The parent company of the Chuck E. Cheese and Peter Piper Pizza restaurant chains proposes, as part of its Chapter 11 bankruptcy protection proceedings, paying landlords a percentage of rent based on how each location is used.
The move by Texas-based CEC Entertainment, which filed for bankruptcy in June after citing temporary venue closings tied to the pandemic, may be unprecedented by a restaurant in Chapter 11 bankruptcy proceedings but could become more common as landlords and tenants navigate issues arising from government-mandated closings, according to multiple bankruptcy attorneys.
CEC Entertainment wants to pay partial rent in one of three categories based on usage of the space. In the proposed levels of payment, CEC Entertainment is offering landlords 20% of owed rent for closed restaurants, 30% of owed rent for venues operating with only take-out service, and 40% of owed rent for venues operating with limited in-room dining, according to court filings.
Typically, in bankruptcy cases, a debtor would handle its real estate leases on a one-off basis by either accepting or rejecting it rather than putting leases into different buckets, said Eric Horn, an attorney at A.Y. Strauss, a New Jersey-based law firm. Horn isn’t involved in the CEC Entertainment bankruptcy case but is familiar with concerns from landlords.
“I’ve never seen this before in my 20 years of practicing bankruptcy law,” said Horn in an interview. “This is a new way of doing business in this pandemic and would involve the landlord having to agree with these concessions.”
The approach appears to be an attempt to be equitable to landlords throughout the United States and Canada, Horn said. As of late August, CEC Entertainment had 570 Chuck E. Cheese stores and 122 Peter Piper Pizza stores. About 17% of the Chuck E. Cheese venues are franchised, while 73% of Peter Piper Pizza venues are franchised. The remaining venues are operated by its corporate entity.
Landlords and their attorneys were fairly split about the proposal during a CEC Entertainment bankruptcy hearing at the U.S. Bankruptcy Court for the Southern District of Texas in Houston.
Some landlords want to continue negotiations while others scheduled hearings as early as next week for the partial rent proposal to be considered. Judge Marvin Isgur, who is overseeing the case, has yet to make a ruling on a potential motion tied to these varying rent payments. CEC Entertainment did not immediately return an email request for more information about the proposal.
Alfredo Perez, an attorney with Weil, Gotshal & Manges law firm that is representing CEC Entertainment in its bankruptcy case, said the categories for rent payment allow landlords to get some of their owed rent. He said the debtor with the help of real estate adviser Hilco Real Estate has about 90 landlords left in which to renegotiate a deal.
Cynthia Hegarty, an attorney at Morrison Sund PLLC, one of the landlord attorneys in the CEC Entertainment bankruptcy case, said it appears the rent schedule is a creative solution meant to give Chuck E. Cheese and Peter Piper Pizza, as well as landlords, some short-term relief until the company can figure out a long-term solution. Hegarty, who declined to comment on her client, said it appears negotiations are ongoing with landlords and she’s anxious to see what comes out of discussions at next Monday’s hearing.
“The pandemic has forced tenants, especially retail and restaurant tenants, to come up with some novel approaches,” Hegarty added.
For landlords, it’s not just an interesting legal question that arose from the pandemic, but depending on the outcome, could have significant business implications for the future, she said. From mortgages that need to be paid to property taxes to master lease agreements, Hegarty said, landlords will need to address a plethora of business issues arising from their commercial real estate.
In negotiating retail and restaurant leases, Michael Navarro, an attorney at Shackelford Bowen McKinley & Norton in Houston, said he’s working on deals with language addressing potential shutdowns tied to the COVID-19 pandemic and what kind of rent abatements might be needed by tenants in order to sign a new lease. For restaurants and other entertainment venues reliant on occupancy of a building to help drive revenue, any type of government shutdown can be devastating to business, he said.
“Generally speaking, in restaurant and hospitality leases we are going to continue to see them being structured differently and some landlords could decide they might want to lease to businesses not as affected by COVID-19 and end up pushing restaurants out,” Navarro said in an interview. “These are active discussions I’m having right now.”