Most landlords have a typical “retail center” form lease for each tenant in their shopping center. These do not often change based on the type of business being run by the tenant; however, when it comes to leasing to food tenants (e.g., sit-down, fast casual and fast food restaurants, or to-go establishments), specific issues should be closely considered. In these cases, it makes sense to deviate from the standard lease to address issues unique to food tenants. Following are some of these issues.
- Permitting/Approvals: Items such as a drive thru, liquor license, and early and late opening/closing times may require special permitting and additional time for approval before a tenant can occupy and operate space. Particular attention should also be paid to parking ratios—both those required by code and those that may be set forth in a declaration of use restrictions—as food tenants usually require more parking than other retail tenants. Most landlords do not want a contingent lease, and most tenants want to know they have the necessary approvals before they sign, so planning is required.
- “Use” Clause: Landlords must be careful to limit the use clause, and not violate any exclusive uses of existing tenants. Tenants, on the other hand, want flexibility in case their concept does not work and a change in offerings is desired. If the tenant requests an exclusive use clause, it must be tailored to maintain the landlord’s flexibility to lease the balance of the center, while ensuring the tenant’s use will be protected against competitors. The use clause does not need to match the exclusive clause. For example, a tenant may be permitted to use the space for “any restaurant that does not violate an existing or future exclusive use in the center,” while at the same time, have the exclusive right to sell pizza. Tenants should make sure they have the right to change their signage should their restaurant’s food concept change.
- Grease Traps: For food tenants with grease traps, landlords are wise to require tenants to have a contract to clean and maintain the grease traps, and to be responsible for the consequences of failing to do so.
- Interior Space: There may be special maintenance requirements for restrooms, ADA compliance, and venting and fire protection for food tenants. The lease must clearly indicate whether the landlord or tenant is responsible for such items. Landlords should also control noise and live music, so as not to disturb other users of the center.
- Pests and Mold: Landlords should ensure that tenants are responsible for keeping the premises clear of pests and mold, and to promptly report sightings of either.
- Tenant Equipment: If a landlord leases space to a food tenant and the space was not previously used for this purpose, the landlord should take security interest in the restaurant equipment. This protects the landlord should the tenant go out of business, as it is easier to find a new food tenant if there is existing restaurant equipment. However, most restaurant equipment will be financed, so it may be subject to a bank lien. If this is a concern, landlords may wish to use their tenant improvement allowance money to purchase the equipment and avoid the potential of fighting with the bank over ownership.
- Garbage Removal: Since restaurants are heavy garbage producers, it would be prudent for landlords to provide the food tenant with a separate dumpster. The cost associated with this dumpster should be the responsibility of the food tenant, not the non-food retail users. This is the most equitable and reasonable way to handle garbage removal, and is fair to both the food tenant and the other tenants of the center.
- Patios: A lease must be clear that any patio is part of the defined “premises,” even if the square footage is not used for rent calculations, and that the patio use must be insured and maintained by the tenant, and subject to all municipal approvals.
- Recapture and Early Termination Provisions: The average life span of most restaurant concepts is five years or less. For this reason, landlords should consider a “recapture” provision in the lease. On the other hand, food tenants should try to secure the right to assign, sublet or restructure the ownership without having to get landlord consent. Another option is an early termination provision. This allows the tenant to break the lease. The landlord should be sure to include a termination fee equal to unamortized tenant improvement payments, the cost of landlord’s work, commissions, and free rent.
Whether you are a tenant or a landlord, these unique issues for food tenants must be considered. As appropriate, the shopping center’s standard for lease should be reviewed carefully and revised accordingly.
For more information, please contact Brad Dallet at (414) 978-5525 or firstname.lastname@example.org, or another member of the Real Estate Practice Group. This article appears in the Spring 2012 edition of the Real Deal Newsletter, presented by the Real Estate Practice Group of Whyte Hirschboeck Dudek S.C.