The Failed or Closed Restaurant and its Lease

Continuing our blog posts about failed or closed restaurants,
when client’s contact us about a failed or closed restaurant, we
ask them to prepare and bring us an Income Statement and a Balance
Sheet for the restaurant.

The purpose of the Income Statement or Profit and Loss Statement is to
show the revenue and expenses for the restaurant for the current year and
to determine the profitability of the restaurant, if any.

The purpose of the Balance Sheet is to determine what money or property is
owed by the restaurant (liabilities), such as back rent to the Landlord,
sales tax, wages due to employees or money owed to suppliers.
We also want to know what property or assets the restaurant has to
satisfy the claims of creditors.

In our experience of representing  failed or closed restaurants, a couple of
 facts become apparent:

Restaurants have little to no inventory, the perishable goods must be used or
 thrown out.
-The accounts receivable are generally credit card based and collected by the
restaurant in 5 to 20 days
-The  used pots, pans and knives have little value
- Fixtures or property attached to the walls or the floor belong to the Landlord and
-The bar stools, tables and other property is generally auctioned off by the restaurant
owner  in a going out of business sale or sold by an auctioneer for 10 to 15 cents on the dollar.

There is however one asset that is often overlooked by restaurant owner and that is the lease. 
The lease needs to be reviewed to determine if the rent is below market, at market or above
market and how many years are left on the lease (the term).

A lease with less than three years remaining on its term, generally has little to no value.

Simerly a lease that is at market or over market generally has no value.
However an “under market” lease with 3 or more years on its term, 
may have a significant value.

The approach that we suggest for the under market lease  is that the assignment and
sublet provisions of the lease be reviewed, then the restaurant owner should contact
the landlord and indicate that they are considering closing their business and they
would like to assign or sublet the lease to a third party or have the landlord “by them out”
out their lease.

The restaurant owner with an under market lease, may want to contemplate hiring a
real estate broker to review the lease, to negotiate with the landlord and to market 
the lease to third parties.

The general standard in New York for the approval of an assignment or sublet of a
lease by a tenant is known as “not unreasonably withheld”. In plain English what
this means is that if a tenant finds a suitable party, that wants to take over the lease,
the landlord must be “reasonable” in approving or not approving /consenting to an
assignment of the lease or the Landlord can be sued.

The Landlord will want the lease to be sublet to a third party and not assigned, so that
the landlord will have recourse against the existing restaurant owner and the new
 restaurant tenant. If the restaurant lease is able to be assigned or sublet, then the 
tenant’s security deposit (which generally is two to three months of rent) will be
preserved and ultimately returned to the restaurant owner.

That money (sublet money & security deposit) can often times create a significant
amount of money, that can be used to pay creditors, such as sales tax, or monies due
the landlord that are guaranteed by the restaurant owner.

A number of issues related to failed or closed restaurants have been discussed in prior blog posts.
Clients with failed or closed restaurants, that have questions regarding the closing of the restaurant,
or a bankruptcy filing by the restaurant or restaurant owner or a sublet or assignment of the lease
should contact Jim shenwick at 212-541-6224 or at jshenwick@gmail.com.
Jim Shenwick has experience in workouts, bankruptcy filings and office leasing.