Phase 4:
Illinois Cautiously Resumes Indoor Dining
and
Legal Considerations for Leases and Joint Venture Agreements in a Post-COVID World
Background:
As of June 26, Illinois has moved into Phase 4 of the “Restore Illinois” Plan. During Phase 4, restaurants are allowed to open for indoor dining, but must comply with new State of Illinois as well as City of Chicago health guidelines. The State and City guidelines, while generally coterminous, do have subtle differences as footnoted below.
- Capacity: Indoor dining in the City of Chicago is limited to the lesser of (i) twenty-five percent (25%) of restaurant capacity or (ii) fifty (50) people, whichever is fewer[1];
- Tables: No more than ten (10) people are allowed to dine at the same table;
- Contactless Payment: Contactless payment is encouraged to minimize interaction between staff and customers;
- Table Spacing: Tables must be spaced six (6) feet apart in seated areas, and bar seating must be spaced by six (6) feet as well;
- Booths: For booth seating, employers may use consecutive booths to serve patrons of unrelated parties only if the employer installs an impermeable barrier with a height of six (6) ft or greater from the floor between booths. Use of plexiglass is a best practice;
- Buffets: Buffets and self-service food stations (e.g. hot and cold bars, bulk items, baked goods) are permitted;[2]
For the full list of the State of Illinois guidelines, please see here, and for the City of Chicago guidelines, please see here.
Analysis:
The resumption of indoor dining has been viewed as essential to the industry’s hope of surviving the acute economic crisis precipitated by COVID-19. As of May, the Illinois Restaurant Association estimated that restaurant sales were down eighty percent (80%), and that nearly fifty percent (50%) of Chicago’s 171,000 food service employees had been laid off. The Federal Paycheck Protection Program (PPP) provided temporary relief for a number of operators who received such federal funds, but, as those funds have generally been expended (or will be shortly), restaurants have not seen enough increase in their top line revenue to support pre-COVID-19 staffing levels.
Even still, how indoor dining will perform is greatly uncertain. As COVID-19 cases swell in the Sun Belt and West Coast — including states that had previously opened restaurants for indoor dining, all eyes are on Illinois and the state’s ability to balance grave public health concerns with the economic needs of its owners and employees.
Legal Discussion:
With so much uncertainty around the future of hospitality in the near- and intermediate-terms, operators and owners should make sure their leases, joint venture agreements, and other commercial contracts provide flexibility around forced closures on account of COVID-19. We have set forth below some important considerations to consider as you review your leases, joint venture agreements, and other commercial contracts:
Lease Considerations:
- For leases which are currently in effect, consider (i) whether such leases include “force majeure” or “unavoidable interruption” provisions, (ii) whether those provisions expressly contemplate “pandemics” (or merely speak, in general, to “circumstances beyond one party’s reasonable control”) and (iii) what rights the tenant possesses on account of “force majeure” events;
- Similarly, you may be able to argue that such forced closures excuse performance on account of the legal doctrines of “frustration of purpose” or “impossibility of performance”. These doctrines are similar to “force majeure” but do not rely upon the literal text of the lease itself, and, rather, invoke general principles of contract law;
- Depending upon the nature of your retail location, your lease may be susceptible to challenge based upon so-called “co-tenancy” provisions;
- If you are currently bound by a lease under which you cannot economically perform, consider consulting with an attorney to see what options you may have, including: (i) the option to renegotiate rent to be on a pure “percentage rent” basis during the pendency of the pandemic; (ii) the option to obtain a “rent deferral” or “rent abatement” for some specified period of time; (iii) the option to terminate the lease, or (iv) the option merely to “walk away” from your obligations under the Lease and what type of damages, if any, you may be exposed to based upon the language of the lease (and/or whether there exists a guarantee of such lease); and
- For leases which are still being negotiated, be sure to address (i) force majeure as well as (ii) the nature of your rent obligations (percentage vs. base) head-on at the letter of intent (LOI) stage. Landlords view these items as material deal points which must be negotiated at the outset in the LOI (rather than during the negotiation of the lease instrument itself).
Joint Venture Agreement Considerations:
If you are bound by a joint venture agreement and no longer see your investment in the restaurant as economically viable, consider consulting with your attorney to see:
- what type of “put”, “forced sale”, or other “exit” options you may have under the JV agreement;
- whether capital calls are mandatory or merely elective — and what penalties you face, if any, in the event you do not honor a capital call;
- What type of leverage you may have, based upon your ownership or significance to the deal, to re-visit core deal economics; and
- What “blocking” or protective provisions you have on the management of the venture.
As always, we are here to help our clients and invite your calls and emails. Please contact Larry Swibel or Scott Schonfeld regarding any questions relating to any of these matters.