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Welcome to the Jungle: Negotiating Restaurant & Bar Leases With Landlords Who Just Don’t Get Hospitality

Too often attorneys representing restaurant, bar, and other hospitality clients must deal with landlords (or their agents, such as asset managers, property managers, or brokers) who are not well-versed in the needs of the F&B tenant. These negotiations can prove frustrating for attorneys who frequently represent these clients. This session will explore some critical F&B lease provisions, as well as strategies for helping landlords and asset managers understand the rationale behind why they are necessary.

CRITICAL PROVISION #1: RENT COMMENCEMENT.

Unlike traditional retail tenants, such as shoe stores or hair salons, restaurants and bars (and donut shops and catering kitchens and virtually every other kind of F&B operation) require highly-specialized mechanical, engineering and plumbing drawings, as well as the inclusion of grease traps, vent hoods, patios, etc. These can affect the time required obtain architectural drawings and, once the drawings are complete, the time required to obtain a building permit from the municipality in which the premises is located. Traditional rent commencement clauses require rent (and other charges) to begin a certain number of days following execution of a lease or delivery of the premises to the tenant, but this can significantly increase the risk that the tenant is paying rent before it is ready to open.

CRITICAL PROVISION #2: EXCLUSIVITY.

Exclusivity provisions should prevent a landlord from leasing space to a similar, competitive enterprise. Tenants, however, often fail to realize that parcels of a shopping center or development are owned by different landlord entities, and without specific language to the contrary, an exclusivity provision binding a landlord entity on one parcel does not bind an affiliated entity in a neighboring parcel. Most landlords will not hesitate to put a paying tenant in close proximity to your client if they have the right to do so, regardless of its financial impact on your client.

Further, exclusivity provisions are often poorly drafted and lack the specificity necessary to prevent landlord infringement. If your client is a diner serving breakfast and lunch, then you do not want an exclusivity merely preventing the landlord from leasing space in the project to another diner. That exclusive is far too broad to afford real protection to the client.

CRITICAL PROVISION #3: ASSIGNMENT.

Landlords to not want tenants to have the unrestricted right to assign the lease to just anyone. That is a valid concern. Conversely, however, a Tenant selling its restaurant should not be beholden to the Landlord’s consent to determine whether the deal will close – especially when the buyer is of a similar net worth and experience level as the tenant. Thus, the use of “Permitted Transferee” language is critical, as is the elimination of landlord consent for an enterprise-level sale of the food and beverage company.

CRITICAL PROVISION #4: PAYMENT OF TENANT IMPROVEMEMT ALLOWANCE.

Because food and beverage tenants have much more significant build-out requirements than most retail tenants (see above), lease provisions requiring that tenants wait to receive 100% of the tenant improvement allowance allocation until after the completion of construction, opening for business, and receipt of all lien waivers is highly-burdensome. Food and beverage tenants should insist on progress payments of improvement allowances, which will reduce the upfront capital requirements on the tenant (often requiring fewer investors or less bank debt), with a final installment payable after opening, receipt of lien waivers, etc.

David Denney

Mr. Denney's practice encompasses both corporate transactions and business litigation. Prior to forming the firm in early 2007, David practiced with Vial, Hamilton, Koch & Knox, LLP, where he was a member of the Litigation and Corporate Transaction Practice Groups, and where he later founded and chaired the Food, Beverage and Hospitality Practice Group. David frequently speaks across the country on legal issues facing the restaurant, bar and hospitality industries.

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