As anyone who has watched FX’s “The Bear” knows, running a restaurant is hard work. When restaurants occupying leased commercial space fail, commercial landlords need a game plan to protect their interests. Some key considerations when terminating a commercial restaurant lease are outlined below.

If the restaurant tenant owes money under the lease, then depending on the terms of the lease, the landlord may draw on the security deposit or look to any guarantors who have provided financial support for the tenant. If neither the tenant nor any guarantor can make the necessary payments, then the landlord needs to determine whether it is worth the legal costs to pursue a claim for damages.

Once the landlord determines that the restaurant will not survive and pursuit of a claim for damages may not be worth the expense, the first step is to regain control of the leased premises. The parties can enter into a simple agreement wherein (i) the tenant surrenders possession of the leased premises to the landlord without terminating the lease, (ii) the tenant reserves its defenses and (iii) the landlord reserves all rights and remedies available under the lease. This way, the landlord can get the space back quickly without going through the eviction process, which can save both parties time and money.

With possession of the leased premises established, the landlord can attempt to relet the space. Landlords typically have obligations to mitigate the damages caused by the tenant’s breach of the lease, so efforts to relet the premises should commence as soon as possible. If the landlord can relet the premises to another restaurant, then the space may need little work to meet the needs of its new occupant. If the premises will receive modifications to accommodate a new use, then removal of existing improvements (such as vented hoods and grease traps) may be required in connection with the build-out of a new space. While attempting to relet the premises, the parties should commence work on a formal lease termination and settlement agreement. Here are some key issues to address in such an agreement:

Kitchen equipment and furnishings

Restaurant tenants often lease appliances and major equipment, which means that when the lease terminates, they will need to be returned to the vendors that provided them. If the tenant owns any such equipment, then the landlord has a lien on personal property under the terms of the lease for past due rents, and the landlord may be able to foreclose on the lien and sell the personal property to offset the tenant’s debts under the lease.

Trade dress and tenant signage

The tenant may own the intellectual property rights to certain improvements and fixtures in the premises (such as a distinctive countertop shape, lighting system, or bar area). In such an event, the landlord may not be able to repurpose such fixtures for another tenant. Similarly, any unique signage and branding equipment belonging to the tenant will need to be stripped from the premises prior to the space being turned over to a new occupant.

Termination fee

In exchange for the landlord releasing the tenant from future claims relating to the lease and the premises, the tenant should pay a single “termination fee” at the time of executing the termination letter. Ideally, the termination fee accounts for both past due sums and future rents owed under the lease. The amount of the settlement will be negotiated between the parties, and if the restaurant tenant is a small independent business, the settlement may represent the landlord’s last best chance to obtain a payment from the tenant. If the restaurant tenant is part of a larger chain, then the landlord may be able to go after the parent company for past due sums.

Protection from tenant bankruptcy

If the tenant files for bankruptcy, the bankruptcy trustee may claw back the termination fee from the landlord through a bankruptcy preference action. The termination agreement should account for this scenario by clarifying that the landlord’s release of the tenant shall be voidable if the termination fee is clawed back by a trustee. Further, the landlord should reserve the option to receive the payment of the termination fee outside of the statutory 90-day preference period to protect its right to collect the termination fee.

Clear termination date

The termination agreement should make it clear which items must be satisfied for the termination (and accompanying release) to become effective. The landlord should require receipt of the termination fee, the tenant’s vacation and surrender of the premises and any other essential items as conditions precedent to the effectiveness of the termination.

Restaurants bring vibrancy to neighborhoods, and everyone wants them to succeed. However, when times get tough and restaurants go under, commercial landlords need to be ready. Experienced commercial real estate attorneys can help landlords review the existing restaurant lease, regain possession of the premises and terminate the lease in a way that minimizes the damage and maximizes the future opportunity for the space.

Patrick Abell is a Stoel Rives LLP associate. He practices in the firm’s real estate group. Contact him at 503-294-9472 or patrick.abell@stoel.com.

Andrew Solomon is a Stoel Rives LLP partner. He practices in the firm’s real estate group. Contact him at 503-294-9203 or andrew.solomon@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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With more and more corporate tenants and institutional owners looking to reduce their carbon footprints, clean energy improvements in initial project development as well as upgrades to existing projects have become more appealing. However, with interest rates and material costs on the rise, financing improvements that do not directly result in an increased return can be particularly challenging.

As a result, commercial property owners looking to include clean energy improvements in their projects or make seismic upgrades may want to consider using a relatively new program known as “PropertyFit” – Multnomah County’s Commercial Property Assessed Clean Energy (CPACE) financing program. PropertyFit provides an alternative to potentially more expensive sources of capital – all while allowing building owners in Multnomah County to potentially lower their operating expenses, increase their properties’ desirability, and decrease their carbon footprints.

According to the U.S. Department of Energy website: “CPACE is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments via an assessment on their property tax bill. The financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building performance. CPACE may be funded by private investors or government programs, but it is only available in states with enabling legislation and active programs.” According to PACENation, 30 U.S. states have active CPACE programs, through which $4.2 billion has been invested in 2,900 projects since 2009.

In 2015, Oregon enacted statutes enabling local governments to create CPACE programs that harness private capital for the purpose of energy efficiency upgrades and seismic rehabilitations. The CPACE statutes grant local governments the authority to place “benefit assessment liens” on the CPACE properties that have the same priority as liens created under the local improvement lien statute. The statutory lien authority lets the county collect project debt service payments in conjunction with property tax assessments to reimburse the project’s private capital investors. PropertyFit, founded in 2015 to support Multnomah County’s carbon reduction goals, is administered by Prosper Portland and serves as the public face of the joint CPACE program in partnership with Multnomah County and Energy Trust of Oregon.

So how does a commercial property owner in Multnomah County take advantage of the PropertyFit program?

• Contact PropertyFit and connect with a project advisor to review the program and its detailed requirements.
• Ask Energy Trust of Oregon, one of the PropertyFit program members, for a vetted list of potential construction vendors depending on the nature of the proposed improvements.
• Take note that while PropertyFit has a list of private lenders already enrolled in the CPACE program, a building owner can also bring its own lender, provided that the lender completes the PropertyFit enrollment process.
• Keep in mind that when the building owner selects a lender, and the lender is satisfied with its due diligence review of the prospective borrower, the parties complete the transaction documents and prepare for closing.
• Recognize that upon closing, the lender wires funds to the building owner to finance the projects, but instead of the lender recording a deed of trust as a monetary lien against the property, the county uses its lien authority created under the CPACE statute to place a benefit assessment lien on the property and collects the CPACE debt service payments simultaneously with the routine property tax assessment over the term of the loan.

PropertyFit offers several advantages for building owners, borrowers, and the Multnomah County community. With inflation roaring through the economy, the immediate cost savings from clean energy and efficiency upgrades can generate meaningful margins for building owners. PropertyFit borrowers can fully amortize their loan repayment over the weighted average life of the improvements to be installed (up to 30 years), and do not have to personally guarantee the loan. PropertyFit financing is not intended to replace traditional mortgage financing, but rather offer a potentially cheaper alternative to owner’s equity or mezzanine debt in the capital stack. From the lender’s perspective, PropertyFit provides it a pipeline of prospective borrowers and loans secured with a higher priority lien than a traditional recorded deed of trust. Lastly, from a public policy perspective, PropertyFit may benefit everyone in Multnomah County by incentivizing investment in cleaner and more resilient commercial properties.

However, as with any program that seems “too good to be true,” there are a few catches. First, the Oregon CPACE statutes apply only to “qualifying” properties in need of “utilities improvements” or “seismic upgrades” as determined by the local government. In Multnomah County, PropertyFit applies to existing buildings, new construction projects or “look back” projects that have been completed within the past 24 months that are multifamily (five or more units), commercial and industrial properties. Building owners should contact PropertyFit to confirm whether their buildings meet the established criteria.

Second, because the lien that secures the CPACE loan will have priority over the rest of the property owner’s financing, the property owner’s primary lender may not allow it and, if it does allow it, may include the payments on the CPACE loan in its evaluation of the property owner’s compliance with loan covenants (e.g., debt service coverage ratio tests).

Third, the building owner can borrow no more than 30 percent of the value of the property to finance the purchase of improvements that relate to the “utilities improvements” or “seismic upgrades” set forth in the CPACE statutes.

Fourth, in addition to the property owner’s obligation for a series of third-party closing costs (title reports, building energy audits, legal fees, appraisal costs, recording fees, etc.), PropertyFit charges a 1 percent “program administration fee” at closing and an annual “servicing fee,” which is 0.25 percent of the outstanding loan balance. However, such closing costs and fees are “eligible costs” that can be included in the PropertyFit financing, covered at closing, and paid back over the lifetime of the loan.

Utilizing the resources made available by PropertyFit, building owners in Multnomah County can invest in their properties with a focus on the long run. Building owners should consider engaging professionals experienced in commercial real estate finance transactions and local Multnomah County regulations to make the process go as smoothly, quickly, and painlessly as possible.

Patrick Abell is a Stoel Rives LLP associate and a member of the real estate, development and construction practice group in the firm’s Portland office. Contact him at 503-294-9472 or patrick.abell@stoel.com.

Andrew Solomon is a Stoel Rives LLP partner and a member of the real estate, development and construction group in the firm’s Portland office. Contact him at 503-294-9203 or andrew.solomon@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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