on the right path. Outdoor dining would give us a fighters chance through LA’s mild winter, and plenty of people were actually making money.  The addition of 25% capacity to our new outdoor patios was around the corner.  Then – everything went sideways. With the closure of all outdoor dining, no indoor dining in sight, and a return to Hail Mary style to-go/delivery operations, LA is looking at a very sad holiday season for restaurants.  

As if it wasn’t bad enough, the city and county officials continue to show their complete disconnect from reality.  One member of the LA Board of Supervisors that voted to uphold the data-less Health Dept decision to shut us down, was discovered to have dined outside in Santa Monica just hours after determining that outdoor dining was too dangerous to continue.  LA county then announced a grant program of up to $30k for restaurants that were forced to cease outdoor operations.  However two small caveats applied – restaurants that received any help from the CARES Act were excluded, as were any restaurants within the CITY of Los Angeles.  

The restaurant community has been particularly outspoken this time around about the shutdown but no support has been offered. Operators find themselves with nobody to turn to but our own selves and what is still a tight knit community.  Most of us are down 80%+ from where we were less than two weeks ago, but what else can you do but hold on?

The lone glimmer of optimism is based on permanent approval of outdoor dining and parklets, reduced red tape, and a more supportive city.  Those changes, however, remain to be seen and most of us are cautiously optimistic at best. 

It’s 81 degrees here and sunny.  A light breeze, and the air even smells clean.  The fires have mostly passed for the season, and this may be the best time of year to be a local.  For restaurants, it’s a waiting game with no certain outcome.  The weather apparently won’t save us, but hopefully we’ll at least be given the chance to save ourselves.  

Love from LA,

AW

R.I.P – The Jazz Standard.  One of the best jazz clubs in the city.  A great room, with excellent acoustics and always solid players. Also the site of my first date with Lauren 12 years ago. It will be missed.

As Jerry and the boys like to say: The future’s here, we are it, we are on our own.