Real Estate Blog
Key Ingredients in Restaurant Leases
Developers of life style centers want to offer their customers an enticing selection of restaurants to draw in customers and promote restaurant and retail sales in their center. Tenants want flexibility to change their menus and protection against other tenants directly competing with their restaurant. Restaurant lease negotiations involve a delicate balancing of each party’s goals, which requires particular attention to the permitted use and exclusive use provisions.
1. Permitted Use. Broad and flexible use clauses are favorable for tenants, especially since a restaurant may need to evolve over the term of the lease. A tenant-favorable use clause gives a tenant the right to modify its menu selection, and even the theme of the restaurant, to keep up with trends in the marketplace. An extremely broad use clause would simply allow the premises to be used as a restaurant or any other legal use.
In contrast, a landlord desires a narrow use clause to enable it to control the type and quality of the restaurant mix at its center. For example, a landlord oriented use clause may state that the premises may be used “only for the operation of a first class, full service Italian restaurant selling alcohol under the trade name Mario’s Café, similar to the Mario’s Café currently located in Lynnfield, Massachusetts.”
The tenant should try to delete any trade name requirement. If the landlord will not agree to this because it is bargaining for a specific restaurant tenant, the tenant should try to limit the trade name restriction to a certain number of years so that it later has more flexibility or can assign or sublet to a third party if the restaurant’s initial concept does not succeed. The tenant can also request that the premises may also be used for other purposes with landlord’s prior written consent, not to be unreasonably withheld.
2. Exclusive Use. Tenants want to be able to protect their primary use. Therefore, tenants will commonly request the exclusive right to have a particular type of restaurant, such as a “high-end steak house,” in the center. It is important to clearly define within the lease what the parties intend by use of the term “high-end steakhouse” in the non-competition clause in order to avoid future disputes as to what does and does not violate the exclusive. One commonly used method is to specify by trade name the restaurants that are allowed and not allowed under the exclusive. To date, Massachusetts courts have not struck down exclusive clauses that prohibit entry of specific competitors as an illegal restraint on trade. In addition, the parties could specify that a restaurant will be considered a steakhouse if a certain percentage of menu items are steak or if a certain percentage of a restaurant’s profits are derived from sales of steak. Whether or not a restaurant is “high-end” may be defined by the price points of entrees. If this approach is used, there should be a mechanism to adjust the price points over time.
Landlords should be as specific as possible in granting exclusives since a broad exclusive may prevent it from bringing another type of restaurant that it desires into the center. For example, by granting a restaurant the exclusive right to operate “a brewery restaurant, beer themed restaurant, or any restaurant that sells more than a certain number of beers on tap,” it may be prohibited from leasing to a sports bar or pub or even other restaurants that serve beer unless the landlord expressly excludes these alternative uses from the exclusive.
Landlords should carve out the incidental sale of certain foods or drinks from any exclusive. For example, an exclusive protecting the operation of a coffee shop should not prohibit the landlord from entering into a lease with a full service restaurant where the sale of brewed coffee is incidental to its principal and primary use.
Finally, landlords should specify that the tenant loses the exclusive if it goes dark for a certain period of time or is not using the premises for the protected use.