Mass closures, lawsuits vs. Starbucks, spotlight lease severance issue

Mass closures, lawsuits vs. Starbucks, spotlight lease severance issue

SEATTLE Starbucks Corp. [3] was battling a handful of landlords in court as the chain was shuttering hundreds of locations and scuttling scores of planned openings, many commercial real estate veterans were not surprised. —When reports surfaced this month that

“In today’s environment, a company like Starbucks is a solid-credit tenant, and landlords are trying to hang on to as many of those as they can,” said Mark Dufton, principal of DJM Realty, a Boston-based real estate consulting firm. —When reports surfaced this month that

Starbucks, which earlier this year revealed plans to close 616 underperforming outlets by next May and back off from previously scheduled openings, is not the only chain looking to break leases or abandon pledged openings. Especially in the hard-hit category of casual dining, which is now expected to see more than 1,000 closures in the next year, dire economic times are forcing scores of operators to shutter underperforming units or rein in near-term growth plans. —When reports surfaced this month that

Lone Star Steakhouse closed 26 branches this year. Last year, parent Darden Restaurants Inc. [4] shuttered 56 Smokey Bones [5] units and sold the remaining 73 branches. —When reports surfaced this month that

Such chains as Jamba Juice [6], Hardee’s [7] and California Pizza Kitchen [8] are among those that have disclosed plans either to close units or reduce planned openings. S&A Restaurant Corp. famously shut down some 220 Bennigan’s [9] and Steak and Ale [10] units suddenly in July, leaving landlords temporarily up in the air while S&A filed for bankruptcy liquidation. —When reports surfaced this month that

In the casual-dining sector alone, more than 1,000 additional restaurants will close during the next 12 months, estimates Ron Paul, chief executive of the Chicago-based research firm Technomic Inc. —When reports surfaced this month that

“I definitely see the pace of closures accelerating,” said lease renegotiation veteran Tom Mullaney, a partner in the law firm of Huntley, Mullaney, Spargo & Sullivan. “It’s getting worse by the month out there.” —When reports surfaced this month that

Breaking a lease can be tricky, and how it is done depends on many variables. However, real estate experts say there are ways to walk away from a location cleanly without ending up in court. —When reports surfaced this month that

“Most sophisticated tenants know you can negotiate any lease,” said Mullaney, whose firm, which specializes in real estate issues, has offices in Roseville, Calif., and Chicago. “Those who are not so sophisticated think they cannot, and they often end up bleeding quietly.” —When reports surfaced this month that

According to Mullaney, whose firm is currently handling more than 1,000 restaurant and store closures in the United States and abroad, the best way out of a lease is to negotiate terms for a consensual buyout. Typically that means settling on a sum—three or six months’ rent, for example—that would allow the tenant to tear up the lease and walk away. —When reports surfaced this month that

Forward-thinking tenants can include buyout-exit provisions into a lease when they first sign on, advises Seattle real estate attorney Stuart Heller. “It’s much easier if you build something into the lease that gives you options,” he said. —When reports surfaced this month that

For example, a lease might include a default provision that allows the tenant to walk away for any reason if they pay, say, six months of rent. —When reports surfaced this month that

Heller also sometimes includes a provision for amortization of damages. For example, if tenants are four years into a five-year lease, they would only have to pay one-fifth of the damages tied to breaking the lease. —When reports surfaced this month that

The problem in today’s credit-frozen market, however, is that tenants might have to borrow money to make such a deal. That’s an option many are finding they don’t currently have. —When reports surfaced this month that

However, there are other ways to entice landlords to let tenants walk, Dufton explained. —When reports surfaced this month that

A chain that has multiple leases with one large developer, for example, may want to consider extending contracts at other locations in exchange for a lease termination, he said. —When reports surfaced this month that

If a buyout offer doesn’t take, tenants also can look for their own replacement tenants as a settlement offering. —When reports surfaced this month that

Again, Heller advised, tenants should build in language into the lease that allows them “broad assignment rights.” Then tenants can shop for replacement without the landlord’s permission. —When reports surfaced this month that

That tactic can be particularly successful for franchisees who may want to turn their stores over to other franchisees of the same brand, where no structural changes might be required, Heller said. —When reports surfaced this month that

In some such cases, however, landlords will allow a second tenant to take over the lease only if the first tenant signs on as a guarantor. —When reports surfaced this month that

“Landlords love that, and you can’t blame them,” Heller said. “They think, ‘Now I have two people I can chase.’” —When reports surfaced this month that

The downside risk of these kinds of guarantor arrangements is that the landlord can extend the lease, or amend the space and raise the rent with the new tenant without telling the first one. Suddenly the original restaurant operator, as guarantor, may find himself on the hook for a longer term or more money than he anticipated. —When reports surfaced this month that

“I often try to put in an end date for a guarantee,” Heller said. “I might say something like, ‘If the new guy is there for two years, my end goes away.’” —When reports surfaced this month that

Of course, in today’s troubled economic climate, finding a replacement may not be easy, either for tenant or landlord, Dufton said. —When reports surfaced this month that

“A year or two ago, you could back out and find a replacement, and everyone walks away happy, but it’s a different environment out there now,” he said. —When reports surfaced this month that

If the buyout and sublease options fail, some operators will attempt to exit leases via court proceedings. That move can be costly and time-consuming, exacerbating an already bad situation for the location in question, experts say. —When reports surfaced this month that

Some companies see bankruptcy as a last resort tactic to break leases. In 1996, for example, Sizzler International Inc. [11], the Sizzler brand’s former parent, filed for Chapter 11 bankruptcy even though the company’s assets outweighed its liabilities, primarily to void leases on some 140 underperforming locations. About half of those units were sold during bankruptcy proceedings that ended 16 months later. —When reports surfaced this month that

Even the possibility of a debtor-in-possession Chapter 11 action can scare some landlords into reaching an agreement because bankruptcies typically reduce landlords’ abilities to recoup losses. —When reports surfaced this month that

A key variable is the tenant’s financial situation, Dufton said. —When reports surfaced this month that

“That will determine what kind of leverage you have,” he said. —When reports surfaced this month that

Companies in good financial shape overall may find their landlords less receptive to waivers of tenants’ legal commitments, especially about breaking leases on units that never opened. —When reports surfaced this month that

“A landlord will get more emotional about a tenant who doesn’t even try to open,” Mullaney said. “He’ll say, ‘You didn’t even give me a chance.’” —When reports surfaced this month that

Terminating a lease on a never-opened unit is a little more complicated, but the basic terms for calculating damages are the same, Mullaney added. —When reports surfaced this month that

In the end, experts advise, distressed restaurateurs should keep their landlords in the loop. —When reports surfaced this month that

“You have to communicate with your landlord and not catch them off guard,” Dufton said. “Share as much information as you can about why you might have to resort” to a store closure. Hiring a third-party firm that specializes in lease renegotiations is also recommended. —When reports surfaced this month that

“A third-party firm will understand what it takes to exit these leases; that’s what we do,” Dufton said. “The marketplace is changing, and it’s not as easy as it was a few years ago, or even last year. You need someone who knows what they’re doing.” —When reports surfaced this month that