Tuesday, January 16, 2007

Restaurant Leases

Retail landlords constantly are seeking ways to keep shoppers at properties longer. Longer stays can mean increased sales. Increased sales can mean increased percentage rental income for landlords and higher profits for tenants. As a result, landlords are setting their sights on recruiting restaurant tenants as the focal point of their leasing strategy; increasingly, restaurants want to be at the center.
Some of the unique issues regarding a retail lease include (but are not limited to):
- Permitted use
- Construction
- Operations
The permitted use should be as specific as possible. Many landlords prefer to incorporate the tenant's menu as an exhibit to the lease, thus restricting what the tenant can sell to that which is on the menu. Conversely, the tenant's interests are best served if the lease language permits flexibility and allows its concept to evolve over time. While the landlord's desire is to protect its tenant mix, the tenant wants to protect its business from present-day competition, yet allow the tenant to evolve to meet its customer's needs over the term of the lease. If a tenant is to be allowed to serve liquor in the premises, the sale of liquor should be specifically included in the permitted use clause, along with the proper liquor liability insurance requirements to be met.
Unique development and construction issues can relate to the restaurant tenant. or instance, many restaurants require grease traps. A grease trap enables a restaurant to function properly without clogging the plumbing systems of the landlord or other tenants. The lease language should be clear as to whether the landlord or the tenant is going to install the grease trap, and who pays for the expense of installation. Additionally, the language should be clear as to whose responsibility it is to maintain and/or replace the grease trap.
Additionally, a landlord may require the use of waterproof membranes for tenants. A waterproof membrane is intended to protect adjoining tenants from the "soggier" side (dishwasher, food prep sinks, etc.) of the restaurant's operation. The lease should clearly define who bears the responsibility for the installation and cost of the waterproof membrane, as well as the repairs and replacement, should they be required.
The lease should state where the tenant's wet trash should be stored. The cost of removing the trash, if it exceeds the normal retail tenant's, should be clearly set forth in the lease.
Restaurant tenants may operate at hours that differ from those of the typical retail tenant. They may operate more or fewer hours.
Restaurants require flexibility to allow their customers time to access parking areas after the other tenants have closed for the day. The lease should clearly state who bears the responsibly of shouldering these extra costs related to the extended or different hours, as well as additional lighting and security costs, if necessary.
Restaurants can create parking nightmares for landlords and other tenants. The parking needs of a restaurant tenant vary greatly from those of a customary tenant. The acceptable parking field should be attached as an exhibit to the lease. It should be of such clarity and detail as to show drive lanes and acceptable parking spaces. The tenant should require language stating that the acceptable parking field complies with applicable local codes and regulations.
Valet parking is an increasingly popular amenity, especially when restaurants are clustered together as part of an entertainment complex or lifestyle expansion. An exhibit should be attached to the lease, which clearly defines where the valet parking pick-up and drop- off location is located. The lease should also define whose responsibility it is to maintain and/or pay for the services.
Existing utility loads available to other retail tenants are not always sufficient to support the needs of kitchen equipment, gas lines are not always available at the premises, and new water and sewer lines may be needed. It is important for both the landlord's and the tenant's attorneys to involve their respective construction coordinators early in the deal process to ensure that any and all work letters are drafted in conformity with pre-approved work responsibilities.
The landlord usually insists on unfettered rights to relocate tenants. However, in light of the capital investment made in the site, and the research made in selecting the location, restaurant tenants often resist any relocation rights contained in the lease.
Understanding future development in the vicinity is crucial to understanding whether or not to delete relocation rights.
Many landlord lease forms contain a lien on tenant's fixtures.
However, a significant number of restaurant tenants obtain financing on or even lease their equipment. Therefore, tenants usually ask for the waiver of a landlord's lien on their equipment. The lease can provide for the subordination of a landlord's lien without much risk to the landlord.
A popular financing mechanism is for tenants to grant leasehold
mortgages in favor of their lenders. Landlords should be careful
that the language agreed to does not vest in the lender any rights to control the operation of the premises in the event of a default by tenant.
At the expiration of the lease, the parties are concerned with their responsibilities with regard to the condition of the leased premises. The lease should provide that the tenant has the right to remove all of its fixtures and kitchen equipment. However, it should be the tenant's responsibility to restore the premises to the same condition as they were at the commencement of the term. For more information or a list of our restaurant clients please see:

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