How Restaurants Can Use Chapter 11 to Renegotiate Leases
Restaurants are particularly prone to earnings downturns, which together with high rent and other obligations can push them to the brink. Chapter 11 is designed to help businesses continue operating while restructuring their debt and expenses. One of its most valuable features is giving owners a remedy for a lease or other rental agreement that has become financially unsustainable.
Restaurants often operate on narrow profit margins, making them vulnerable when the revenue stream diminishes. A lease that was manageable during years of strong patronage can become an untoward burden when customer traffic falls. Some restaurant owners are subject to percentage-rent provisions that require them to pay a portion of their revenue to the landlord. Others are locked into long-term leases negotiated years earlier when market conditions were very different. In addition, a restaurant owner might have personally guaranteed business debts, putting their own assets at risk.
Chapter 11 gives a restaurant owner a unique bargaining position when dealing with a landlord. The bankruptcy court will approve assumption or rejection of a commercial lease if the debtor shows the decision is a reasonable exercise of business judgment. Because of this, landlords may be more willing to negotiate rent reductions, revised payment terms or other concessions that help keep a tenant in place. Both parties may benefit from reaching an agreement rather than facing the effects of a rejected lease.
Chapter 11 also can help restaurants address burdensome contracts with food suppliers, equipment vendors and service providers. Businesses may be able to renegotiate contract terms that no longer make economic sense or to reject contracts that are harming the company’s viability. The ability to revisit these obligations can significantly reduce operating expenses and improve cash flow.
The restructuring process may also create opportunities to address secured and unsecured debt, develop payment plans and reorganize business operations. For restaurant owners who have personally guaranteed certain obligations, Chapter 11 may provide a framework for negotiating with creditors and pursuing solutions that would be difficult to achieve outside of the bankruptcy process.
For restaurants facing high rent, unfavorable lease terms and mounting debt, Chapter 11 can provide powerful tools to negotiate with landlords and vendors while preserving the opportunity to continue serving customers. Taking action before financial problems become overwhelming often provides the greatest range of restructuring options and the best chance for a successful turnaround.
The Law Offices of Michael Jay Berger in Beverly Hills represents businesses in Chapter 11 throughout Southern California. If your restaurant is struggling insurmountable debt, schedule a free initial consultation by calling 310-271-6223 or contacting us online.
