While there is obviously some commonality among different commercial leases, restaurants often have specific issues that arise from their use which are not encountered in a standard retail tenant negotiation. One of the most fundamental differences between a restaurant and a clothing store is hours of business. Few of us expect to buy clothes much past 9 o’clock at night, but most of us expect sit-down restaurants to still be open at that time. Similarly, we may shop for clothes at 10 o’clock in the morning, but we rarely patronize licensed sit-down restaurants in shopping centres before lunch time. Indeed, both food court and sit-down restaurant tenants will likely want to be able to operate independent of the general operating hours for the shopping centre.
The restaurant’s proposed use itself will also need to be considered in the context both of existing and prospective uses in the centre. A restaurant tenant will likely not be prepared to be tied to a sample menu appended to the lease for its entire lease term but, on the other hand, the landlord will want some certainty that the restaurant will be compatible with, rather than competitive with, existing and prospective users. A use clause, for instance, of “foods derived from various Mediterranean cuisines,” although potentially appealing to the demographics the landlord wants to reach, may cross over the themes of several other food sellers in the property including, for example, an Italian restaurant and a Greek restaurant. Even in the absence of any exclusive covenants protecting those uses, a prudent landlord will want to ensure that a new tenant is not cannibalizing the sales of an existing tenant.
Other Tenants’ Expectations
As with many retail uses which fall outside of the standard “store” type use, there may be controls in place which prohibit a landlord from proceeding with the deal. A food anchor, for instance, may prohibit a sit-down restaurant within 300 feet of its entrance. Many anchor tenants prohibit “arcade” type uses, whether or not they sell food as well, so there needs to be clarity as to whether or not four or five pinball or arcade-type machines within a restaurant will cause a problem for the landlord. Similarly, some anchor tenant leases prohibit “nightclubs and discotheques.” This wording may have had a clear meaning in the 1970s but is often difficult to interpret in the context of a 21st century shopping centre.
Some in-line retailers may also require that the landlord not lease to food uses on either side of their space. This is uncommon, but not unheard of, with the more expensive ladies’ wear stores as they do not want their merchandise ruined by careless hands holding ice cream cones, cups of coffee or other food items.
Although food court and coffee outlets generally do not need a liquor licence, almost all sit-down restaurants will want to serve some sort of alcoholic beverages. Obtaining a liquor licence generally involves a sufficiently complex process that the time between signing the lease and opening the business may be longer than that for most retail uses, partly because of the delays involved in obtaining the licence. For landlords, there should be a clear understanding that the tenant will apply for a liquor licence as soon as possible and pursue its application diligently to completion. Although some tenants will “pre-open” while waiting for their licence, for a roadhouse type of tenant, for instance, opening makes little sense without a liquor licence. Although it is self-evident, the use clause should provide that the tenant will only sell liquor if it is properly licensed to do so.
Here in Canada, where winter can seem endless, patios are treasured additions to restaurants, as the first sunny day of spring will usually find the patios packed full – even if everyone has to wear a sweater!
There are certain complexities to adding patio space into the tenant’s use which need to be considered up front. Is the tenant to pay rent on the patio space? Often, a landlord will not want to charge rent because the patio is an exclusive-use common area for five months of the year but, for the other seven months of the year, the landlord wants it to revert to common area so that there is no shortfall for that period. A landlord will, however, expect to see the sales from the patio included in the tenant’s Gross Revenue for Percentage Rent purposes.
Some Final Thoughts
Although much of a restaurant lease negotiation will resemble any other retail lease negotiation, there are specific issues, such as patios and liquor licences, that are solely related to restaurants. In approaching a restaurant lease negotiation, it is important to understand these issues so that the parties can create the solutions which are best for them in the lease document