One in four restaurants won’t reopen after the coronavirus pandemic, according to OpenTable’s CEO.[1] Indeed, businesses within the hospitality industry such as restaurants and bars are especially vulnerable in the current economic crisis caused by COVID-19. Even in times of fairer weather, opening and maintaining a successful restaurant or bar is no easy feat. Chapter 11 protections allow struggling businesses to take a step back and reorganize. By filing for Chapter 11 protections a struggling business may take advantage of the following benefits.

The Business May Operate Normally During Proceedings

An “automatic stay” goes into effect as soon as a Chapter 11 case is filed and prevents creditors from taking any collection activity against the business. 11 U.S.C. § 362. If a restaurant or bar owner does not own the building where they operate, the automatic stay prevents the landlord from obtaining possession of the property until the lease terminates. This also prevents other creditors, like suppliers and tax collection authorities, from taking collective action. As a result, the business may remain open and operational while the case proceeds. The debtor may also negotiate with creditors during this period to work out repayment strategies.

Tenant Decides What To Do With Their Lease

The tenant has 120 days from the petition date to assume, assign, or reject the lease. This period can be extended for another 90 days for cause. If the tenant decides to assume the lease and remain in possession of the property, they must cure all defaults under the lease and provide adequate assurance of future payments.

The ability to assign the lease after filing is necessary to maintaining the option of selling the business during the pendency of the case.  The purchaser must assume the lease and similarly cure all defaults and provide adequate assurance of future payments. A buy-sell transaction typically involves the negotiation of complex terms and several contingencies.  The breathing room provided by the automatic stay makes closing such a deal possible.

If the business chooses to reject the lease, they must vacate the premises and return possession to the landlord. The business ceases rent payments. However, rejecting the lease before its termination date may result in another claim which may be brought by the landlord for future rent under the lease.

Post-Petition Rent Obligations May Be Postponed

The debtor may also seek to delay any post-petition rent obligations for up to 60 days following the petition date. The permitted delay in satisfying rent obligations allows the tenant to use those funds for more pressing expenses involved with reorganization.

Strategies For Business Owners : Plan Ahead !

Pre-planning is critical.  Although there is an automatic stay preventing creditors from collecting, there are significant requirements that must be met within the first few weeks after filing the case, including the filing of motion for court orders authorizing:

• Payment of Pre-Filing Wages Due to Employees
• Payment of Pre-Filing Claims of Vendors / Partners
• Rejection or Assumption of Executory Contract(s) (including leases)
• Use of “Cash Collateral”
• Maintain Current Bank Accounts (rather than the default under the Bankruptcy Code, which is to require new bank accounts)
• Cash Management Procedures

Other administrative motions may need to be filed on day one, or may need be filed shortly after commencement of the case:

• Post-filing Financing
• Employment of Professionals (e.g. attorney, broker, ombudsmen).

Tenants must also determine the value of their leases relative to the market, and strategize as to if and when it is best to cease paying the monthly rent to conserve cash.

Focus on Your Bottom Line

In the hospitality industry, many owners attach sentimental value to their business and struggle to let it go, even if it’s beyond saving. It’s important to not allow these emotions cloud business judgment. If, after careful consideration, continuing the business is not the best course, a business owner may benefit from liquidating.

The protections offered by Chapter 11 allow a struggling business owner to press the pause button on a stressful situation. They are given time to assess all their options and reorganize accordingly without the threat of creditors attempting to collect against them.

[1] https://www.marketwatch.com/story/1-in-4-restaurants-wont-reopen-after-the-coronavirus-pandemic-opentable-ceo-warns-2020-05-15?mod=article_inline

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ANAND LAW is composed of attorneys, business/financial strategists, and real estate brokers.   We represent businesses (including small business debtors under Subchapter V and single asset real estate debtors), in the cities and areas of Los Angeles, Pasadena, Arcadia, Burbank, La Canada Flintridge, Covina, West Covina, Downey, Santa Monica, Glendale, Eagle Rock, Hollywood, Atwater Village, Echo Park, Glassell Park, Loz Feliz, Silverlake, Highland Park, Boyle Heights, Hancock Park, Cheviot Hills, Koreatown, Miracle Mile, Mid City, Venice, Van Nuys, Encino, Studio City, Sherman Oaks, Panorama City, North Hills, West Hills, Thousand Oaks, Calabasas, Granada Hills, Long Beach, Glendora, Anaheim, Inglewood, Santa Ana, Beverly Hills, Pomona, Marina Del Rey, Playa Del Rey, Mar Vista, Culver City, Cheviot Hills, Holmby Hills, Westchester, El Segundo, Hermosa Beach, Redondo Beach, Manhattan Beach, Huntington Beach, Orange, Irvine, Costa Mesa, Newport Beach, Moorpark, and communities throughout Los Angeles, Orange, Santa Barbara, Riverside, San Bernardino, San Luis Obispo, San Diego and Ventura Counties.

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