Top 10 Legal Considerations For Restaurant Leases
Abe Schear

As restaurants seem to be a more integral part of most every project, it is important to reflect on issues which provoke anguish in the negotiation and, when not addressed, aggravation during the lease term. Restaurants varying in size, leverage and importance, can, when properly effectuated, promote just the right image for the project and, to fulfill that goal, their needs must be properly addressed. Ten key issues are noted below in no particular order.

1. Hours of Operation: Related to the use clause, of course, the lease needs to properly reflect the hours and, in addition, whether the tenant will pay additional charges if open beyond the specified hours or those established for the overall project. Often, this is reflected in a lease that the tenant must be open “not less than” a set number of hours per day, but does the tenant need to be open “such additional hours as requested by the landlord”? Does this play at all into any co-tenancy provision? How late may the tenant be open? In a mixed use environment, are there noise concerns? If there is a kickout, must the tenant be open minimum hours to effect such an option? As to a smaller tenant in a mall setting, can the tenant be open early to serve mall walkers?

2.Patio Seating: Many restaurants (and landlords) today want patio seating to both expand the usable area of the premises (the square footage is not normally included in the size of the premises) and, from the landlord’s perspective, enhance the visual appeal of the project; two very important considerations. Often lost in the shuffle are considerations such as who cleans the area? What insurance obligations are required? Who installs a railing (if needed)? What are the standards for patio furniture (and who pays and maintains same)? What are the maximum hours for the patio? Are there noise restrictions? Can the patio be enclosed for “all-weather use”?

From the landlord’s perspective, the lease should definitely include the patio square footage as part of the premises (particularly in determining rent and extra charges), and clearly allocate the risks noted above.

3. Grease Trap/Utilities: How many times have we, as landlords or tenants, asked how and where are the grease traps and/or utilities? If utilities are stubbed “near the premises,” where is “near”? If there is a grease trap, who is paying for it? Who pays to have the grease trap cleaned and how are these costs allocated? Are some facilities shared or must each tenant provide for itself? In a mixed use project, where is the venting and who pays for the maintenance? In new space, the parties need to work closely to make sure that the slab is not poured before the plumbing is set.

4. Use: While it is essential that the initial use be property identified (and a menu attached to the lease where possible), so too is it important to focus on what tenant can and cannot sell, particularly in the event of an assignment. If, for instance, the use is a Mexican restaurant, and if the tenant fails to produce a viable restaurant with that use, is it reasonable to expect that the assignee will have the same use? Should the size and complexity of the project have a bearing in the answer? Of course, the existence of exclusives and restrictions (the tenant’s and others), should be analyzed and appropriate limitations included in the lease. Also, the tenant should only have the right to protect an exclusive use so long as it continues to use the space for that use. It should not be able to bar others from attempting to succeed where it has failed.

5. Assignability: The longer the lease term, the more likely assignability will come into play. While expecting some degree of flexibility, The tenant needs to understand the landlord’s requirements, particularly:  (i) acceptable use (if changing); (ii) demonstrable ability to execute the obligations of the tenant; (iii) appropriate reputation; and (vi) acceptable financials. The tenant also needs to understand that it is not likely to be released from its obligations under the lease unless the assignee’s financials are significantly greater than the existing financials of the Tenant. The lease should also address a possible assignment to a related entity as part of a company sale or transfer to a franchisor or franchisee.

6.Fixtures: More so than in a ready-to-wear uses, the parties need to be clear as to who owns the fixtures. The landlord expects that equipment such as sinks, coolers, hoods, fire prevention equipment and the like will stay with the premises, particularly if there was an initial tenant allowance that likely paid for a part or all of these items. While the seating/decor/fixturization might change from time to time, the preparation area is much more likely to remain unchanged and the costs to replace and modify it are much more expensive. From the landlord’s perspective, providing for (and perfecting) a security interest in these more permanent fixtures might be in order.

7. The Guaranty: Given the expense of a restaurant, often the landlord’s, and the likelihood of a “shell” corporation as the tenant, is it predictable that a guaranty will be required. The tenant should expect this requirement, but may seek to limit the scope of the guaranty by dollars or time. Perhaps the amount will be reduced as time goes on and the tenant stays out of default, or perhaps the guaranty will terminate at the end of the original term, notwithstanding that the tenant exercises an option to extend the term. The tenant also needs to understand that the guaranty is not likely to be released in the event of an assignment without specific negotiation of that point and the satisfaction of certain stringent criteria.

8. Parking: More important as time moves on, this problem focuses on three basic issues:  (i) a “no build” zone; (ii) the cost of parking; and (iii) the location of parking. This becomes more and more important in the mixed use model as the tenant needs to know where its customers will park and what it will cost. Like many of these issues, the concept of remedy for a breach by the landlord should be addressed in the lease as well. Simply put, in most retail environments, accessible and affordable parking is key to a restaurant’s success and needs to be specifically dealt with in the lease.

9.Permitting: The tenant cannot open unless it has its permits and if the commencement date is tied to such condition, what level of effort is the tenant required to make to obtain the permits? Is an expeditor required? May the landlord (at the tenant’s cost) obtain such permits? What happens if the permits are not obtained? It is critical that the timing is properly aligned with the commencement date and reflect accurate local requirements rather than relying on generic terminology.

10. Construction Issues: Ultimately, the landlord and the tenant must delineate the division of build-out responsibility and the lease needs to reflect the cost allocation. Are there to be chargebacks to the tenant? It is, of course, never a healthy situation if the landlord and tenant have not agreed in writing on the allocation of responsibilities, resulting in delays and aggravation. At the time the lease is being negotiated, both parties will sincerely want to open as soon as possible, but financial, construction, staffing and other issues intervene and from the landlord’s point of view, should not be allowed to postpone the opening.

The above “Top 10” are but a sampling of unique restaurant issues. Failing to address them correctly will result in delays, confusion, and increased costs, and may impact the success of both the restaurant and the project.

Abe Schear is a partner with Atlanta-based Arnall Golden Gregory. He can be reached by e-mail at Abe.Schear@agg.com.


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