By Patrick Wartan and Paul DiBenedetto
As Canada – and the world – struggle to contain the spread of COVID-19 and manage its enormous economic toll, it’s hard to find an industry that’s been harder hit than hospitality, especially restaurants. The year-over-year decline of seated diners in Canadian restaurants was a staggering 100% on April 20, 2020 as physical distancing continues on.
The business goal is coming out of this crisis intact. It is critical that hospitality industry managers know their options for maintaining their businesses until physical distancing rules are lifted and their establishments can safely reopen. Two of the most pressing current considerations follow:
- Rent obligations when cash flow is cut off
A common legal issue is whether a tenant has an obligation to pay rent during the shutdown and shelter-in-place. It is best to avoid a contentious dispute with a landlord over whether the force majeure clause of a lease might contain releases from an obligation to pay rent. (These clauses typically apply to an event which “prevents performance.” A shutdown does not necessarily prevent the payment of rent.) Reach out to your landlord to discuss the status of your business and your cash-flow. You may get support in the form of rent deferral, though in some limited circumstances, rent forgiveness is also possible. Landlords may also have “asks” in return, like extending the lease term.
On the insurance side, landlords and tenants alike must be sure they have updated certificates and meet the requirements to be compliant with their leases. Different strategies – unique to each client and situation – can also be implemented to save costs at the same time. For example, one might consider moving to a vacancy policy for 60 days to maintain general liability and property insurance at a reasonable cost during a shutdown. Constructive conversations with landlords can be productive since everyone has the same goal: to get their business reopened!
Additionally, while the emergency orders are in place, landlords and tenants should continue maintenance and security of the property, to avoid more traditional losses like theft, broken pipes, problems with utilities, or damage resulting from the failure to have working alarms and security devices, among others.
- Liquor licensing issues to be aware of
Liquor licensing rules vary from province to province, so it’s important to check provincial and municipal liquor commission websites concerning COVID-19 related updates. From an insurance perspective, there have been many questions over whether liquor liability insurance must be carried during a shutdown and what the ramifications would be should it be dropped. The determination to maintain or hold coverage will depend on factors such as timing and provincial regulations.
Guest blogger Patrick Wartan is a partner and chair of the Food & Beverage Practice Group at Taft Law. He counsels multi-unit restaurant, hotel developers and food and beverage consumer brand companies on their day-to-day legal needs. Additionally, he brings extensive experience to matters relating to financing arrangements, food and liquor licensing, mergers and acquisitions, real estate and general corporate governance in jurisdictions from coast to coast.
Please note that Patrick currently represents clients in insurance coverage litigation against an insurer and nothing stated herein shall be construed as an official statement or position of his, Taft Law, or his co-counsel, such that it could impact Patrick’s clients in the pending litigation.
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