Restaurants are About to Take Off. Are Restaurateurs Prepared? Legal (and Business) Issues as Restaurants Open
The Spanish Flu pandemic of 1918 was followed by the Roaring Twenties, and some are now predicting a modern version of a roaring 20’s following our own Coronavirus plague. Just as in the Roaring Twenties, people today are gathering again and celebrating and much of this human interaction is taking place in restaurants. While the pandemic has decimated much of the restaurant industry, the industry is on the brink of a colossal rebound. Many restaurateurs are poised to reopen, begin new business ventures and introduce new dining concepts. Restaurateurs should be cognizant of the legal landscape and plan accordingly. Here are a few suggestions, a la carte:
Understand the Real Estate Framework
Few restaurateurs are fortunate enough to own the buildings in which their restaurants operate. Whether before or after the pandemic, rent is usually a restaurateur’s highest monthly expense. It is very important to understand the contractual relationship with one’s landlord. During the pandemic, many landlords reduced or waived rent to assist the restaurant tenant to ride out the pandemic, rather than carry vacant space and try to locate a new tenant in a market downturn. On the other hand, some well-capitalized restaurateurs took advantage of other restaurants going out of business and landlords needing to fill vacant spaces, and signed leases to open new restaurants. Some landlords who lowered or temporarily waived rent added the rent to the end of the lease term, i.e., assisting the tenants through the downturn but essentially deferring the rent to later. Some restaurant tenants negotiated the application of their security deposits toward rent due. As the pandemic recedes and consumers return to storefronts, the balance of power, and the relative negotiating strengths, between landlords and tenants will change yet again.
Going forward, restaurateurs must be clear on their lease terms. If the landlord deferred rent during the pandemic, when does the tenant have to pay it back? If the landlord agreed to accept less rent, for how long? Can the restaurant negotiate an increase in rent (maybe even instead of paying past due rent) contingent on an increase in revenue from patrons returning to dine? Is there a replenishment or other change to the security deposit?
In New York City, during the pandemic, landlords were prevented from proceeding against a personal guarantor (usually the restaurant owner) for rent in arrears. As we emerge from the pandemic, owners and guarantors must assess their personal liability for rent and other restaurant expenses.
Finally, one lesson of the pandemic, at least for restaurants in urban areas, is that outdoor spaces (yards, sidewalks, etc.) are essential. During the pandemic, outdoor dining proved to be a lifeline for many restaurants. Of course, this means that landlords able to offer outdoor space attached to the restaurant may charge a premium. An additional lesson of the pandemic is that, along with outdoor space, heat lamps and a structure to shelter from the elements are essential and should be secured long before the weather turns cold.
Stay in Compliance with Governmental Financial Aid
Some restaurants were able to secure PPP loans in 2020. However, the government set conditions for loan forgiveness, such as that 60% of the funds must only be spent on payroll costs, and the remainder on other permitted expenses, such as rent. Many other costs essential to the operation of a restaurant, such as food, drink, and marketing, were not covered. In addition, many in the restaurant and hospitality industries criticized the government for offering too little, too late.
A new round of government aid is now available to restaurateurs, including the Restaurant Revitalization Fund, part of the $1.2 trillion American Rescue Plan Act (ARP). The Restaurant Revitalization Fund is first being allocated to priority groups including women, veterans, and minorities. As long as the funds are used properly, restaurateurs will not have to repay the government.
Like the PPP, the lesson is the same: restaurants must remain in compliance with the rules. We recommend that you keep these funds in their own dedicated accounts, do not comingle, and carefully document that you used the monies properly. Timely submit the information required for loan forgiveness.
Know the Rules
Here are some important questions:
- Is indoor dining limited by capacity? In New York City, beginning May 7, indoor dining may be at 75% capacity, in line with the rest of the state. Beginning May 17, New York restaurants and bars may operate at 100% capacity, the same as New Jersey and Connecticut.
- Is there a curfew? In New York State, a 12 a.m. food and beverage curfew will be lifted for outdoor dining on May 17 and for indoor dining on May 31.
- What is the proper distance between tables? Do you need partitions?
- Can people sit at the bar? In New York City, as of May 3, bar service and the ability to sit and eat or drink at the bar counter are allowable.
- Must you take temperatures when patrons arrive?
- Do you need air filters?
- Even if local rules and regulations do not require air filters, for instance, should you have them anyway? Should you undertake the expense in order to show the public that you take health issues seriously? (Sometimes good business practices transcend the legal threshold.)
What’s Your Direction?
During the pandemic, many restaurants pivoted in order to stay alive. For example, some restaurants became markets of sorts, offering groceries and packaged delicacies. Some became takeout or delivery only. With the pandemic receding, will these restaurants now pivot back to dining-in? Will the restaurants who successfully changed their models now offer two or more parallel businesses, e.g., meals-to-go and dine-in? If so, plan accordingly with vendors now and avoid supply issues later. As one example, during the pandemic, many restaurants sold off the bottles in their wine cellars to raise needed capital. Restaurateurs now have to replenish, at higher market prices, and older wines are in shorter supply. Luckily, the pause in the wine tariffs with the EU has contributed to a robust market. On the other hand, supply chain problems in global shipping have caused other difficulties.
Know the Employment Laws and Stay Compliant
As the pandemic recedes, many restauranteurs currently report a shortage of laborers. This may have to do with young adults leaving high-rent cities during the pandemic and returning to live with parents. In addition, with borders closed, the immigrant labor pool disappeared. These issues should resolve as cities re-emerge and borders open.
Restaurateurs are advised to pay careful attention to the many local, state, and federal employment regulations. New health requirements apply in kitchens. Be mindful of wage-and-hour laws that apply to tip sharing and overtime pay, among others. Have a proper employee manual. Invest in a consultation with your labor and employment attorney to make sure you are doing everything correctly. Once the courts open fully, plaintiffs lawyers will be back, encouraging lawsuits against restaurant owners for alleged violations of the Fair Labor Standards Act (FLSA), violation of the Americans with Disabilities Act (ADA), etc. Consider asset protection to guard against such lawsuits.
A New Era
Vaccinations, lower infection rates and economic re-awakening will benefit the restaurant and hospitality industries. The Roaring Twenties are upon us, and restaurants will be where we celebrate and gather once again. To be sure, the restaurant business will still be challenging – costs are high, and margins are thin. However, as the pandemic recedes, savvy restaurateurs are poised to benefit, and they should understand the various legal and business issues to maximize their growth. We would be pleased to pull up a chair and assist.