A ‘MAD SCRAMBLE’ IN THE RESTAURANT SECTOR
closures, rent renegotiations and ‘predatory’ secrecy
• A rapid rise in restaurant closures together with growing numbers of tenants struggling to pay rent has led to a flurry of dealmaking for some of Toronto’s most sought-after commercial spaces.
Industry insiders say that in some cases, landlords are striking different deals with different tenants, and forcing tenants to sign non- disclosure agreements (NDA) about the terms of their respective deals with each other. In other cases, landlords are renegotiating leases out of fear that rapidly declining rent prices will cause tenants to seek cheaper premises.
“Right now, it’s a mad scramble,” said Stephen Lilly, a commercial realtor and restaurant broker who runs his own company, Toronto Restaurant Brokers. “You will have the same landlord dealing with a different property in a completely different way.”
Andrew Oliver, chief executive of Oliver & Bonacini Hospitality Inc., a restaurant group that operates almost 40 restaurant and event spaces in Toronto, Montreal, Calgary and Edmonton, said he’s dealing with an “unpleasant” landlord who requested he sign an NDA when he even broached the question of renegotiating the lease terms on an existing property.
“Even to have the conversation about rent relief, they are making you sign something that says if you talk about it, your lease will be terminated. I think that is predatory,” said Oliver, who has not paid rent on any of his premises for April and May because he said his company has lost as much as 98 per cent of its revenue.
“Landlords realize dealing with different tenants differently will be a public relations nightmare, so they are saying ‘ Sign this NDA, we will give you a good deal, but just don’t talk about it.’ We have refused to sign anything,” he said.
“In fairness, everyone is shocked, and we are still in the early innings of this mess.”
The hospitality sector has taken a dramatic hit from the COVID-19 pandemic, with almost 800,000 restaurant workers laid off across the country, according to Restaurants Canada, and 30 per cent of restaurant owners said they will probably have to permanently shut down if the status quo persists for the summer months.
Some popular bars and restaurants in Toronto such as Pretty Ugly, The Hideout, Marché Movenpick and Southern Accent have been forced to shut their doors, either evicted by their landlords or because they have not been able to make ends meet despite a bevy of government income- support programs targeted at individuals, workers, businesses and landlords.
The turmoil has sparked a new flexibility in negotiating leases and in buying or selling restaurants that the sector has not seen in years, according to Stephen Murphy, a restaurant investor and founder of OMG Real Estate, a Toronto- based commercial real estate company.
“There’s certainly a lot more for sale,” he said. “Four months ago, people were rushing to sign leases at $ 80 a square foot in an area like King West. That used to be $ 35 to $ 45 dollars a square foot, so I think we’re going to see a recalibration of prices, back to what they really are supposed to be worth.”
One deal- maker, who declined to be named because he wasn’t authorized to discuss ongoing transactions with the media, said a major landlord owning a building in Toronto’s clubbing district has negotiated a new lease with an existing club owner that brought the rent down to $ 65 per square foot from $105.
“No one’s going to buy a club,” the deal- maker said. “I’m seeing restaurants selling, there’s definitely an interest in buying small bars and restaurants, but not clubs.”
Contracts between landlords and tenants are also becoming more “unorthodox and interesting,” Lilly said.
For example, he recently negotiated a lease involving a learning institution for international students that included a clause stating the institution would have the option to extend the deal’s closure for up to six months in the event of government- imposed travel bans or restrictions against allowing international students into the country. The institution is taking over a recently vacated restaurant space.
“I’m observing a lot of tension between landlords and tenants,” he said. “Everyone is feeling the effect of this, so you could say there’s a lot of heartache, but a lot of opportunity as well.”
Murphy said as many as 160 restaurants would be for sale at any given point prior to the pandemic, but that number has rapidly risen in the past two months.
“I’ve been on the phone with 14 clients today saying they are not going to be able to open up, even when they’re allowed to,” he said. “At the same time, I’ve got someone giving me a call saying they’re interested in buying a brewery, so how about that?”
Much of Murphy’s work over the past few weeks has been trying to convince landlords on the verge of evicting bar and restaurant tenants that they might not be able to find a new tenant willing to sign a lease.
“It takes four months to get a liquor licence now. Then a few more months to fix up the place, so even with a new tenant, they’re probably not going to be able to pay you rent for maybe three- quarters of the year,” he said. “Why not use the government rent relief program and work with the tenant?”
Both The Hideout and Pretty Ugly — clients of Murphy’s — were locked out of their premises after failing to pay rent. The Canada Emergency Commercial Rent Assistance program was first announced April 16, but landlords can’t apply until May 25, so in the interim they have been either crafting their own deals with tenants, or kicking non- paying tenants out, he said.
Murphy believes that those who have the best chance of economically surviving the pandemic are bar and restaurant owners lucky enough to own their own property.
“The longtime guys are only surviving because they own their own brick and mortar. They are more cushioned than most others,” he said. “They’re not going to deal with landlords pushing them out because they can find tenants that can pay $80 a square foot instead of $50. That was what this sector had become in Toronto, and I think it’s over. We’re in a new environment now.”