Many aspects of commercial leasing are complex—but restaurant leases are an especially unique dish for restaurant counsel to serve up. Counsel to restaurants must be aware of key operational and logistical issues posed by hospitality businesses, and be prepared to address these issues to protect the restaurant.
Cause for Concern in Construction
Restaurant construction is different from other tenants’ fit-out work, involving several moving parts that must come together to facilitate the restaurant’s successful operation. These include utilities, heating, ventilation, and air conditioning, managing odors, grease traps, hot water, and fire suppression systems. While counsel to restaurants need not have the knowledge of a contractor or architect, it’s important to understand the importance of the size of HVAC systems, the design of fire suppression and sprinkler systems, the capacity and location of electrical conduit and electrical service, and sanitary, sewer, and gas lines. For example, grease traps are imperative for restaurants, and it is important to determine (i) whether a grease trap is separate and external, or shared with other tenants, (ii) if shared, how maintenance responsibility and cost will be allocated among the shared users; and (iii) whether the grease trap’s location is convenient for operations.
Mitigation of cooking odors is another key issue, especially in a mixed-use development, shopping center, or an urban residential neighborhood. Some landlords and municipalities require expensive odor control systems, and negotiation is important in determining the size and scope of such measures, especially given how individuals perceive odors differently. It’s also helpful to include an objective standard of negative pressure for odor control. Noise mitigation is likewise an issue landlords may be sensitive to as restaurants draw crowds of people who are out to enjoy themselves, leading to loud voices, music, and other noise that emanates from the restaurant in a way that may affect other abutters and neighbors, especially residences or hotels.
Operations
Hours of Operation: All businesses are sensitive to their hours of operation, but restaurants need to understand the impacts that may come with later hours, which often cause landlords concern (especially if the restaurant serves alcohol). If the restaurant has outdoor seating or a patio area, are those hours the same as for the interior space? Some liquor licenses or municipal regulations may also restrict operations, so it’s important to understand and comply with the requirements and rules of governing bodies.
Deliveries: Restaurants receive multiple deliveries daily, often more than other types of businesses. The logistics of delivering food to the restaurant are critically important. Sometimes landlords want to limit the hours during which deliveries may be made or the loading docks (if any) that may be used. Counsel should know how deliveries will be made and determine whether any restrictions on some will be troublesome to the restaurant’s operations.
Trash: Restaurants generate a substantial amount of trash, both wet and dry, food and nonfood. The location and adequacy of trash storage as well as the frequency of removal are key issues to specify in the lease. Some landlords also require a cold storage area for food waste, and of course, care should be taken to avoid vermin infestations. Where will the tenant need to take their trash? If the common trash room is far from the kitchen, that may present problems for restaurant staff.
Parking: Vehicle parking is an issue for all tenants, but it’s often magnified for restaurants. Counsel should understand where the restaurant’s patrons are expected to park, and if desired, negotiate designated takeout parking spaces for the restaurant. If there is valet parking, or if a development designates certain areas as approved for ride share drop-off/pick-up and not others, counsel should understand whether those services and areas pose a business risk for the client.
Lease Exclusives:
Many types of retail businesses seek exclusives in leases, but restaurants are particularly invested in ensuring landlords do not lease other space to a competitor restaurant. If the development contains a hotel, the restaurant lease should contain an exclusive which prevents the hotel from operating a similar restaurant.
Timing is Key
If a restaurant is located in a mixed-use project or shopping center, or otherwise not on its own parcel, the restaurant will want to negotiate the ability to determine when construction occurs and when it is obligated to open for business. Timing of construction can pose a big risk, resulting in costly delays and interruptions that can set back the opening. Aside from construction timing, opening requirements may be important, especially in light of whether other tenants in the project are open and operating. Restaurant counsel may seek an opening co-tenancy requirement such that the restaurant will not be obligated to open until the major tenant or a substantial portion of the development is also open.
Restaurant leases are more complicated than other retail leasing, and restaurant counsel need to be aware of these unique business issues and strive to fully understand the details of its client’s business to set the restaurant on a successful path.
Jennifer Ioli Connelly is a commercial real estate attorney at Sherin and Lodgen with experience in acquisitions, development, leasing, and financing. In particular, Connelly represents retailers, developers, and institutions on all aspects of commercial real estate transactions.
Richard Heller represents real estate and hospitality clients and has over 40 years of experience advising corporations and businesses on a broad range of business and legal matters. Of Counsel in Sherin and Lodgen’s Real Estate Department, Heller advises clients on all aspects of commercial real estate transactions. He is also a member of the firm’s Hospitality Practice Group, representing hospitality clients on a broad range of projects.
