RUTH Ruths Hospitality Group Inc

By Esther Fung and Heather Haddon 

National restaurant chains and other stable businesses are prodding their landlords for rent relief as the economic picture sours, setting the stage for court battles and protracted clashes between big tenants and property owners.

A number of blue-chip companies that made rent payments the past two months have indicated they reached their limit with June. Chipotle Mexican Grill Inc. and Shake Shack Inc. said they are lobbying property owners to renegotiate the leases or offer deferred rent payments. Starbucks Corp. sent a letter to landlords asking for a range of concessions, including changes to lease terms and base rent for at least 12 months, starting next month.

Restaurant and cafe operators are starting to reopen outlets again as more states like Florida, Texas and South Carolina begin to relax lockdown orders. But many of these companies say that social-distancing guidelines restrict them to only about a quarter to half of their normal capacity, forcing them to modify operations and cut expenses to stay in business.

Rents usually account for around 8% of sales at restaurants. Now, with the pandemic causing restaurants to shut outlets or cut capacity, it can represent as much as 20% of sales, according to Jeffrey McNeal, president of Fessel International, a restaurant and hospitality consulting firm.

That has many firms leaning on their landlords for help with another rent payment due in less than two weeks, and mounting evidence that the U.S. economy could be under pressure for an extended period. The Congressional Budget Office on Tuesday said an economic recovery would drag on through the end of 2021, and that gross domestic product will likely be 5.6% smaller in the fourth quarter of 2020 than a year earlier.

A number of blue-chip companies that made rent payments the past two months, including Chipotle and Starbucks, are now requesting relief.

"We are a strong tenant with significant growth ahead of us, and we expect our landlords will partner with us during this difficult time period," Chipotle's chief financial officer, Jack Hartung, told investors in April.

In Starbucks' letter, which was reviewed by The Wall Street Journal, an executive said the company "will require concessions to support modified operations and adjustments to lease terms and base rent structures, so we can withstand this uncertainty together."

Many landlords privately fumed over this request, even though Starbucks paid its rent in full for April and May at most of its stores. A company with a $86 billion market capitalization should be able to raise debt or more equity in the capital markets, enabling it to meet its obligations, these landlords said.

Conflicts are already beginning to erupt. In one Texas city, a sheriff padlocked shops owned by a retail tenant that was behind on rent. Some landlords have initiated lawsuits to collect unpaid rent.

Some big tenants say the pandemic qualifies as a force majeure, or an event outside their control that prevents them from meeting contractual obligations, opening the door to rent negotiations. Others said they were hindered from accessing their stores. But most property owners say that neither the pandemic nor the economic fallout count as a force majeure.

Some lawyers now say it's inevitable the courts will have to decide, and some early test cases are under way. Shopping center owner Palm Springs Mile Associates sued retail chain Ross Dress for Less Inc. over unpaid rent for three stores in Hialeah and Lake Worth, Fla.

"While the Leases do contain a force majeure provision, the provision does not apply to these circumstances," said the landlord's complaint filed to the District Court for the Southern District of Florida. The owner is asking for all rent and charges for the remaining term of the leases, amounting to more than $5.5 million.

Attorneys for the apparel retailer filed a motion to dismiss the case last week. Ross Dress For Less and Palm Springs Mile Associates did not respond to requests for further comment.

Landlords are generally reluctant to cut rent because accounting rules still allow them to book income if rent is deferred as long as it isn't reduced. Temporary rent forgiveness or discounts would also reduce their property valuations, which could hurt an owner's ability to get a loan.

"We are not offering forgiveness," said Sandy Sigal, chief executive officer of NewMark Merrill Cos., which owns more than 70 shopping centers in California, Illinois and Colorado. "We understand the situation and are doing our best."

The privately held company has received some government assistance, which it says helped retain staff. Mr. Sigal said that for some restaurants, he has offered to trade deferral for percentage rent, which is a percentage of sales rather than fixed rent. Such deals work out for landlords if business is good. There are no takers yet, he said.

Franchisees for Dunkin' Brands Global Inc., Applebee's and Yum Brands Inc. are also negotiating with their landlords, the companies said. Some tenants are considering extending leases in exchange for deferred rent to be forgiven.

Dunkin' executives have become directly involved in lease negotiations for franchisees in about 1,000 properties. Landlord responses have been mixed, Dunkin' Americas President Scott Murphy said, with more offering rent deferrals than abatements.

"We've had a couple cold reactions from landlords," he said. "They've said, 'You are doing fine. You have a drive-through. I have 10 other retail establishments that have gone to zero revenue.'"

Other public restaurant companies are pleading a similar case. Steakhouse chain Ruth's Hospitality Group Inc. reported same-store sales at its owned restaurants plunged 84% last month and said it was considering closing some company-owned locations.

"We've been in regular contact with all our landlords about abatements and lease modifications, and we expect that they will partner with us during this difficult time," said Chief Financial Officer Arne Haak.

A few can boast of success. Jack in the Box Inc. said its landlords offered some relief, helping the burger chain to deliver $10 million in cost reductions to franchises for April, May and June. The chain is postponing rent collections of that amount for franchisees, a spokeswoman said.

Write to Esther Fung at esther.fung@wsj.com and Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

May 19, 2020 19:06 ET (23:06 GMT)

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