Case Study 1: The Year Everyone Read Their Lease

What the 2020 dining-room closures revealed about a document the industry had been signing without reading

Background

In March 2020, state and local governments across the United States issued orders that closed or severely restricted indoor dining. This is documented public record: the orders were issued, they varied by jurisdiction, they were amended repeatedly over the following eighteen months, and for extended periods a very large number of American restaurants could not lawfully do the thing their premises existed to do.

Rent did not stop.

That sentence is the entire case study, and it produced the largest simultaneous examination of commercial lease language in the history of the American restaurant industry. Operators who had never opened the binder went looking for the clause that would save them. Landlords — many of them carrying their own mortgage obligations, many of them not large institutions — went looking for the clause that would not. Both sides found the same thing, and it surprised almost nobody who had read a commercial lease carefully and almost everybody who had not.

The operating issue

Three legal arguments were raised, over and over, in negotiations and in litigation across many jurisdictions. Each is worth understanding structurally, because each one teaches something about how leases are actually built.

Force majeure. Most commercial leases contain a clause excusing performance that is prevented by events outside a party's control — the traditional list runs to acts of God, war, civil unrest, strikes, and governmental action. Two features of these clauses proved decisive. First, whether a pandemic or a government closure order fell within the enumerated events depended entirely on the specific wording, and wordings differed enormously; some clauses named epidemics or quarantines, many did not, and many contained a catch-all whose reach was contested. Second — and this is the feature that mattered most — a great many commercial force-majeure clauses expressly provide that nothing in the clause excuses the obligation to pay money. That carve-out is standard, it is usually one sentence long, and it had been sitting in these documents unread for years.

Impossibility and impracticability. The argument that performance became impossible. Courts have generally treated the obligation to pay rent as an obligation that money can satisfy, and a tenant's inability to generate revenue has historically been distinguished from an inability to perform.

Frustration of purpose. The most interesting argument, and the one with the most varied outcomes: that the fundamental purpose for which the lease was made — operating a restaurant open to the public — was destroyed by an unforeseen event, even though performance remained technically possible. Where a lease's permitted-use clause was written narrowly and specifically ("operation of a full-service restaurant"), some tenants argued that the narrow drafting itself established what the parties' shared purpose had been.

Courts in different states, applying different bodies of contract law to differently worded documents, reached genuinely different conclusions. There is no single national answer, and anyone who tells you there is has not read enough of the record. What is not in dispute is that the outcome turned overwhelmingly on the specific language of the specific lease — which is precisely the point of this chapter.

What it shows

Four things, each of which changes how a practitioner reads a lease.

One: the clauses you never negotiate are the ones that decide catastrophes. No first-time restaurant tenant in 2019 negotiated their force-majeure clause. It was boilerplate near the back, between casualty and notices, and it read as though it were about hurricanes. In 2020 it turned out to be the most consequential paragraph in the document for an enormous number of businesses.

Two: narrow drafting cuts both ways. A narrow permitted-use clause is normally bad for a tenant — §6.5 argues exactly that, because it blocks catering, retail, delivery brands, and private events. In the frustration-of-purpose arguments, some tenants found that same narrowness working in their favor as evidence of shared purpose. This is not a reason to accept a narrow use clause. It is a reason to understand that every clause has a downside case, and that the downside case is the one you should read for.

Three: most of this was resolved commercially, not judicially. Litigation is slow and expensive, and a landlord who wins a judgment against a closed restaurant frequently wins a piece of paper. The great majority of these disputes were settled by negotiation, and the instruments used are worth memorizing because they are the same instruments available in any bad year:

• Deferral — rent postponed and repaid later, often amortized over the remaining term.
• Abatement — rent forgiven outright for a period, typically in exchange for something.
• Percentage-rent conversion — a temporary switch from fixed rent to a share of actual sales, which is the single most elegant structure for a demand shock because it moves with the business.
• Blend and extend — reduced rent now in exchange for additional years on the term, which is a landlord converting a cash problem into a duration asset.

Note what every one of those has in common: the tenant had to have something to trade. Term, credit, a track record, an improved space, a personal guarantee already in place. Operators with nothing to trade got the worst deals.

Four: government intervention changed the negotiation, not the lease. The Paycheck Protection Program and the Restaurant Revitalization Fund were documented public interventions that put cash into restaurants and, indirectly, into landlords' hands. They shifted what was negotiable. They did not change a word of anybody's contract.

Outcome

The visible, durable consequence is in the documents themselves. Commercial leases negotiated after 2020 commonly address government-ordered closure explicitly — sometimes allocating the risk to the tenant more clearly than before, sometimes providing for abatement or percentage-rent conversion during a mandated closure, and frequently expanding or tightening the force-majeure enumeration in whichever direction the drafting party preferred.

That is the honest outcome, and it is not a triumphant one: the industry's response to discovering that a clause allocated risk badly was for both sides to start negotiating that clause. Which is what should have been happening all along.

The other durable consequence is cultural. A generation of operators now reads the lease. Ask a restaurateur who signed before 2019 what their force-majeure clause says and you will usually get a blank look. Ask one who has signed since and you will frequently get a specific answer.

Lesson

A lease allocates risk, and every clause you do not negotiate is a risk you accepted without pricing it.

That is the transferable principle, and it is much larger than pandemics. The same structural insight applies to the clauses in §6.5 that this chapter told you to negotiate:

• A relocation clause allocates the risk of a landlord's redevelopment to you.
• A continuous-operation covenant allocates the risk of an unprofitable daypart to you.
• A repair-and-replacement allocation puts somebody else's rooftop HVAC on your balance sheet.
• An absolute assignment-consent right allocates the entire resale value of your business to the landlord's discretion.
• An unlimited personal guarantee allocates the risk of business failure to your household.

None of those is scandalous. Landlords are not villains, and a landlord who has funded \$75,000 of improvements has a legitimate interest in recourse. But every one of these is a priced term in a negotiation where the tenant usually does not know they are negotiating.

The practical instruction is uncomfortable and simple. Read the clause you think will never matter, ask what happens in the worst year you can imagine, and if the answer is "I pay regardless," decide whether that is acceptable before you sign — because that is the only moment at which you have any leverage at all.

Discussion questions

1. The force-majeure carve-out — "nothing in this clause excuses the obligation to pay money" — is standard, and from the landlord's side it is entirely rational. Argue the landlord's position honestly. What would happen to the commercial real-estate market if rent obligations were routinely excused by events outside both parties' control?

2. Of the four settlement instruments named above (deferral, abatement, percentage-rent conversion, blend and extend), which would you most want as a tenant, and which would you most want as a landlord? Do your answers conflict, and what does that tell you about which one actually gets agreed to?

3. This chapter argues for a broad permitted-use clause. Some 2020 tenants argued that their narrow use clause helped their frustration-of-purpose position. Reconcile these. What should a tenant actually do, and how do you weigh a certain operational cost against an uncertain legal benefit?

4. Operators "with something to trade" got better outcomes. Name three things a first-year restaurant tenant could have in their pocket, before a crisis, that would be worth trading — and say which of them are decided at the moment of signing rather than during the crisis.

5. Suppose you are negotiating a lease today and ask for a clause providing rent abatement during any government-ordered closure of indoor dining. The landlord refuses. What do you ask for instead, and what would you offer for it?

6. The lesson claims that "every clause you do not negotiate is a risk you accepted without pricing it." Push back on this. Is there a point at which the transaction cost of negotiating every clause exceeds the expected value of doing so — and if so, how would you decide which five clauses to spend your leverage on?