The ‘Friends’ Restaurant — can you negotiate the new lease?

In early 2009, Monica and Chandler decide to buy a restaurant from Monica’s father, Elliot. Elliot has been a successful restaurant owner for a number of years with a good relationship with the landlords, Joey and Ross. Monica and Chandler have decided to purchase the restaurant from Elliot for $1 million payable in monthly payments for a term of 20 years. Elliot decides to keep the master lease and simply sublease to Monica and Chandler to make sure that he gets his million dollars. Elliot’s master lease is scheduled to terminate on June 10, 2012. He has one remaining “option” to renew for an additional five years to June 10, 2017. Monica and Chandler have formed a Limited Liability Company (LLC). They signed the sublease as “Members” of the LLC.
By late 2009, cash flow has become a serious problem despite the fact that gross revenues had almost doubled to about $468,000 a month. For the first time, Monica and Chandler have bounced several of their $15,000 a month rent checks. In late March, 2010, Monica and Chandler apply for a $250,000 SBA Loan. The lease was up for termination or exercise the “lease option” to extend the lease for an additional five years. The $250,000 SBA loan is to be repaid over the next 10 years.
As you might imagine, because of the recent bounced rent checks, the landlords, Joey and Ross want a sufficient security deposit to cover the landlord’s interest in the event that the tenants, Monica and Chandler, cannot pay the rent. In order to obtain the SBA loan, the bank has required the “Landlord’s Consent” not to pursue a tenant lease default for 90 days and not to declare any sort of tenant “breach” in tenant’s lease obligation for 90 days. The SBA loan also requires that the “SBA Bank” remain in the senior position in any of the tenant’s real, business or personal property. The “Landlord Consent” requires that the landlord give up their “security interest” in any of the tenant’s property. Before they sign any possible new lease option, the landlords, Joey and Ross, want a $60,000 “Lease Security Deposit.”.Landlords cannot afford to be without the income.
The subtenants, Monica and Chandler, simply do not have the requested $60,000 cash security deposit. The master lease tenant, Elliot, is concerned about getting paid on the 20 year, $1 million debt.  The subtenants, Monica and Chandler do not have any extra money but they have a fair credit rating. This is the last meeting to discuss the resolution of this matter.

BUSINESS DEVELOPMENT PRINCIPLES:

How to create a “Win-Win” in what appears to be adverse positions.  For the lessor, the lease is an opportunity to secure a return on the investment made to purchase the premises. For the lessee, a lease is often a long-term commitment to occupying and using the premises for all or a large portion of the lessee’s business activities, and the lessee will generally treated the premises as if it was actually the owner. The essential document underlying all commercial leasing transactions is the lease agreement.
In today’s economy, it is important for both parties to think “outside of the traditional box” on leases. Creative solutions, never seen before, are critical for this lease to commence. The parties’ counsel will play an important role in drafting the lease, and any ancillary documents which the parties may require because of the specific circumstances of their deal.
Tenant’s Position: The tenants, Monica and Chandler, do not have any money. The tenants will owe over $900,000 to Elliot who is Monica’s father. Any default in the “purchase payments” to Elliot would destroy Elliot’s retirement. They really want this lease to continue. Monica and Chandler have only $10,000 available towards a security deposit. Elliot is very concerned that he will not get paid for the sale of his business to Monica and Chandler.
Landlord’s Position: Landlords, Joey and Ross, are very concerned about Monica and Chandler’s ability to pay the rent on time. The landlords see no reason why they cannot get some of that $250,000 SBA loan money for their “Security Deposit.” The landlords have figured that Elliot, who has an interest in the lease continuing for an additional 18 years, could afford to pay the requested $60,000 security deposit. Joey and Ross will not sign the new lease without knowing that their concerns about getting paid the rent in the event of a “default” are satisfied.

DO YOU HAVE THE ANSWERS?
Test yourself here. Send your answers to bobpage@sandiegometro.com. The best entry receives a $50 gift certificate at a local restaurant.

1. Which of the below “resolution options” will work best for both the Landlord/Tenant?
a. $10,000 Security Deposit
b. The SBA Bank waiving their “Landlord Consent” request
c. An Equity Line of Credit on Tenant’s home

2. Which of the below options would be best for the Tenant?
a. Revocable Letter of Credit from a Guarantor
b. Irrevocable Letter of Credit from a Credit Union
c. Security Agreement for the business assets

3. Which of the below options would be best for the Landlord?
a. Irrevocable Standby Letter of Credit from a bank
b. Performance Bond from an Insurance Agency
c. A Home Equity Line of Credit from Elliot paid to the Landlord
Provided by the California Business Development Center (californiabusinessdevelopment.com)