Article Originally Posted on Restaurant-Hospitality.com
Lisa Jennings | Mar 27, 2020

A massive $2 trillion economic stimulus package designed to offer some relief for the millions of laid off workers and the nation’s small businesses was passed by the House of Representatives on Friday and sent to the President’s desk, where it will likely get his signature.

As passed earlier in the week in the Senate, the bill — dubbed the Coronavirus Aid, Relief and Economic Security, or CARES Act — includes a plan to send up to $1,200 in stimulus checks to lower and middle-income Americans to help them cover immediate bills. As of March 21, more than 3 million Americans had filed for unemployment claims, many of them restaurant workers.

A centerpiece of the bill is also designed to help restaurants struggling with the impact of forced dining room closures to prevent the spread of the virus.

Small and medium-sized businesses would be entitled to federal loans that could be forgiven — depending on whether workers remain on the payroll or are re-hired.

The bill would also extend unemployment eligibility to many workers who were previously not entitled to such benefits, including gig workers and independent contractors.

The CARES Act follows the Families First Coronavirus Response Act signed by the President earlier this month, which addresses sick and family leave mandates.

Here’s a look at how the CARES Act would impact restaurants, from various legal sources and the National Restaurant Association:

Small business loans: The bill includes a $349 billion program for “paycheck protection” loans to businesses with 500 or fewer workers. The loan amount is based on 250% of the borrower’s average monthly payroll cost (average payroll costs x 2.5) for the preceding year, and provisions for seasonal employers are included, up to $10 million. For example, an employer with an average monthly payroll of $900,000 would be eligible for a loan of $2.25 million.

Waived are collateral requirements and the “credit elsewhere” requirements. The loan is forgiven if the money is used for payroll costs, mortgage interest or rent/utilities. But the amount of forgiveness will be reduced if employers reduce their workforce compared to prior periods, or reduces salary/wages by more than 25% during the covered period between Feb. 15 through June 30.

However, if employers re-hire all employees laid off going back to Feb. 15, or increases previously reduced wages before June 20, the loan can be fully forgiven.

For restaurants and hotels, the 500-employee count is based on the number of workers at each physical location. So a restaurant franchisee or multiconcept group with 600 employees across five properties would still qualify.

These loans are fully guaranteed by the federal government through Dec. 31, 2020, and available through SBA-certified lenders. The deadline to apply is June 30, 2020. (NRA and law firm Fisher Phillips)

Tax benefits: The CARES Act provides a new “employee retention tax credit,” but the credit is not available to employers that take paycheck protection loans.

The credit offers employers a refundable tax credit for 50% of the wages paid during the COVID-19 crisis and applies to wages between March 13 and the end of the year.

Those eligible are employers whose operations were fully or partially suspended due to coronavirus shut-down order, or whose gross receipts declined by more than 50% compared to the same quarter the previous year.

The tax credit applies to the first $10,000 of compensation, including health benefits, paid to an eligible employee based on qualified wages. For employers with more than 100 full-time workers, “qualified wages” may include contributions to health insurance costs, but it excludes amounts for which the employer already received a tax credit. For those with fewer than 100 employees, all employee wages count, regardless of whether the business is open during the dine-in shut-down.

The Act also offers a payroll social security tax “holiday” for employers with immediate cash-flow issues. Deferred taxes must be paid over the next two years, and at least half by Dec. 31, 2021. (Fisher Phillips)

The bill also relaxes limitations on a company’s use of losses. Net Operating Losses, or NOL, are currently subject to a taxable-income limitation and they cannot be carried back to reduce income in a prior tax year. The bill allows an NOL arising in tax year beginning in 2018, 2019 or 2020 to be carried back five years. It also temporarily removes the taxable income limitation to allow an NOL to fully offset income. (Pillsbury Winthrop Shaw Pittman).

Unemployment Insurance: The legislation creates a temporary Pandemic Unemployment Assistance program that expands federal benefits to those not traditionally eligible, including the self-employed, independent contractors and those with a limited work history. Benefits are available for those who are unemployed, partially unemployed or unable to work. It also adds $600 per week in benefits, on top of benefits already available under federal or state programs, for four months. (Pillsbury).

Quality Improvement Property, or QIP fix: Restaurants will be able to write off costs associated with improving facilities with this retroactive amendment to the bonus depreciation rules. Sometimes called the “retail glitch,” industry groups, including the NRA, have been pushing for this correction to the 2017 Tax Act. (Pillsbury)

Contact Lisa Jennings at lisa.jennings@informa.com

March 31, 2020 – Hartman Simons & Wood

Faced with the unprecedented fall out from COVID-19, our real estate owners, landlords, tenants, lenders, borrowers and other clients are making real-time decisions based on the economic, governmental, public health and legal realities of the current situation.  The environment is ever-evolving.  In some instances, government authorities have mandated the closure of businesses.  More mandated closures may be forthcoming.  Office buildings are empty as employees work from home, malls are shuttered, and many retail tenants are not operating.   Tenants are deciding whether to pay next month’s rent, and many are already proactively requesting rent abatement from their landlords.  Landlords have ongoing expenses and must pay their lenders, who are also fielding requests for payment deferrals and loan extensions.  Nevertheless, mass evictions and foreclosures are not the preferred outcome (and evictions themselves have been put on hold by courts in many jurisdictions.)  To assist with the difficult decisions faced by our clients at this time, we wanted to provide some context for the current legal framework within which these negotiations will likely play out.

FORCE MAJEURE:

Force majeure, a once obscure legal doctrine that is Latin for “superior force”, is a hot topic.  Many commercial leases contain force majeure clauses which may or may not be mutual and may favor one party over the other. The typical force majeure clause excuses a party’s nonperformance if based on an “act of God” or an improbable, external, uncontrollable event preventing performance.[1]  Even if mutual, many force majeure clauses require a tenant to continue paying rent while excusing performance of other terms of the lease.  Yes, a tenant might be excused from operating, but a landlord may assert force majeure to excuse delivery obligations, co-tenancy provisions, exclusives, and the like.

Each situation is different, but for force majeure relief to be available, there must be a direct causal link between the unforeseen event and the nonperformance.  For example, force majeure is likely applicable where a business is unable to obtain supplies necessary to operate its business or complete construction, but not where the mere threat of the virus is causing a shut down.  Documenting and retaining any evidence demonstrating the causal link between COVID-19 and any inability to perform is important.  Thus, in the example above, the business should request and retain communications from its suppliers documenting the unavailability of supplies due to COVID-19.

In the commercial leasing context, courts typically enforce the lease agreement as written.  Most force majeure provisions do not directly address a pandemic or public health emergency, but many such clauses reference governmental action and include a catch-all provision such as “other matters outside the reasonable control of the party.”  While there is little case law in most jurisdictions regarding the interpretation of force majeure provisions, and some courts have been loath to excuse a party’s nonperformance where the event is not specifically listed in the force majeure provision, there may well be pressure on courts to reevaluate this position and construe force majeure clauses more broadly than prior decisions would suggest.

Finally on this point, landlords and tenants should be careful to comply with any notice requirements of a commercial lease when invoking a force majeure provision.  A party may not be able to excuse performance due to force majeure if it does not provide sufficient and timely notice.  Even if not expressly required by the lease, a party would be wise to give prompt notice of the force majeure event.  Going forward, for any new leases or lease amendments, we recommend including the following events in the force majeure provision:  “outbreak of disease, epidemic, pandemic, or other declaration of public health emergency and quarantine restrictions.”

OTHER COMMERCIAL LEASE PROVISIONS:

Other lease provisions have also been recent topics of discussion amongst our attorneys.  In the case of a government-mandated closure, the parties must comply with the law, and a lease generally requires the tenant do so.  Accordingly, a government mandate may excuse or postpone a landlord’s meeting of a delivery date or tenant’s performance under a continuous operation covenant or a requirement to open for business.

Many leases set forth a covenant of tenant’s quiet enjoyment of the leased premises.  Quiet enjoyment typically means the undisturbed right to enjoy the premises free of hostile claimants.  Some tenants may argue that COVID-19 and its effects have interfered with their right quiet enjoyment rights.  Even so, many commercial leases do not provide an unfettered right of quiet enjoyment; rather a tenant may only excuse performance if the landlord or landlord’s agents interfere with a tenant’s right of quiet enjoyment, in which case the general effects of COVID-19 have nothing to do with landlord.

There are casualty clauses in most commercial leases, and many tenants may seek relief under these provisions. These clauses, however, typically address situations where the leased premises is damaged due to fire or natural disaster and contemplate a period of time when it is uninhabitable, but being restored.  Insurance is often involved.  The effects of the COVID-19 pandemic may inhibit the productive use of leased premises, but they have not damaged most leased premises, there will be no period of restoration, and many commercial property and business insurance policies do not cover the impacts of  a disease or virus outbreak (see below).

Tenants may also contend that the effects of COVID-19, including government-mandated closures, constitute an event of eminent domain that permits the abatement of rent or altogether termination of the lease.  Eminent domain, however, typically involves a government “taking” of property for a public purpose in exchange for which just and adequate compensation is paid.  Here, it may be a stretch to argue that a mandated closure constitutes a public appropriation of private property.  Indeed, there are no reports of governmental payments equivalent to just and adequate compensation to landlords who shutter office buildings, malls, shopping centers, etc.

Under the typical lease, rent is due without notice, demand or setoff and, legally, is considered an independent covenant.  As a result, the tenant has an ongoing obligation to pay rent (subject to the potential legal defenses discussed below).  A review of the pertinent lease terms (including the notice requirements and dates for performance) is necessary, and communication between the parties on these issues is critical.

LEGAL DOCTRINES POTENTIALLY EXCUSING PERFORMANCE:
 

There are a number of legal doctrines that a party may attempt to invoke to excuse non-performance of a contractual obligation – frustration of purpose, commercial impracticability, and impossibility.  For example, a bar in a jurisdiction that has mandated closures of drinking establishments may invoke the doctrine of frustration of purpose because the basic assumption by landlord and tenant (when entering into the lease) was that the sale of alcohol would be legal.  Impossibility concerns an unforeseen event that prevents a party from performing its contractual obligations such as weather conditions, natural disaster and governmental law making performance illegal. The less common doctrine of commercial impracticability excuses performance if it has become exceptionally and unforeseeably more difficult.  The existence and interpretation of these interrelated doctrines varies by jurisdiction.  The unavailability of financing, price increases and general economic conditions would most likely not provide a basis for any of these doctrines.  Such risks are considered foreseeable, and the contract allocates such risk between the parties as they have agreed. Typically, when and if these other legal doctrines apply, remaining performance under the contract would be excused on both sides and the lease would terminate.

BUSINESS INTERRUPTION INSURANCE:

Business interruption insurance typically provides coverage for loss of income due to interruption in operations caused by a casualty event such as a fire or natural disaster.  Since the SARS epidemic, however, insurers have routinely excluded viral or bacterial outbreaks from coverage.  Even so, it is worthwhile to review your commercial insurance policies for coverage that may potentially be available.  For example, “civil authority” provisions may provide coverage for losses resulting from a government mandate prohibiting access to a business location.  To preserve their rights, parties should consider filing an insurance claim in case the insurance companies are later required to provide coverage because COVID-19 is deemed to be “physical damage.”  Preserving such rights must be weighed against the potential increased premium for future coverage based on the filing of the claim.

MATERIAL ADVERSE CHANGE PROVISIONS IN COMMERCIAL PURCHASE AND SALE AGREEMENTS:

A “material adverse change” provision is typically included in a purchase and sale agreement for the buyer’s benefit and in loan agreements for the lender’s benefit.  The definition of a material adverse change will be unique to each contract and may even be determined by the party benefitting from the provision. If there is a material adverse change, the buyer may refuse to close on the sale of the property, and the lender may be able to declare a default, accelerate the loan payments, foreclose on any collateral and/or refuse to fund the loan or to make advances under the loan documents.

With regard to purchase agreements, the inability of the buyer to obtain funding will not typically qualify as a material adverse change, and the buyer most likely must perform unless the purchase agreement is expressly contingent on the buyer’s ability to obtain financing.  Property buyers may not be successful in excusing their nonperformance based on a contractual limitation to those material adverse changes affecting the property itself.  If the purchase agreement does not contain a “time of the essence” provision, however, the buyer may have more leeway in delaying the closing.  In practice, many parties are navigating this crisis by pragmatically negotiating concessions, and we are able to provide assistance with drafting any modifications to contracts necessitated by COVID-19.  Even so, many lenders are refusing to fund commercial real estate loans at this time, and, as a result, buyers are simply unable to close.

PRACTICAL CONSIDERATIONS:

Given the economic realities of the crisis, many landlords and lenders are providing payment concessions to tenants and borrowers.  This may be in the form or deferral, forbearance, abatement, and/or application of a security deposit.  Such concessions could be made, for example, on a month-by-month basis with deferred repayment over a period at a later date.  Some landlords and tenants may choose to apply tenant security deposits.  The prompt application of a security deposit often benefits a landlord if a tenant ultimately files for bankruptcy.  All parties are wise to carefully document these new terms so that there is clarity and certainty.  Further, in making concessions, landlords must ensure that any notice to and approvals from any lenders are obtained as required by any loan documents.

Another issue is whether the landlord can pass through any costs it has incurred in connection with COVID-19 to its tenants.  For example, a landlord that has ordered a “deep clean” of the premises and has increased maintenance to combat the spread of germs, and has incurred additional expenses as a result, may be able to pass that along to tenants as part of Common Area Maintenance (“CAM”) or Direct Operating Expenses (“DOE”).

We have also been asked whether a landlord or business is obligated to inform its tenants, employees, and customers if they have been made aware that a person who has tested positive for COVID-19 has been on the premises, lives in the building, or has been at the office.  Our typical response is that notice should be given, but the identity of the positive-tested individual should never be disclosed and the landlord or business owner would be wise to inform of their efforts to sanitize and maintain the premises and retard the spread of COVID-19.  We do not foresee liability unless a property owner or business is careless in its maintenance of the premises or disregards the well-being of its employees, customers, or tenants.

Finally, if the situation requires litigation, note that many courts have declared a state of emergency and are continuing or postponing civil cases, including evictions.  Some jurisdictions are postponing foreclosures or evictions altogether.  There, these remedies may simply be unavailable for the duration of the COVID-19 crisis.

CONCLUSION

The specific words used in each contract, the specific facts of each case, the lack of development of this area of law, the potential variability in judicial interpretation, the potential for governmental intervention, and the evolving scope and impact of the COVID-19 pandemic have prompted great uncertainty for our real estate owners, landlords, tenants, lenders, borrowers and other clients.  Please contact us if we can provide assistance with any issue you may be facing.  We would welcome the opportunity to navigate these uncharted waters with you.  We hope this update finds you and your family healthy.

Article Originally Posted on NRN.com

Mar 25, 2020 Joanna Fantozzi |

Lawyers weigh in on whether restaurants will be able to cash in on business interruption insurance during the COVID-19 panic.

As restaurants have shut down across the United States in response to city and statewide coronavirus-related lockdown mandates, business owners are wondering if this disaster is covered under their business insurance protection plans. And while there is likely no pandemic provision (or exception) in any restaurant’s insurance coverage, business owners are hoping for relief in the global health emergency that could result in economic catastrophe.

One restaurant, Oceana Grill in New Orleans, along with its parent company, Cajun Conti, has filed a lawsuit seeking a judgment for its insurer to cover losses incurred while most restaurants are closed down in Louisiana. The restaurant is seeking relief based on the fact that their insurance company covers “direct physical loss” from outside forces including “the event of the businesses closure by order of Civil Authority.”

While Oceana Grill is one of the first restaurants to file a lawsuit against its insurance company in an attempt to reclaim some of the losses incurred during the pandemic, it will likely not be the last.

Below, lawyers answer insurance-related questions that restaurant owners and franchisees might have about their insurance claims related to the COVID-19 pandemic.

What type of insurance could possibly cover loss of business due to COVID-19?

The key type of insurance to be on the lookout for, lawyers say, is business interruption insurance, also known as income interruption insurance. As the name suggests, business interruption insurance compensates your business for interruptions that force you to close your doors temporarily. Usually covered under this claim is fires, weather disasters and other unexpected phenomena. Not usually listed in these insurance plans? Pandemics.

“I assure you that the next iteration of insurance contracts will have worldwide pandemics as an exclusion, but right now many of them don’t,” said Robert Zarco, a business litigation attorney that represents franchisees of more than 300 restaurant companies. “We have developed substantial arguments that reflect that there is a strong viable chance of getting recovery considering the language of these policies.”

What are the requirements of a business interruption claim?

The catch with using business interruption insurance is that most of these types of insurance plans will require physical property loss or damage in order to cash in on the claim. However, in the case of the COVID-19 pandemic, in many circumstances, even though a restaurant property might not be physically damaged from a fire or flood or other natural disaster, it could still be covered under physical loss.

“I think they can meet this direct physical loss requirement in certain circumstances if they are forced to shut down and have no access to their restaurant,” Jonathan Sokol, a business litigation attorney with Greenberg Glusker Fields Claman and Machtinger law firm said.

“It’s different if they are still operating by serving takeout because then you’re not actually shut down, you’re making less money.”

What should I be looking for in my insurance coverage?

There are certain keywords and phrases to be on the lookout for in the language of your insurance policy. These are the types of insurance coverage that restaurant owners should be asking their insurance brokers and lawyers about.

Crisis Management Coverage covers times of crisis that might include a violent act like a break-in or armed robbery, as well as a restaurant being shut down for food contamination or communicable disease, said Jason Upton, president of the Upton Group, an insurance agency specializing in restaurant and delivery insurance.

Contingent Business Interruption Insurance is a specific type of business interruption insurance that covers indirect loss caused by “the inability of a supplier to perform his/her obligations with the insured (business owner) due to no fault of his own,” Robert Zarco’s law firm said. A government lockdown of an entire city or state could be covered under this type of insurance.

Civil Authority Coverage is when your business is interrupted by federal, state or city government mandate.

Impossibility of Performance and Frustration of Purpose is, just like it sounds, when a business cannot “perform a contractual obligation” through no fault of their own that they could not have foreseen, Zarco said.

What are the odds that my insurance company will cover coronavirus?

Unfortunately, because no one — not even insurance companies – could have predicted the scale of a global pandemic, there is likely no specific language that pertains to COVID-19 in business insurance policies.

Therefore, there is a lot of creative leeway for both insurance companies to claim exclusions, but also for business attorneys to find loopholes in that vague language for restaurants to take advantage.

“I think that 10-20% of policies will cover these restaurants as clearly written,” Zarco said. “But by using the arguments that we’re making? I would say that number could go up to 60-70%. This is going to create huge legal precedence.”

Sokol seemed less optimistic, saying that “insurance companies are going to dig their heels in,” claiming that their insurance policies are not meant to cover global health incidents like this, and that the government should be compensating businesses instead.

What is a virus exclusion?

Although most insurance policies won’t specifically mention pandemics, they might have a virus exclusion policy.

“When we had the SARS epidemic over a decade ago, the insurance industry became concerned with viruses,” Sokol said. “You sometimes see these referred to as pathogenic organism exclusions, which includes any bacteria, yeast, mildew and viruses.”

Even though virus exclusions are common, Sokol said that “depending on the wording” of the contract, there might easily be a way around these exceptions.

Is my restaurant covered under the “Act of God” defense?

It is uncertain whether or not the “Act of God” defense, also known as a “Force Majeure,” would be applicable in this case. An Act of God usually covers unforeseeable natural phenomena like floods, fires, earthquakes and other natural disasters, as well as businesses that were affected in the aftermath of 9/11.

“The punitive measures imposed upon us all include the required closure of businesses, imposed travel bans, etc.,” Zarco said.  “Clearly, none of this is within the control, fault, or negligence of the businesses gravely affected, but instead a government imposition of its civil authority for the benefit of the communities at large.”

But the Act of God clause is more complicated than it may seem.

“It is typically defined as a natural disaster and I don’t think a virus would be covered under that,” Sokol said, claiming that there would be exceptions if a restaurant owner contracted the virus and/or did not recover.

Are certain types of restaurants more likely to be covered than others?

America’s restaurants need our help!

The coronavirus poses a significant threat to the future of an industry that employs more than 15 million Americans. That’s why a coalition of restaurants is asking for help.

Tuesday 3/24 restaurants across the country are asking for your support by ordering takeout during the #thegreatamericantakeout

Order delivery or takeout from your favorite restaurant and channel your inner ‘foodie’ by sharing your experience/meal with a photo or video across social media with the hashtag #thegreatamericantakeout