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

December 11, 2008 | Insights

Republished with permission from the December 2008 edition of A’La Carte: Foodservice Consulting Group.

By Rob 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.

Please note that this content is for informational purposes only and does not constitute legal advice. This information does not establish an attorney-client relationship with Jackson Walker or any individual attorney at Jackson Walker. You should not act or rely on any information from this article without seeking the advice of an attorney licensed to practice law in your jurisdiction for your particular issue. For additional assistance in these areas, you can contact an attorney in Jackson Walker’s Real Estate practice.

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Robert W. Harlow
Partner, Houston