A'La Carte Foodservice Consulting Group

SERVICE SPOTLIGHT - LEGAL

How to Protect Your Restaurant in Today's Hard Economic Times

By Robert W. Harlow

Family Owned Restaurant Falls Victim to Foreclosure Crisis”, “Longtime Favorite Restaurant Shuttering Doors”, “Local Hangout Calling It Quits” – These are headlines that are all too familiar in today’s economy. However, many times the restaurant affected was a success but fell victim to the financial pitfalls of the landlord. So, the question becomes, how does a restaurant operator obtain protection against such risk.

The first question is “Is there a mortgage on the restaurant property that the Landlord obtained with a lender?”. If you are not sure, you can ask the landlord or have a title company run a quick title search on the property.

If there is a mortgage, the issue then becomes how to get the Lender to not terminate the lease should they foreclose on the Landlord’s property after a Landlord default. This is done via a document called a subordination agreement (often termed in the real estate industry a SNDA for Subordination, Non-Disturbance, and Attornment Agreement). In a subordination agreement, you as the tenant would recognize that the mortgage is ahead of you in the priority line as relates to items affecting the Landlord’s property, but more importantly for you as the restaurant operator, it should contain provisions wherein the Lender agrees not to terminate the lease and allow it to remain in effect should the property be foreclosed.

If there is not a mortgage, it is important to insure that your lease would be “first in line” against any future mortgage. If it is not prohibited under the Lease, the easiest method to do this would be to file a memorandum of lease in the real property records of the county in which the restaurant is located. A memorandum of a lease is typically a one or two page document that sets forth some of the basics of the lease (i.e., the names of the parties and the term of the lease). The purpose of filing such a memorandum is to put third parties (including any potential lenders) on notice of the existence of your lease and to establish your lease as having “priority” over any document following the date of filing of the memorandum.

What do you do if you learn the property may be foreclosed and you do not have any type of SNDA or subordination agreement in place with the landlord’s lender? First of all, it would be advisable to confirm that the property is indeed subject to a potential foreclosure sale. If the property is indeed up for foreclosure, the recommended course of action would be to get in touch with the landlord’s lender and see if a quick subordination agreement can be worked out. In today’s economic times, the lender will probably prefer to keep your lease in place after foreclosure. As such, they may be willing to get an SNDA or subordination agreement in place fairly quickly.

In summary, in today’s business climate, a little attention and diligence now can save a great deal of headache down the road.

POST HURRICANE IKE ISSUES

Hurricane Ike Inerrupts Business Operations

Hurricane Ike devastated the Texas Gulf Coast, causing an economic loss in excess of $20 billion. Many restaurants suffered both physical damage and the interruption of their operations for days. Three different scenarios emerged when restaurants submitted their claim to their insurance carrier, who responded to each claim differently, all according to the Terms & Conditions of the policy purchased by each restaurant operator.

Some carriers paid the loss of income and spoilage of food when the approximate cause of loss was from a covered peril that caused interruption of the electricity from the utility provider, or the utility provider could not repair the power lines to the business.

Some carriers only paid the loss or spoilage of food from the electricity being interrupted, but did not pay for the loss of income from the interruption of the sales of the restaurant.

Some carriers did not respond to the claim at all, declining any liability from the loss of power from the electricity provider.

How can you be certain your coverage will respond to a loss of income and food when the proximate cause of loss is the interruption of power to your restaurant? This coverage can be found under the topic of Business Interruption.

Business Interruption is a difficult coverage for the restaurant owner and the insurance carrier to settle or “adjust” the loss. Insurance companies will outsource the process to a specialized auditor or forensic accountant. This claim could take up to one year to settle, because in some cases, the initial loss of income is made up within the 12 month period of restoration. Insurance does not pay for more than what would have been earned had the claim never occurred.

Many restaurateurs were shocked to learn that their insurance coverage did not respond to a loss of income when the damage occurred from the loss of electricity from their off premise utility provider. After Hurricane Ike passed this area and restaurant operators began to clean up their restaurant sites, many faced the inability to open for business because of the interruption of electricity to their restaurant, anywhere from four to 12 days. Some suffered a loss to their income, ranging from $10,000 to $70,000 during the down time. Many policies excluded coverage from a loss due to the interruption of the electricity to their restaurant. The coverage is available, but if you did not ask for it, many agents do not include it to the Terms & Conditions of a policy through an endorsement. When the coverage is not automatically included in the carrier’s forms, it can be purchased at the inception date or during the term of coverage, almost at any time.

Business Interruption is a vital coverage for all restaurant owners. Even if the coverage includes a three day or 72 hour deductible, a restaurant operator can budget for this easier than suffering a loss of income over a two week period. If it is even longer, the absence of Business Interruption coverage is what prevents the business from continuing their operations after the property damage has been repaired. Contact your agent today and ask if this coverage is on your policy, and ask for a written response to confirm the coverage. If you do not have it, add it immediately to protect your future operations.

Some restaurateurs ask, “How am I to know how the policy is going to respond to my claim. Isn’t this why I have my agent; to protect my business from these types of claims?”

The key is to be certain you have the proper coverage to protect your business from the loss of electricity and request a summary of all coverage from the agent. This does not replace the actual policy, but it will allow you to know the difference between the coverage you want and the coverage provided by the policy. Have the agent show you where to find the coverage for Business Interruption in the policy, and if it provides protection from the loss of income caused by the interruption of electricity from your off premise power provider. Now is the time to do it.

I have talked to many owners of businesses which suffered from the interruption of electricity from their provider. Some have installed a generator, either gasoline of LPG, for the next time a hurricane hits. The cost to continue operations using a generator will be more expensive per day, than using a regular utility provider. This extra expense to operate can be claimed under the Business Interruption section of the property coverage. Insurance companies will work with an insured that is trying to keep his losses to a minimum.

The Greater Houston Restaurant Association (www.ghra.com) will feature a Hurricane Preparedness section on their website in May 2009, created by a committee of restaurant managers and specialists, with tips on how they prepare for the hurricane season, beginning in June and the final preparations just days before a named storm makes landfall. If you want to view something today, go to www.capitalonebank.com/disasterplanning , compliments of Paul Davidson, President Capital One Bank - Houston.