He signed an agreement, so why is the owner of this popular Biloxi restaurant suing the city?

McElroy’s restaurant at the Biloxi Small Craft Harbor on Nov. 28, 2017. McElroy’s is suing Biloxi over terms of the lease.
McElroy’s restaurant at the Biloxi Small Craft Harbor on Nov. 28, 2017. McElroy’s is suing Biloxi over terms of the lease.

He agreed to the terms of the lease when McElroy’s Harbor House at the Biloxi Harbor reopened after Hurricane Katrina, and now restaurant owner Mickey McElroy is paying his rent to the city under protest and is suing Biloxi in Chancery Court to get his payments lowered.

McElroy’s attorney, Wayne Hengen, said McElroy essentially is double-paying. The lawsuit is asking that monthly lease payments be lowered from about $6,000 a month back to about $2,600.

“We are asking the court to rule as void that portion of the lease that requires Mickey to pay back to the city the insurance proceeds that he used to rebuild the Harbor House restaurant after it was destroyed by Hurricane Katrina,” Hengen said.

City officials disagree.

“Years ago, McElroy’s signed a long-term lease to use this city property,” said Vincent Creel, public affairs manager for Biloxi. “The lease spelled out that the rent would be adjusted after a five-year period. Now that the five-year point has passed, McElroy’s is challenging the signed lease. The city must protect the interests of the taxpayers, and, accordingly, believes the lease is as fair today as it was five years ago.”

McElroy went before the Biloxi Council several times after Katrina trying to work out his comeback, and it took almost seven years from when the restaurant was destroyed in August 2005 until it was rebuilt and reopened in May 2012.

During that time, Hengen said, McElroy continued to pay the $1,822 rent to Biloxi on a building that was no longer there, along with his liquor license renewal and insurance on the property.

The restaurant was damaged again during Hurricane Nate in October and McElroy paid for the repairs. At the end of the lease in 2040, the building will belong to the city, Hengen said.

The 45-page lawsuit contends that McElroy was in “a desperate financial situation” when terms of the lease were being renegotiated and he had to take what was offered by the city or risk losing his lease on the property.

McElroy built the original restaurant and added onto it several times over the 25 years before Hurricane Katrina. New flood regulations required that he rebuild 29 feet above sea level, which increased costs and provided much better views of the water, the Biloxi Small Craft Harbor and Deer Island.

The $657,258.80 insurance check was issued to McElroy after Katrina. Biloxi attorneys said the building and insurance money were the property of the city and demanded that McElroy turn the money over to them, according to the lawsuit.

McElroy used the insurance proceeds to rebuild, and Hengen said, “As it stands now he’s paying rent but its cost and value are far more than the insurance that he received. And he paid for all of it through loans he is paying back,” he said. “So our position is they’re being double paid — the insurance proceeds pay back that is part of the lease and the rent that he’s also paying. Not to count the other loan payments that he’s making.”

Under the amended lease, rent was set at $2,574.76 for the first five years after the certificate of occupancy was issued on June 29, 2012, plus an additional $1,000 for use of insurance proceeds. Starting in July 2017 the rent increased by $238.07 a month in consideration of deferring rent for the first five years, and another $2,190.86 plus costs for using insurance proceeds to rebuild, for a total of about $6,000 a month.

The lawsuit asks that McElroy not be required to pay the fees for using the insurance proceeds or for deferring the rent for five years, which totals about $3,429 a month. That would return the monthly payment to $2,574.76. The lawsuit also asks that Biloxi reimburse McElroy for the amount he’s already paid for these additional charges.

Biloxi recently signed an agreement to lease the city-owned Old Biloxi Library on Lameuse Street for $7,500 a month. The Original Beignet Factory will pay $4,700 a month for the second floor and Old Biloxi Library LLC signed a $2,800 lease for a steakhouse on the first floor. Both tenants have an option to buy the property.