News, Insights & Events

Restaurants Continue to Face Uncertain Times Due to the Impact of COVID-19

February 3, 2021

Joel F. Newell

Phoenix, Arizona

Before the impact of COVID-19, restaurants were already facing various developments that collectively impacted historical dine-in trends. Whether it was the increase in patrons utilizing delivery services such as UberEats, DoorDash, GrubHub, or the fairly new market of prepackaged, ready-to-cook meals such as Blue Apron. Each have impacted the restaurant industry in different ways.  The decline in dine-in patrons was exponentially increased with COVID-19 restrictions.  Leaving the questions of how, can, and will restaurants adjust to remain open. . . and how long can restaurants keep their doors open in the present status quo.

On January 8, 2021, the U.S. Department of Labor reported that in December 2020, employment declined by 498,000 in the “leisure and hospitality” area.  75% of this decline was attributable to a decrease in food and bar service.  The U.S. Department of Labor further identified that since February 2020, the “leisure and hospitality” industry is down 23.2% (or 3.9 million workers).  Recently, Steve Chucri, CEO of the Arizona Restaurant Association, was quoted in the Phoenix Business Journal stating the following in relation to the impact of COVID-19, “Arizona restaurants have lost $2 billion and 1,000 restaurants have been closed for good.”  Thus, despite positive trends with distributing vaccines, the restaurant industry is neither certain nor stress-free.  Bankruptcy has been and will continue to be a potential solution to distressed small businesses, like restaurants.  However, many restaurants (and small businesses in general) hesitate in pursuing bankruptcy relief as it starts the time clock in certain crucial areas, such as:

• Administrative claims from vendors that shipped goods within 20 days of filing Bankruptcy.  See 11 U.S.C. § 503(b)(9);
• Time limitations to reject or assume executory contracts and unexpired leases.  See 11 U.S.C. § 365(d)(4); or,
• Whether the venue and timing for the bankruptcy filing impacts the payment of rent under non-residential real property leases.

The above is not an exhaustive list of considerations before seeking bankruptcy relief, but provides some key issues on the prospective timing of filing bankruptcy.  Some of these hesitations may have been reduced recently.  The larger restaurant bankruptcies that have sought relief during the pandemic include Chuck E. Cheese, Sizzler, and California Pizza Kitchen.  Although the smaller to mid-size restaurants that may have filed for bankruptcy relief during the pandemic would not likely draw the same public news reporting, it does not appear many restaurants are pursuing an attempt to restructure through bankruptcy. Rather, as mentioned above, many individually owned or smaller restaurants have simply closed their doors.  

The Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020.  The CAA not only provided for approximately $284 billion in aid for small businesses, but also made certain changes to the U.S. Bankruptcy Code.  Many of the changes to the U.S. Bankruptcy Code are specifically beneficial to small businesses. Before taking a look at some of the changes to the U.S. Bankruptcy Code, let’s first turn to what has commonly been referred to as PPP2.  The Small Business Administration started accepting applications for Paycheck Protection Program (PPP2) loans on January 11, 2021, for business that did not receive a prior PPP loan.  Those small businesses that did receive a prior PPP loan were permitted to apply on January 13, 2021.  The ongoing discussion is whether the combination of the CARES Act and the recent CAA will be sufficient to aid small businesses during the pandemic recovery. 

The CAA included amendments to the U.S. Bankruptcy Code that specifically apply to subchapter V debtors.  The CAA amended 11 U.S.C. § 365(d)(3) to permit the debtor to seek an additional 60 days (total of 120) before it is required to maintain post-bankruptcy non-residential real property rent obligations.  The additional time given to subchapter V debtors is particularly of interest in light of the fact that subchapter V debtors, unless otherwise ordered by the Court, have to file the Plan within 90 days of filing for bankruptcy.  This amendment to 11 U.S.C. § 365(d)(3) also has a 2-year sunset provision. 

There were additional amendments to 11 U.S.C. § 365 that also provide additional time to both subchapter V debtors and Chapter 11 debtors that do not otherwise have the benefit of the above amendment.  Time will tell whether the CAA amendments to the U.S. Bankruptcy Code will compel debtors and landlords to work more closely with one another to pursue an amicable solution; or, will the additional time provided place additional strain on landlords and their tenants as they consider what options are available to weather the extended impact of the pandemic.  It is always recommended to stay informed as these areas are continuing to evolve as time passes, and to encourage those experiencing the continued economic impact to consult professionals about potential workout options or, if warranted, consider the relief provided under the U.S. Bankruptcy Code.